Part I.
In this Annual Report on Form 20-F for the year ended December 31, 20192022 (referred to herein as "this Annual Report"), "Celestica," the "Corporation," the "Company," "we," "us" and "our" refer to Celestica Inc. and its subsidiaries.
In this Annual Report, the United States is referred to as the "U.S." Unless we indicate otherwise: (i) all dollar amounts are expressed in United States dollars, except where we state otherwise. AllU.S. dollars; (ii) all references to "U.S.$" or "$" are to United StatesU.S. dollars and all references to "C$" are to Canadian dollars. Unless we indicate otherwise,dollars; and (iii) any reference in this Annual Reportreferences to a conversion between U.S.$ and C$ is a conversion at the average of the exchange rates in effect for the year ended December 31, 2019.2022. During that period, based on the relevant noon buying rates in New York City for cable transfers in Canadian dollars, as certified for customs purposes by the Board of Governors of the U.S. Federal Reserve Bank,System, the average daily exchange rate was U.S.$1.00 = C$1.3269.1.3014. Note that use of the word "including" in this Annual Report means "including, without limitation."
Unless we indicate otherwise, all information in this Annual Report is stated as of February 19, 2020.21, 2023.
Forward-Looking Statements and Risk Factor Summary
Item 3(D), "Key Information — Risk Factors," Item 4, "Information on the Company," Item 5, "Operating and Financial Review and Prospects" and other sections of this Annual Report contain forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, orand the U.S. Securities Act, Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the U.S. Exchange Act, and forward-looking information within the meaning of applicable Canadian securities laws (collectively, forward-looking statements), including, without limitation, statements related to: potential adverse impacts resulting from coronavirus disease 2019 and related mutations (COVID-19); our priorities, intended areas of focus, targets, objectives targets and goals (including, but not limited to, those set forth under the caption "Celestica's Strategy" in Item 4(B), and the captioncaptions "Operating Goals and Priorities" (including "Our Strategy")and "Our Strategy" in Item 5)5, "Operating and Financial Review and Prospects"); trends in the electronics manufacturing services (EMS) industry and our segments (including the components thereof)(and/or their constituent businesses), and their anticipated impact on our business;impact; the anticipated impact of specified adversecurrent market conditions inon each of our segments (and/or componenttheir constituent businesses) and near-term expectations; anticipated improvements in backlog; the anticipated range and timing ofpotential restructuring charges associated primarily with the phased non-renewal of our programs with Cisco Systems, Inc. (Cisco Disengagement); the anticipated impact, range and timing of actions associated with our comprehensive Connectivity & Cloud Solutions (CCS) segment portfolio review (CCS Review), including the Cisco Disengagement;potential divestiture actions; our anticipated financial and/or operating results;results and outlook; our growth and diversification strategies and plans (andexpectations with respect to insurance recoveries for tangible losses in connection with a recent fire at our Batam facility in Indonesia (Batam Fire); our strategies; our credit risk; the potential hindrances thereto); materials constraints; the anticipated impact of completed acquisitions, andor program wins, transfers, losses or disengagements on our business;disengagements; materials, component and supply chain constraints; shipping delays; anticipated expenses, restructuring actions, capital expenditures and other anticipated working capital requirements including the anticipated amounts, timing, impact and contractual obligations (and intended methods of funding thereof; the anticipatedsuch items); our intended repatriation of certain undistributed earnings from foreign subsidiaries;subsidiaries (and amounts we do not intend to repatriate in the foreseeable future); diversity and inclusion, employee engagement, and other environmental, social and governance (ESG) matters; the potential impact of international tax reform; the potential impact of tax and litigation outcomes; our anticipated ability to use certain net operatingtax losses; intended investments in our business and associated risks;business; the potential impact of the pace of technological changes, customer outsourcing, program transfers, and the global economic environment onenvironment; the intended method of funding subordinate voting share (SVS) repurchases and our business; raw materials prices; the timing of the commencement of, and amount of payments under, a lease for our new corporate headquarters; our expectations with respect to days in cash deposits;restructuring provision; the impact of our outstanding indebtedness under our credit facility on our business;indebtedness; liquidity and the sufficiency of our capital resources; our intention (when in our discretion) to settle outstanding equity awards with subordinate voting shares (SVS); the anticipated impact of recent U.S. tax reform onSVS; our business;financial statement estimates and assumptions; recently-issued accounting pronouncements and amendments; the potential impact of price reductions and longer payment terms and longer-term contracts on our business;terms; our compliance with covenants under our credit facility; the potential userefinancing debt at maturity; interest rates and effect of cash, securities issuances and further increases in third-party indebtedness to fund our operations or acquisitions;expense; the potential adverse impacts of events outside of our control including, among others, Britain's departure from the European Union (Brexit), policies or legislation proposed or instituted by the current administration(see "External Factors that May Impact our Business" in the U.S., the potential impact of significant tariffs on items imported into the U.S. and related countermeasures, and/or coronavirus disease 2019 (COVID-19) or other widespread illness or diseaseItem 5) (External Events); potential true-up premiums under our U.K. main pension plan; the amount, method of funding, and impact of mandatory 2020 prepayments under our credit facility based on 2019 excess cash flow;facility; pension plan funding requirements;requirements and obligations, and the anticipated impact of the expiration of certainannuity purchases; income tax incentives in Thailand;incentives; accounts payable cash flow levels; accounts receivable sales; our cash generating units with goodwill; our future warranty obligations; our expectations with respect to cybersecurity threats;threats and incidents; our intentions with respect to environmental assessments for newly-leased or acquired properties; our expectations with respect to expiring leases; anticipated insignificant hedge ineffectiveness of our interest rate swap agreements; the pay-for-performance alignment of our executive compensation program; our intention to retain earnings for general corporate purposes; and the expectation of continued adverse impacts from costs incurred in connection with our pursuit of acquisitions and strategic transactions. Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," "continues," "target," "goal," "project," "potential," "possible," "contemplate," "seek," or similar expressions, or may employ such future or conditional verbs as "may," "might," "will," "could," "should" or "would," or may otherwise be indicated as forward-looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, where applicable, and applicable Canadian securities laws.
Forward-looking statements are provided to assist readers in understanding management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. Forward-lookingForward-
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looking statements are not guarantees of future performance and are subject to risks that could cause actual results to differ materially from those expressed or implied in such forward-looking statements, including, among others, as is described in more detail in Item 3(D), Key Information — Risk Factors and elsewhere in this Annual Report, risks related to:
•customer and segment concentration;
•challenges of replacing revenue from completed, lost or non-renewed programs or customer disengagements,disengagements;
•managing our business during uncertain market, political and economic conditions, including the Cisco Disengagementamong others, global inflation and/or recession, and geopolitical and other CCS Review disengagements;risks associated with our international operations, including military actions, protectionism and reactive countermeasures, economic or other sanctions or trade barriers, including in relation to the Russia/Ukraine conflict;
•managing changes in customer demand;
•our customers' ability to compete and succeed withusing our products and services;
•delays in the delivery and availability of components, services and/or materials, as well as their costs and quality;
•our inventory levels and practices;
•the cyclical and volatile nature of our capital equipment business,semiconductor business;
•changes in particular our semiconductor and display businesses;mix of customers and/or the types of products or services we provide, including negative impacts of higher concentrations of lower margin programs;
•price, margin pressures, and other competitive factors and adverse market conditions affecting, and the highly competitive nature of, the EMS industryand original design manufacturer (ODM) industries in general and our segments in particular (including the risk that anticipated market improvementsconditions do not materialize);
•challenges associated with new customers or programs, or the provision of new services;
•interest rate fluctuations;
•rising commodity, materials and component costs, as well as rising labor costs and changing labor conditions;
•changes in U.S. policies or legislation;
•customer relationships with emerging companies;
•recruiting or retaining skilled talent;
•our ability to adequately protect intellectual property and confidential information;
•the impactvariability of revenue and operating results;
•unanticipated disruptions to our cash flows;
•deterioration in financial markets or the macro-economic environment, including as a result of global inflation and/or recession;
•maintaining sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities;
•the expansion or consolidation of our restructuring actions, including a failureoperations;
•the inability to achievemaintain adequate utilization of our workforce;
•integrating and achieving the anticipated benefits from our CCS Review (including the Cisco Disengagement)acquisitions and "operate-in-place" arrangements;
•execution and/or quality issues (including our productivity initiatives;ability to successfully resolve these challenges);
•negative impacts on our business resulting from any significant uses of future restructuring charges, impairment charges cash, securities issuances, and/or other write-downsadditional increases in third-party indebtedness (including as a result of assets;an inability to sell desired amounts under our uncommitted accounts receivable sales program or supplier financing programs);
•disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of External Events (in particular,Events;
•defects or deficiencies in our products, services or designs;
•volatility in the impact of COVID-19);commercial aerospace industry;
•negative impacts on our business resulting from any significant usesour third-party indebtedness;
•the scope, duration and impact of cash, securities issuances, and/the COVID-19 pandemic and materials constraints;
•declines in U.S. and other government budgets, changes in government spending or additional third-party indebtedness for acquisitionsbudgetary priorities, or delays in contract awards;
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•failure of the U.S. federal government to manage its fiscal matters or to otherwise fundraise or further suspend the debt ceiling, and changes in the amount of U.S. federal debt;
•the military conflict between Russia and Ukraine;
•changes to our operations;operating model;
•our global operations and supply chain;
•competitive bid selection processes;
•our dependence on industries affected by rapid technological change;
•rapidly evolving and changing technologies, and changes in our ability to adequately protect intellectual property;customers' business or outsourcing strategies;
•increasing taxes (including as a result of global tax reform), tax audits, and challenges of defending our tax positions;
•obtaining, renewing or meeting the conditions of tax incentives and credits;
•the management of our information technology systems, and the fact that while we have not been materially impacted by computer viruses, malware, ransomware, hacking attemptsincidents or outages, thatwe have been (and may disruptin the future be) the target of such events;
•the impact of our operations;restructuring actions and/or productivity initiatives, including a failure to achieve anticipated benefits therefrom;
•the incurrence of future restructuring charges, impairment charges, other unrecovered write-downs of assets (including inventory) or operating losses;
•the inability to prevent or detect all errors or fraud;
•compliance with applicable laws regulations, and government grants;regulations;
•our pension and other benefit plan obligations;
•changes in accounting judgments, estimates and assumptions;
•our ability to maintain compliance with applicable credit facility covenants;
•the restrictive and financial covenants under discontinuation of LIBOR;
•our credit facility;entry into a total return swap agreement;
•our credit rating; and
•the interest of our controlling shareholder;
•current or future litigation, governmental actions, and/or changes in legislation or accounting standards.standards;
•volatility in our stock price;
•the impermissibility of SVS repurchases or a determination not to repurchase SVS under any normal course issuer bid (NCIB);
•potential unenforceability of judgments;
•negative publicity;
•the impact of climate change; and
•our ability to achieve our ESG targets and goals, including with respect to climate change and greenhouse gas emissions reduction.
The foregoing and other material risks and uncertainties are discussed in our public filings, which can be found at www.sedar.com and www.sec.gov, including in this Annual Report, and subsequent reports on Form 6-K furnished to, the U.S. Securities and Exchange Commission, and as applicable, the Canadian Securities Administrators.
Our forward-looking statements contained in this Annual Report are based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions includeinclude: continued growth in our end markets; growth in manufacturing outsourcing from customers in diversified markets; no significant unforeseen negative impacts to our operations; no unforeseen materials price increases, margin pressures, or other competitive factors affecting the EMS or ODM industries in general or our segments in particular, as well as those related to the following:
•the scope and duration of materials constraints (i.e., that they do not materially worsen) and the COVID-19 pandemic, and their impact on our sites, customers and suppliers;
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•our ability to fully recover our tangible losses caused by the Batam Fire through insurance claims;
•fluctuation of production schedules from our customers in terms of volume and mix of products or services;
•the timing and execution of, and investments associated with, ramping new business;
•the success of our customers' products;
•our ability to retain programs and customers;
•the stability of general economic and market conditions, currency exchange ratesrates;
•supplier performance and interest rates;
•compliance by third parties with their contractual obligations and the accuracy of their representations and warranties;obligations;
•the costs and availability of components, materials, services, equipment, labor, energy and transportation;
•that our customers will retain liability for recently-imposedproduct/component tariffs and countermeasures;
•global tax legislation changes;
•our ability to keep pace with rapidly changing technological developments;
•the timing, execution and effect of restructuring actions;
•the successful resolution of quality issues that arise from time to time;
•the components of our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities; leverage ratio (as defined in our credit facility);
•our ability to successfully diversify our customer base and develop new capabilities;
•compliance with applicable credit facility covenants;
•anticipated demand levels across our CCS Review (including the Cisco Disengagement);businesses;
• the timing and nature of anticipated improvements in the capital equipment market in 2020; and
•our ability to achieve the expected long-term benefits from our acquisition of PCI Private Limited (PCI); and
•our maintenance of sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities.
Although management believes theseits assumptions to be reasonable under current circumstances, they may prove to be inaccurate, which could cause actual results to differ materially (and adversely) from those that would have been achieved had such assumptions been accurate.
Forward-looking statements speak only as of the date on which they are made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. You should read this Annual Report, and the documents, if any, that we incorporate herein by reference, with the understanding that our actual results may be materially different from what we expect.
All forward-looking statements attributable to us are expressly qualified by the cautionary statements included in this Annual Report.
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data[Removed and Reserved]
| Year ended December 31 | |||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||
Consolidated Statements of Operations Data(1): | |||||||||||||||||||
Revenue(1) | $ | 5,639.2 | $ | 6,046.6 | $ | 6,142.7 | $ | 6,633.2 | $ | 5,888.3 | |||||||||
Cost of sales(1) | 5,248.1 | 5,617.0 | 5,724.2 | 6,202.7 | 5,503.6 | ||||||||||||||
Gross profit(1) | 391.1 | 429.6 | 418.5 | 430.5 | 384.7 | ||||||||||||||
Selling, general and administrative expenses (SG&A), including research and development(2) | 230.7 | 236.0 | 229.4 | 247.8 | 255.7 | ||||||||||||||
| Amortization of intangible assets | 9.2 | 9.4 | 8.9 | 15.4 | 29.6 | ||||||||||||||
Other charges (recoveries)(3) | 35.8 | 25.5 | 37.0 | 61.0 | (49.9 | ) | |||||||||||||
Earnings from operations(1) | 115.4 | 158.7 | 143.2 | 106.3 | 149.3 | ||||||||||||||
Refund interest income(4) | — | (14.3 | ) | — | — | — | |||||||||||||
Finance costs(5) | 6.3 | 10.0 | 10.1 | 24.4 | 49.5 | ||||||||||||||
Earnings before income taxes(1) | 109.1 | 163.0 | 133.1 | 81.9 | 99.8 | ||||||||||||||
| Income tax expense (recovery) | 42.2 | 24.7 | 27.6 | (17.0 | ) | 29.5 | |||||||||||||
Net earnings(1) | $ | 66.9 | $ | 138.3 | $ | 105.5 | $ | 98.9 | $ | 70.3 | |||||||||
Other Financial Data(1): | |||||||||||||||||||
Basic earnings per share(1) | $ | 0.43 | $ | 0.98 | $ | 0.74 | $ | 0.71 | $ | 0.54 | |||||||||
Diluted earnings per share(1) | $ | 0.42 | $ | 0.96 | $ | 0.73 | $ | 0.70 | $ | 0.53 | |||||||||
| Property, plant and equipment and computer software cash expenditures | $ | 62.8 | $ | 64.1 | $ | 102.6 | $ | 82.2 | $ | 80.5 | |||||||||
| Shares used in computing per share amounts (in millions): | |||||||||||||||||||
| Basic | 155.8 | 141.8 | 143.1 | 139.4 | 131.0 | ||||||||||||||
| Diluted | 157.9 | 143.9 | 145.2 | 140.6 | 131.8 | ||||||||||||||
| As of December 31 | |||||||||||||||||||
| 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
| (in millions) | |||||||||||||||||||
Consolidated Balance Sheet Data(1) | |||||||||||||||||||
| Cash and cash equivalents | $ | 545.3 | $ | 557.2 | $ | 515.2 | $ | 422.0 | $ | 479.5 | |||||||||
Working capital(1)(6) | 990.6 | 1,121.5 | 1,210.1 | 1,203.2 | 1,110.7 | ||||||||||||||
| Property, plant and equipment | 314.6 | 302.7 | 323.9 | 365.3 | 355.0 | ||||||||||||||
Right-of-use (ROU) assets (1) | — | — | — | — | 104.1 | ||||||||||||||
Total assets(1) | 2,612.0 | 2,841.9 | 2,964.2 | 3,737.7 | 3,560.7 | ||||||||||||||
Borrowings under credit facility(7) | 262.5 | 227.5 | 187.5 | 757.3 | 592.3 | ||||||||||||||
Lease obligations(1)(7) | 19.0 | 18.4 | 17.7 | 10.4 | 116.1 | ||||||||||||||
| Capital stock | 2,093.9 | 2,048.2 | 2,048.3 | 1,954.1 | 1,832.1 | ||||||||||||||
Total equity(1) | 1,091.0 | 1,257.8 | 1,370.2 | 1,332.3 | 1,356.2 | ||||||||||||||
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Each of the following risk factors, or any combination of them, could have a material adverse effect on our business, financial condition, and/or operating results. Our shareholders and prospective investors should carefully consider each of the following risks and all of the other information set forth in this Annual Report.
We are dependent on a limited number of customers and end markets. A decline in revenue from, or the loss of, any significant customer, could have a material adverse effect on our financial condition and operating results.
We depend upon a small number of customers for a substantial portion of our revenue. Our top 10 customers in 2019 represented 65% (2018 — 70%; 2017 — 71%)66% of our total revenue.revenue in each of 2022, 2021 and 2020. We also remain dependent upon revenue from our CCSConnectivity and Cloud Solutions (CCS) segment, (consisting of our Communications and Enterprise end markets), which represented 61%59% of our consolidated revenue in 2019, and 67% and 68% of our consolidated revenue in 2018 and 2017, respectively. To reduce our reliance on any one customer or end market (including the concentration of our revenues with traditional CCS segment customers), we continue to target new customers and services, including a continued focus on2022 (2021 — 59%; 2020 — 64%). Notwithstanding the expansion of our Advanced Technology Solutions (ATS) segment, andour reshaped CCS segment portfolio, and growth initiatives focused onin our newly-reshaped post-CCS Review segment portfolio. Notwithstanding our expansion efforts, however,Hardware Platform Solutions (HPS) business, we remain dependent on our CCS segment (in particular our traditional CCS customers)business for a large portion of our revenue, which continues to experience slower growth rates, increased pricing pressures and a highly competitive marketplace, including from original design manufacturers (ODMs).
A decline in revenue from, or the loss of, any significant customer could have a material adverse effect on our financial condition and operating results. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments— Segment Environment:CCS Segment" below for a discussion of our Cisco Disengagement, as well as other disengagements stemming from our CCS Review, and the anticipated impact of these disengagements on our business. We cannot assure: (i) the replacement of completed, delayed, cancelled or reduced orders with new business; (ii) that our current customers will continue to utilize our services consistent with historical volumes or at all; and/or (iii) that our customers will renew their long-term manufacturing or services contracts with us on acceptable terms or at all.
There can also be no assurance that our efforts to secure new customers and programs in our traditional or new markets, including through acquisitions, will succeed in reducing our customer concentration. Acquisitions are also subject to integration risk, and revenues and margins could be lower than we anticipate. Failure to secure business from existing or new customers in any of our end markets would adversely impact our operating results.
Any of the foregoing may adversely affect our margins, cash flow, and our ability to grow our revenue, and may increase the variability of our operating results from period to period. See "Our revenue and operating results may vary significantly from period to period" below.
We continue to operate in an uncertain global economic and political environment.
Concerns over global economic conditions, financial markets, geopolitical issues, energy costs, inflation, and the availability and cost of credit, have contributed to increased global economic and political uncertainty. The political environment in the U.S., tensions between the U.S. and other countries (including recent threats of retaliatory action from the Chinese government due to recent tensions between the U.S. and China), and the continuing Russia/Ukraine conflict, have contributed to such uncertainty. Trade actions between the U.S. and China have made our production from China less cost-competitive than other low-cost countries in recent periods and are expected to continue to adversely impact our China operations. All of the foregoing factors are outside of our control. See "Our operations have been and could continue to be adversely affected by events outside our control,""U.S.policies or legislation could have a material adverse effect on our business, results of operations and financial condition" and "Failure of the U.S. federal government to manage its fiscal matters or to raise or further suspend the debt ceiling, and changes in the amount of U.S. federal debt, may negatively impact the economic environment and adversely impact our results of operations,"and"The military conflict between Russia and Ukraine, and the global response thereto, may adversely affect our business and results of operations" below. Uncertain global economies have adversely impacted, and may continue to unpredictably impact, currency exchange rates. See "We are exposed to translation and transaction risks associated with foreign currency exchange rate fluctuations; hedging instruments may not be effective in mitigating such risks"below. Financial market instability may result in lower returns on our financial investments, and lower values on some of our assets.
Our operating costs have increased, and may continue to increase, as a result of the recent growth in inflation due to, among other things, the continuing impact of the pandemic, the Russia/Ukraine conflict and related international response, and the uncertain economic environment. Although we have been successful in offsetting the majority of our increased costs with increased pricing for our products and services to date, unrecovered increased operating costs in future periods would adversely impact our margins. We cannot predict future trends in the rate of inflation or other negative economic factors or associated increases.
In the event of a further economic slowdown or recession, we may experience declines in revenues, profitability and cash flows from lower customer demand, including as a result of payment delays, collection difficulties, increased pricing
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pressures and other factors caused by the impact of adverse economic conditions on our customers. Adverse conditions in the financial and credit markets, lower consumer confidence and spending, inflation, higher labor, healthcare, and insurance costs, fluctuating fuel and commodities costs and their effects on the U.S. and global economies and markets are all examples of negative factors which could cause customers to delay or forgo use of our services. These economic conditions may also reduce our customers' operating budgets or ability to commit funds to purchase our solutions or renew their existing contracts with us. If an economic recession is followed by a slow and relatively weak recovery, the effects from a broadening or protracted extension of these negative economic conditions on our customers could have a significant adverse effect on our revenues, cash flows and results of operations.
General uncertainty surrounding the global economic environment and geopolitical outlook may impact current and future demand for some of the products we manufacture or services we provide, the financial condition of our customers and/or suppliers, as well as the number and pace of customer consolidations. If any of the foregoing impacts the financial condition of our customers, they may delay payments to us or request extended payment terms, which could have an adverse effect on our financial condition and working capital. If any of the foregoing impacts the financial condition of our suppliers, this may have an adverse effect on our operations, financial condition and/or customer relationships. We cannot predict the precise nature, extent, or duration of these economic or political conditions or if they will have any impact on our financial results. A deterioration in the economic environment may exacerbate the effect of the various risk factors described in this Annual Report and could result in other unforeseen events that may adversely impact our business and financial condition.
Inherent challenges in managing changes in customer demand may impact our planning, supply chain execution and manufacturing, and may adversely affect our operating performance and results.
Our customers typically do not commit to production schedules for more than 30 to 90 days in advance (however, due to global supply shortages, some customers have provided us with longer commitments), and we often experience volatility in customer orders and inventory levels. Customers may terminate their agreements with us prior to scheduled expiration, fail to renew such agreements upon expiration, or significantly change, reduce or delay the volume of manufacturing or other services they order from us, any of which adversely affect our operating results when they occur. Customers may also shift business to our competitors, in-source programs, or adjust the concentration of their supplier base. The global economic environment, adverse market conditions, political and geopolitical pressures, negative sentiment from our customers' customers or changes made by local governments (such as tax benefits, tariffs or export controls) may also impact our customers' business decisions. These and other factors could adversely affect the rate of outsourcing to EMS providers generally or to us in particular. A significant portion of our revenue can occur in the last month of the quarter, and purchase orders may be subject to change or cancellation, all of which affect our operating results when they occur. Because we cannot predict customer behavior, or if or when adverse market conditions will reverse, our forecasts of customer orders may be inaccurate, and may make it difficult to order appropriate levels of materials, schedule production, and maximize utilization of our manufacturing capacity and resources.
Our customers from time to time change their forecasts, production quantities or product type requirements, or accelerate, delay or cancel production quantities. When customers change production volumes or request different products to be manufactured from those in their original forecast, the unavailability of components and materials for such changes could also adversely impact our revenue and working capital performance. See "We are dependent on third parties to supply certain materials, and our results have been, and may continue to be, negatively affected by the quality, availability and cost of such materials"below.
Further, to guarantee continuity of supply for many of our customers, we are required to manufacture and warehouse specified quantities of finished goods. The uncertainty of demand in our customers' end markets, intense competition in our customers' industries and general order volume volatility from time to time result in customers delaying or canceling the delivery of products we manufacture for them or placing purchase orders for lower volumes of products than previously anticipated. This may result in higher than expected levels of inventory, which could in turn have a material adverse impact on our operating results and working capital performance. Although the levels of inventory we carry in any period reflect inventory required to support new program ramps, inventory levels are also impacted by demand volatility and significant product mix changes, including late changes from customers, as well as materials constraints from suppliers (which persisted throughout 2022). As a result of global supply constraints, and related customer requests for us to order sufficient components, there has been a significant increase in our purchase order obligations from prior periods.We may not be able to return or re-sell excess inventory resulting from these factors, or we may be required to hold such inventory for a period of time, any of which may result in higher working capital needs (offset in part by customer cash deposits), and/or a requirement to record additional (and higher-than-typical) reserves for excess or obsolete inventory (as occurred in 2022). Order cancellations and
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delays could also lower our asset utilization, resulting in higher levels of unproductive assets, lower inventory turns, and lower margins. See "Our products and services involve inventory risk" below.
We are dependent on our customers' ability to compete and succeed in the marketplace with theusing our products and services we provide.services.
Our operating results are highly dependent upon our customers' ability to compete and succeed in the marketplace withusing our products and services. Factors that may adversely affect our customers include: rapid changes in technology,technology; evolving industry standards, and short product life cycles;standards; seasonal demand; our customers'their failure to successfully market, and/or a lack of widespread commercial acceptance of, their products; supply chain issues; dramatic shifts in demand which may cause our customersthem to lose market share or exit businesses; and/or recessionary periods in our customers' markets.markets; short product lifecycles resulting from continuous improvements in products and services, commoditization of certain products, changes in preferences by end customers, and the emergence of new entrants or competitors with disruptive products, services, or new business models that de-emphasize traditional original equipment manufacturer (OEM) solutions and distribution channels. In addition, certain of our customers have experienced, and may in the future experience, severe revenue erosion, pricing, margin and cash flow pressures, and excess inventories that, in turn, have adversely affected (and in the future may adversely affect) our operating results. If technologies or standards supported by our customers' products and services or their business models become obsolete, fail to gain widespread acceptance or are canceled, our business would be adversely affected. For example, declines in end-market demand for customer-specific proprietary systems in favor of open systems with standardized technologies has had an adverse impact on certain of our customers, and consequently, our business. See "Our customers may be negatively affected by rapid technological changes, shifts in business strategy and/or the emergence of new business models, and new entrants/competition with disruptive products and/or services" and "Our revenue and operating results may vary significantly from period to period" below.
We are dependent on third parties to supply certain materials, and our results canhave been, and may continue to be, negatively affected by the quality, availability and cost of such materials.
The purchase of materials and electronic components represents a significant portion of our costs. We rely on third parties to provide such items. Although our customers often dictate the materials to be used in their products, materialsMaterials shortages or other issues affecting timely access to these materials (which often occur in our industry) may impact our ability to successfully complete a program. A delay or interruption in supply from a component supplier, especially for single-sourced components, could have a significant impact on our operations and on our customers if we are unable to deliver finished products in a timely manner. If the amount we are required to pay for equipment and supplies exceeds what we have estimated, especially in a fixed price contract, we may suffer losses on these contracts. If a supplier or manufacturer fails to provide components, supplies or equipment as required under a contract, for any reason, we may be required to source these items from other third parties on a delayed basis or on less favorable terms, which could impact our profitability. Additionally, quality or reliability issues at any of our component providers, or financial difficulties that affect their production and ability to supply us with components, could halt or delay production of a customer's product, or result in claims against us for failure to meet required customer specifications, which could materially adversely impact our operating results. Shortages may also result in our carrying higher levels of inventory and extended lead-times, or result in increased component prices, which may require price increases in the products and services that we provide. Any increase in our costs that we are unable to recover would negatively impact our margins and operating results. Changes in forecasted volumes or in our customers' requirements can also negatively affect our ability to obtain components and adversely impact our operating results.
We have experienced materials constraints from certain suppliers in both of our segments commencing in 2017,recent years, due in part to industry-wide shortages for certain electronic components. AlthoughThese constraints were significantly exacerbated by COVID-19 (including as a result of COVID-19-related workforce constraints on the factories of certain of our suppliers), commencing in 2020. As we are dependent on our suppliers to prioritize their manufacturing to produce the products we need to fulfill our customer orders, these constraints generally improved in 2019, our A&D business continues to be negatively impacted by materials shortages particularly with respect to the availability of high reliability parts and machined components. These shortages have caused delays in the production of customer products in both of our segments, have resulted in higher-than-expected levels of inventory,extended lead-times for certain components, and in combination with volatile market demand, have negatively impactedresulted in adverse impacts on our margins and higher-than-expected levels of inventory in recent periods.
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of operations" and "Our customers expect rapid response times to meet changes in their volume requirements.products and services involve inventory risk" as well as Item 5, Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — "Recent Developments – Segment Environment" and "Liquidity — Contractual Obligations."
Our products and services involve inventory risk.
For most of our products and services, we purchase some, or all, of the required materials and components based on customer forecasts or orders. Although we generally enter into master supply agreements withour commercial contracts often obligate our customers to ultimately purchase inventory ordered to support their forecasts or orders, under those agreements arewe typically finance these purchases initially. Suppliers may also require us to purchase materials and components in minimum order quantities that may exceed current customer forecast requirements. In addition, a customer's cancellation, delay or reduction of forecasts or orders can result in excess, surplus or obsolete inventory or additional expense to us. Engineering changes by a customer may result in obsolete materials or components. While we attempt to cancel, return or otherwise mitigate excess and obsolete inventory, require customers to reimburse us for these items, put up cash deposits and/or price our services to address related risks, we may not guaranteed. Instead,actually be reimbursed in a timely manner or in full, receive adequate cash deposits, be able to collect on these obligations, or fully protect against such risks in our pricing. In addition to increasing inventory in certain instances to support new program ramps, we bid onhave also increased inventory to mitigate the impact of component shortages and longer lead times in recent periods in order to maintain a program-by-program basishigh level of customer service. This has led to an increase in inventory, as well as additional increased, excess, and/or obsolete inventory, which has resulted in increased inventory provisions in 2022, and typically receivemay result in the need for additional inventory provisions in future periods. Excess or obsolete inventory, the need to acquire increasing amounts of inventory due to shortages, customer purchase orders for specific quantitiesdemand or otherwise, has and timing of products. Our customers typically do not commitmay continue to production schedules for more than 30 to 90 days in advance, and we often experience volatility in customer orders and inventory levels. Customers may terminate their manufacturing or service agreements or arrangements with us prior to scheduled expiration, fail to renew such agreements or arrangements upon expiration, or significantly change, reduce or delay the volume of manufacturing or other services they order from us, any of which would adversely affect our operating results. Customersresults.
In addition, we provide managed inventory programs for some of our customers under which we hold and manage finished goods or work-in-process inventories. These managed inventory programs will result in higher inventory levels, further reduce our inventory turns and increase our financial exposure with such customers. In addition, our inventory may also shiftbe held at a customer's facility or warehouse, or elsewhere in a location outside of our control, which may increase the risk of loss. Even though our customers generally have contractual obligations to purchase such inventories from us, we remain subject to customers' credit risks as well as the risk of potential customer default and the need to enforce those obligations.
The semiconductor industry is cyclical and volatile in nature.
The semiconductor industry is highly cyclical and has experienced significant economic downturns, often in connection with, or in anticipation of, maturing product cycles or a decline in general economic conditions. These downturns are characterized by diminished product demand, lower volumes and rapid erosion of average selling prices, resulting in revenue declines, production overcapacity, and excess inventory. The timing, length and volatility of these cycles are difficult to predict. The quick onset of demand changes, as well as the high level of fixed costs associated with this business, exacerbate the adverse impact of these downturns on our operating results. Actions taken to reduce our competitors, in-source programs,costs may be insufficient to align our structure with prevailing business conditions, and we may be unable to invest in R&D and engineering at the levels we believe are necessary to maintain our competitive position. On the other hand, in the event of a significant upturn, we may not be able to expand our workforce and operations in a sufficiently timely manner, procure adequate resources and raw materials, or adjustlocate suitable third-party suppliers to respond effectively to changes in demand for our existing products or to the concentrationdemand for new products requested by our customers. Any of their supplier base. The global economic environment, political pressures, negative sentiment from our customers' customers or changes made by local governments (such as tax benefits or tariffs)the foregoing may also impact our customers' business decisions. These and other factors could adversely affect the rate of outsourcingour margins, cash flow, and our ability to EMS providers generally or to us in particular. Additionally, a significant portion ofgrow our revenue, can occur inand may increase the last monthvariability of the quarter, and purchase orders may be subject to change or cancellation, all of which affect our operating results when they occur. For example, commencingfrom period to period.
A change in the second halfmix of 2018,customers and/or the types of products or services we experienced weaker-provide could have a material adverse effect on our financial condition and operating results.
We operate in any period reflect inventory required to support new program ramps, inventory levels are also impacted by demand volatilityan industry comprised of numerous competitors and significantaggressive pricing dynamics.
We operate in a highly competitive industry. Our competitors include large global EMS companies, ODMs that specialize in providing internally-designed products and manufacturing services, smaller EMS companies that often have a regional, product, mix changes, including late changes from customers,service or industry-specific focus, as well as materials constraintscomponent and sub-system suppliers, distributors and/or systems integrators. In addition, our HPS offering may compete with our traditional customers' hardware offerings. Offering products or
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services that compete with the offerings of our customers may negatively impact our relationship with, or result in a loss of business from, suppliers.such customers. We face indirect competition from current and prospective customers who decide to manufacture products internally, or insource previously outsourced business. In addition to the foregoing, we may face competition from distribution and logistics providers expanding their services across the supply chain.
The competitive environment in our industry is intense and aggressive pricing is a common business dynamic. Some of our competitors have greater scale and offer a broader range of services. Additionally, our current and/or future competitors may: be more effective than we are in increasing or shifting their presence in new lower-cost, lower-tariff or tariff-free regions to try to offset continuous competitive pressure and increasing labor costs or to secure new business; develop or acquire services comparable or superior to ours; consolidate to form larger competitors; have greater name recognition, critical mass and/or geographic market presence; have greater manufacturing, research and development (R&D) and/or marketing resources; be better able to take advantage of acquisition opportunities; be willing to, or able to make sales or provide services at lower margins than we do; or adapt more quickly than we do to new technologies, evolving industry trends and changing customer requirements. In addition, our competitors may be more effective than we are in investing in information technology solutions to differentiate their offerings. Some of our competitors have increased their vertical capabilities by manufacturing modules or components used in the products they assemble. Although we have also expanded our capabilities, including through acquisitions and "operate-in-place" arrangements, our competitors' expansion efforts may be more successful than ours. Competition may cause pricing pressures, reduced profits or a loss of market share (for example, from program losses, non-renewals or customer disengagements). We may not be able to return compete successfully against our current and/or re-sell excess inventory resultingfuture competitors.
Challenges associated with new customers or programs, or the provision of new services, could adversely affect our operations and financial results.
In determining whether to pursue a potential new customer, program or service, we evaluate whether it fits with our value proposition as well as its potential end-market success. Where we proceed, our goal is to ensure that our terms of engagement appropriately reflect anticipated costs, risks and rewards. The failure to make prudent engagement decisions or to establish appropriate contractual terms could adversely affect our profitability and margins.
There are also risks associated with the timing and ultimate realization of anticipated revenue from a new program or service. Certain new programs or services require us to devote significant capital and personnel to new technologies and competencies. We may not meet customer expectations, which could damage our relationships with such customers and impact our ability to timely deliver conforming products or services. The success of new programs may also depend heavily on factors including product reliability, supply chain dynamics, market acceptance, regulatory approvals and/or economic conditions. Any failure to meet expectations on these factors could adversely affect our results of operations.
We are subject to interest rate fluctuations.
Borrowings under our credit agreement generally bear interest at a selected rate (depending on the currency of the borrowing and our election for such currency), plus a margin (based on the rate we select and a defined consolidated leverage ratio). Our term loans currently bear interest at LIBOR plus a specified margin (2.125% for one term loan and 2.0% for the other). These borrowings expose us to interest rate risks due to fluctuations in these rates and margins, and our interest rate swap agreements only apply to a portion of the total borrowings under our term loans. Significant interest rate fluctuations may adversely affect our business, operating results and financial condition. Also see "We have entered into a total return swap (TRS) agreement in respect of our SVS, which exposes us to certain risks, including SVS price decrease risk, counterparty risk and interest rate risk, any of which could adversely affect our financial condition and/or financial results" below.
Our results may be negatively affected by rising labor costs.
There is some uncertainty with respect to the pace of rising labor costs (including minimum wage increases that are government-mandated from time to time), and increasing competition for specific talent/resources in various regions in which we operate. Any increase in labor costs that we are unable to recover in our pricing to our customers would negatively impact our margins and operating results. Our labor costs increased in the first half of 2022 as a result of border controls imposed by various governments, which limited the supply of available foreign labor, and required us to rely on more expensive talent solutions.
U.S. policies or legislation could have a material adverse effect on our business, results of operations and financial condition.
The former U.S. administration created uncertainty with respect to, among other things, trade agreements and free trade generally, and imposed significant increases on tariffs on goods imported into the U.S. from specified countries, each of
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which has imposed retaliatory tariffs on specified items. These actions, and/or other governmental actions related to tariffs or international trade agreements, have increased (and could further increase) the cost to our U.S. customers who use our non-U.S. manufacturing sites and components, and vice versa, which may materially and adversely impact demand for our services, our results of operations or our financial condition. We anticipate continued actions from non-China based customers to exit China to avoid the impact of these additional tariffs. In addition, our China-based customers may focus on China-based solutions.
In addition, in 2022, the U.S. government imposed additional export controls on certain advanced computing semiconductor chips, integrated circuits, semiconductor manufacturing items and related transactions. These recent export controls are, in part, intended to restrict China's ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. The implementation, interpretation and impact on our business of these rules and other regulatory actions taken by the U.S. government is uncertain and evolving, and these actions, and/or other actions taken by the governments of either the U.S. or China, or both (including in response to recent increased tensions), could materially and adversely affect our business, revenue and results of operations.
Given the uncertainty regarding the scope and duration of these (or further) trade and export actions, whether trade tensions will escalate further, and whether our customers will continue to bear the cost of the tariffs and/or avoid such costs by in-sourcing or shifting business to other providers, their impact on the demand for our services, our operations and results for future periods cannot be currently quantified, but may be material. See Item 5, "Operating and Financial Review and Prospects — MD&A — External Factors that May Impact our Business" for further detail.
In addition, we cannot predict whether new U.S. laws will be passed or new regulatory proposals will be adopted, if any (or whether current laws or regulations will be rolled back), or the effect that such events may have on the economy and/or our business. However, changes in U.S. social, political, regulatory and economic conditions or laws and policies governing foreign trade and exports, taxes, manufacturing, clean energy, the healthcare industry, development and investment in the jurisdictions in which we and/or our customers or suppliers operate, could materially adversely affect our business, results of operations and financial condition. See "We are subject to the risk of increasing income and other taxes, tax audits, and the challenges of successfully defending our tax positions, and obtaining, renewing or meeting the conditions of tax incentives and credits, any of which may adversely affect our financial performance."
Volatility in commodity prices may negatively impact our operating results.
We rely on various energy sources in our production and transportation activities. Increases in prices for energy and other commodities have resulted in, and may result in further increased raw material and component costs and transportation costs. Any increase in our costs that we are unable to recover in our pricing to our customers would negatively impact our margins and operating results.
Customer relationships with emerging companies may present more risks than with established companies.
Customer relationships with emerging companies present special risks because we do not have an extensive product or customer relationship history. There is less demonstration of market acceptance of their products making it harder for us to anticipate requirements than with established customers. Our credit risk on these customers, especially in A/R and inventories, and the risk that these customers will be unable to fulfill indemnification obligations to us are potentially increased.
If we are unable to recruit or retain highly skilled talent, our business could be adversely affected.
The recruitment of personnel in the EMS and ODM industries is highly competitive. We believe that our future success depends, in part, on our ability to attract and retain highly skilled executive, technical and management talent in the various geographies in which we operate. Competitive dynamics, as well as the time required to replace or redistribute responsibilities related to the loss of the services of certain executive, management and technical employees, individually or in the aggregate, could have a material adverse effect on our operations, and there can be no assurance that we will be able to retain their services. Regional competitive dynamics may also impact our ability to retain and acquire talent. Organizational changes may impact our relationships with customers, vendors, and employees, potentially resulting in loss of business, loss of vendor relationships, and the loss of key employees or declines in employee productivity. Uncertainties associated with any senior management transitions could lead to concerns from current and potential third parties with whom we do business, any of which could hurt our business prospects. Turnover in key leadership positions within the Company, or any failure to successfully integrate key new hires or promoted employees, may adversely impact our ability to manage the Company efficiently and effectively, could be disruptive and distracting to management and may lead to additional departures of existing personnel, any of which could have a material adverse effect on our business, operating results, financial results and internal controls over financial reporting.
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We may not adequately protect our intellectual property or the intellectual property of others.
We believe that certain of our proprietary intellectual property rights and information provide us with a competitive advantage. Accordingly, we take steps to protect this proprietary information, including obtaining patents to safeguard our HPS intellectual property, entering into non-disclosure agreements with customers, suppliers, employees and other parties, and by implementing security measures. However, these measures may not be sufficient to prevent or detect the misappropriation or unauthorized use or disclosure of our intellectual property or information. We also conduct business in some countries where the extent of effective legal protection for intellectual property rights is uncertain. Even if we have intellectual property rights, there is no guarantee that such rights will provide adequate protection of items we consider to be proprietary. We may also be required to compromise protections or yield rights to technology, data or intellectual property in order to conduct business in or access markets in certain jurisdictions, either through formal written agreements or due to legal or administrative requirements in the host nation. If we are not able to protect our intellectual property rights, our business, financial condition and results of operations may be adversely affected.
There is also a risk that claims of intellectual property infringement could be brought against us, our customers and/or our suppliers. If such claims are successful, we may be required to holdspend significant time and financial resources to develop non-infringing processes, technology or information or to obtain appropriate licenses from the owner. We may not be successful in such inventory for a period of time,development, or any of whichsuch licenses may result in our having to record additional reserves for the inventorynot be available on commercially acceptable terms, if it becomes excess or obsolete. For example, increased levels of overall aged inventory in 2018 compared to 2017 resulted in approximately $10 million in higher inventory provisions in 2018. Order cancellationsat all. In addition, any litigation could be lengthy and delayscostly and could also lower our asset utilization, resulting in higher levels of unproductive assets, lower inventory turns, and lower margins.
Our revenue and operating results may vary significantly from period to period.
Our quarterly and annual results may vary significantly depending on various factors, certain of which are described below, and many of which are beyond our control.
•the volume and timing of customer demand relative to our capacity;
•the typical short life cycle, and success in the marketplace, of our workforce.customers' products;
•the cyclical nature of customer demand in several of our businesses;
•changes to our mix of customers, programs and/or end market demand;
•how well we execute on our operational strategies, and the impact of changes to our business model;
•varying revenues and gross margins among geographies and programs for the products or services we provide;
•pricing pressures, the competitive environment and contract terms and conditions;
•upfront investments and challenges associated with the ramping of programs for new or existing customers;
•provisions or charges resulting from unexpected changes in market conditions impacting our industry or the end markets we serve;
•customer disengagements or terminations or non-renewal of customer programs, arrangements or agreements;
•the timing of expenditures in anticipation of future orders;
•our effectiveness in planning production and managing inventory, fixed assets and manufacturing processes;
•operational inefficiencies and disruptions in production at individual sites;
•unanticipated disruptions to our cash flows;
•changes in cost and availability of providingcommodities, materials, components, services and labor;
•current or future litigation;
•seasonality in quarterly revenue patterns across some of our services,businesses;
•governmental actions or changes in legislation;
•currency fluctuations; and
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•changes in global economic and political conditions and world events, including the extentimpact of External Events.
See Item 5, "Operating and Financial Review and Prospects — MD&A — Overview" for a discussion of additional factors, including rapid shifts in technology, model obsolescence, commoditization of certain products, and the emergence of new business models, that contribute to which we utilizethe complexity of managing our workforce, affectsoperations and fluctuations in our profitability. The rate at which we utilize our workforce is affected by a number of factors, including:financial results.
Deterioration in financial markets or in the macro-economic environment may adversely affect our ability to transition employees from completed projectsraise funds or increase the cost of raising funds.
Our ability to new programsborrow or raise capital, or refinance or increase our third-party indebtedness may be impacted if financial markets are unstable. Disruptions in the capital and to hire and assimilate new employees;credit markets could adversely affect our ability to forecast demand fordraw on our services and thereby maintain an appropriate headcount in each of our geographies and operating sites;revolver (or any successor or additional facility), or our ability to manage attrition;sell desired amounts of A/R under our needA/R sales program or customer supplier financing programs. Our access to devote time and resources to training and development; andfunds under our ability to matchcredit facility (or any successor or additional facility) will be dependent on the skill setsability of our employeessenior lenders to meet their funding commitments. They may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time. Longer term disruptions in the needscapital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the marketplace. If we over-utilize our workforce, our employees may become disengaged, whichmarkets stabilize or until alternative credit arrangements or other funding sources can be arranged. Such measures could impact employee attrition. If we under-utilize our workforce, our marginsinclude deferring capital expenditures, and profitability could suffer.reducing or eliminating discretionary uses of cash.
We may encounter difficulties expanding or consolidating our operations or introducing new competencies or new offerings, which could adversely affect our operating results.
As we expand our business, open new sites, enter into new markets, products and technologies, invest in research, design and development, acquire new businesses or capabilities, transfer business from one location to another location within our network, consolidate certain operations, and/or introduce new business models or programs, we may encounter difficulties that result in higher than expected costs associated with such activities. Potential difficulties related to such activities include our ability: to manage growth effectively; to maintain existing business relationships during periods of transition; to anticipate disruptions in our operations that may impact our ability to deliver to customers on time, produce quality products and ensure overall customer satisfaction; and to respond rapidly to changes in customer demand or volumes. For example, we incurred operating losses in the second halfour profitability was adversely impacted during 2020 and 2021 as a result of 2018 and throughout 2019significant reduced demand in our recently-expanded capital equipmentaerospace and defense (A&D) business, relateddue in part to significant decreases in customer demand which commenced in the second half of 2018, which also resulted in additional costsCOVID-19, requiring cost reduction actions to consolidate sites and transfer programs in an effort to reduce the fixed costs associated with this business.appropriately adjust our cost base.
We may also encounter difficulties in ramping and executing new programs. Ramping new programs can range from several months to over a year before production starts, and often requires significant up-front investments and increased working capital. These programs may generate lower margins or losses during and/or following the ramp period, or may not achieve the expected financial performance, due to production ramp inefficiencies, lower than expected volume, or delays in ramping to volume. In addition, our customers may significantly change these programs, or even cancel them altogether, due to decreases in their end-market demand or in the actual or anticipated success of their products in the marketplace. For example, we incurred higher-than-expected costs in 2018 and 2019 with respect to ramping new programs, including in our A&D, healthtech and industrial businesses. We may continue to incur similar additionalincreased ramping costs as we further expand our ATS segmentbusiness and integrateramp new acquisitions.programs. There can be no assurance that our increased investments will benefit us or result in business growth. As we pursue opportunities in new markets or technologies, we may encounter challenges due to our limited knowledge or experience in these areas. In addition, the success of new business models or programs depends on a number of factors including: understanding the new
business or markets; timely and successful product development; market acceptance; the effective management of purchase commitments and inventory levels in line with anticipated demand; the development or acquisition of appropriate intellectual property and capital investments, to the extent required; the availability of materials in adequate quantities and at appropriate costs to meet anticipated demand; and the risk that new offerings may have quality or other defects in the early stages of introduction. Any of these factors could prevent us from realizing the anticipated benefits of growth in new markets or technologies, which could materially adversely affect our business and operating results.
As part of our strategy to enhance our end-to-end service offerings, we intend to continue to expand our design and engineering including JDM, capabilities. Providing these services may expose us to different or greater potential risks than those we face when providing our manufacturing services. Our design services offerings require significant investments in research and development,R&D, technology licensing, testing and tooling equipment, patent applications and talent recruitment. Our margins may be adversely impacted if we incur higher than expected investment costs, or if our customers are not satisfied with our progress, or do not approve our completed designs. In addition, our design activities often require the purchase of inventory for initial production runs before we have a firm purchase commitment from a customer. Furthermore, we may face increased competition with respect to this offering, as well as the
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recruitment of our HPS talent, from ODMs and other companies providing similar services, including our own customers.services. As we anticipate continuingcontinue to grow thisour HPS business globally, costs required to support our design and engineering capabilities mayare expected to increase and adversely affectimpact our profitability. In addition, some of the products we design and develop must satisfy safety and regulatory standards and/or receive government certifications. If we fail to obtain these approvals or certifications on a timely basis, we would be unable to sell these products, which would harm our revenues, profitability and reputation.
There can be no assurance that our expansion into new markets or new business will be successful, or that we will achieve the anticipated benefits.
In addition, there is no assurance that we will find suitable new acquisition targets, that we will be able to consummate any such transactions on terms and conditions acceptable to us, or that we will be able to fund any such acquisitions with existing cash resources or through financing provided by external lenders. We may be unable to obtain additional capital if and when required on terms acceptable to us or at all. If the amount of capital we are able to raise from financing activities, together with the cash from our operations, is not sufficientunable to consummate an acquisition we have deemed desirable, we may not be able to implement our intended business plan, which could adversely affect our business, results of operations and financial condition. In addition, we may incur costs to support our pursuit of acquisitions and/or other strategic opportunities, which may adversely impact our operating results, and may not result in the consummation of any such transactions, and are expected to continue to adversely impact our operating results.transactions. See "We have incurred substantial third-party debt in recent periods,to fund acquisitions, which has increased our debt service requirements, may reduce our ability to fund future acquisitions and/or to respond to unexpected capital requirements, and may have other adverse impacts on our business"below.
The cost of providing our services, including the productsextent to which we design or manufacture that could result in liability/warranty claims against us, which may reduceutilize our workforce, affects our profitability. Our workforce utilization rate is affected by a number of factors, including: our ability to transition employees from completed projects to new programs and to hire and assimilate new employees; our ability to forecast demand for our services damage our reputation, and/or cause us to incur significant costs.
2021.
We may encounter integration and other significant challenges with respect to our acquisitions and strategic transactions which could adversely affect our operating results.
We have expanded (and may continue to) expandto expand) our network, capabilities and presence in new regions and end markets through acquisitions and/or strategic transactions, including multi-year "operate-in-place" arrangements, where we manage certain production, assembly or other services for customers directly from their locations, acquire their inventory, equipment and/or other assets, hire their employees, and lease or acquire their manufacturing sites. Potential challenges related to these acquisitions and transactions include: integrating acquired operations, systems and businesses (which may include transferring production from acquired operations to our existing network, or downsizing or closing acquired locations, in each case to obtain anticipated operational synergies); meeting customers' expectations as to volume, product quality and timeliness; supporting legacy contractual obligations; retaining customer, supplier, employee or other business relationships of acquired operations; addressing unforeseen liabilities of acquired businesses; limited experience with new technologies and markets; failure to realize anticipated benefits, such as cost savings and revenue enhancements; failure to achieve anticipated business volumes or operating margins; valuation methodologies not accurately capturing the value of the acquired business; the effects of diverting management's attention from day-to-day operations to matters involving the integration of acquired businesses; incurring potentially substantial transaction costs associated with these transactions; increased burdens on our staff and on our administrative, internal control and operating systems, which may hinder our legal and regulatory compliance activities; overpayment for an acquisition; and potential impairments resulting from post-acquisition deterioration in, or reduced benefit from, an acquired business. While we often obtain indemnification rights from the sellers of acquired businesses, such rights may be difficult to enforce, the losses may exceed any dedicated escrow funds, and the indemnitors may not have the ability to financially support the indemnity. Any of these factors may prevent us from realizing the anticipated benefits of an acquisition, including additional revenue, operational synergies, andand/or economies of scale. Any delay or failure to realize the anticipated benefits of acquisitions may adversely affect our business and operating results and may require us to write-down the carrying value of any related goodwill and intangible assets in periods subsequent to the acquisitions. For example, we incurred operating losses in the second half of 2018 and throughout 2019 in our recently-expanded capital equipment business related to significant unanticipated cyclical decreases in customer demand which commenced in the second half of 2018, which also resulted in additional costs to consolidate sites and transfer programs in an effort to reduce the fixed costs associated with this business. Acquisitions may also involve businesses we are not familiar with, and expose us to additional business risks that are different than those we have traditionally experienced or anticipated at the time of acquisition.
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Quality and execution issues may reduce demand for our services, damage our reputation, and/or have a material adverse effect on our business and operating results.
In any given quarter, we can experience quality and process variances related to materials, testing, or other manufacturing or supply chain activities. Although we are successful in resolving the majority of such issues, the existence of these variances could cause us to incur significant costs in relation to corrective actions, have a material adverse impact on the demand for our services in future periods from any affected customers, damage our reputation, and/or have a material adverse effect on our business and operating results.
We are subject to financial and reputational risk due to non-performance by counterparties.
A failure by counterparties, including customers, suppliers, financial institutions (including the issuers of our purchased annuities and the counterparty to our total return swap agreement), or other third parties with whom we conduct business, to fulfill their contractual obligations, may result in financial loss to us and may have adverse effects on our business.
If a key supplier, or any company within such supplier's supply chain, experiences financial or other difficulties, such difficulties may affect their ability to supply us with materials, components or services, which could halt or delay the production of a customer's products, and/or have a material adverse impact on our operations, financial results, and customer relationships. In addition, our ability to collect outstanding A/R depends, in part, on the financial strength of our customers. See Item 5, "Operating and Financial Review and Prospects — MD&A — External Factors that May Impact our Business" for further detail. In 2022, one customer individually represented 10% or more of total A/R (2021 and 2020 — two customers). If a customer bankruptcy occurs, our profitability may be adversely impacted if affected A/R are in excess of our allowance for doubtful accounts. Additionally, our future revenues could be adversely impacted by a customer bankruptcy. Inability to collect A/R and/or the loss of one or more major customers could adversely impact our operating results, financial position and cash flows. We cannot reasonably determine the extent to which a customer or supplier may have financial difficulties, or whether we will be required to adjust customer pricing, payment terms and/or the amounts we pay to suppliers for materials and components.
To mitigate the actuarial and investment risks of our defined benefit pension plans, we purchase annuities (using existing plan assets) from time to time from third party insurance companies for certain, or all, of our obligations under specified pension plans. Failure by the insurance companies to fulfill their contractual obligations would result in a significant financial loss to us, as we retain ultimate responsibility for the payment of benefits to plan participants unless and until such pension plans are wound-up.
We may use cash on hand, issue debt or equity securities, and/or incur additional third-party debt (or any combination thereof) to complete future acquisitions or otherwise fund our operations, which may adversely affect our liquidity, credit ratings, financial condition and/or results of operations.
Any significant use of cash (for future acquisitions or otherwise) would adversely impact our cash position and liquidity. In addition, we may choose to issue debt securities or otherwise incur additional debt to fund future acquisitions or otherwise fund our operations. Any additional incurrence of debt (either through the issuance of debt securities or through a new or refinanced credit facility) would increase our debt leverage and debt service requirements (necessitating the use of additional cash flow for this purpose), may reduce our debt agency ratings, may further adversely impact our ability to fund future acquisitions and/or respond to unexpected capital requirements, may impose additional restrictions on our operations, and may have a variety of additional adverse effects, including, but not limited to, those described in "We have incurred substantial third-party debt in recent periods,to fund acquisitions, which has increased our debt service requirements, may reduce our ability to fund future acquisitions and/or to respond to unexpected capital requirements, and may have other adverse impacts on our business.
business"below. To the extent we sell equity or convertible debt securities, the issuance of these securities (the pricing of which would be subject to market conditions at the time of issuance) could result in material dilution to our stockholders. Sales of our equity securities or convertible debt, or the perception that these sales could occur, could also cause the market price for our subordinate voting shares (SVS) to fall, and new securities could have rights, preferences and privileges senior to the holders of our SVS.
Our debt leverageoperations have been and debt service requirementscould continue to be adversely affected by events outside our control.
Our operations and those of our customers, component suppliers and/or our logistics partners may be disrupted by global or local events outside our control, including: natural disasters, fires and related disruptions; political instability; increased political tension between countries (including threats of retaliatory action from the Chinese government due to recent tensions between the U.S. and China); geopolitical dynamics; terrorism; armed conflict; labor or social unrest; criminal activity; disease or illness that affects local, regional, national or international economies (see below); unusually adverse weather
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conditions (including those caused by climate change), such as hurricanes, tornados, other extreme storms, wildfires, droughts and floods; cybersecurity incidents (see "Our operations and our customer relationships may be adversely affected by disruptions to our information technology (IT) systems, including disruptions from cybersecurity breaches of our IT infrastructure"below);and other risks present in the jurisdictions in which we, our customers, our suppliers and/or our logistics partners operate. These types of events could disrupt operations at one or more of our sites or those of our customers, component suppliers and/or our logistics partners, with the impact of the event potentially magnified in areas where we or they have each increasedmultiple facilities in close proximity. These events could also lead to higher costs or supply shortages, and may disrupt the delivery of components to us or our ability to provide finished products or services to our customers, any of which could adversely affect our operating results materially. We carry insurance to cover damage to our sites and interruptions to our operations, including those that may occur as a result of third-party borrowings usednatural disasters, such as flooding, earthquakes or other events. Our insurance policies, however, are subject to financedeductibles, coverage limitations and exclusions, and may not provide adequate (or any) coverage should such events occur. Such events could also impact our acquisitions of Atrenne Integrated Solutions, Inc. (Atrenne) and Impakt Holdings, LLC (Impakt). This increased indebtedness, together with the mandatory prepayment provisionsinsurance premiums. In addition, some of our creditfacilities possess certifications or unique equipment necessary to work on specialized products that our other locations lack. If work is disrupted at one of these facilities as a result of the foregoing events or otherwise, it may be impractical or we may be unable to transfer such specialized work to another facility may reducewithout significant costs and delays. Thus, any disruption in operations at a facility possessing specialized certifications or equipment could adversely affect our ability to provide products and services to our customers, and potentially have a negative affect our relationships and financial results.
Our business and operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease or other adverse public health developments. These effects could (and with respect to COVID-19, did and from time to time) include disruptions or restrictions on our employees' and other service providers' ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain, including single source suppliers, and shipping delays and premiums. In addition, a significant outbreak of contagious diseases in the human population could (and with respect to COVID-19, did and continues to) result in a widespread health crisis that adversely affects the economies and financial markets of many countries, resulting in an economic downturn that affects demand for our end customers' products and in turn adversely impacts our operating results. See "The effect of COVID-19 on our operations and the operations of our customers, suppliers and logistics providers has had, and may in the future have, a material and adverse impact on our financial condition and results of operations"belowfor a discussion of the actual and potential impact of COVID-19 on our business.
Increased international political volatility, including changes to previously accepted trading or other government policies or legislation in the U.S. and Europe, instability in parts of Europe and the Middle East, as well as the ongoing refugee crisis, anti-immigrant activities, social unrest and fears of terrorism, enhanced national security measures, armed conflicts (including between Russia and Ukraine), security issues at the U.S./Mexico border related to illegal immigration or criminal activities associated with illegal drug activities, labor or social unrest, strained international relations, including tensions between the U.S. and other countries, and any related decline in consumer confidence arising from these and other factors may materially hinder our ability to conduct business, or may reduce demand for our products or services. Any escalation in these events or similar future events may disrupt our operations or those of our customers and suppliers and could adversely affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing sites and finished products to customers. Changes in policies by the U.S. or other governments could negatively affect our operating results due to changes in duties, tariffs or taxes, or limitations on currency or fund transfers, as well as government-imposed restrictions on producing certain products in, or shipping them to, specific countries.
The foregoing events have had and may in the future acquisitionshave an adverse impact on the U.S. and global economy in general, and on consumer confidence and spending, which may adversely affect our revenue and financial results. Such events could increase the volatility of the market price of our securities and may limit the capital resources available to us and/or our customers and suppliers.Also see "We continue to respondoperate in an uncertain global economic and political environment,""The effect of COVID-19 on our operations and the operations of our customers, suppliers and logistics providers has had, and may in the future have, a material and adverse impact on our financial condition and results of operations,""U.S.policies or legislation could have a material adverse effect on our business, results of operations and financial condition," "Our ability to successfully manage unexpected capital requirements. Such increaseschanges or risks inherent in our global operations and supply chain may also: requireadversely impact our financial performance,"and Item 5, "Operating and Financial Review and Prospects — MD&A — External Factors that May Impact our Business."
In June 2022, a fire occurred at our Batam, Indonesia facility. We expect to fully recover our tangible losses through insurance coverage. Whereas we previously anticipated that certain unfulfilled revenues would shift to 2023, we returned to pre-incident operating levels by year end.
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We rely on a variety of common carriers for the transportation of materials and products and for their ability to route these materials and products through various international ports and other transportation hubs. A work stoppage, strike or shutdown of any important supplier's site or operations, or at any major port or airport, or the inability to access any such site for any reason, could result in manufacturing and shipping delays or expediting charges, which could have a material adverse effect on our operating results.
There may be problems with the products we design or manufacture that could result in liability/warranty claims against us, which may reduce demand for our services, damage our reputation, and/or cause us to pursue additional term financingincur significant costs.
In most of our sales contracts, we provide warranties against defects or deficiencies in our products, services, or designs. We generally design and manufacture products to our customers' specifications, many of which are highly complex, and include products for regulated industries, such as HealthTech and A&D. The customized design solutions that form a part of our HPS offering also subject us to the risk of liability claims if defects are discovered or alleged. Despite our quality control and assurance efforts, problems may occur or be alleged, in or resulting from the design and/or manufacture of these products. Whether or not we are responsible, problems in the products we design and/or manufacture, or in products which include components we manufacture, whether real or alleged, whether caused by faulty customer specifications, the design or manufacturing processes or a component defect, may result in increased costs to us, as well as delayed shipments to our customers, and/or reduced or canceled customer orders. These potential investments, whichclaims may include damages for the recall of a product and/or injury to person or property, including consequential and/or punitive damages.
Even if customers or third parties, such as component suppliers, are responsible for defects, they may not, or may not be available on acceptable termsable to, assume responsibility for any such costs or at all; limitrequired payments to us. While we seek to insure against many of these risks, insurance coverage may be inadequate, not cost effective or unavailable, either in general or for particular types of products or issues.
As we expand our abilityservice offerings (including our HPS offerings) and pursue business in new end markets, our warranty obligations have increased and we may not be successful in pricing our products to obtain additional financingappropriately cover our warranty costs. A successful claim for working capital, business activities,damages arising from defects or deficiencies for which we are not adequately insured, and other general corporate requirements; limit our ability to refinance our indebtedness on terms acceptable to us or at all; limit our flexibility to plan for and adjust to changing business and market conditions, increase our vulnerability to general adverse economic and industry conditions; and will require us to dedicatewhich indemnification from a portion of our cash flow to make interest and principal payments on such indebtedness, thereby limiting the availability of our cash flow for other purposes. In addition, such increased indebtednessthird party is not timely (or otherwise) available, could have a variety of othermaterial adverse effects, including: (i) default and foreclosureeffect on our assets if we have insufficient fundsreputation and/or our operating results and financial condition.
We are subject to repaydemand volatility in the debt obligations; (ii) accelerationcommercial aerospace industry, and the sustained downturn in this industry as a result of such indebtedness or cross-defaults if we breach financial or other covenants under applicable debt agreementsCOVID-19 has adversely impacted the revenues of our A&D business.
Our A&D business may be affected by certain characteristics and such breaches are not waived; (iii) increased vulnerability to adverse changes in competitive conditions or government regulation; and (iv) other disadvantages compared to our competitors who have less debt. Our current credit facility prohibits share repurchases for cancellation if our leverage ratio (as defined in such facility) exceeds a specified amount. This restriction is currently in effect.
Any failure to comply with customer-driven policies and standards, and third party certification requirements including those related to social responsibility, could adversely affect our business and reputation.
In addition to government regulations and industry standards, our customers may require us to comply with their own climate change, social responsibility, conflict minerals, quality or other business policies or standards, which may be more restrictive than current laws and regulations and our pre-existing policies, before they commence, or continue, doing business with us.policies. Such policies or standards may be customer-driven, established by the industries in which we operate, or imposed by third party organizations. For example, we are a member of the Responsible Business Alliance (RBA). The RBA is a non-profit coalition of electronics companies that, among other things, establishes standards for its members in responsible and ethical practices in the areas of labor, environmental compliance, employee health and safety, ethics and social responsibility. Our compliance with these policies, standards and third-party certification requirements could be costly, and our failure to comply could adversely affect our operations, customer relationships, reputation and profitability.
We have incurred significant restructuring charges in recent periods,substantial third-party debt to fund acquisitions, which has increased our debt service requirements, may reduce our ability to fund future acquisitions and/or to respond to unexpected capital requirements, and expectmay have other adverse impacts on our business.
Our outstanding indebtedness, together with the mandatory prepayment provisions of our credit facility, require us to incur further significant restructuring charges during 2020;dedicate a portion of our cash flow to make interest and principal payments on such indebtedness, thereby limiting the availability of our cash flow for other purposes, and may reduce our ability to fund future acquisitions and/or to respond to unexpected capital requirements. Such indebtedness (which may increase if we are unable to sell desired amounts under our uncommitted accounts receivable sales program or supplier financing programs) may also: require us to pursue additional term financing for potential investments, which may not achieve somebe available on acceptable terms or allat all; limit our ability to obtain additional financing for working capital, business activities, and other general corporate requirements; limit our ability to refinance our indebtedness on terms acceptable to us or at all; limit our flexibility to plan for and adjust to changing business and market conditions; and increase our vulnerability to general adverse economic and industry conditions. In addition, such indebtedness could have a variety of other adverse effects, including: (i) default and foreclosure on our assets if we have insufficient funds to repay the debt obligations; (ii) acceleration of such indebtedness or cross-defaults if we breach financial or other covenants under applicable debt agreements and such breaches are not waived; (iii) increased vulnerability to adverse changes in competitive conditions or government regulation; and (iv) other disadvantages compared to our competitors who have less debt. Our credit facility also prohibits share repurchases for cancellation if our leverage ratio (as defined in such facility) exceeds a specified amount (this restriction is not currently, and during 2022 was not, in effect).
In addition, our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings reflect the opinions of the expected benefitsratings agencies of our financial strength, operating performance and ability to meet our debt obligations. There can be no assurance that we will achieve a particular rating or maintain a particular rating in the future, which could place us at a disadvantage compared to our competitors and prevent us from taking actions that could benefit us in the long term. Any negative change in our restructuring activities, these activitiescredit rating or outlook may adversely affectmake it more expensive for us to raise additional capital in the future on terms that are acceptable to us, if at all. We may not be able to obtain financing arrangements on acceptable terms or in amounts sufficient to meet our needs in the future, which could harm our ability to grow our business, internally or through acquisitions.
The effect of COVID-19 on our operations and additional restructuring actions may be required once currently-contemplated actions are complete.
COVID-19 had a material and completedadverse impact on our operations during 2020 and 2021. In addition to the impact of demand reductions due to COVID-19 on our revenue (most significantly in the fourth quarterour Industrial and commercial aerospace businesses), we experienced significant adverse revenue impacts across our businesses resulting from materials constraints (including as a result of 2019, and commenced implementation of a new restructuring program associated primarily with the Cisco Disengagement (with anticipated restructuring charges of $30 million in 2020)COVID-19). We recorded restructuring charges of $37.9 million in 2019, $35.4 million in 2018, and $28.9 million in 2017. See Item 5, "Operating and Financial Review and Prospects — Management's DiscussionMD&A — Recent Developments — Segment Environment" for further detail. As a result of supply chain and Analysis of Financial Conditionworkforce constraints and Results of Operations — Operating results — Other charges (recoveries)." Implementation of our restructuring activities may be costlyCOVID-19-related expenses, we were also negatively impacted by approximately $4 million, $32 million and disruptive$37 million during 2022, 2021 and 2020, respectively, in estimated Constraint Costs (defined as both direct and indirect costs, including manufacturing inefficiencies related to lost revenue due to our business,inability to secure materials, idled labor costs, and incremental costs for labor, expedite fees and freight premiums, cleaning supplies, personal protective equipment, and IT-related services to support our work-from-home arrangements). Adverse COVID-19-related impacts were mitigated in part by an aggregate of $11 million and $34 million in COVID-19-related government subsidies, grants or credits and $1 million and $3 million of COVID-19-related customer recoveries we may not achieve the cost savingsrecognized in 2021 and benefits anticipated from2020, respectively. However, no such activities. We may not be ablerelief was granted to retain or expand existing business due to execution issues relating to anticipated headcount reductions, plant closures or product/service transfers, and we may incur higher operating expenses during the periods of transition. Additionally, restructuring actions may resultus in a loss of continuity and accumulated knowledge in our workforce and related2022. Although operational inefficiencies, as well as negative publicity. Headcount reductions can also have a negative impact on morale and our ability to attract and hire new qualified personnel in the future. Our restructuring activities are expected to require a significant amount of management and other employees’ time and focus, which may divert attention from operating and growing our business.
We have incurred significant impairment chargesexperienced (and continue to experience) shipping surcharges on ocean freight, premiums on air freight, and operating lossesincreased transit times in receiving certain raw materials as a result of shipping delays due to, among other things, additional safety requirements imposed by port authorities, closures of or congestion at ports, reduced availability of commercial transportation, border restrictions and capacity constraints for air freight as a result of COVID-19, which have had an adverse impact on our ability to obtain materials and, at times, deliver our products in a timely manner, and consequently, our results of operations. Although shipping delays and increased shipping costs are anticipated to improve in 2023, we continue to expect adverse impacts from such conditions on our operations and financial results.
The pandemic has impacted our customers in recent periods and may incur such charges and losses in future periods.
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individuals contracting or being exposed to new variants of COVID-19. While we continue to follow the requirements of governmental authorities and equipment, ROU assetstake preventative and deferred tax assets on an ongoing basis,protective measures to prioritize the safety of our employees, these measures may not be successful, and we may be required to temporarily close facilities or take other measures. If factory closures or significant reductions in capacity utilization occur, we would incur impairment charges, which could be substantialadditional inefficiencies and could adversely affect our financial results. Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices,direct costs, or other factors that may result in changes in our estimates of future cash flows. Factors that might reduce the recoverable amount of these assets below their respective carrying values include declines in our stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in any of our businesses. Sustained market price decreases, demand softness, and/or failure to realize future revenue at an appropriate profit margin in any cash generating unit (CGU) could negatively impact our operating results, including restructuring actions and/or impairment losses for such CGU. Similar factors are considered in evaluating the recoverability of our deferred tax assets. Our deferred tax assets are reduced to the extent it is no longer probable that we will realize the related tax benefits; such reductions are reversed if it again becomes probable that we will realize such benefits.
In addition to the potential items noted above, future impacts from the continued impact of COVID-19 (and/or future resurgences) may also include: (i) a further decrease in short-term and/or a decrease in long-term demand and/or pricing for certain of our products; (ii) reductions in production levels and R&D activities; (iii) further increased costs resulting from our efforts to mitigate the impact of COVID-19; (iv) further deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures, could result in losses on our holdings of cash and investments due to failures of financial institutions and other parties, and could result in a higher rate of losses on our accounts receivable (A/R) due to credit defaults; (v) further disruptions to our supply chain, including as a result of shipping delays; (vi) write-downs and/or logistics disruptions could materially impactimpairments of assets; (vii) diversion of management's attention from our operations outside China since we purchasekey strategic priorities, causing us to reduce, delay, alter or abandon initiatives that may otherwise increase our long-term value or otherwise disrupt our business operations; and/or (viii) adverse impacts on our information technology systems and our internal control systems as a meaningful levelresult of components from Chinese suppliers for our sites in other countries.continued remote work arrangements.
A decline in the U.S./Mexico border related to illegal immigration or criminal activities associated with illegal drug activities, labor or social unrest, strained international relations, including tensions between the United States and other countries,government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and any relatedadversely affect our future revenue and limit our growth prospects.
Because we generate a portion of our revenue from contracts with the U.S. government and government agencies, our results of operations could be adversely affected by relevant spending caps or changes in budgetary priorities, as well as by delays in the budget process, program starts, or the award of contracts or orders. Current U.S. government spending levels for defense-related and other programs may not be sustained in future periods, including as a result of budgetary constraints, spending cuts resulting from sequestration, a continuing resolution, a government shutdown, the debt ceiling or measures taken to avoid default, or otherwise, and uncertain funding of programs. Spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide services or are less likely to be awarded contracts. Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds and the number and intensity of military conflicts or other factors. A significant decline in consumer confidence arising from these and other factors may materially hinder our ability to conduct business,overall U.S. government spending, a significant shift in spending priorities, the substantial reduction or may reduce demandelimination of particular defense-related programs, or significant budget-related delays in contract or task order awards for our products or services. Any escalation in these events or similar future events may disrupt our operations or those
Failure of the availabilityU.S. federal government to manage its fiscal matters or to raise or further suspend the debt ceiling, and changes in the amount of materials neededU.S. federal debt, may negatively impact the economic environment and adversely impact our results of operations.
U.S. federal budget deficit concerns and the potential for political conflict over legislation to manufacture our products orfund U.S. government operations and raise the means to transport those materials to manufacturing sites and finished products to customers. Changes in policiesU.S. government's debt limit may increase the possibility of a default by the U.S. or other governments could negatively affect our operating results due to changes in duties, tariffs or taxes, or limitationsgovernment on currency or fund transfers, as well as government-imposed restrictions on producing certain products in, or shipping them to, specific countries.
The current U.S. administration has created uncertainty with respectmilitary conflict between Russia and Ukraine, and the global response thereto, may adversely affect our business and results of operations.
In response to among other things, existingthe military conflict between Russia and proposed trade agreements, free trade generally, and significant increases on tariffs on goods imported intoUkraine, the U.S. from specified countries. The, United States, CanadaKingdom, European Union and Mexicoothers have agreedimposed significant new sanctions and export controls against Russia and certain Russian individuals and entities.
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This conflict has also resulted in significant volatility and disruptions to the global markets. It is not possible to predict the long-term implications of this conflict, which could include but are not limited to further sanctions, uncertainty about economic and political stability, increases in inflation rates and further increases in energy prices, supply chain challenges and adverse effects on a revised trade deal (USMCA) to replace the North American Free Trade Agreement. The USMCA was executed at the end of 2018, but has not yet been ratified by Canada. We cannot currently quantify the impact on our business of the USMCA, if ratified.currency exchange rates and financial markets. In addition, sanctions against Russia in response to the current U.S. administration has increased tariffs on certain items imported into the U.S. from several countries (many of which are not addressed by the USMCA), each of which has imposed retaliatory tariffs on specified items. These actions, or other governmental actions related to tariffs or international trade agreements, could increase the cost to our U.S. customers who use our non-U.S. manufacturing sites and components, and vice versa, which may materially and adversely impact demand for our services, our results of operations or our financial condition. We transferred numerous customer programs in 2019, primarily located in China, to countries unaffected by these tariffs (including Thailand). Remaining transfers were completed in early 2020. These transfers resulted in new investments and costs to realign our manufacturing footprint, including expansion in non-affected countries, and reductions of operations in impacted geographies. Although such costs were not material in 2019, given the uncertainty regarding the scope and duration of these trade actions, the uncertainty of the impact of the USMCA, if ratified, on our business, whether trade tensions will escalate further, and whether our customers will continue to bear the cost of the tariffs, their impact on our operations and results for future periods cannot be currently quantified, but may be material. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — External Factors that May Impact our Business" for further detail.
Changes to our operating model may adversely affect our business.
We continuously work to improve our productivity, quality, delivery performance and flexibility. In connection therewith, we recently completed an $81.3 million cost efficiency initiative, implemented to further streamline our business and improve our margin performance. We have also commenced implementation of a new restructuring program, associated primarily with our Cisco Disengagement, and expect to incur $30 million in restructuring charges in 2020 in connection therewith. Charges related to these initiatives adversely impact our financial condition and results of operations in the periods incurred. In addition, as a result of our CCS Review (implemented to address under-performing programs and to disengage from customer programs that do not meet our strategic objectives), we are disengaging from programs that are expected to result in an aggregate annualized decline in our CCS segment revenue of approximately $1.25 billion once all such disengagements (including the Cisco Disengagement) are complete. See "Operating Results — Other charges (recoveries)" and "Overview — Recent Developments" in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations."
flexibility through various operational initiatives. Implementation of these initiatives, however, presents a number of risks, including: (i) failure to achieve anticipated margin improvements from such actions; (ii) actual or perceived disruption of service or reduction in service levels to customers; (iii) potential adverse effects on our internal control environment with respect to general and administrative functions during transitions resulting from such initiatives; (iv) actual or perceived disruption to suppliers, distribution networks and other important operational relationships and the inability to resolve potential conflicts in a timely manner; (v) diversion of management attention from ongoing business activities and strategic objectives; and (vi) failure to retain key employees. Because of these and other factors, we cannot predict whether we will fully realize the purpose and anticipated benefits or cost savings of these initiatives and, if we do not, our business and results of operations may be adversely affected. Furthermore, adverse changes to our business may require additional restructuring or reorganization activities in the future. See "We have incurred significant restructuring charges in recent periods,the past, and expect to incur further significant restructuring charges during 2020;2023; we may not achieve some or all of the expected benefits from our restructuring activities, these activities may adversely affect our business, and additional restructuring actions may be required once currently-contemplated actions are complete" above.
We are exposed to translation and transaction risks associated with foreign currency exchange rate fluctuations; hedging instruments may not be effective in mitigating such risks.
Global currency markets can be volatile. Although we conduct the majority of our business in U.S. dollars, (our functional currency), our global operations subject us to translation and transaction risks associated with fluctuations in currency exchange rates that could have a material adverse impact on our operating results and/or financial condition. A significant portion of our operational costs (including payroll, pensions, site costs, costs of locally sourced supplies and inventory, and income taxes) are denominated in various currencies other than the U.S. dollar. Fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for costs incurred in other currencies or significantly decrease the U.S. dollars received from non-U.S. dollar revenues. Our non-U.S. currency exposures consist of the Canadian dollar, Czech Koruna, Thai baht, Malaysian ringgit, Mexican peso, British pound sterling, Brazilian real, Chinese renminbi, Euro, Romanian leu, Korean won, Lao kip, Japanese yen, Hong Kong dollar, Philippine peso, Indian Rupee, Taiwan dollar, and Singapore dollar.
Although our functional currency is the U.S. dollar, currency risk on our income tax expense arises as we are generally required to file our tax returns in the local currency for each particular country in which we have operations. A weakening of the local currency against the U.S. dollar could have a negative impact on our income taxes payable (related to increased local-currency taxable profits) and on our deferred tax costs (primarily related to the revaluation of non-monetary foreign assets from historical average exchange rates to the period-end exchange rates). See note 2120 to the Consolidated Financial Statements in Item 18. While
our hedging program is designed to mitigate currency risk vis-à-vis the U.S. dollar, we remain subject to taxable foreign exchange impacts in our translated local currency financial results relevant for tax reporting purposes.
As part of our risk management program, we enter into foreign exchangecurrency forward and swap contracts to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability offoreign currency risk related to our operating costs and future cash flows denominated in local currencies. While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates. We do not enter into these contracts for trading purposes or speculation, and our management believes all such contracts are entered into as hedges of underlying transactions. Nonetheless,In addition, these instruments involve costs and risks of their own in the form ofare subject to transaction costs, credit requirements and counterparty risk. If our hedging program is not successful, or if we change our hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates.
Our financial results have been adversely impacted by negative foreign currency translation effects, and such adverse effects, some of which may be substantial, are likely to recur in the future.
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Our ability to successfully manage unexpected changes or risks inherent in our global operations and supply chain may adversely impact our financial performance.
We have sites in the following countries: Canada, the United States,U.S., China, Ireland, Japan, Laos, Malaysia, Mexico, Romania, Singapore, South Korea, Spain, Indonesia, India, Philippines and Thailand. During 2019,2022, approximately 80% of our revenue was produced at locations outside of North America. We also purchase the majority of our components and materials from international suppliers.
Global operations are subject to inherent risks which may adversely affect us, including:
•changes in local tax rates and tax incentives and the adverse tax consequences of repatriating earnings;
•labor unrest and differences in regulations and statutes governing employee relations, including increased scrutiny of labor practices within our industry;
•cultural differences and/or differences in local business customs;
•negative impacts, or ineffectiveness, of executingour restructuring activities;
•changes in regulatory requirements;
•inflationary trends and rising costs;
•changes in international political relations;
•difficulty in staffing (including skilled labor availability and cost) and managing foreign operations;
•challenges in building and maintaining infrastructure to support operations;
•compliance with a variety of foreign laws, including import and export tariffs and regulations;
•adverse changes in trade policies and/or agreements between countries in which we maintain operations;
•changes in logistics costs;
•changes in the availability, lead time, and cost of components and materials;
•weaker laws protecting intellectual property rights and/or greater difficulty enforcing such rights;
•global economic, political and/or social instability;instability, including military actions, protectionism and reactive countermeasures, economic or other sanctions or trade barriers;
•potential restrictions on the transfer of funds and/or other restrictive actions by foreign governments;
•the effects of terrorist activity, armed conflict, natural disasters, fires and epidemics (including the recent COVID-19 outbreak)COVID-19); and
•global currency fluctuations.
Any of these risks could disrupt the supply of our components or materials, slow or stop our production, and/or increase our costs. Compliance with trade and foreign tax laws may increase our costs and actual or alleged violations of such laws could result in enforcement actions or financial penalties that could result in substantial costs. In addition, the introduction or expansion of certain social programs in foreign jurisdictions may increase our costs, and certain supplier's costs, of doing business.
In particular, a significant portion of our manufacturing, design, support and storage operations are conducted in our facilities in China, and revenues associated with our China operations are important to our success.success (2022 — 11%; 2021 — 16%; 2020 — 20%). Therefore, our business, financial condition and results of operations may be materially adversely affected by economic, political, legal, regulatory, competitive and other factors in China. International trade disputes with China could result in tariffs and other measures that could adversely affect the Company’s business. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement and control over economic growth. In addition, our operations in China are governed by Chinese laws, rules and regulations, some of which are relatively new. The Chinese legal system continues to rapidly evolve, which may result in uncertainties with respect to the interpretation and enforcement of Chinese laws, rules and regulations that could have a material adverse effect on our business. China experiences high turnover of direct labor in the manufacturing sector, and engineers in our design centers, due to the intensely competitive and fluid market for labor, and the retention of adequate labor is a challenge. If our labor turnover rates are higher than we expect, or we otherwise fail to adequately manage our labor needs, then our business and results of operations could be adversely affected. We are also subject to risks associated with our subsidiaries organized in China. For
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example, regulatory and registration requirements and government approvals affect the financing that we can provide to our subsidiaries. If we fail to receive required registrations and approvals to fund our subsidiaries organized in China, or if our ability to remit currency out of China is limited, then our business and liquidity could be adversely affected.
In addition, see "Our operations could be adversely affected by global or local events outside our control"above for a discussion of potential and anticipated adverse impacts on our business resulting from the recent outbreak of COVID-19, and Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — External Factors that May Impact our Business"for a discussion of current actions weinternational trade disputes with China have takenresulted in response to recentincreased tariffs and potential adverse impactsother measures that have, and may continue to, adversely affect the Company's business. Our production from China has become less cost-competitive than other low-cost countries in recent periods, and we anticipate continued actions from non-China based customers to exit China to avoid the impact of recent trade tensions between the United States and China.
Our business is dependent on us winning competitive bid selection processes.
processes.
These selection processes are typically lengthy and can require us to dedicate significant development expenditures and scarce engineering resources in pursuit of a single customer opportunity. Failure to obtain a particular design win may prevent us from obtaining design wins in subsequent generations of a particular product. This can result in lost revenue and could weaken our position in future competitive bid selection processes.
We may not keep pace with rapidly evolving technology.
Many of the markets for our manufacturing and engineering services are characterized by rapidly changing technology and evolving process development. We believe our future success depends, in part, upon our ability to: continually developdevelopment, and deliver electronic and complex mechanical manufacturing services that meet our customers' evolving needs; hire, retain and expand our qualified engineering and technical personnel; maintain and continually improve our technological expertise; and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.
Various industry-specific standards, qualifications and certifications are required to produce certain types of products for our customers. Failure to obtain or maintain those certifications may adversely affect our ability to maintain existing levels of business or win new business.
We may not adequately protect our intellectual property or the intellectual property of others.
We conduct business operations in a number of countries, including countries where tax incentives have been extended to encourage foreign investment or where income tax rates are low. Our income tax expense could increase significantly if certain tax incentives from which we benefit are retracted. A retraction could occur if we fail to satisfy the conditions on which these tax incentives are based, or if they are not renewed or replaced upon expiration. Our income tax expense could also increase if tax rates applicable to us in such jurisdictions are otherwise increased, or due to changes in legislation or administrative practices. Changes in our outlook in any particular country could impact our ability to meet the required conditions. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Operating Results — Income taxes" and note 2019 to the Consolidated Financial Statements in Item 18 for a discussion of recently expired tax incentives, the status ofour existing tax incentives, and a challenge to our Brazilian salesRomanian tax levy rates.position.
We develop our tax filing positions based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions currently in effect in the jurisdictions in which we have assets or conduct business, all of which are subject to change or differing interpretations, possibly with retroactive effect. If the recent global minimum tax agreement is implemented in the jurisdictions in which we do business, it could, among other things, increase
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cash taxes, increase audit risk, and increase our worldwide corporate effective tax rate. In addition, the Organization for Economic Cooperation and Development continues to issue guidelines and proposals related to Base Erosion and Profit Shifting which may result in legislative changes that could reshape international tax rules in numerous countries and negatively impact our effective tax rate. We cannot predict the outcome of any specific legislative proposals or initiatives, and we cannot provide assurance that any such legislation or initiative will not apply to us. Legislation or other changes in U.S. and/or international tax laws could increase our tax liability or adversely affect our overall profitability and results of operations.
Certain of our subsidiaries provide financing or products and services to, and may from time-to-time undertake certain significant transactions with, other subsidiaries in different jurisdictions. Moreover, several jurisdictions in which we operate have tax laws with detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm's-length pricing principles, and that contemporaneous documentation must exist to support such pricing.
We are subject to tax audits in various jurisdictions, which could result in additional tax expense in future periods related to prior results. Any such increase in our income tax expense and related interest and/or penalties could have a significant adverse impact on our future earnings and future cash flows. The successful pursuit of assertions made by any taxingtax authority could result in our owing significant amounts of tax, interest, and possibly penalties. We believe we adequately accrue for any probable potential adverse tax ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and could be in excess of amounts accrued.
As at December 31, 2019,2022, a significant portion of our cash and cash equivalents was held by foreign subsidiaries outside of Canada, a large part of which may be subject to withholding taxes upon repatriation under current tax laws. We repatriated in 2022, and currently expect to repatriate in the foreseeable future, an aggregate of approximately $117$320 million from various foreign subsidiaries in the near term (December 31, 20182021 — expected to repatriate $30$290 million), which has resulted in higher related deferred tax liabilities than in the prior year..
Our operations and our customer relationships may be adversely affected by disruptions to our information technology (IT) systems, including disruptions from cybersecurity breaches of our IT infrastructure.
As a complex, global company, we are heavily dependent on our IT systems to support our customers' requirements and to successfully manage our business. Any inability to successfully manage the procurement, development, implementation, execution or maintenance of such systems, including matters related to system and data security, cybersecurity, privacy, reliability, compliance, performance and access, as well as any inability of these systems to fulfill their intended purpose, could have an adverse effect on our business.
We relyare increasingly reliant on information technologyIT networks and systems, including our own and those of third-party service providers, to process, transmit and store electronic information. In particular, we depend on our IT infrastructure for a variety of functions, including (among others), product manufacturing, worldwide financial reporting, inventory and other data management, procurement, invoicing, employee payroll and benefits administration, and email communications. AnyAll of these systems may beare susceptible to outages due to fire, floods, power loss, telecommunications failures, terrorist attacks, sabotage and similar events. GlobalThese systems are also susceptible to cybersecurity threats and incidents, can rangeranging from uncoordinated individual attempts to gain unauthorized access to our IT systems to sophisticated and targeted measures known as 'advanced persistent threats'. The ever-increasing use, and evolution of technology, including cloud-based computing and the rise of the 'Internet of Things,' creates opportunities for the unintentional dissemination or intentional destruction of confidential information stored in our systems or in non-encrypted portable media or storage devices. We could also experience a business interruption, information theft of confidential data, or reputational damage frommay include industrial espionage attacks, data theft, malware, phishing, ransomware attacks (which are becoming increasingly prevalent), or other cyber-attacks,cybersecurity threats or incidents. Similarly, third parties and infrastructure in our supply chain may become compromised or contain exploitable defects (of which we may compromise be unaware) that could result in a breach or disruption of our systems and networks or the systems or networks of third parties that support us. We believe attempts to gain unauthorized access through the Internet or to introduce malicious software to our information systems are increasing in number and in technical sophistication.
If our security measures are compromised, or the security, confidentiality, integrity or availability of, our IT, software, services, communications or data is compromised, limited or fails, it could result in: damage to our system infrastructureinfrastructure; significant business interruption, delays or lead to data leakage,outages, either internally or at our third-party providers. Despiteproviders; significant data loss or leakage (including exposure to unauthorized persons or the implementationpublic of advanced threatsensitive data, including our intellectual property, trade secrets or personal information of our employees, customers or other business partners); significant extra expense to restore data or systems; reputational loss; significant fines, penalties and liability; breach or triggering of data protection informationlaws, privacy policies and/or data protection obligations (discussed below); loss of customers or sales, and networkin the case of our defense business, debarment from future participation in U.S. government programs. In addition, we may be required to expend significant resources, change our business practices or modify our operations in an effort to protect against security measuresbreaches and disaster recovery plans,to mitigate, detect, and remediate actual and potential vulnerabilities that could adversely affect our systemsbusiness and thoseoperations and/or
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result in the loss of third parties on which we rely may also be vulnerable to computer viruses, break-ins and similar disruptions. critical or sensitive information. If we or our vendors are unable (or are perceived as unable)to be unable to prevent or promptly identify and remedy such outages and breaches, this could result in reputational loss and/or loss of customers or sales.
While we have invested, and continue to invest, in the protection of our operationsdata and IT infrastructure, we regularly face attempts by others to access our information systems in an unauthorized manner, to introduce malicious software to such systems or both, and while we have not been materially impacted by computer viruses, malware, ransomware, hacking incidents, outages, or unauthorized access to data, we have been (and may in the future be) the target of such events. In addition, there can be disrupted,no assurance that our efforts will prevent further service interruptions or identify breaches in our systems that could adversely affect our business reputationand operations and/or result in the loss of critical or sensitive information, which could result in financial, legal, business or reputational harm to us (as described above). Although this has not been an issue to date, our liability insurance may not be adversely affected,sufficient in type or amount to cover us against claims related to security breaches, cybersecurity attacks and there could be a negative impact on our financial condition and results of operations. other related breaches.
We expect that risks and exposures related to cybersecurity attacks will remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats.threats, and the enhanced risk resulting from the increased number of employees that work remotely, through the increased use of home networks that may lack encryption or secure password protection, virtual meeting/conference security concerns and increase of phishing/cyber-attacks around digital resources.
We are also subject to increasing expectations and data security requirements from our customers, including those related to the U.S. Federal Acquisition Regulation, U.S. Defense Federal Acquisition Regulation Supplement, and U.S. Cybersecurity Maturity Model Certification. In addition, we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in various jurisdictions. For example, the European Union's General Data Protection Regulation, and similar legislation in other jurisdictions in which we operate, impose additional obligations on companies regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with customer expectations and existing, proposed and recently enacted laws and regulations can be costly; any failure to comply with these expectations and regulatory standards could subject us to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against the Company by governmental entities or others, fines and penalties, damage to our reputation and credibility and could have a negative impact on our business and results of operations.
We have incurred significant restructuring charges in the past, and expect to incur restructuring charges during 2023; we may not achieve some or all of the expected benefits from our restructuring activities, these activities may adversely affect our business, and additional restructuring actions may be required once currently-contemplated actions are complete.
We incurred restructuring charges of $8.4 million in 2022, $10.5 million in 2021, and $25.8 million in 2020, and expect to incur incremental restructuring charges in 2023. Implementation of our restructuring activities may be costly and disruptive to our business, and we may not achieve the cost savings and benefits anticipated from such activities. We may not be able to retain or expand existing business due to execution issues relating to anticipated headcount reductions, plant closures or product/service transfers, and we may incur higher operating expenses during the periods of transition. Additionally, restructuring actions may result in a loss of continuity and accumulated knowledge in our workforce and related operational inefficiencies, as well as negative publicity. Headcount reductions can also have a negative impact on morale and our ability to attract and hire new qualified personnel in the future. Our restructuring activities require a significant amount of management and other employees' time and focus, which may divert attention from operating and growing our business. Any failure to achieve some or all of the expected benefits of our restructuring activities, including any delay in implementing planned related restructuring actions, may have a material adverse effect on our competitive position and operating results. In addition, we may implement additional future restructuring actions or divestitures as a result of changes in our business, the marketplace and/or our exit from less profitable, under-performing, non-core or non-strategic operations.
We have incurred impairment charges and operating losses in certain of our businesses, and may incur such charges and losses in future periods.
We record impairment charges when we determine that the carrying amount of our assets, or related cash generating unit or units (CGUs), may not be recoverable (last recorded in 2015). We have also recorded charges (including during 2020 - 2022) to write-down specified assets in connection with our restructuring actions (described in note 15 to the Consolidated Financial Statements in Item 18). Determining the recoverable amount of our assets and CGUs is subjective and requires management to exercise significant judgment in estimating future growth, profitability, discount and terminal growth rates, and in projecting future cash flows, among other factors, including the impact of market conditions on management's assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, or other factors that may result in changes to our estimates of future cash flows, which may in turn result in impairment charges, which could be substantial and
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adversely affect our financial results. Factors that might reduce the recoverable amount of these assets below their respective carrying values include declines in our stock price and market capitalization, reduced future cash flow estimates, slower growth rates, or significant operating losses in any of our businesses. Sustained market price decreases, demand softness, and/or failure to realize future revenue at an appropriate profit margin in any CGU could negatively impact our operating results, including the incurrence of restructuring charges and/or impairment losses for such CGU or operating losses for the relevant business. Similar risks apply to assessing the recoverability of our deferred tax assets.
We may not be able to prevent or detect all errors or fraud.
Due to the inherent limitations of internal control systems, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. Accordingly, we cannot provide absolute assurance that all control issues, errors or instances of fraud, if any, impacting us have been or will be prevented or detected. In addition, over time, certain aspects of a control system may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate, which we may not be able to address quickly enough to prevent all instances of error or fraud. In connection with our on-going assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses”"material weaknesses" in our internal controls. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’scompany's annual or interim financial statements will not be prevented or detected on a timely basis. The existence of any material weakness may require management to devote significant time and incur significant expense to remediate any such material weaknesses.remediation expense. The existence of any material weakness in our internal control over financial reporting may result in errors in our financial statements that could require us to make corrective adjustments, restate our financial statements, cause us to fail to meet our reporting obligations, and cause shareholders to lose confidence in our reported financial information, all of which could materially and adversely affect the market price of our securities. If we are unable to successfully identify and remediate any material weaknesses that may arise in a timely manner, the accuracy and timing of our financial reporting may be adversely affected, and we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and applicable stock exchange listing requirements.
Compliance with governmental laws and obligations could be costly and may negatively impact our financial performance; any failure to comply may negatively impact our financial performance.
We are subject to various federal/national, state/provincial, local, foreign and supra-national environmental laws and regulations. Our environmental management systems and practices have been designed to provide for compliance with these laws and regulations. Maintaining compliance with and responding to increasingly stringent environmental regulations requires a significant investment of time and resources and may restrict our ability to modify or expand our manufacturing sites or to continue production. AnyAlthough our environmental management systems and practices have been designed to provide for compliance with these laws and regulations, such compliance cannot be assured, and any failure to comply with these laws and regulations may potentially result in significant fines and penalties, our operations may be suspended or subjected to increased oversight, and our cost of related investigations could be material in any period.
More complex and stringent environmental legislation continues to be imposed globally, including laws that place increased responsibility and requirements on the "producers" of electronic equipment and, in turn, their providers and suppliers. Such laws may relate to product inputs (such as hazardous substances and energy consumption), product use (such as energy efficiency and waste management/recycling), and/or operational outputs/by-products from our manufacturing processes that can result in environmental contamination (such as waste water, air emissions and hazardous waste). Noncompliance with these requirements could result in substantial costs, including fines and penalties, and we may incur liability to our customers and consumers.
Even where compliance responsibility rests primarily with our customers, they may request our assistance in meeting their obligations. Our customers remain focused on issues such as waste management (including recycling), climate change (including the reduction of carbon emissions) and product stewardship, and expect their EMS providers to be environmental leaders. We strive to meet such customer expectations, although these demands may extend beyond our regulatory obligations and require significant investments of time and resources to attract and retain customers.
We generally conduct environmental assessments, or review assessment reports undertaken by others, for our manufacturing sites at the time of acquisition or leasing. However, such assessments may not reveal all environmental liabilities, and assessments have not been obtained for all sites. In addition, some of our operations involve the use of hazardous substances that could cause environmental impacts. While we have operational systems to provide environmental management, we cannot rule out all risk of non-compliance and could incur substantial costs to comply. Although if deemed necessary, we may investigate, remediate or monitor emissions and site conditions at some of our owned or leased sites (such as air, soil and/or groundwater conditions), we may not be aware of, or adequately address, all such emissions and conditions, and we may
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incur significant costs should such work be required. In many jurisdictions in which we operate, environmental laws impose liability for the costs of removal, remediation or risk assessment of hazardous or toxic substances on an owner, occupier or operator of real estate, even if such person or company was unaware of or not responsible for the discharge or migration of such substances. In some instances, where soil or groundwater contamination existed prior to our ownership or occupation, landlords or former owners may have retained some contractual responsibility or regulatory liability, but this may not provide sufficient protection to reduce or eliminate our liability. Third-party claims for damages or personal injury are also possible and could result in significant costs to us. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating sites indicate that we are responsible for the release of hazardous substances into the air, ground and/or water, we may be subject to additional liability. Additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future.
Our healthtechHealthTech business is subject to regulation by the U.S. Food and Drug Administration (FDA), Health Canada, the European Medicines Agency, the Brazilian Health Surveillance Agency, and similar regulatory bodies in other jurisdictions, relating to the medical devices and hardware we manufacture for our customers. Our sites that deliver products to the healthcare businessindustry are certified or registered in applicable quality management standards applicable to the healthcare industry.standards. We are required to comply with various statutes and regulations related to the design, development, testing, manufacturing and labeling of our medical devices in addition to reporting of certain information with respect to the safety of such products.devices. Any failure to comply with these regulations could result in fines, injunctions, product recalls, import detentions, additional regulatory controls, suspension of production, and/or the shutting down of one or more of our sites, among other adverse outcomes. Failure to comply with these regulations may also materially affect our reputation and/or relationships with customers and regulators.
We provide design, engineering and manufacturing related services to our customers in the A&D business. As part of these services, we are subject to substantial regulation from government agencies including the U.S. Department of Defense (DOD) and the U.S. Federal Aviation Administration. Our A&D sites are certified in quality management standards applicable to the A&D industry. Failure to comply with these regulations or the loss of any of our quality management certifications may result in fines, penalties and injunctions, and could prevent us from executing on current or winning future contracts, any of which may materially adversely affect our financial condition and operating results. In addition to quality management standards, there are several other U.S. regulations with which we are required to comply, including the Federal Acquisition Regulations (FAR), which provides uniform policies and procedures for acquisition; the Defense Federal Acquisition Regulation Supplement, a DOD agency supplement to the FAR that provides DOD-specific acquisition regulations that DOD government acquisition officials, and those contractors doing business with DOD, must comply with in the procurement process for goods and services; and the Truth in
Negotiations Act, which requires full and fair disclosure by contractors in the conduct of negotiations with the government and its prime contractors. These rules are complex, our performance under them is subject to audit by the U.S. Defense Contract Audit Agency, the U.S. Office of Federal Contract Compliance Programs and other government regulators, and in most cases must be complied with by our suppliers. If an audit or investigation reveals a failure to comply with regulations, we could become subject to civil or criminal penalties and administrative sanctions by either the government or the prime customer, including government pre-approval of our government contracting activities, termination of the contract, payment of fines and suspension or debarment from doing further business with the U.S. government. Any of these actions could increase our expenses, reduce our revenue and damage our reputation as a reliable U.S. government supplier. We are also subject to the export control laws and regulations of the countries in which we operate, including, but not limited to, the U.S. International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR).
Our international operations require us to comply with various anti-bribery laws, including the U.S. Foreign Corrupt Practices Act (FCPA) and the Corruption of Foreign Public Officials Act (Canada) (CFPOA). In some countries in which we operate, it may be customary for businesses to engage in business practices that are prohibited by the FCPA, CFPOA or other laws and regulations. Although we have implemented policies and procedures designed to ensure compliance with the FCPA, CFPOA and similar laws in other jurisdictions, there can be no assurance that all of our employees and agents, as well as those companies to which we outsource certain business operations, will not be in violation of these laws and our policies or procedures. In addition to the difficulty of monitoring compliance, any suspected or alleged activity would require a costly investigation by us and may result in the diversion of management's time, resources and attention. Failure to comply with these laws may subject us to, among other things, adverse publicity, penalties and legal expenses that may harm our reputation and have a material adverse effect on our business, financial condition and operating results.
As a public company, we are subject to stringent laws, regulations and other requirements, including the U.S. Sarbanes-Oxley Act and the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), affecting, among other areas, our accounting, internal controls, corporate governance practices, securities disclosures and reporting. For example, Dodd-Frank contains provisions concerning specified minerals originating from the Democratic Republic of Congo or adjoining countries (referred to as "conflict minerals"). As required by Dodd-Frank, the U.S. Securities and Exchange Commission (SEC) has adopted due diligence, disclosure and reporting requirements for companies that manufacture, or contract to manufacture, products that include conflict minerals. We manufacture such products for our customers. Due to our complex supply chain, compliance with these rulesDodd-Frank diligence, disclosure and reporting requirements with respect to defined "conflict minerals" is time-consuming and costly. If we are unable to ascertain the origins of all such minerals
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used in the manufacturing of our products through the due diligence procedures we implement, we may be unable to satisfy our customers' certification requirements. This may harm our reputation, damage our customer relationships and result in a loss of revenue. If the SECU.S. Securities and Exchange Commission rules or other new social or environmental standards limit our pool of suppliers in order to produce "conflict free" or "socially responsible" products, or otherwise adversely affect the sourcing, supply and pricing of materials used in our products, we could also experience cost increases and a material adverse impact on our operating results.
In addition, whenever we pursue business in new end markets, or our customers pursue new technologies or businesses, we are required to navigate the potentially heavy regulatory and legislative burdens of such end markets or technologies, as well as applicable quality standards with respect thereto.
The regulatory climate can itself affect the demand for our services. For example, government reimbursement rates and other regulations, as well as the financial health of healthcare providers, changes in how healthcare in the U.S. is structured, including as a result of the U.S. Affordable Care Act (or any successor legislation), and how medical devices are taxed, could affect the willingness and ability of end customers to purchase the products of our customers in this market as well as impact our margins.
Our customers are also required to comply with various government regulations, legal requirements and industry standards, including many of the industry-specific regulations discussed above. Our customers' failure to comply could affect their businesses, which in turn would affect our sales to them. In addition, if our customers are required by regulation or other requirements to make changes in their product lines, these changes could significantly disrupt particular programs for these customers and create inefficiencies in our business.
In addition, a failure by a supplier or manufacturer to comply with applicable laws, regulations or customer requirements could negatively impact our business, and for governmental customers, could result in fines, penalties, suspension or even debarment being imposed on us, which could have a material adverse impact on our business, financial condition and results of operations.
Compliance or the failure to comply with employment laws and regulations may negatively impact our financial performance.
We are subject to a variety of domestic and foreign employment laws, including those related to: workplace safety, discrimination, harassment, whistle-blowing, wages and overtime, personal taxation, classification of employees, work authorizations and severance. Compliance with such laws may increase our costs. In addition, such laws are subject to change,
and enforcement activity relating to these laws, particularly outside of the United States,U.S., may increase as a result of greater media attention due to alleged violations by other companies, changes in law, political and other factors. There can be no assurance that, in the future, we will not be found to have violated elements of such laws. Any such violations could lead to the assessment of fines or damages against us by regulatory authorities or claims by employees, any of which could adversely affect our operating results and/or our reputation.
We may be required to make larger contributions to our defined benefit pension and other benefit plans in the future.
We maintain defined benefit and defined contribution pension plans, as well as other benefit plans globally. Our pension funding policy for our defined benefit and defined contribution pension plans is to contribute amounts sufficient, at minimum, to meet local statutory funding requirements that are based on actuarial calculations. Our obligations are based on certain assumptions relating to plan asset performance, salary changes, employee turnover, retirement ages, life expectancy, expected healthcare costs, the performance of the financial markets, future interest rates, and plan and legislative changes. If actual results or future expectations differ from these assumptions or if statutory funding requirements change, the amounts we are obligated to contribute to the pension plans may increase and such increase could be significant. We are also required to contribute amounts to our other benefit plans to meet local statutory or such plans' funding requirements. The amounts we are obligated to contribute may increase due to legislative or other changes. We recorded non-cash charges of $4.1 million in 2019, representing additional obligations under our Thailand post-employment benefit plan, as a result of recent changes in labor protection laws in Thailand that increase severance benefits for specified employees upon termination.
There are inherent uncertainties involved in the judgments, estimates, and assumptions used in the preparation of our financial statements. Any changes in judgments, estimates and assumptions could have a material adverse effect on our financial position and results of operations.
Our Consolidated Financial Statements in Item 18 are prepared in accordance with IFRS. The preparation of financial statements in conformity with IFRS, which requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, revenues and expenses. Judgments, estimates, and assumptions are inherently subject to change in future periods, which could have a material adverse effect on our financial position and results of operations.
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Our credit agreement contains restrictive and financial covenants that may impair our ability to conduct business, and the failure to comply with such covenants could cause our outstanding debt to become immediately payable.
Our credit agreement contains restrictive covenants that limit our management's discretion with respect to certain business matters. Among other factors, these covenants limit our ability and our subsidiaries' ability to incur additional debt, create liens
or other encumbrances, change the nature of our business, sell or otherwise dispose of assets, make certain investments and payments, repurchase SVS for cancellation if a defined leverage ratio exceeds a specified amount, (Repurchase Restriction), merge or consolidate with other entities, or effect specified changes in control. This agreement also contains certain financial covenants related to indebtedness and interest coverage. If we are not able to comply with these covenants, our outstanding debt could become immediately due and payable, and the incurrence of additional debt under our revolving credit facility may not be allowed, either of which could have a material adverse effect on our liquidity and ability to conduct our business. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis
The discontinuation of Financial Condition and Results of Operations — Capital Resources" for a discussion of defaults related to the Repurchase Restriction waived in the fourth quarter of 2019.
We have entered into a transition from LIBORtotal return swap (TRS) agreement in respect of our SVS, which exposes us to an alternative will not result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers,certain risks, including SVS price decrease risk, counterparty risk and interest rate risk, any of which could have an adverse effect on our liquidity, results of operations or financial condition.
Under our TRS agreement, the counterparty is obligated to raise funds ormake a payment to us based on the increase the cost of raising funds.
Weanticipate that we will refinance outstanding indebtedness from time to time, and an inability to refinance on favorable terms, or at all, would have a material adverse effect on our operating results and financial condition.
We anticipate that we will repay outstanding debt from time to time through refinancing. The amount of our existing indebtedness may impede our ability to obtain such refinancing on acceptable terms, or at all. If we cannot refinance, extend, or pay principal payments due at maturity with the proceeds of other capital transactions, our cash flows may not be sufficient to repay our debt upon maturity. In such event, we may be forced to dispose of one or more assets on disadvantageous terms. In addition, refinanced debt may carry higher interest rates and liquidityhave more restrictive covenants than our current outstanding indebtedness. Although we anticipate that we will be able to repay or if they experience excessive volumes of borrowing requests from us and other borrowers within a short period of time. Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affectrefinance our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding sourcesexisting indebtedness when it matures, there can be arranged. Such measures could include deferring capital expenditures,no assurance we will be able to do so, or that the terms of any such refinancing will be favorable. An inability to refinance, extend or otherwise satisfy our debt as it matures would have a material adverse effect on our business, contracts, financial condition, operating results, cash flow, liquidity and reducing or eliminating discretionary uses of cash.
prospects.
Our credit rating may be downgraded.
Any negative change in our credit rating or outlook may make it more expensive for us to raise additional capital in the future on terms that are acceptable to us, if at all. See "We have incurred substantial third-party debt in recent periods, which has increased our debt service requirements, may reduce our ability to fund future acquisitions and/or to respond to unexpected capital requirements, and may have other adverse impacts on our business."
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The interest of our controlling shareholder, Onex Corporation, with an approximate 81%82.0% voting interest, may conflict with the interests of other shareholders.
Onex Corporation (Onex) beneficially owns all of our outstanding multiple voting shares (MVS) and less than 1% of our outstanding SVS. The number of SVS and MVS beneficially owned by Onex represents approximately 81%82.0% of the voting interest in Celestica. Accordingly, Onex has the ability to exercise significant influence over our business and affairs and generally has the power to determine all matters submitted to a vote of our shareholders where our shares vote together as a single class. Onex may make decisions regarding Celestica and our business that are opposed to other shareholders' interests or with which other shareholders may disagree. Onex's voting power could have the effect of deterring or preventing a change in control of our Corporation that might otherwise be beneficial to our other shareholders.
Through its shareholdings, Onex has the power to elect our directors and its approval is required for significant corporate transactions such as certain amendments to our Restated Articles of Incorporation (Articles), the sale of all or substantially all of our assets and plans of arrangement. The directors so elected have the authority, subject to applicable laws, to appoint or replace senior management, cause us to issue additional SVS or MVS or repurchase SVS or MVS, declare dividends or take other actions.
Gerald W. Schwartz, the Chairman of the Board President and Chief Executive Officer of Onex, indirectly owns shares representing the majority of the voting rights of the shares of Onex. The interests of Onex and Mr. Schwartz may differ from the interests of the remaining holders of SVS. For additional information about shareholder rights and restrictions relative to our SVS and MVS, see Item 10(B), "Memorandum and Articles of Incorporation" and Exhibit 2.3. For additional information about our principal shareholders, see Item 7(A), "Major Shareholders." Also see Item 7(B), "Related Party Transactions" for a description of related party transactions involving Onex and/or Mr. Schwartz.
Onex has, from time-to-time, issued debentures exchangeable and redeemable under certain circumstances for our SVS, entered into forward equity agreements with respect to our SVS, sold our SVS (after exchanging MVS for SVS), or redeemed these debentures through the delivery of our SVS, and could take similar actions in the future. These sales may impact our share price or have consequences on our debt and ownership structure.
We are subject to litigation and proceedings, which may result in substantial litigation expenses, settlement costs or judgments, require the time and attention of key management resources, and result in adverse publicity, any of which may negatively impact our financial performance.
We are from time to time party to various copyright, patent and trademark infringement, unfair competition, breach of contract, customs, employment and other legal actions incidental to our business, as plaintiff or defendant, as well as various other claims, suits, investigations and legal or governmental proceedings (including securities class action and shareholder derivative lawsuits which have been settled or dismissed). Additional legal claims or regulatory matters may arise in the future and could involve matters relating to commercial disputes, government regulation and compliance, intellectual property, antitrust, tax, employment or shareholder issues, product liability claims and other issues on a global basis. Regardless of the merits of the claims, litigation or governmental proceedings may be both time-consuming and disruptive to our business. The defense and ultimate outcome of any lawsuits or other legal proceedings may result in higher expenses, which could have a material adverse effect on our business, financial condition, or results of operations. We cannot predict the final outcome of such lawsuits or proceedings or the likelihood that other proceedings will be initiated against us. Accordingly, the cost of defending against such lawsuits or proceedings, or any future lawsuits or proceedings may be high and, in any event, these legal proceedings may result in the diversion of our management's time and attention away from our business. In the event that there is an adverse ruling in any legal proceeding, we may be required to make payments to third parties that could be in excess of any amounts accrued, and could have a material adverse effect on our reputation, financial condition andand/or results of operations.
Changes in accounting standards enacted by the relevant standard-setting bodies may adversely affect our reported operating results, profitability and financial performance.
Accounting standards are revised periodically and/or expanded upon by applicable standard-setting bodies. We are required to adopt new or revised accounting standards and to comply with revised interpretations issued from time-to-time by these authoritative bodies, including the Canadian Accounting Standards Board (CASB), the IASB, and the SEC. While these accounting changes do not typically affect the economics of our business, such standards couldhave in the past, and may in the future, have a significant effect on our accounting methods and reported results. For example, the IASB issued a new revenue recognition standard and amended the standard relating to the classification, measurement and impairment of financial assets and hedge accounting; both of these standards became
The issuance or sale of SVS may adversely affect our share price.
Volatility in our business can result in significant SVS price and volume fluctuations in the market price of our SVS.fluctuations. Factors such as changes in our operating results, announcements by our customers, competitors or other events affecting companies in the electronics industry, currency fluctuations, general market fluctuations, macro-economic conditions, and External Events may cause the market price
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of our SVS to decline. In addition, if our operating results do not meet the expectations of securities analysts or investors, the price of our SVS could decline. Furthermore, the existence of our NCIB may cause our SVS price to be higher than it would be in the absence of such a program, and repurchases under the NCIB expose us to risks resulting from a reduction in the size of our "public float," which may reduce our trading volume as well as our SVS price.
There can be no assurance that we will continue to repurchase SVS for cancellation.
Potential unenforceability of judgments.
We are incorporated under the laws of the Province of Ontario, Canada. Our controlling persons, a majorityfour of our directors, and severalone of our executive officers are residents of (or are organized in) Canada. Also, a substantial portion of our assets and the assets of these persons are located outside of the United States.U.S. As a result, it may be difficult to effect service of process within the United StatesU.S. upon those directors, officers, or controlling persons who are not residents of the United States,U.S, or to enforce judgments in the United StatesU.S. obtained in courts of the United States.U.S. It may also be difficult for shareholders to enforce a U.S. judgment in Canada predicated upon the civil liability provisions of U.S. federal or state securities laws or to succeed in a lawsuit in Canada based only on U.S. federal or state securities laws.
Negative publicity could adversely affect our reputation as well as our business, financial results and share price.
Unfavorable media related to our industry, company, brand, marketing, personnel, operations, business performance, or prospects may affect our share price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication, including social media outlets, websites, blogs, and newsletters. Our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary
from any media outlet could damage our reputation and reduce the demand for our products, which would adversely affect our business.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere has, and will continue to, cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Changes in weather patterns and an increased frequency, intensity and duration of extreme weather conditions could, be negatively impacted as a result of actions by activist shareholders or others.
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have a long-term material adverse impact on our business, dueresults of operations and financial condition. See "Our operations have been and could continue to actions institutedbe adversely affected by activist shareholders or others. Responding to such actionsevents outside our control" and "Our business and operations could be costlyadversely impacted by environmental, social and time-consuming, may not align with our business strategies and could divert the attention of our Board and senior management from the pursuit of our business strategies. Perceived uncertainties as to our future direction as a result of shareholder activism may lead to the perception of a change in the direction of the business or other instability and may make it more difficult to attract and retain qualified personnel and business partners and may adversely affect our relationships with vendors, customers and other third parties.
governance (ESG) initiatives."
Our business and operations could be adversely impacted by climate changeenvironmental, social and governance (ESG) initiatives.
Concern over climate change has led to international legislative and regulatory initiatives directed at limiting carbon dioxide and other greenhouse gas emissions. Proposed and existing efforts to address climate change by reducing greenhouse gas emissions could directly or indirectly affect our costs of energy, materials, manufacturing, distribution, packaging and other operating costs, which could adversely impact our business and financial results.
Further, investors are placing a greater emphasis on non-financial factors, including ESG factors, when evaluating investment opportunities. Although we actively manage a broad range of ESG matters, including the potential impact of our business on society and the environment, and matters relating to diversity and inclusion, there can be no certainty that we will manage such issues effectively, or that we will successfully meet society's expectations in this regard. The perception of our operations held by our shareholders, potential investors, suppliers, customers, other stakeholders, or the communities in which we do business may depend, in part, on the ESG standards we have chosen to aspire to meet, whether or not we meet these standards on a timely basis or at all, and whether or not we meet external ESG factors they deem relevant. In addition, notwithstanding our achievements in these regards, the subjective nature and wide variety of methods and processes used by various stakeholders, including investors, to assess a company with respect to ESG criteria can result in the perception of negative ESG factors or a misrepresentation of our ESG policies and practices. In addition, by electing to set and publicly share our ESG standards, our business may face increased scrutiny related to ESG activities. As a result, our reputation could be harmed if we fail to act effectively in the areas in which we report. In addition, our failure to achieve progress on our ESG policies and practices on a timely basis, or at all, or to meet ESG criteria set by third parties, could adversely affect our SVS price, business, financial performance, or growth.
Item 4. Information on the Company
A. History and Development of the Company
We were incorporated in Ontario, Canada on September 27, 1996. Our legal and commercial name is Celestica Inc. We are a corporation domiciled in the Province of Ontario, Canada and operate under the Business Corporations Act (Ontario) ("OBCA")(OBCA). Our principal executive offices are currently located at 5140 Yonge Street, Suite 1900, Toronto, Ontario, Canada M2N 6L7. Our telephone number is (416) 448-5800, and our internet address is www.celestica.com. Information on our website is not incorporated by reference into this Annual Report.
Prior to our incorporation, we were an IBM manufacturing unit that provided manufacturing services to IBM for more than 75 years. In 1993, we began providing electronics manufacturing services to non-IBM customers. In October 1996, we were purchased from IBM by an investor group led by Onex, and in 1998, we completed our initial public offering.
A description of our acquisition activities (including our 2018 acquisitionsacquisition of Atrenne and Impakt)PCI in November of 2021), our principal capital expenditures (including property, plant and equipment), and our financing activities over the last three financial years is set forth in notes 3, 4, 7, 12, 13, 22,6, 8, 11, 21, and 24 to the Consolidated Financial Statements in Item 18, and Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations.MD&A."
A description of our divestiture activities (including our restructuring activities) over the last three financial years is set forth in notes 6, 7, and 1615 to the Consolidated Financial Statements in Item 18, and Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations,MD&A." including a discussion of the consummation of the sale of our real property locatedNo material divestiture activities have occurred from January 1, 2023 to date, nor are any currently in Toronto, Ontario, and related transition matters.progress.
A description of our significant commitments for capital expenditures as at December 31, 20192022 and those currently in progress and planned for 20202023 is set forth in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Liquidity — Tabular Disclosure of Contractual Obligations: Additional Commitments." From January 1, 2023 to date, our capital expenditures total approximately $7 million.
See "Overview — Celestica's business" and"Recent Developments" ofin Item 5,"Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations"MD&A" for a discussion of the anticipated impact, range and timing of actions associated with our CCS Review, which commenced in the second half of 2018, including the Cisco Disengagement, and anticipated related restructuring actions; recent adverse trends impacting our businesses; andbusinesses, including the completionimpact of our cost efficiency initiative (initiated in the fourth quarter of 2017). global supply constraints.
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There were no public takeover offers by third parties in respect of the Corporation's SVS or MVS or by the Corporation in respect of other companies' shares which occurred during the last or current financial year.
The U.S. Securities and Exchange Commission (SEC) maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
B. Business Overview
General
We deliver innovative supply chain solutions globally to customers in two operating and reporting segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS).
Our ATS segment consists of our ATS end market, and is comprised of our A&D, industrial, energy, healthtech,Industrial, HealthTech, and capital equipmentCapital Equipment businesses. Our capital equipmentCapital Equipment business is comprised of our semiconductor, display and power & signal distributionrobotics equipment businesses. Our CCS segment consists of our Communications and Enterprise end markets. Our Enterprise end market is comprised of our servers and storage businesses. All period percentages and financial information in this Annual Report reflect the current presentation. In 2017, we operated in one reportable segment comprised of multiple end markets. See note 25 to the Consolidated Financial Statements in Item 18.
Our customers include OEMs, cloud-based and other service providers, including hyperscalers, and other companies in a wide range of industries. Our global headquarters is located in Toronto, Ontario, Canada. We operate a network of sites and centers of excellence (discussed below) strategically located in North America, Europe and Asia, with specialized end-to-end supply chain capabilities tailored to meet specific market and customer product lifecycle requirements.
We offer a comprehensive range of product manufacturing and related supply chain services to customers in both of our segments, including design and development, new product introduction, engineering services, component sourcing, electronics manufacturing and assembly, testing, complex mechanical assembly, systems integration, precision machining, order fulfillment, logistics, asset management, product licensing, and after-market repair and return services. WithinOur HPS offering, within our CCS segment, includes the development of infrastructure platforms, hardware and software design solutions and development, our JDM offering includes developing hardware platforms and design solutionsservices that can be used as-is, or customized for specific applications in collaboration with our customers, and managingmanagement of program design and aspects of the supply chain, manufacturing, and manufacturing. after-market support.
We believe our services and solutions create value for our customers by enabling their strategies, while accelerating their time-to-market, and by providing higher quality, lower cost, and reduced cycle times (as compared to insourcing) in our customers' supply chains. We believe this results in lower total cost of ownership, greater flexibility, higher returnreturns on invested capital and improved competitive advantage for our customers in their respective markets.
We depend on a small number of customers for a substantial portion of our revenue. In the aggregate, our top 10 customers represented 65%66% of our total 2019 revenue.revenue in each of 2022, 2021 and 2020. In 2019, we had one customer that2022, two customers (each in our CCS segment) individually represented 10% or more of total revenue (Cisco Systems, Inc., which accounted(11% for 12%each customer). No customer individually represented 10% or more of total revenue for 2019).in either 2021 or 2020. Significant reductions in, or the loss of, revenue from these or any of our major customers may have a material adverse effect on us. See Item 3(D), Key Information — Risk Factors — "We are dependent on a limited number of customers and end markets. A decline in revenue from, or the loss of, any significant customer, could have a material adverse effect on our financial condition and operating results." Also see Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments— Segment Environment: CCS Segment" for a discussion of the Cisco Disengagement, as well as other disengagements stemming from our CCS Review, and the anticipated impact of these disengagements on our business.
Products and services in our ATS segment are extensive and are often more regulated than in our CCS segment, and can include the following: government-certified and highly-specialized manufacturing, electronic and enclosure-related services for A&D-related&D customers; high-precision semiconductor and display equipment and integrated subsystems; a wide range of industrial automation, controls, test and measurement devices; engineering-focused engagements, including full product development in the areas of telematics, human machine interface, Internet-of-Things and embedded systems; advanced solutions for surgical instruments, diagnostic imaging and patient monitoring; and efficiency products to help manage and monitor the energy and power industries. Our ATS segment businesses typically have a higher margin profile,profiles and margin volatility, higher working capital requirements, and longer product life cycles than the businesses in our CCS segment. Products and services in our CCS segment consist predominantly of enterprise-level data communications and information processing infrastructure products and systems, and can include routers, switches, data center interconnects, edge solutions, servers and storage-related products used by a wide range of businesses and cloud-based and other service providers to manage digital connectivity, commerce and social media applications. Our CCS segment businesses typically have a lower margin profile,profiles, lower working capital requirements, and higher volumes than the businesses in our ATS segment. Within our CCS segment, however, our HPS business (which includes
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firmware/software enablement across all primary IT infrastructure data center technologies and after-market services) typically has a higher margin profile than our traditional CCS businesses, but also requires specific investments (including R&D) and higher working capital. Our CCS segment generally experiences a high degree of volatility in terms of revenue and product/service mix, and as a result, our CCS segment margin can fluctuate from period to period. In recent periods, we have experienced an increasing shift in the value that we deliver tomix of our programs towards cloud-based and other service providers, which are cyclically different from our traditional OEM customers, we continue to make investments in people, value-added service offerings, new capabilities, capacity, technology, IT systems, softwarecreating more volatility and tools, and work to improve our productivity, quality, delivery performance and flexibilityunpredictability in our effortsrevenue patterns, and additional challenges with respect to be recognized as a leading company in the EMS industry. We have been increasingmanagement of our investments in automationsupply chain and digital factory solutions and capabilities throughout our network to improve quality and productivity. Our recently-completed cost efficiency initiative and related restructuring actions were also intended to further streamline our business, increase operational efficiencies and improve our productivity.
working capital requirements.
We believe that continuedremain committed to making the investments in these areaswe deem necessary to support our long-term growth strategy, and will strengthen our competitive position, enhance customer satisfaction, and increase long-term shareholder value. Within both of our segments, we are focused on: increased penetration in our end markets; diversifying our customer mix and product portfolios, including increasing design and development, engineering, and after-market services (higher value-added services); and diversifying our capabilities.capabilities and supply chains. In response to slower growth rates and increased pricing pressures in our traditional markets, which continue to account for a substantial portion of our revenue, we intend to continue to concentrate on expanding our business beyond such traditional markets, including through CCS segment growth initiatives focused on our newly-reshaped post-CCS Review segment portfolio,HPS business and services, and by continuing to pursue new customers and acquisition opportunities in our ATS segment. See "Celestica’s"Celestica's Strategy" below for a discussion of our strategy, and Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Operating Goals and Priorities" for a discussion of our current priorities.
Electronics Manufacturing Services Industry
Overview
Leading EMS companies manage global networks that are capable of delivering customized supply chain solutions. They offer end-to-end services for the entire product lifecycle, including design and engineering services, manufacturing, assembly, testing, systems integration, fulfillment and after-market services. Our customers, which include OEMs, cloud-based and other service providers (including hyperscalers), and other companies in a wide range of industries, useoutsource these services to enhance their competitive positions. Outsourcing manufacturing and related services can help our customers to address their business challenges related to cost, asset utilization, quality, time-to-market, demand volatility, customer support, and rapidly changing technologies. In particular, service providers have utilized our services to expand and optimize their data centers to enable their strategies.
We believe outsourcing by these companies will continue across a number of industries as a means to:
Reduce Operating Costs and Invested Capital. The manufacturing process for electronics products has become increasingly automated, requiring greater levels of investment in property, plant and equipment. Global EMS companies help enable their customers to gaincan provide access to a global network of manufacturing sites with supply chain management expertise, advanced engineering capabilities, flexible capacity and economies of scale. ByAs a result, outsourcing to EMSsuch companies customers can reduce theircustomers' overall product lifecycle and operating costs, working capital, and property, plant and equipment investment requirements, and further focus on their own objectives.requirements.
Focus Resources on Core Competencies. Many EMS customers are able to prioritize their resources on their core competencies of product development, sales, marketing and customer service by outsourcing design, engineering, manufacturing, supply chain, product lifecycle management, and other product support requirements to their EMS partners.requirements.
Improve Time-to-Market. Electronic products generally experience short lifecycles, requiring companies that use our services to continually reduce the time and cost of bringing products to market. We believe that such companies can significantly improve their product development cycles and enhance time-to-market by benefiting from the expertise and infrastructure of EMS providers, including their capabilities relating to design and engineering services, prototyping and the rapid ramp-up of new products to high-volume production, all with the critical support of global supply chain management and manufacturing networks.
Utilize EMS Companies' Procurement, Inventory Management and Logistics Expertise. We believe that the successful manufacturing of electronic products requires significant resources to manage the complexities in planning, procurement and inventory management, frequent design changes, short product lifecycles and product demand fluctuations. Companies can help manage these complexities by outsourcing to those EMS providers that (i) possess sophisticated IT systems and global supply chain management capabilities and (ii) can leverage significant component procurement advantages to lower product costs.
Access Leading Engineering Capabilities and Technologies. EMS providers can assist companies in the development of new product concepts, or the re-design of existing products, as well as assistand improvements with improvements inrespect to the performance, cost and time required to bring products to market. In addition, companies can gain access to high-quality manufacturing expertise and capabilities in the areas of advanced process, interconnect and test technologies.
Improve Access to Global Markets. EMS companies with global infrastructure and support capabilities help to provide customers with efficient world-wide manufacturing solutions, distribution capabilities and after-market services.
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Access Value-Added Service Offerings. EMS providers strive to expand their offerings to include services such as design, fulfillment and after-market services, including repair and recycling, to encourage companies to outsource more of their cost of goods sold.
Celestica's Strategy
We constantly seek to advance our quality, engineering, manufacturing, HPS, and supply chain capabilities to help our customers achieve a competitive advantage.capabilities. We will continue to focus on our pursuit of the following, intended to strengthen our competitive position and enhance customer satisfaction and shareholder value:
Increase Penetration in our End Markets.Markets/Offerings. We continually strive to establish a diverse customer base across several industries with different business cycles. We believefurther diversify our expertise in technology, quality and supply chain management, in addition to our service offerings and centers of excellence, have positioned us as an attractive partner to companies across various markets.portfolio. Our goal is to increase our presence across our high-value end markets, with particular emphasis on CCS segment growth initiatives focused onexpanding our newly-reshaped post-CCS Review segment portfolio,HPS business and expanding our ATS segment, both organically and through acquisitions. Revenue dollars from our ATS segment for 2022 increased by 17%approximately 29% from 20172021. Within our CCS segment, we continue to 2019, representing 39%expand our HPS offering, which accounted for 25% of our total 2022 revenue, in 2019, up from 33%20% in 2018 and 32%2021. We intend to pursue expansion of our portfolio in 2017.higher-margin service offerings.
Our segment and end market revenue as a percentage of total revenue is as follows:
| 2020 | 2021 | 2022 | |||||||||||||||
| ATS | 36 | % | 41 | % | 41 | % | |||||||||||
| Communications | 42 | % | 40 | % | 40 | % | |||||||||||
| Enterprise | 22 | % | 19 | % | 19 | % | |||||||||||
| 2017 | 2018 | 2019 | |||
| ATS | 32% | 33% | 39% | ||
| Communications | 43% | 41% | 40% | ||
| Enterprise | 25% | 26% | 21% | ||
Selectively Pursue Acquisitions and Strategic Transactions. We will continue to selectively seek acquisition opportunities and strategic transactions in order to (i) profitably grow our revenue, (ii) further develop strategic relationships with customers in our end markets andmarkets; (iii) enhance the scope of our capabilities and service offerings.offerings, (iv) enhance our intellectual property portfolio, and (v) expand our capabilities and offerings to include further after-market services and product licensing opportunities.
Continuously Improve Operational Performance. We will continue to focus on: (i) managing our mix and volume of business and service offerings to improve our overall margins, (ii) leveraging our supply chain practices globally to lower materials costs, minimize lead times and improve our planning cycle to better meet volatility in customer demand and improve asset utilization and inventory levels, (iii) successfully ramping new programs, and (iii)(iv) improving operating efficiencies to reduce costs and improve margins. In order to help us streamline our processes, we have been increasingcontinue to invest in our investments in the "digital factory," which automates and automating and connectingconnects our equipment, people and systems throughout our global network, including our customers and suppliers. Although our overall revenues and gross profit decreased in 2019 compared to 2018, resulting primarily from lower revenue in our CCS segment and our capital equipment business, ourOur mix of programs, and volume leverage across several of our businesses had a favorable impact on our gross marginsmargin in 2019. We also intend2022. In addition, our cost reductions initiatives, intended to continue to invest in higher margin services (includingfurther streamline our JDM offering),business, increase operational efficiencies and focus on driving better inventory performance in the continuing A&D constrained materials environment. Our recently-completed cost efficiency initiative, intended primarily to better alignimprove our Enterprise end market and capital equipment business to the current demand environment, alsoproductivity, had a favorable impact on our profitability in 2019.2022.
Develop and Grow Trusted Relationships with Leading Customers. We continue to seek to buildpursue profitable, strategic relationships with industry leaders that we believe can benefit from our services and solutions. We strive to respond to our customers' needs with speed, flexibility and predictability in delivering results.predictability. We have established and maintain strong relationships with a diverse mix of leading OEMs, cloud-based and other service providers and other companies across our end markets. We believe that our customer base is a strong potential source of growth for us as we seek to strengthen these relationships through the delivery of additional services.
Expand Range of Service Offerings and Continue to Invest in Developing New Technology, Quality Products and Supply Chain Solutions and Services. We continually seek to expand the services we offer to our customers, and we are committed to meeting our customers' needs in the areas of technology, engineering, quality, product lifecycle management and supply chain management. We believe our expertise in these areas enables us to meet the rigorous demands of our customers, allows us to produce a variety of electronic products ranging from high-volume electronics to highly complex technology infrastructure products used in a broad array of end markets, and allows us to deliver consistently reliable products to our customers. We also believe the systems and collaborative processes associated with our expertise in supply chain management help us to adjust our operations to meet thecustomer lead time requirements, of
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See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Operating Goals and Priorities" for a discussion of our current priorities and areas of focus.
Celestica's Business
Innovative Supply Chain Solutions and Services
We are a global provider of innovative supply chain solutions. We offer a range of services including design and development, engineering services, supply chain management, new product introduction, component sourcing, electronics manufacturing, assembly, testing, complex mechanical assembly, systems integration, precision machining, order fulfillment, logistics, asset management, product licensing, and after-market repair and return services. Our design and development services include our JDMHPS offering, which consists of developing infrastructure platforms, hardware platforms and software design solutions and services in collaboration primarily with CCS segment customers, as well as managing aspects of the supply chain and manufacturing. manufacturing, including firmware/software enablement across all primary IT infrastructure data center technologies, and after-market support. We believe that our JDMHPS offering helps to differentiate us from other EMS providers, by encompassing advanced technology design solutions that customers can tailor to their specific platform applications. We execute our business in our global network of sites, including our designated centers of excellence, strategically located in North America, Europe and Asia. We leverage these sites and centers of excellence, information technology,IT, and our supply chain expertise using collaborative processes and a team of highly skilled, customer-focused employees. We believe that our ability to deliver a range of supply chain and hardware solutions to our customers provides them with a competitive lead time, and advantages in quality, flexibility and total cost of ownership.
The objective of our centers of excellence program is to help ensure that our operations reflect a solid understanding of the markets we serve, have current capabilities and standardized practices, and are positioned to provide efficiency, consistency, and value to our customers around the globe. To obtain "center of excellence" status, our sites must meet our defined criteria pertaining to quality, supply chain capabilities, Lean and Six Sigma, market specific certifications (to the extent applicable), and other matters regarding their operations. In addition, we have established a Master Validation Plan to help ensure that our IT systems that support regulated industries, including HealthTech and A&D, are compliant with customer expectations with respect to data security.
Quality, Lean and Six Sigma Culture
We believe one of our strengths is our ability to consistently deliver high-quality services and products. We have an extensive quality management system that focuses on continual process improvement and achieving high levels of customer satisfaction. We employ a variety of advanced statistical engineering techniques and other tools to assist in improving product and service quality. Most of our principal sites are ISO 9001 and ISO 14001 certified (international quality management standards), and have other required industry-specific certifications.
Our Celestica Operating System (COS) consists of the application of global standard processes to all critical aspects of our operations, including quality, supply and operations planning, new product introduction, daily visual performance management, and continuous operational improvement through a "Plan Do Check Adjust" cycle. The COS is intended to improve cost productivity, create accountable teams, and assure consistent performance.
In addition to these standards, we deploy Lean and Six Sigma initiatives throughout our operations network to deliver customer value and eliminate defects and waste. Lean initiatives help drive manufacturing efficiencies, cycle times velocities and improved product quality. Wequality, and use Six Sigma extensively in an effort to reduce process variation and to drive root cause problem-solving. Lean and Six Sigma methods are also used in non-production areas to streamline our processes and eliminate waste. We apply the knowledge we gain in our after-market services to help improve the quality and reliability of next-generation products. We believe that success in these areas helps our customers to lower their costs, positioning them more competitively in their respective markets.
Design and Engineering Services
Our global design teams are focused on delivering flexible solutions and expertise, intended to help customers reduce overall product costs, improve time-to-market, introduce competitively differentiated products, and drive hardware innovations. For customer-owned designs, we partner with our customers to augment their design teams, and utilize our proprietary design analysis tools to minimize design revisions and to achieve improved manufacturing yields. Our JDM service involves developingHPS offering includes the development of infrastructure platforms and hardware platforms and software design solutions in collaboration with customers, managing aspects of the supply chain, and manufacturing their products.products and providing asset management services (including IT asset disposition). Our HPS offering is an
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engineering-led, intellectual-property-based offering that allows us to drive hardware innovation and solutions for our customers and further broaden our value proposition by leveraging our ecosystem partners and broad range of capabilities across the product lifecycle. We continue to invest in leading-edge product roadmaps and design capabilities aligned with both market standards and emerging technologies in support of our JDMHPS offering. We are currently deliveringdeliver both partially customized JDMHPS products, and complete hardware platform solutions to customers in the storage, servers, communications, and industrialcommunications markets. These products and solutions are intended to help our customers reach their markets faster and enable their strategies, while reducing producttotal costs, increasing supply chain resilience and building valuable intellectual property for their product portfolios.portfolios and/or data centers. Through our collective experience with common technologies across multiple industries and
product groups, we believe we provide quality and cost-focused solutions for a wide range of our customers' design needs.needs and strategies. Revenue attributable to our JDMHPS business has grownmore than doubled since 2020, driven by approximately 20% since 2017.new program wins.
We collaborate with some of our core customers' product designers in the early stages of product development, using advanced tools to enable new product ideas to progress from electrical and application-specific integrated circuit design, to simulation, physical layout and design review, all intended to ensure readiness for manufacturing. We use our design expertise to create innovative technologies and hardware product solutions, and leverage key ecosystem partners to drive both innovation and supply chain leverage. Our JDM offerings encompassHPS offering encompasses advanced technology infrastructure platforms, and hardware and software design solutions that customers can tailor to their specific platform applications. We believe that collaboration between our customers' teams, key ecosystem partners, and our design and manufacturing groups helps to ensure that new designs are released rapidly, smoothly and cohesively into production.
Our engineering services team works with our customers throughout the product life-cycle. We believe our engineering expertise and experience in product and process design, design review, product test solutions, assembly technology, automation, and quality and reliability, position us to deliver the services required to address the challenges facing our customers. We maintain ties with key industry associations and engineering firms to help us stay apprised of advances in technical knowledge.
Prototyping and New Product Introduction
Prototyping is a critical early-stage process in the development of new products. Our engineers collaborate with our customers' engineers to provide quick responses in the early stages of the product development lifecycle.
Supply Chain Management and Services
We use advanced planning, analytics, enterprise resource planning, and supply chain management systems to optimize materials management from suppliers to our customers' customers. We believe that the effective management of the supply chain is critical to our customers' success, as it directly impacts the time and cost required to deliver products to market and the capital requirements associated with carrying inventory.
We strive to reduce our customers' total cost of ownership by providing lower costs and reduced cycle times in their supply chain, and by delivering higher quality products. We also strive to align our preferred suppliers in close proximity to our centers of excellence to increase the speed and flexibility of our supply chain, to deliver higher quality products and to reduce time-to-market. We believe we deliver a differentiated supply chain offering.
Through our global supply chain management processes and integrated IT tools, we endeavor to provide our customers with enhanced visibility to balance their global demand and supply requirements, including inventory and order management.
Manufacturing Services
Printed Circuit Board Assembly
Printed circuit board (PCB) assembly includes the attachment of electronic components, such as capacitors, microprocessors, resistors and memory modules, to printed circuit boards.PCBs. Our global network of engineers helps us to provide our customers with full printed circuit board (PCB)PCB assembly technology capabilities. These capabilities include design for manufacturing, PCB layout, packaging, assembly (circuit card assembly or CCA), lead-free soldering, test development, and data analytics for complex flexible and rigid-flex circuits and hybrid PCBs.
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Complex Mechanical Assembly
We provide systems integration and precision machined components to our capital equipmentCapital Equipment customers. Complex mechanical systems integration consists of multiple interconnected subsystems that interact with various materials, e.g., fluids, solids, particles and rigid bodies. Such systems are often used in advanced manufacturing applications such as semiconductor manufacturing, display manufacturing (including LCD, OLED, QLED and other displays), medical applications using robotics, and other applications such as cash handling machines where precise standards are required. We also provide complex mechanical assembly primarily to our aerospace customers, including wire harness assembly, systems integration, sheet metal fabrication, welding and machining.
Precision Machining
We utilize specialized computer-controlled machines to manufacture high quality components to tight tolerance requirements. Such components are often used in applications similar to those noted above for complex mechanical assembly.
Energy Services
We provide integrated solutions and services to our renewable energy customers in the areas of power generation, conversion and monitoring. Our energy portfolio includes power inverters, energy storage products, smart meters and other electronic componentry, and encompasses complete product lifecycle solutions, including design, manufacturing and reliability services.
Systems Assembly and Testing
We use sophisticated technologies in the assembly and testing of our products. We continue to make investments in the development of automated solutions, as well as new assembly and test process techniques intended to enhance product quality, reduce cost and improve delivery time to customers. We work independently and also collaborate with customers and suppliers to develop assembly and test technologies. Systems assembly and testing require sophisticated logistics capabilities to rapidly procure components, assemble products, perform complex testing and distribute products to customers around the world. Our full systems assembly services involve combining and testing a wide range of sub-assemblies and components before shipping them to their final destination. Some customers require custom build-to-order system solutions with very short lead times, and we are focused on using our advanced supply chain management capabilities to respond to our customers' needs.
Quality and Product Assurance
We provide complete product reliability testing, inspection and qualification capabilities to support our customers' full product lifecycle requirements. Our quality and product assurance teams perform product testing to ensure that designs meet or exceed required specifications. We are capable of testing to various industry standards, and we work closely with our customers to execute unique test protocols. We believe that this service allows our customers to assess certification risks early in the product development lifecycle, reducing cost and time-to-market.
Failure Analysis and After-Market Services
Our extensive failure analysis capabilities concentrate on identifying the root cause of product failures and determining corrective actions. The root causes of failures typically relate to inherent component defects and/or deficiencies in design specifications. Products are subjected to various environmental extremes, including temperature, humidity, vibration, voltage and contamination. Field conditions are simulated in failure analysis laboratories which employ electron microscopes, spectrometers and other advanced equipment. Our engineers work proactively in partnership with suppliers and customers in an effort to discover product failures before products are shipped, and to develop and implement resolutionssolutions if required.
We also seek to provide value to our customers through our after-market services offerings which include repair, fulfillment, reverse logistics, asset management and disposition, reclamation and returns processing and prevention. Our fulfillment offering includes the design and management of integrated supply chain and materials management for light manufacturing and final assembly and reclamation. Our reverse logistics offering includes the design and management of transportation networks, warehousing and distribution of products, asset recovery services, and transportation and supply chain event monitoring. Our returns processing and prevention offering provides our customers with product screening and testing and product design and process analysis. Our reclamation offering includes product disassembly, reassembly and re-use, as well as certified scrap disposition processing. We offer these services individually or integrated through a 'Control Tower' model which coordinates our people, systems and processes with those of our customers to improve service levels by providing an increased level of visibility and analytics throughout the entire after-market value chain.
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Product Licensing
With respect to our partners that are seeking to rationalize their product lines, licensing to us provides them with an alternative to sale or discontinuation. Celestica manages the entire business process for the licensed product or product line, including order acceptance, customer service, engineering, supply chain, obsolescence management, manufacturing, logistics, service parts offering, and after-market services. This allows our partners to continue to serve their customers while maintaining ownership of their intellectual property, and to redeploy their resources for other uses.
Geographies
For each of 2017, 20182020, 2021 and 2019,2022, approximately 70% of our revenue was produced in Asia and approximately 20% of our revenue was produced in North America. Revenue produced in Canada represented 8%5% of revenue in 2019 (20182022 (2021 — 9%7%; 20172020 — 8%6%). Our property, plant and equipment in Canada represented 10%6% of our property, plant and equipment at December 31, 20192022 (December 31, 20182021 — 9%7%; December 31, 20172020 — 6%8%). A listing of our principal locations is included in Item 4(D), "Information on the Company — Property, Plants and Equipment." Certain geographic information for countries exceedingwith 10% or more of our external revenue, property, plant and equipment (and commencing in 2019, ROU assets),and right-of-use (ROU) assets, and intangible assets and goodwill is set forth in note 25 to the Consolidated Financial Statements in Item 18.
Marketing and Customer Experience
We structure our business development teams by end market, with a focus on offering market insight and expertise, and complete manufacturing, HPS (in the case of our CCS segment) and supply chain solutions to our customers. We have customer-focused teams, each headed by a group general manager who oversees the global relationship with our key customers. These teams work with our Solutions Architects
subject matter experts to meet the requirements of each customer's product or supply chain. Our global network is comprised of such customer-focused teams, as well as operational and project managers, and supply chain management teams, as well asand senior executives.
Customer Concentration and Relationship Management
We target industry-leading customers in each of our segments. Our current CCS segment customers include Cisco Systems,Amazon Fulfillment Services, Inc., Ciena Corporation, Dell Technologies, Google Inc., Hewlett-Packard Enterprise, Hewlett-Packard Inc., IBM Corporation, Juniper Networks, Inc., Meta Platforms, Inc., NEC Corporation, Oracle Corporation, and Polycom, Inc. However, see Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments— Segment Environment: CCS Segment" for a discussion of the Cisco Disengagement, as well as other disengagements stemming from our CCS Review, and the anticipated impact of these disengagements on our business. Our current ATS segment customers include Applied Materials, Inc., LAM Research and Honeywell Inc. We are focused on strengthening our relationships with strategic customers through the delivery of new and expanding end-to-end solutions.
| Segment | Year ended December 31 | ||||||||
| 2017 | 2018 | 2019 | |||||||
| Cisco Systems, Inc. | CCS | 18 | % | 14 | % | 12 | % | ||
| Dell Technologies | CCS | * | 10 | % | * | ||||
| Juniper Networks, Inc. | CCS | 13 | % | * | * | ||||
| Total | 31 | % | 24 | % | 12 | % | |||
or more of total revenue in 2020 or 2021. Our top 10 customers represented 65%, 70% and 71%66% of total revenue for 2019, 2018each of 2022, 2021, and 2017, respectively.2020.
We generally enter into master supply agreements with our customers that provide the framework for our overall relationship, although thesuch agreements do not typically guarantee a particular level of business under those agreements is not guaranteed.or fixed pricing. Instead, we bid on a program-by-program basis and typically receive customer purchase orders for specific quantities and timing of products. We believe that our customer-focused factories are flexible and can be reconfigured as needed to meet customer-specific product requirements and fluctuations in volumes (although we do incur increased production costs from time to time in connection with unexpected demand changes). A majority of these supply agreements also require the customer to purchase unused inventory that we have purchased to fulfill that customer's forecasted manufacturing demand. Some of these agreements require us to provide specific price reductions to our customers over the term of the contracts. We expect such price reductionscontracts, which has had (and is expected to become more prevalent as customers increasingly seek longer-term contracts to lock in their supply, terms and pricing. In addition, we have extended payment terms for certain customers, and/or provided longer payment terms for new customers and/or with respect to new programs. These factors have, and may continue to adverselyhave) a significant adverse impact on our revenues, gross margin and operating results in future periods.results. Also see Item 3(D), Key Information — Risk Factors — "Inherent challenges in managing unanticipated changes in customer demand may impact our planning, supply chain execution and manufacturing, and may adversely affect our operating performance and results."
Research and Technology Development
We use advanced technology to design, assemble and test the products we manufacture. We continue to invest in our global design services and capabilities to conceive differentiated JDMHPS product solutions for our customers.
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We have extensive capabilities across a broad range of specialized assembly, configuration and test processes. We work with a variety of substrates based on the products we build for our customers, from thin, flexible printed circuit boardsPCBs to highly complex, dense multi-layer printed circuit boards,PCBs, as well as a broad array of advanced component and attachment technologies employed in our customers' products and our own product designs. We believe that increasing demand for full-system assembly solutions continues to drive technical advancement in complex design, including power, thermal, mechanical assembly and configuration.We also develop and manufacture sub-components, such as optical modules and complex machined parts, intended to drive targeted technical advancements to support these opportunities.
Our automated electronics assembly lines are continuouslyroutinely refreshed with the latest generation technology, with a focus on flexible lines with quick changeover, large board capability, and small component capability. Our assembly capabilities are complemented by advanced test capabilities. The technologies we use include high-speed functional testing, optical, burn-in, vibration, radio frequency, and in-circuit and in-situ dynamic thermal cycling stress testing. Our inspection technology includes X-ray computed tomography, advanced automated optical inspection, three-dimensional paste volumetric inspection and scanning electron microscopy. We work directly with leaders in the equipment industry to optimize their products and solutions or to jointly design solutions to meet the needs of our customers. We apply automation solutions for higher volume products, where possible, to help improve product quality, lower product costs, and increase manufacturing efficiencies.
Our ongoing research and developmentR&D activities include the development of processes, and test technologies, as well as focused product development and technology building blockshardware platform solutions, spanning core data center technologies, that can be used by customers in the development of their products,as-is or customized to accelerate their products' time-to-market.optimize a customer's specific applications. Our JDMHPS offering is focused on developing these design solutions and subsequently managing the other aspects of the supply chain, including product manufacturing.manufacturing and after-market services. We focus our solutions on developing current and next generationnext-generation storage, server and communications products (in particular, elements of data centers, which include the development of complete hardware platform solutions to reduce product costs and accelerate time to market, and which we believe will continue to grow). We work directly with our customers to understand their product roadmaps and requirements, and to develop technology solutions intended to meet their particular needs. We are proactive in developing manufacturing techniques that take advantage of the latest component, product and packaging designs. We have worked with, and have taken leadership roles in, industry and academic groups that strive to advance the state of technology in the industry. As we continue to pursue deeper relationships with our customers, and participate in additional services and revenue opportunities with them, we anticipate an increase in our spending in these development areas.
Supply Chain Management
We share data electronically with our key suppliers, and help ensure speed of supply through strong relationships with our component suppliers and logistics partners. We view the size and scale of our procurement activities, including our IT systems, as an important competitive advantage, as they enhance our ability to obtain better pricing, influence component packaging and designs, and obtain a supply of components in constrained markets. We procure substantially all of our materials and components on behalf of our customers pursuant to individual purchase orders that are generally short-term in nature.
Components and raw materials are sourced globally, with a majority of electronic components originating from Asian countries. See Item 3(D), Key Information — Risk Factors — "Our ability to successfully manage unexpected changes or risks inherent in our global operations and supply chain may adversely impact our financial performance" for a discussion of various risks related to our foreign operations.All of the products we manufacture or assemble require one or more components. In many cases, there may be only one supplier of a particular component. Some of these components could be rationed in response to supply shortages. We work with our suppliers and customers to attempt to ensure continuity in the supply of these components. In cases where unanticipated customer demand or supply shortages occur, we attempt to arrange for alternative sources of supply, where available, or defer planned production in response to the availability of the critical components. Notwithstanding these efforts, however, we have experienced materials constraints from certain suppliers in bothrecent years, driven by workforce constraints on the factories of certain of our segments in recent periods, due in partsuppliers caused by COVID-19. As we are dependent on our suppliers to industry-wide shortages for certain electronic components. Theseprioritize their manufacturing to produce the products we need to fulfill our customer orders, these shortages caused delays in the production of customer products in both of our segments, and required usin combination with volatile market demand, negatively impacted our margins and led to carry higher than expectedhigher-than-expected levels of inventory commencing in 2017. Although the availability of previously constrained materials has improved generally, our A&D business continued to be negatively impacted by materials shortages throughout 2019, particularly with respect to the availability of certain high reliability partsrecent years, and machined components, resultingresulted in operational and materials inefficiencies and a continued backlog of orders. As global supply shortages for many electronic components continued during 2022, we have been placing purchase orders with longer-than-usual lead times (in some cases in excess of one year), in order to secure materials needed for production. As a result, combined with other supply chain management techniques and collaboration with our customers and suppliers, materials constraints did not have a material impact on our revenues or expenses during recent quarters. However, we continue to experience extended lead-times for certain components and increased levels of inventory, and supply chain constraints are expected to persist in 2023. See Item 5, "Operating and Financial Review and Prospects — MD&A — Recent Developments— Segment Environment" for a discussion of the impact of materials constraints (including due to COVID-19) on our business during recent years. See Item 3(D), Key Information — Risk Factors, "We are dependent on third parties to supply certain materials, and our results canhave been, and may continue to be,
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negatively affected by the quality, availability and cost of such materials." Generally, Although the impact of the current Russia/Ukraine conflict on our supply chain has not been significant, as some sub-tier suppliers providing raw materials such as palladium, neon gas and high-grade aluminumare partially dependent on supply from Russia/Ukraine, we will continue to closely monitor the supply availability and price fluctuations of these raw materials. While the prices of principal raw materials are generally not volatile, price increases have resulted from materials shortages and inflation in recent periods. Although we have been successful in offsetting the majority of our increased costs with increased pricing for our products and services to date, price increases resulting from materialssuch shortages and/or other factors are typically recoverablewhich we cannot recover from our customers.customers have, and may continue to, adversely impact our results of operations.
We utilize our enterprise systems, as well as specific supply chain IT tools, to provide comprehensive information on our logistics, financial and engineering support functions. These systems provide management with the data and analytics required to manage the logistical complexities of our business and are augmented by and integrated with other applications, such as shop floor controls, component and product database management, and design tools.
To minimize the risk associated with inventory, we primarily order materials and components only to the extent necessary to satisfy existing customer orders and forecasts covered by the applicable customer contract terms and conditions. However, in light of the constrained materials environment in recent periods, we have also been placing additional orders to secure supply, offset in part by the receipt of cash deposits from the relevant customers. We have implemented specific inventory management strategies with certain suppliers, such as "supplier managed inventory" (pulling inventory at the production line on an as-needed basis) and on-site stocking programs. Our initiatives in Lean and Six Sigma also focus on eliminating excess inventory throughout the supply chain. Notwithstanding the foregoing, however, as a result of demand
volatility from our customers and the materials constraints from certain suppliers discussed above, we carried higher than expected levels of certain inventory (and recorded higher inventory provisions) at December 31, 2019. We expect these adverse market conditions2022 compared to continue in the near term.December 31, 2021.
Intellectual Property
We hold licenses to various technologies which we have acquired in connection with acquisitions. In addition, we believe that we have secured access to technology sufficient for the current conduct of our business.
We regard our manufacturing processes and certain designs as proprietary trade secrets and confidential information. We rely largely upon a combination of trade secret laws, non-disclosure agreements with our customers, suppliers, employees and other parties, and upon our internal security systems, confidentiality procedures and employee confidentiality agreements to maintain the trade secrecy of our designs and manufacturing processes. Although we take steps to protect our trade secrets and other intellectual property, we cannot assure that misappropriation will not occur. See Item 3(D), Key Information — Risk Factors, "We may not adequately protect our intellectual property or the intellectual property of others."
Our increased research and design activities (including JDM), along with related developments, have resulted in the growth of our dependence on our patent portfolioportfolio. We have over 250 hardware and its importancesoftware patents that are integral to us.our HPS business. We anticipate that such growth (and importance) will continue as we expand our business activities.this business. In addition, we currently have a limited number of other patents and patent applications pending to protect our intellectual property. Other factors significant to our proprietary rights include the knowledge and experience of management and personnel, and our ability to develop, enhance and market electronics manufacturing services.
Each of our customers typically provides us with a license to its technology for use in providing electronics manufacturing services to such customer. Generally, the agreements governing such technology grant to us non-exclusive, worldwide licenses with respect to the subject technologies, are typically provided without charge, and terminate upon a material breach by us of the terms of such agreements, or termination of the program to which such licenses relate.
We also license some technology from third parties that we use in providing electronics manufacturing services to our customers. We believe that such licenses are generally available on commercial terms from a number of licensors. Generally, the agreements governing such technology grant to us non-exclusive, worldwide licenses with respect to the subject technologies and terminate upon expiration, or a material breach by us of the terms, of such agreements.
Competition
The EMS industry is highly competitive with multiple global EMS providers competing for customers and programs. Our competitors include Benchmark Electronics, Inc., Flex Ltd., Hon Hai Precision Industry Co., Ltd., Jabil Inc., Plexus Corp., and Sanmina Corporation, as well as smaller EMS companies that often have a regional, product, service or industry-specific focus, and ODMs (including Quanta Computer Inc., Wistron Corp., Delta Network, Inc., and Accton Technology Corp.) that provide internally designed products and manufacturing services. AsWe provide hardware platform solutions as part of our JDM offering, we also provide completeHPS offering. There may be instances where our hardware platform solutions which may compete with those of our customers. Offering products or services to customers that compete with the offerings of other customers may negatively impact our relationship with, or result in a loss of business from, such other customers.customer's hardware offerings.
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We also face indirect competition from current and prospective customers who evaluate our capabilities and commercial models against the merits of manufacturing products internally, and from distribution and logistics providers expanding their services across the supply chain, including assembly, fulfillment, logistics and in some cases, engineering services. We compete with different companies depending on the type of service or geographic area. Some of our competitors have greater scale and provide a broader range of services than we provide. We believe our competitive advantage is our track record in manufacturing technology, quality, complexity, responsiveness and cost-effective, value-added services. To remain competitive, we believe we must continue to provide technologically advanced manufacturing services and solutions, maintain quality levels, offer flexible delivery schedules, deliver finished products and services on time and compete favorably on price.
The competitive landscape in theour CCS areasegment remains aggressive, as demand growth continues to move from traditional enterprise network infrastructure providersOEMs to cloud-based and other service providers, resulting in aggressive bidding from EMS providers and increased competition from ODMs as they further penetrate these markets. As a result of the high concentration of our business in the CCS marketplace, we expect continuedthese competitive pressures, aggressive pricing and technology-driven demand shifts, tohave negatively impacted, and in future periods may negatively impact, our CCS businesses in future periods.businesses. We intend to continue to monitor these dynamics and focus on cost and portfolio management, including HPS growth initiatives, in response to these factors. To enhance our competitiveness, we continue to focus on expanding our service offerings and capabilities beyond our traditional areas of EMS expertise.expertise, including expanding our HPS and after-market services offerings.
See Item 3(D), Key Information — Risk Factors — "We operate in an industry comprised of numerous competitors and aggressive pricing dynamics" and Item 5, "Operating and Financial Review and Prospects — Management's Discussion and
Environmental Matters
We are subject to various federal/national, state/provincial, local, foreign and supra-national laws and regulations, including environmental measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of contaminants, hazardous substances and waste, and health and safety measures related to practices and procedures applicable to the construction and operation of our sites. We have management systems in place designed to maintain compliance with such laws and regulations.
Our past operations and the historical operation by others of our sites may have resulted in soil and groundwater contamination on our sites, and in many jurisdictions in which we operate, environmental laws impose liability for the costs of removal, remediation or risk assessment of hazardous or toxic substances on an owner, occupier or operator of real property even if such person or company was unaware of or not responsible for the discharge or migration of such substances. From time-to-time we investigate, remediate and monitor soil and groundwater contamination at certain operating sites. We generally obtain Phase I or similar environmental assessments (which involve general inspections without soil sampling or groundwater analysis), or review assessment reports undertaken by others, for our manufacturing sites at the time of acquisition or leasing. However, such assessments may not reveal all environmental liabilities (due, for example, to limited available information about prior operations at the properties or other gaps in information at the time we acquire or lease such sites), and assessments have not been obtained for all sites. Where contamination is suspected at sites being acquired or leased, Phase II intrusive environmental assessments (that can include soil and/or groundwater testing) are usually performed. We expect to conduct Phase I or similar environmental assessments in respect of future property acquisitions or leases and intend to perform Phase II assessments where we deem it appropriate. Past environmental assessments have not revealed any environmental liability that we believe will have a material adverse effect on our operating results or financial condition, in part because of contractual retention of liability by landlords and former owners at certain sites. However, any such contractual retention of liability may not provide sufficient protection to reduce or eliminate our liability. Third‑party claims for damages or personal injury are also possible and could result in significant costs to us. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former sites indicate that we are responsible for the release of hazardous substances into the air, ground and/or water, we may be subject to additional liability. Environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. See Item 3(D), Key Information — Risk Factors — "Compliance with governmental laws and obligations could be costly and may negatively impact our financial performance; any failure to comply may negatively impact our financial performance."
Environmental legislation also occurs at the product level. Celestica works with its customers in connection with compliance with applicable product-level environmental legislation in the jurisdictions where products are manufactured and/or offered for use and sale by our customers.
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Backlog
Our A&D business continued to be negatively impacted by materials shortages throughout 2019, particularlyduring 2022, most significantly with respect to the availability of certain high reliability electronic parts and machined components, resulting in, operational and materials inefficiencies andamong other things, a continued backlog of orders. We currently expect gradual improvement in this backlog over the next several quarters.
Although we obtain purchase orders from our customers, they typically do not commit to delivery of products more than 30 to 90 days in advance. However, due to global supply shortages, some customers have provided us with longer commitments. We do not believe that the backlog of expected product sales covered by purchase orders is a meaningful measure of future sales, since generally orders may be rescheduled or canceled.
Seasonality
Seasonality is reflected in the mix of products we manufacture from quarter-to-quarter. From time to time, we experience some level of seasonality in our quarterly revenue patterns across certain of our businesses. The addition of new customers may also introducehas introduced different demand cycles than our existing businesses.cycles. For example, cloud-based service providers have increased their use of products in our CCS segment in recent periods. These customers and markets are cyclically different from our traditional OEM customers, creating more volatility and unpredictability in our revenue patterns, as we adjust to this shift, and additional challenges with respect to the management of our working capital requirements. The pace of technological change, the frequency of customers transferring business among EMS and/or ODM competitors and the constantly changing dynamics of the global economy will also continue to impact us. As a result of these factors, the impact of new program wins or program losses or non-renewals, overall demand variability, and limited visibility in technology end markets, it is difficult to isolate the impact of seasonality on our business. In recent periods,Typically, revenue from the storage component of our Enterprise end market has increased in the fourth quarter
Controlling Shareholder Interest
Onex is our controlling shareholder with an approximate 81%82.0% voting interest in Celestica. Accordingly, Onex has the ability to exercise a significant influence over our business and affairs and generally has the power to determine all matters submitted to a vote of our shareholders where the SVS and MVS vote together as a single class. Such matters include electing our Board and thereby influencing significant corporate transactions, including mergers, acquisitions, divestitures and financing arrangements. Gerald W. Schwartz, the Chairman of the Board President and Chief Executive Officer of Onex, indirectly owns shares representing the majority of the voting rights of the shares of Onex. For further details, refer to Item 3(D), Key Information — Risk Factors — "The interest of our controlling shareholder, Onex Corporation, with an approximate 81%82.0% voting interest, may conflict with the interests of other shareholders" and footnotes 2 and 3 of Item 7(A) "Major Shareholders and Related Party Transactions — Major Shareholders."
Government Regulation
Information regarding material effects of government regulations on Celestica's business is provided in the risk factors entitled "We are subject to the risk of increasing income and other taxes, tax audits and the challenges of successfully defending our tax positions, and obtaining, renewing or meeting the conditions of tax incentives and credits, any of which may adversely affect our financial performance,""Compliance with governmental laws and obligations could be costly and may negatively impact our financial performance; any failure to comply may negatively impact our financial performance,""Compliance or the failure to comply with employment laws and regulations may negatively impact our financial performance," and "PoliciesU.S.policies or legislation proposed or instituted by the current U.S. administration could have a material adverse effect on our business, results of operations and financial condition," and "Our business and operations could be adversely impacted by environmental, social and governance (ESG) initiatives" in Item 3(D), Key Information — Risk Factors.
Sustainability and Ethical Labor Practices
We are committed to driving sustainability initiatives through collaboration with our employees, customers, suppliers and local communities. Our Sustainability Report, which is published annually, outlines our sustainability strategy, the progress we have made as a socially responsible organization, and the key activities and milestones we are working to achieve for each of our focus areas, including employee sustainability, environmental sustainability, material stewardship, sustainable solutionsareas: our planet, our products and sustainableservices, our people and our communities. Our most recent Sustainability Report, as well as our Corporate Values, can be found on our website: www.celestica.com (information on our website is not incorporated by reference into this Annual Report).
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We strive to minimize the impact of our operations on the environment by working to make our infrastructure sustainable and by reducing our greenhouse gas (GHG) emissions. Since 2009, we have published annual reports documenting our corporate social responsibility programs and environmental sustainability initiatives. We currently report in accordance with the guidance of the Global Reporting Initiative (GRI), and our most recent Sustainability Report includes disclosures aligned with the standards of the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).Our most recent Sustainability Report also includes a UN Global Compact Communication on Progress. We are committed to reporting our GHG emissions annually, and have included third-party assurance of our GHG emissions in our annual report since 2013. Since 2010, we have responded to the CDP (formerly the Carbon Disclosure Project) climate changeClimate Change questionnaire, which enables engagement on environmental issues worldwide. We continue to make progress on our GHG emissions reduction target, which has been approved by the Science Based Targets initiative (SBTi). As part of our sustainability strategy, we have adopted the ten (of 17) United Nations Sustainable Development Goals as part of(SDGs) that we believe present opportunities for us to affect the greatest change. We determine this annually through our sustainability strategy, as well as amateriality assessment and during stakeholder conversations. The SDGs we have adopted reflect our commitment to diversity and inclusion, investments in our employees, continued focus on climate action and increased focus on water. We have an established Conflict Minerals Policy in accordance with Dodd-Frank. We fully support the objectives of the conflict minerals legislation, which aims to minimize violence and environmental damage in the Democratic Republic of Congo and adjoining countries, and expect our suppliers to provide all necessaryrequested declarations.
Diversity and Inclusion
We believe in building an inclusive culture that encourages diversity of thought and attributes while allowing employees to thrive, be valued and celebrated. In our view, diversity includes, but is not limited to, gender or gender identity, race, age, ethnicity, religious or cultural background, disability, marital or family status, sexual orientation, education, skills, experiences, perspectives, language and other areas of potential difference. In furtherance of these beliefs, we have adopted a Diversity and Inclusion Policy, under which we are committed to providing a work environment in which everyone feels accepted and valued, by being treated fairly and with respect across the enterprise. We seek to listen, learn and understand from our employees, through whom we continuously strive to improve our culture of inclusivity.
In furtherance of the foregoing, we maintain both a Diversity and Inclusion Steering Committee (D&I Steering Committee) and a Diversity and Inclusion Committee (D&I Committee). The D&I Steering Committee, which is comprised of members of senior management and co-chaired by our Chief Executive Officer and Chief Human Resources Officer, oversees diversity and inclusion at Celestica and seeks to ensure that diversity and inclusion are incorporated into our culture, workplace and talent practices. The D&I Committee is responsible for developing and promoting diversity and inclusion initiatives. We have also appointed a Diversity and Inclusion Leader to drive Celestica's diversity and inclusion strategy. Management periodically updates the Human Resources and Compensation Committee on the Corporation's progress towards its diversity and inclusion objectives.
Some of the key diversity and inclusions initiatives undertaken by Celestica in 2022 include:
•launch of "Leading Inclusively" training to our global leaders in order to raise awareness of the importance of inclusion, awareness of bias and micro-aggression, and how leaders can create a more inclusive environment;
•diversity and inclusion training programs for all people leaders and employees;
•held our second consecutive "Celestica Day for Diversity and Inclusion Awareness" to highlight the value of equity and reveal issues of inequity that may be unnoticed and unaddressed, understand diverse teams, cultural differences to develop intercultural fluency, spark ways of thinking about inclusion within Celestica and reinforce the value of diverse teams in the workplace; and
•expanded our employee-led employee resource groups to five (Celestica Women's Network, Celestica Black Employee Network, Celestica Pride Network, Celestica Indigenous Affinity Group and Celestica Net Gen) each of which is championed by a member of senior management.
During 2022, our Chief Executive Officer and executive leadership team considered the ways in which, as a leadership team, they could drive meaningful impact in the area of diversity and inclusion at Celestica. They set goals for 2023 and beyond, including a long-term objective to strengthen diversity in our workforce, and agreed to take visible leadership roles in our diversity and inclusion initiatives.
Board diversity, particularly gender diversity, has been a priority area for the Board. During 2022, we were focused on supporting thoughtful Board renewal and promoting Board diversity, with a particular emphasis on appointing additional women. With our appointment of Françoise Colpron and Jill Kale to our Board, effective October 1, 2022 and December 1, 2022, respectively, we fulfilled our commitment to achieve 30% target representation of women on the Board at or prior to our 2023 Annual Meeting of Shareholders (2023 Meeting). The Board's goal is to maintain 30% women on the Board.
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In January 2023, the Nominating and Corporate Governance Committee reviewed our Board Diversity Policy and updated it to include a goal of maintaining a Board composition in which at least 30% of the Board identify as women and at least one Board member identifies as an Indigenous person, is a member of a visible minority, has a disability, or is LGBTQ+. When identifying candidates for election or appointment to the Board of Directors, the Board and its Nominating and Corporate Governance Committee will:
•consider candidates who are qualified based on a balance of skills, background, experience and knowledge;
•take into account diversity considerations such as age, geographical representation from the regions in which Celestica operates, and representation from underrepresented groups;
•ensure that diverse candidates are brought forth for consideration;
•ensure that the initial candidate list is comprised of no less than 50% people who identify as women; and
•periodically review recruitment and selection protocols to ensure diversity remains an important component of the Board.
The Board believes that the composition and number of director nominees will allow the Board to perform effectively and act in the best interests of the Company and its stakeholders, and we further believe the Board is successfully addressing diversity.
Three of the ten director nominees at our upcoming 2023 Meeting self-identify as women (30%). Three other director nominees self-identify as members of visible minorities (30%), while no director nominees self-identify as Indigenous peoples, persons with disabilities or LGBTQ+.
COVID-19 Oversight
We maintain robust disaster recovery plans to identify, prevent and respond to crisis situations. As each crisis is situational, our framework is adaptable. Management updates the Board in identifying, monitoring and mitigating risks to the business and the Board monitors the implementation of appropriate systems to manage such risks.
The Board continues to receive regular updates concerning the impact of and our response to the COVID-19 pandemic. These updates focus on the supply chain interruptions caused by the pandemic, employee safety and protective measures, disruptions to our plant operations, and supply chain resilience. The Board expects to continue to receive information from management relating to the effects of the pandemic on the Company, its operations and employees on a regular basis for the foreseeable future.
Employee Engagement
At Celestica, we know our success depends on our talented people and their commitment to excellence. We believe employee engagement is crucial for employee performance and productivity, and strong business outcomes. We therefore continually strive to enhance employee engagement to ensure that we continue to attract and retain talent.Since our last employee engagement survey conducted in 2021, we believe that we have made solid progress in shaping our employee culture and strengthening employee engagement and experience across our sites, locations and functions. Engagement activities conducted in 2022 include:
• diversity and inclusion training programs for employees and people leaders;
• a formalized mentorship program and enhanced leadership training;
• an enhanced Women In Action program;
• education, training and meeting guidelines for people leaders to create a safe, respectful and inclusive environment where employees feel valued and are encouraged to engage in open dialogue;
• deployment of employee focus groups across all regions;
• launch of an "Employee Value Proposition" based on employee input on their experience and what they value about working at Celestica; and
• establishment of "Grow Together" talent programs to support ongoing talent development emphasizing growth opportunities for employees by providing specialized speaking events aligned to Celestica's culture and overall topics of interest, leadership academies and modernized online learning experiences.
Celestica's rewards and recognition programs acknowledge employees who are achieving business results by living our brand and values, and embracing the characteristics of our Leadership Imperatives. We encourage business and people leaders
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to acknowledge individual and team success in quarterly town halls, and in more formal ways through our Bravo! and Ignition Awards programs. Acknowledging the challenges presented by the lack of in-person connection as a result of the pandemic, we continually look for ways to reward our employees with virtual recognitions.
We believe that employee engagement and well-being is strengthened through healthy, supportive and safe workplaces. Globally, we have established a framework whereby all sites are required to measure and report on their environmental, health and safety performance regularly. As we prepare to measure employee engagement and gather employee feedback on what we are doing well and where there are opportunities to do more, we intend to launch our next global employee engagement survey in 2023, which will include both engagement and diversity and inclusion related questions.
We believe that employee engagement and well-being is strengthened through healthy, supportive and safe workplaces. Globally, we have established a framework whereby all sites are required to measure and report on their environmental, health and safety performance regularly.
Community Engagement
We strive to support the local communities in which we live and work. We encourage all full-time employees to take up to 16 hours of paid time off per year to volunteer through our Time Off to Volunteer program. This program gives employees the opportunity to become involved in their communities in a meaningful way and to help those in need.
United Way is a federated network of 69 local United Way Centraide offices serving more than 5,000 communities across Canada, each registered as its own non-profit organization. In 2022, Celestica's annual United Way fundraising campaign raised C$170,000 plus a match of C$85,000 for a total of C$255,000, which brings Celestica's lifetime fundraising amount to C$12.5 million.
Ethical Labor Practices
We maintain a Business Conduct Governance (BCG) Policy, which outlines the ethics and practices we consider necessary for a positive working environment, as well as the high legal and ethical standards to which our employees are held accountable. 100% of our employees have completed BCG Policy training, and we conductcertify to the BCG policy on an annual re-certifications.basis. Our BCG Policy is available on our website: www.celestica.com (information on our website is not incorporated by reference into this Annual Report).
In addition, we have well-established policies regarding fair labor practices and guidelines intended to create a respectful, safe and healthy work environment for our employees globally.
We are a founding (and remain a) member of the RBA, a non-profit coalition of electronics companies that, among other things, establishes standards for its members in responsible and ethical practices in the areas of labor, environmental compliance, employee health and safety, ethics and social responsibility. The RBA Code of Conduct outlines industry standards intended to
ensure that working conditions in the supply chain are safe, workers are treated with respect and dignity, and manufacturing processes are environmentally responsible. We continually work to implement, manage and audit our compliance with the RBA Code of Conduct.
We are committed to the development and fair treatment of our global workforce, including promotion of a diverse workforce, an inclusive work environment, equal employment opportunity hiring practices and policies, and anti-harassment, workforce safety and anti-reprisal policies.
Financial Information Regarding Geographic Areas
Details of our financial information regarding geographic areas are disclosed in note 25 to the Consolidated Financial Statements in Item 18, in Item 4(B) "Information on the Company — Business Overview — Geographies," and in Item 4(D) "Information on the Company — Property, Plants and Equipment." Risks associated with our foreign operations are disclosed in Item 3(D), Key Information — Risk Factors, including "Our ability to successfully manage unexpected changes or risks inherent in our global operations and supply chain may adversely impact our financial performance."
C. Organizational Structure
Onex, an Ontario corporation, is the Corporation's controlling shareholder with an approximate 81%82.0% voting interest in Celestica (via its direct and indirect beneficial ownership of approximately 18.6 million (100%) of the Corporation's MVS, and approximately 0.4 million of the Corporation's SVS). Gerald W. Schwartz is the Chairman of the Board President, and Chief Executive Officer of Onex, and indirectly owns multiple voting shares of Onex representing the majority of the voting rights of the shares of Onex (also see footnotes 2 and 3 to the Major Shareholders Table in Item 7(A) below).
Celestica conducts its business through subsidiaries operating on a worldwide basis. The following companies are considered significant subsidiaries of Celestica, and each of them is wholly-owned, directly or indirectly, by Celestica:
Celestica Cayman Holdings 1 Limited, a Cayman Islands corporation;
Celestica Cayman Holdings 9 Limited, a Cayman Islands corporation;
Celestica (Thailand) Limited, a Thailand corporation;
Celestica (USA) Inc., a Delaware, U.S. corporation;
2480333 Ontario Inc., an Ontario, Canada corporation;
Celestica Holdings Pte Limited, a Singapore corporation; and
PCI Private Limited, a Singapore corporation.
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D. Property, Plants and Equipment
The following table summarizes our principal owned and leased properties as of February 19, 2020.21, 2023. These sites are used to provide manufacturing services and solutions, such asincluding the manufacture of printed circuit boards,PCBs, assembly and configuration of final systems, complex mechanical assembly, precision machining, as well as other related services and customer support activities, including design and development, warehousing, distribution, fulfillment and after-market services, with a total of approximately 6.77.2 million square feet of productive capacity.
| Major locations | Square Footage(1) | Segment | Owned/Leased | Lease Expiration Dates | |||||||||||||
Canada (2)(3) | 341 | ATS/CCS | Leased | between 2025 and 2028 | |||||||||||||
| Arizona | 111 | ATS | Leased | 2027 | |||||||||||||
California(3) | 198 | ATS/CCS | Leased | between 2023 and 2027 | |||||||||||||
China(3)(4) | 983 | ATS/CCS | Owned/Leased | between 2023 and 2056 | |||||||||||||
| India | 5 | CCS | Leased | 2024 | |||||||||||||
Indonesia(3)(4) | 266 | ATS | Owned/Leased | between 2023 and 2028 | |||||||||||||
Ireland(3) | 104 | ATS/CCS | Leased | between 2024 and 2030 | |||||||||||||
Japan(3) | 594 | ATS/CCS | Owned/Leased | 2023 | |||||||||||||
| Laos | 121 | CCS | Leased | between 2023 and 2024 | |||||||||||||
Malaysia(3)(4)(5) | 1,451 | ATS/CCS | Owned/Leased | between 2023 and 2060 | |||||||||||||
Massachusetts(5) | 60 | ATS | Owned | N/A | |||||||||||||
Minnesota(3) | 116 | ATS/CCS | Leased | between 2024 and 2032 | |||||||||||||
Mexico(3) | 731 | ATS/CCS | Leased | between 2023 and 2032 | |||||||||||||
Oregon(3) | 240 | ATS | Leased | 2026 | |||||||||||||
| Romania | 252 | ATS/CCS | Owned | N/A | |||||||||||||
Singapore(3)(4) | 171 | ATS/CCS | Owned/Leased | between 2023 and 2053 | |||||||||||||
South Korea(3) | 207 | ATS | Owned/Leased | 2026 | |||||||||||||
| Spain | 109 | ATS | Owned | N/A | |||||||||||||
Texas(6) | 153 | CCS | Leased | 2032 | |||||||||||||
Thailand(3)(4) | 982 | ATS/CCS | Owned/Leased | between 2023 and 2048 | |||||||||||||
(3)Represents multiple locations.
(4)With respect to these locations, the land is leased, and the buildings are either owned or leased by us.
| Major locations | Square Footage(1) (in thousands) | Segment | Owned/Leased (2) | Lease Expiration Dates | |
Canada (3)(5) | 341 | ATS/CCS | Leased | between 2020 and 2028 | |
| Arizona | 111 | ATS | Leased | 2027 | |
California(3) | 206 | ATS/CCS | Leased | between 2020 and 2023 | |
| Oregon | 240 | ATS | Leased | between 2021 and 2026 | |
| Massachusetts | 55 | ATS | Owned | N/A | |
Minnesota(3) | 230 | ATS | Leased | between 2021 and 2024 | |
Mexico(3) | 463 | ATS/CCS | Leased | between 2020 and 2023 | |
Ireland(3) | 82 | ATS/CCS | Leased | between 2020 and 2024 | |
| Spain | 109 | ATS | Owned | N/A | |
| Romania | 260 | ATS/CCS | Owned | N/A | |
China(3)(4) | 1,147 | ATS/CCS | Owned/Leased | between 2020 and 2056 | |
Malaysia(3)(4) | 1,350 | ATS/CCS | Owned/Leased | between 2020 and 2060 | |
Thailand(3)(4) | 982 | ATS/CCS | Owned/Leased | between 2020 and 2048 | |
Singapore(3) | 202 | ATS/CCS | Leased | between 2020 and 2022 | |
South Korea (3) | 233 | ATS | Owned/Leased | 2021 | |
Japan(3) | 594 | ATS/CCS | Owned/Leased | between 2020 and 2022 | |
| Laos | 121 | CCS | Leased | between 2021 and 2023 | |
(6)We are committed to leasing additional space at this site starting April 2027. See Item 5, "Operating and Financial Review and Prospects — MD&A — Liquidity — Cash requirements — Contractual Obligations."
We consider each of the properties in the table above to be adequate for its purpose and suitably utilized according to the individual nature and requirements of the relevant operations. We currently expect to be able to extend the terms of expiring leases or to find replacement sites on commercially acceptable terms. Also see "Environmental Matters" in Item 4(B) above.
Our principal executive office is located at 5140 Yonge Street, Suite 1900, Toronto, Ontario, Canada M2N 6L7.
Our material tangible fixed assets (of which approximately one-third is pledged as security under our credit agreement) are described in note 76 to the Consolidated Financial Statements in Item 18.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
CELESTICA INC.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 20192022
The following Management’'s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our 20192022 audited consolidated financial statements (2019(2022 AFS), which we prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise noted, all dollar amounts are expressed in U.S.United States (U.S.) dollars. The information in this discussion is provided as of February 19, 202021, 2023 unless we indicate otherwise.As used herein, "Q1," "Q2," "Q3," and "Q4" followed by a year refers to the first quarter, second quarter, third quarter and fourth quarter of such year, respectively.
Certain statements contained in this MD&A constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (U.S. Exchange Act), and contain forward-looking information within the meaning of Canadian securities laws. Such forward-looking information includes, without limitation, statements related to: potential adverse impacts resulting from coronavirus disease 2019 and related mutations (COVID-19); our priorities, intended areas of focus, targets, objectives, and goals; trends in the electronics manufacturing services (EMS) industry and our segments (including the components thereof),(and/or their constituent businesses) and their anticipated impact on our business;impact; the anticipated impact of specified adversecurrent market conditions inon each of our segments (and/or componenttheir constituent businesses) and near term expectations; anticipated improvements in backlog; the anticipated rangepotential restructuring and timing of restructuring charges associated primarily with the phased non-renewal of our programs with Cisco Systems, Inc. (Cisco Disengagement); the anticipated impact, range and timing of actions associated with our Connectivity & Cloud Solutions segment portfolio review (CCS Review), including the Cisco Disengagement;divestiture actions; our anticipated financial and/or operating results; growthresults and diversification strategies and plans (andoutlook; our expectations with respect to insurance recoveries for tangible losses in connection with a recent fire at our Batam facility in Indonesia (Batam Fire); our strategies; our credit risk; the potential hindrances thereto); materials constraints; the anticipated impact of completed acquisitions, and orprogram wins, transfers, losses or disengagements on our business;disengagements; materials, component and supply chain constraints; shipping delays; anticipated expenses, restructuring actions and charges, capital expenditures, and other anticipated working capital requirements includingand contractual obligations (and intended methods of funding such items); the anticipated amounts, timing, impact of our price reductions and funding thereof; the anticipatedlonger payment terms; our intended repatriation of certain undistributed earnings from foreign subsidiaries;subsidiaries (and amounts we do not intend to repatriate in the foreseeable future); the potential impact of international tax reform; the potential impact of tax and litigation outcomes; our anticipated ability to use certain net operatingtax losses; intended investments in our business and associated risks;business; the potential impact of the pace of technological changes, customer outsourcing, program transfers, and the global economic environment onenvironment; the intended method of funding subordinate voting share (SVS) repurchases and our business; raw materials prices; the timing of the commencement of, and amount of payments under, a lease for our new corporate headquarters; our expectations with respect to days in cash deposits;restructuring provision; the impact of our outstanding indebtedness under our credit facility on our business;indebtedness; liquidity and the sufficiency of our capital resources; our intention (when in our discretion) to settle outstanding equity awards with subordinate voting shares (SVS); the anticipated impact of recent U.S. tax reform on our business; the potential impact of price reductions, longer payment termsfinancial statement estimates and longer-term contracts on our business; our compliance with covenants under our credit facility; the potential useassumptions; interest rates and effect of cash, securities issuances and further increases in third-party indebtedness to fund our operations or acquisitions;expense; the potential adverse impacts of events outside of our control including, among others, Britain's departure from the European Union (Brexit), policies or legislation proposed or instituted by the current administration(including those described in the U.S., the potential impact of significant tariffs on items imported into the U.S. and related countermeasures,and/or coronavirus disease 2019 (COVID-19) or other widespread illness or disease"External Factors that May Impact our Business" below) (External Events); potential true-up premiums under our U.K. main pension plan; the amount, method of funding, and impact of mandatory 2020 prepayments under our credit facility based on 2019 excessfacility; our compliance with covenants under our credit facility; refinancing debt at maturity; income tax incentives; accounts payable cash flow;flow levels; expectations with respect to cash generating units with goodwill; pension plan funding requirements;requirements and the anticipated impact of the expiration of certain income tax incentives in Thailand.obligations; and accounts receivable sales. Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “continues,” “project,” “target,” “goal,” “potential,” “possible,” “contemplate,” “seek,” or similar expressions, or may employ such future or conditional verbs as “may,” “might,” “will,” “could,” “should”“should,” or “would,” or may otherwise be indicated as forward-looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, and for forward-looking information under applicable Canadian securities laws.
Forward-looking statements are provided to assist readers in understanding management’smanagement's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. Forward-looking statements are not guarantees of future performance and are subject to risks that could cause actual results to differ materially from those expressed or implied in such forward-looking statements, including, among others, risks related to: customer and segment concentration; challenges of replacing revenue from completed, lost or non-renewed programs or customer disengagements,disengagements; managing our business during uncertain market, political and economic conditions, including the Cisco Disengagementamong others, global inflation and/or recession, and geopolitical and other CCS Review disengagements;risks associated with our international operations, including military actions, protectionism and reactive countermeasures, economic or other sanctions or trade barriers, including in relation to the Russia/Ukraine conflict; managing changes in customer demand; our customers' ability to compete and succeed withusing our products and services; delays in the delivery and availability of components, services and/or materials, as well as their costs and quality; our inventory levels and practices; the cyclical and volatile nature of our capital equipment business, in particular our semiconductor and display businesses; competitive factors and adverse market conditions affecting the EMS industry in general and our segments
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conditions affecting, and the highly competitive nature of, the EMS and original design manufacturer (ODM) industries in general and our segments in particular (including the delivery and availability of components, services and materials; unanticipated changes in customer demand; the inability to maintain adequate utilization of our workforce; the expansion or consolidation of our operations; defects or deficiencies in our products, services or designs; integrating acquisitions and "operate-in-place" arrangements, and achieving therisk that anticipated benefits therefrom; negative impacts on our business resulting from recent increases in third-party indebtedness; rapidly evolving and changing technologies, and changes in our customers' business and outsourcing strategies; customer, competitor and/or supplier consolidation; compliance with social responsibility initiatives;market conditions do not materialize); challenges associated with new customers or programs, or the provision of new services; interest rate fluctuations; rising commodity, materials and component costs as well as rising labor costs and changing labor conditions; changes in U.S. policies or legislation; customer relationships with emerging companies; recruiting or retaining skilled talent; our ability to adequately protect intellectual property and confidential information; the impactvariability of restructuringrevenue and operating results; unanticipated disruptions to our cash flows; deterioration in financial markets or the macro-economic environment, including as a result of global inflation and/or recession; maintaining sufficient financial resources to fund currently anticipated financial actions including a failureand obligations and to achievepursue desirable business opportunities; the expansion or consolidation of our operations; the inability to maintain adequate utilization of our workforce; integrating and achieving the anticipated benefits from actions associated with the CCS Review, including the Cisco Disengagementacquisitions and "operate-in-place" arrangements; execution and/or quality issues (including our productivity initiatives; the incurrenceability to successfully resolve these challenges); non-performance by counterparties; negative impacts on our business resulting from any significant uses of future restructuring charges, impairment charges cash, securities issuances, and/or other write-downsadditional increases in third-party indebtedness (including as a result of assets; managingan inability to sell desired amounts under our operations, growth initiatives, and our working capital performance during uncertain market, political and economic conditions;uncommitted accounts receivable sales program or supplier financing programs); disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of External Events (in particular,Events; defects or deficiencies in our products, services or designs; volatility in the impact of COVID-19); changes to our operating model; changing commodity, materialscommercial aerospace industry; compliance with customer-driven policies and component costs as well as labor costsstandards, and conditions; retaining or expanding our business due to execution or quality issues (including our ability to successfully resolve these challenges); non-performance by counterparties; maintaining sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities;third-party certification requirements; negative impacts on our business resulting from any significant usesour third-party indebtedness; the scope, duration and impact of cash, securities issuances, and/the COVID-19 pandemic and materials constraints; declines in U.S. and other government budgets, changes in government spending or additional increasesbudgetary priorities, or delays in third-party indebtedness for additional acquisitionscontract awards; failure of the U.S. federal government to manage its fiscal matters or to otherwise fundraise or further suspend the debt ceiling, and changes in the amount of U.S. federal debt; the military conflict between Russia and Ukraine; changes to our operations; our financial exposure tooperating model; foreign currency volatility; our global operations and supply chain; competitive bid selection processes; customer relationships with emerging companies; recruiting or retaining skilled talent; our dependence on industries affected by rapid technological change; rapidly evolving and changing technologies, and changes in our ability to protect intellectual property;customers' business or outsourcing strategies; increasing taxes (including as a result of global tax reform), tax audits, and challenges of defending our tax positions; obtaining, renewing or meeting the conditions of tax incentives and credits; the management of our information technology systems, and the fact that while we have not been materially impacted by computer viruses, malware, ransomware, hacking attemptsincidents or outages, thatwe have been (and may disruptin the future be) the target of such events; the impact of our operations;restructuring actions and/or productivity initiatives, including a failure to achieve anticipated benefits therefrom; the incurrence of future restructuring charges, impairment charges, other unrecovered write-downs of assets (including inventory) or operating losses; the inability to prevent or detect all errors or fraud; the variability of revenue and operating results; compliance with applicable laws regulations, and government grants; the management of our IT systems and our ability to protect confidential information;regulations; our pension and other benefit plan obligations; changes in accounting judgments, estimates and assumptions; our ability to maintain compliance with applicable credit facility covenants; the restrictive and financial covenants underdiscontinuation of LIBOR; our credit facility; interest rate fluctuations and changesentry into a total return swap agreement; our ability to LIBOR; deterioration in financial markets or the macro-economic environment;refinance our indebtedness from time to time; our credit rating; andthe interest of our controlling shareholder; current or future litigation, governmental actions, and/or changes in legislation or accounting standards.standards; volatility in our stock price; the impermissibility of SVS repurchases, or a determination not to repurchase SVS, under any normal course issuer bid (NCIB); potential unenforceability of judgments; negative publicity; the impact of climate change; and our ability to achieve our environmental, social and governance (ESG) targets and goals, including with respect to climate change and greenhouse gas emissions reduction. The foregoing and other material risks and uncertainties are discussed in our public filings at www.sedar.com and www.sec.gov,, including in this MD&A, our most recent Annual Report on Form 20-F filed with, and subsequent reports on Form 6-K furnished to, the U.S. Securities and Exchange Commission (SEC), and as applicable, the Canadian Securities Administrators.
Our forward-looking statements are based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions includeinclude: continued growth in our end markets; growth in manufacturing outsourcing from customers in diversified markets; no significant unforeseen negative impacts to our operations; no unforeseen materials price increases, margin pressures, or other competitive factors affecting the EMS or ODM industries in general or our segments in particular, as well as those related to the following: the scope and duration of materials constraints (i.e., that they do not materially worsen) and the COVID-19 pandemic, and their impact on our sites, customers and suppliers; our ability to fully recover our tangible losses caused by the Batam Fire through insurance claims; fluctuation of production schedules from our customers in terms of volume and mix of products or services; the timing and execution of, and investments associated with, ramping new business; the successful pursuit, completion and integration of acquisitions; the success of our customers’customers' products; our ability to retain programs and customers; the stability of general economic and market conditions, currency exchange rates, and interest rates; supplier performance and quality, pricing and terms; compliance by third parties with their contractual obligations and the accuracy of their representations and warranties;obligations; the costs and availability of components, materials, services, equipment, labor, energy and transportation; that our customers will retain liability for recently-imposedproduct/component tariffs and countermeasures; global tax legislation changes; our ability to keep pace with rapidly changing technological developments; the timing, execution and effect of restructuring actions; the successful resolution of quality issues that arise from time to time; the components of our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities;leverage ratio (as defined in our credit facility); our ability to successfully diversify our customer base and develop new capabilities; that we achieve the expected benefits fromavailability of capital resources for, and the permissibility under our recent acquisitions credit facility of, repurchases of outstanding SVS under
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our current NCIB,and actions associatedcompliance with applicable laws and regulations pertaining to NCIBs; compliance with applicable credit facility covenants; anticipated demand levels across our CCS Review (including the Cisco Disengagement); the impact of actions associated with the CCS Review (including the Cisco Disengagement) on our business; the magnitude of anticipated profits in our capital equipment business in the first quarter of 2020; the timing and nature of anticipated improvements in the capital equipment market in 2020; andbusinesses; the impact of anticipated adverse market conditions in 2020 on our A&D business.businesses; that global inflation and/or recession will not have a material impact on our revenues or expenses; our ability to achieve the expected long-term benefits from our PCI Private Limited (PCI) acquisition; and our maintenance of sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities. Although management believes its assumptions to be reasonable under the current circumstances, they may prove to be inaccurate, which could cause actual results to differ materially (and adversely) from those that would have been achieved had such assumptions been accurate. Forward-looking statements speak only as of the date on which they are made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Overview
Celestica's business:
We deliver innovative supply chain solutions globally to customers in two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS segment consists of our ATS end market, and is comprised of our aerospaceAerospace and defenseDefense (A&D), industrial, energy, healthtech,Industrial, HealthTech, and capital equipment businesses. Our capital equipment business is comprised of our semiconductor, display, and power & signal distribution equipmentCapital Equipment businesses. Our CCS segment consists of our Communications and Enterprise (servers and storage) end markets. Our Enterprise end market is comprised of our servers and storage businesses. Additional information regarding our reportable segments is included in note 25 to the 20192022 AFS.
Our customers include original equipment manufacturers (OEMs), cloud-based and other service providers, including hyperscalers, and other companies in a wide range of industries.
Our global headquarters is located in Toronto, Ontario, Canada. We operate a network of sites and centers of excellence strategically located in North America, Europe and Asia, with specialized end-to-end supply chain capabilities tailored to meet specific market and customer product lifecycle requirements.
We offer a comprehensive range of product manufacturing and related supply chain services to customers in both of our segments, including design and development, new product introduction, engineering services, component sourcing, electronics manufacturing and assembly, testing, complex mechanical assembly, systems integration, precision machining, order fulfillment, logistics, asset management, product licensing, and after-market repair and return services. WithinOur Hardware Platform Solutions (HPS) offering (within our CCS segment) includes the development of infrastructure platforms, hardware and software design solutions and development, our Joint Design and Manufacturing (JDM) offering includes developing hardware platforms and design solutionsservices that can be used as-is, or customized for specific applications in collaboration with our customers, and managingmanagement of program design and aspects of the supply chain, manufacturing, and manufacturing.after-market support.
Products and services in our ATS segment are extensive and are often more regulated than in our CCS segment, and can include the following: government-certified and highly-specialized manufacturing, electronic and enclosure-related services for A&D-related&D customers; high-precision semiconductor and display equipment and integrated subsystems; a wide range of industrial automation, controls, test and measurement devices; engineering-focused engagements, including full product development in the areas of telematics, human machine interface, Internet-of-Things and embedded systems; advanced solutions for surgical instruments, diagnostic imaging and patient monitoring; and efficiency products to help manage and monitor the energy and power industries. Our ATS segment businesses typically have a higher margin profile,profiles and margin volatility, higher working capital requirements, and longer product life cycles than the businesses in our CCS segment.
Products and services in our CCS segment consist predominantly of enterprise-level data communications and information processing infrastructure products and systems, and can include routers, switches, data center interconnects, edge solutions, and servers and storage-related products used by a wide range of businesses and cloud-based and other service providers to manage digital connectivity, commerce and social media applications. Our CCS segment is subject to negative pricing pressures driven by the highly competitive nature of this market and is experiencing technology-driven demand shifts, which are not expected to abate. Our CCS segment businesses typically have a lower margin profile,profiles, lower working capital requirements, and higher volumes than the businesses in our ATS segment. Within our CCS segment, however, our HPS business (which includes firmware/software enablement across all primary IT infrastructure data center technologies and aftermarket services) typically has a higher margin profile than our traditional CCS businesses, but also requires specific investments, including research and development (R&D), and higher working capital. Our CCS segment generally experiences a high degree of volatility in terms of revenue and product/service mix, and as a result, our CCS segment margin can fluctuate
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from period to period. In recent periods, we have experienced an increasing shift in the mix of our programs towards cloud-based and other service providers, which are cyclically different from our traditional OEM customers, creating more volatility and unpredictability in our revenue patterns, and additional challenges with respect to the management of our supply chain and working capital requirements.
Overview of business environment:
The EMS industry is highly competitive. Demand can be volatile from period to period, and aggressive pricing is a common business dynamic, particularly in our CCS segment.dynamic. Customers may shift production between EMS providers for a numbervariety of reasons, including changes in demand for their products, pricing concessions, more favorable terms and conditions, execution or quality issues, their preference or need to modify or consolidate their supply chain capacity or change their supply chain partners, tax benefits, new trade and/or export policies or legislation, or consolidation among customers. Customers may also change the amount of business they outsource, or the concentration or location of their EMS suppliers. As a result, customer and segment revenue and mix, as well as overall profitability, are difficult to forecast. The loss of one or more major customers could have a material adverse effect on our operating results, financial position and cash flows.
Managing our operations is complex, and our financial results often fluctuate, in each case as a result of, among other factors, product lifecycles in the markets we serve, production lead times required by our customers, our ability to secure materials and components, our ability to manage staffing and talent dynamics, rapid shifts in technology, model obsolescence, commoditization of certain products, the emergence of new business models, shifting patterns of demand, (such asthe proliferation of software-defined technologies enabling the disaggregation of software and hardware, product oversupply, changing supply chains and customer supply chain requirements, and the build-up by customers of inventory buffers. For example, the shift from traditional network infrastructures to highly virtualized and cloud-based environments, and declines in end-market demand for customer-specific proprietary systems in favor of open systems with standardized technologies), the prevalence of solid state or flash memory technology as a replacement for hard disk drives, the proliferation of software-defined technologies enabling the disaggregation of software and hardware, product oversupply, and the build-up by customers of inventory buffers. For example,
Capacity utilization, customer mix and the types of products and services we provide are important factors affecting our financial performance. The number of sites, the location of qualified personnel, the manufacturing and engineering capacity and network, and the mix of business through that capacity are also vital considerations for EMS and original design manufacturing (ODM) providers in terms of supporting their customers and generating appropriate returns. Because the EMS industry is working capital intensive, we believe that non-IFRS adjusted return on invested capital, (ROIC), which is primarily based on non-IFRS operating earnings (each discussed in "Non-IFRS measures"Financial Measures" below) and investments in working capital and equipment, is an important metric for measuring an EMS provider’sprovider's financial performance.
See "Recent Developments" and "External Factors that May Impact our Business" below for a discussion of othercertain factors, including COVID-19 and the impact of global supply chain constraints, that couldhave (and/or may in the future), adversely impact our business.
Recent Developments
Segment Environment:
ATS Segment
ATS segment margin increased to 4.7% for 2022 compared to 4.5% for 2021, driven by improved profitability across our ATS businesses as a result of higher volumes and maturing program ramps.
Our Industrial business achieved 24% organic revenue growth in 2022 compared to 2021, and sequential improvement in each quarter throughout the year. In addition, PCI performed well, exceeding our year-one synergy targets. We continueexpect
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continued revenue growth in our Industrial business in 2023, with approximately 75% of such growth anticipated to come from green energy programs.
Our Capital Equipment business had a solid 2022, driven by market demand, market share gains and strong operational execution. Although we expect a near-term soft display market, with modest recoveryCapital Equipment revenues to decrease slightly in late 2020,2023 compared to 2022 as a result of anticipated increasesdeclines in demand from the demand for these next generation smart phonesWafer Fabrication and large form factor displays. However, the pace of this transition may impact the speed of the recovery. Our capital equipmentmemory markets, we anticipate that our existing business for the fourth quarter of 2019 (Q4 2019) improved relative to Q3 2019, due to higher sequential revenue and the positive impact of our cost reduction initiatives. The low single-digit million dollar loss for Q4 2019 for this business was in line with our expectations. For the first quarter of 2020 (Q1 2020), we expect to generate a profit in our capital equipment business in the single-digit million dollar range, driven by our cost productivity initiatives and increased volumes. We continue to believe that new program wins,mix, market share gains and new applications positionprograms wins will enable us favorably to benefitoutperform broader market expectations.
Our A&D business showed solid demand recovery in 2022, achieving sequential improvement in each quarter of the year, and low double-digit annual revenue growth. In our commercial aerospace business, we expect continued normalization of commercial air traffic towards pre-COVID-19 levels throughout 2023. Revenue in our defense business achieved low double-digit growth in 2022, and is expected to maintain its solid trajectory in 2023, supported by increased military spending and investments in equipment modernization from potentialEuropean and North American governments amid rising geopolitical tensions.
Our HealthTech business is experiencing strong demand growth. Due to the nature of demand for health care goods and services, we believe that our HealthTech business is less sensitive to recessionary pressures than certain other businesses in our portfolio. We anticipate year-over-year revenue growth in this business in the future.2023, supported by new project ramps in surgical, imaging and patient monitoring devices.
In general, we ramped new programs. Although the cost of ramping multiple new programs in these businesses adversely impacted their profitability in the first half of 2019, their profitability improved and stabilized in the second half of 2019.
CCS Segment
CCS segment revenue for 2022 increased 29% ($1.0 billion) to $4.3 billion compared to $3.3 billion in 2021, driven by strength in both our Communications and Enterprise end markets. Communications end market revenue increased due to improved materials availability and growth of our HPS business. Our HPS business revenue for 2022 increased 59% compared to 2021, supported by substantial capital investments in data center expansion by our service provider customers, as well as market share gains from ODMs. Enterprise end market revenue increased primarily due to new program ramps. We expect our HPS business and Enterprise end market revenues to grow at more moderate levels in 2023.
CCS segment margin improved to 5.1% in 2022 compared to 3.9% in 2021, primarily driven by improved leverage from higher volumes and improved mix due to growth in our HPS business.
Operational Impacts
Global supply chain constraints (including as a result of COVID-19) continue to impact our business, resulting in extended lead times for certain components, and impacting the availability of materials required to support customer programs. However, our advanced planning processes, supply chain management, and collaboration with our customers and suppliers helped to substantially mitigate the impact of these constraints on our revenue during most of 2022.While we have incorporated these dynamics into our financial guidance to the best of our ability, their adverse impact (in terms of duration and severity) cannot be estimated with certainty, and may be materially in excess of our expectations. As some sub-tier suppliers providing raw materials such as palladium, neon gas and high-grade aluminumare partially dependent on supply from Russia/Ukraine, we will continue to monitor the supply availability and price fluctuations of these raw materials. However, the impact of the current Russia/Ukraine conflict on our supply chain has not been significant.
As a result of anticipated strengthening demandresurgences of COVID-19 outbreaks, governments of various jurisdictions, including China, from time-to-time mandate periodic lockdowns or workforce constraints (collectively, Workforce Constraints). Although these Workforce Constraints present a challenge to our business performance when in our capital equipment business, growth in our industrialforce, due to effective resource management and healthtech businesses, and benefits from our cost productivity initiatives,planning, we expecthave been able to see margin improvement in our ATS segment in 2020.
As a result of adding the Cisco Disengagement to thesupply chain constraints that prevented us from fulfilling customer orders, we had adverse revenue impacts of approximately $17 million in 2022, all within Q1 2022 and all within our ATS segment (2021 — approximately $127 million (approximately $73 million within our ATS segment, and approximately $54 million within our CCS segment); 2020 — $81 million, including Workforce Constraints (approximately $23 million within our ATS segment, disengagements then-underway,and approximately $58 million within our CCS segment)).
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As a result of supply chain constraints, Workforce Constraints and COVID-19-related expenses, we increased our anticipated annualized declineincurred approximately $4 million of Constraint Costs1 in CCS segment revenue (once2022, all such disengagements are complete) fromwithin Q1 2022 (2021 — approximately $500 million (as described above) to $1.25 billion. We are working collaboratively with Cisco to ensure a seamless$32 million; 2020 — approximately $37 million). Constraint Costs in 2021 and successful transition, and expect the transition (including associated restructuring actions described under "Restructuring Update" below) to be largely complete by the end of 2020. No revenue impact from the Cisco Disengagement is expected in Q1 2020.
Future Uncertainties:
Global supply chain constraints and the COVID-19 pandemic have impacted (and may in the future impact) our operations and have created (and may continue to create) unpredictable reductions or increases in demand for our services. In addition, the ability of our employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19. While we continue to follow the requirements of governmental authorities and take preventative and protective measures to prioritize the safety of our employees, these disengagementsmeasures may not be successful, and we may be required to temporarily close facilities or take other measures. If factory closures or significant reductions in capacity utilization occur, we would incur additional inefficiencies and direct costs, and may also lose revenue. If our cost productivity initiatives hadsuppliers experience additional closures or reductions in their capacity utilization levels (as a beneficial impactresult of COVID-19 or otherwise), we may have further difficulty sourcing materials necessary to fulfill production requirements, especially in an already constrained materials environment. A material adverse effect on our CCS segment margin for 2019. We are focusedemployees, customers, suppliers and/or logistics providers could have a material adverse effect on completing our CCS Review disengagements in 2020, and continue to expectus.
The ultimate magnitude of the impact of such disengagements,global supply chain constraints and COVID-19 on our business will depend on future developments which cannot currently be predicted, including the Cisco Disengagement,speed at which our suppliers and logistics providers can return to and/or maintain full production, the impact of supplier prioritization of backlog, infection resurgences, government responses, and the status of labor shortages. As a result, we cannot currently estimate the overall severity or duration of the impact of these matters, which may be material. While we have been successful in an aggregate revenue decline in 2020 as comparedlargely mitigating the impact of supply constraints and COVID-19 on our productivity, and are currently operating at pre-COVID-19 production capacity, the continued spread, resurgence and mutation of the virus may make our mitigation efforts more challenging. Even after these issues have subsided, we may experience significant adverse impacts to 2019 in the range of approximately $400 million to $600 million. Notwithstanding the foregoing, we intend to continue to invest in areas that we believe are key to the long-term success of our CCS segment, including our JDM offering, and evolve our product offerings to serve our growing service provider customer base.
Restructuring Update:
We have recorded an aggregate of $81.3$8.4 million in restructuring charges from the commencementduring 2022. Our restructuring activities consisted primarily of actions to adjust our cost base to address reduced levels of demand in certain of our cost efficiency initiative (CEI) inbusinesses and geographies.
Subordinate Voting Share (SVS) Repurchases:
On December 8, 2022, the fourth quarter of 2017 (Q4 2017) through its completion at the end of Q4 2019, including $37.9 million of restructuring charges recorded in 2019. Aggregate charges under the CEI were above the high end ofToronto Stock Exchange accepted our previously disclosed range of $50notice to $75 million, as we accelerated certain other cost actions, including those related to the Cisco Disengagement. See "Operating Results — Other charges (recoveries)."
1Constraint Costs consist of IFRS 16:
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During 2022, we paid an aggregate of January 1, 2019, without restatement$34.6 million (including transaction fees) to repurchase a total of prior period comparative information. 3.4 million SVS for cancellation under the 2022 NCIB and a previous NCIB (2021 NCIB), at a weighted average price of $10.45 per share. We also paid an aggregate of $44.9 million in 2022 to purchase 3.9 million SVS in the open market through an independent broker during the term of the 2021 NCIB for delivery obligations under our SBC plans. No SVS were purchased in 2022 in the open market during the term of the 2022 NCIB for such purpose.
See note 212 to our 2019 AFS.2022 AFS for details regarding automatic share purchase plans (ASPPs) we entered into in 2022 and 2021, and SVS purchases made thereunder.
New Board Members:
As previously announced, Françoise Colpron and Jill Kale have been appointed to our Board of Directors, effective October 1, 2022 and December 1, 2022, respectively.
Operating Goals and Priorities
Our current priorities are focused on evolving our revenue portfolio; expanding our non-IFRS operating margin* and segment margins*; and maintaining a balanced approach to capital allocation. Management believes that each of these goals and priorities is reasonable.are set forth below.
Evolving our Revenue Portfolio — To evolve our revenue portfolio, we intend to continue to focus on: (i) realigning our portfolio towardspursuing more diversified revenue, (ii) driving sustainable, profitable revenue growth, (iii) growing our aggregate ATS segment and HPS business revenue organically by an average of 10% per year over the long term, (iv) supplementing our organic growth with disciplined and targeted acquisitions intended to expand capabilities, and (v) optimizing and reshaping our portfolio to drive more consistent returns and profitability.
Margins and Non-IFRS adjusted EPS* — With respectWe intend to continue to focus on improvements to our margins, we intend to focus on: (i) achievingsegment margins†, non-IFRS operating margin* in the target range of 3.75% to 4.5%, (ii) achieving ATS segment margin in the target range of 5.0% to 6.0% and maintaining CCS segment margin in the target range of 2.0% to 3.0%, and (iii) achieving greater than 50%non-IFRS adjusted EPS*.
The duration and impact of total segment income fromglobal supply constraints, the COVID-19 pandemic, and other industry market conditions are not within our ATS segment. In ordercontrol, and may therefore impact our ability to achieve our ATS segment income and margin, and non-IFRS operating margin* goals: (i) the current demand environment in the capital equipment business must return to prior levels; (ii) materials shortages and the demand environment in our A&D business must stabilize, to help reduce production inefficiencies; and (iii) we must successfully execute the ramping of new ATS programs, particularly in our industrial and healthtech businesses, to their targeted profitability levels. Because we cannot control market conditions, however, the timeline to achieve these goals, as well as our long-term ATS segment revenue growth rate objective, cannot be assured. To maintain our CCS segment margin, we must (i) execute the Cisco Disengagement as planned, while continuing to achieve cost productivity improvements, and (ii) continue to expand our portfolio in higher margin services.foregoing goals. See "Recent Developments" above.
Balanced Approach to Capital Allocation — We are focused on maintaining a strong balance sheet, generating non-IFRS adjusted free cash flow* and balancing our debt and capital levels, while maintaining optimal financial flexibility. In terms of capital allocation, we are focused on:our goal is to: (i) returningreturn approximately 50% of non-IFRS adjusted free cash flow* to shareholders annually, on average and when permitted, over the long term, (ii) investinggenerally invest 1.5% to 2.0% of annual revenue in capital expenditures to support our organic growth, and (iii) executing onpursue potential strategic acquisitions as part of a disciplined capital allocation framework. We are also focused on maintaining a strong balance sheet, as well as lowering outstanding borrowings.
The foregoing priorities and areas of intended focus constitute our objectives and goals, and are not intended to be projections or forecasts of future performance. Our future performance is subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from the goals and priorities described above.
† Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue), each of which is defined in "Operating Results — Segment income and margin" below.
* OperatingNon-IFRS operating margin, non-IFRS adjusted EPS (each a ratio based on a non-IFRS financial measure), and non-IFRS adjusted free cash flow are non-IFRS financial measures without standardized meanings, and may not be comparable to similar measures presented by other companies. See "Non-IFRS measures"Financial Measures" below for a discussionthe definitions and uses of thethese non-IFRS financial measures, included herein (including a description of recent modifications to our calculation of certain non-IFRS measures), and a reconciliation of historicalthese non-IFRS financial measures to the most directly comparabledirectly-comparable financial measures determined under IFRS measures.for specified periods. We do not provide reconciliations for forward-looking non-IFRS financial measures, as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various events that have not yet occurred, are out of our control and/or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking IFRS financial measure. For these same reasons, we are unable to address the probable significance of the unavailable information. Forward-looking non-IFRS financial measures may vary materially from the corresponding IFRS financial measures. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue), each of which is defined in "Operating Results — Segment income and margin" below.
Our Strategy
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therefore prevent us from achieving our diversification objectives. In addition, the ramping activities associated with investments that we do make may be significant and could negatively impact our margins in the short and medium term. To counteract these factors, we continue to invest in and deploy automation and digital factory solutions and capabilities throughout our network to improve quality and productivity. The focus and scale of our Celestica Operating System, which standardizes best practices and processes across our network, continued to drive operational optimization and improved supply chain resiliency during 2022. Our recently-completed CEIrecent productivity initiatives and related restructuring actions were also intended to further streamline our business and increase operational efficiencies and improve our productivity.efficiencies.
As we expand our business, open new sites, or transfer business within our network to accommodate growth or achieve synergies however,and supply chain resilience, we may encounter difficulties that result in higher than expected costs associated with such activities. Potential difficulties related to such activities include our ability to: manage growth effectively; maintain existing business relationships during periods of transition; anticipate disruptionsare described in Item 3(D), Key Information — Risk Factors, "We may encounter difficulties expanding or consolidating our operations that may impact our ability to deliver to customers on time, produce quality products and ensure overall customer satisfaction; and respond rapidly to changes in customer demand or volumes. We may also encounter difficulties in ramping and executingintroducing new programs. We may require significant investments in additional capabilities and increased working capital to support these new programs, including those associated with business acquisitions, and may generate lower marginscompetencies or losses during and/or following the ramp period. There can be no assurance that our increased investments will benefit our financial performance or result in business growth. As we pursue opportunities in new markets or technologies, we may encounter challenges due to our limited knowledge or experience in these areas. In addition, the success of new business models or programs depends on a number of factors including: understanding the new business or markets; timely and successful product development; market acceptance; the effective management of purchase commitments and inventory levels in line with anticipated demand; the development or acquisition of appropriate intellectual property and capital investments, to the extent required; the availability of materials in adequate quantities and at appropriate costs to meet anticipated demand; and the risk that new offerings, may have quality or other defects in the early stageswhich could adversely affect our operating results" of introduction.our 2022 Annual Report, of which this MD&A is a part. Any such difficulties could prevent
us from realizing the anticipated benefits of growth in our business, including in new markets or technologies, which could materially adversely affect our business and operating results.
We may, at any time, be in discussions with respect to possible acquisitions or strategic transactions. There can be no assurance that any of suchthese discussions will result in a definitive agreement and, if they do, what the terms or timing of any such agreement would be. There can also be no assurance that any acquisition or other strategic transaction will be successfully integrated or will generate the returns we expect. We may fund our acquisitions and other strategic transactions from cash on hand, third-party borrowings, the issuance of securities, or a combination thereof.
External Factors that May Impact our Business
Inflationary pressures could adversely impact our financial results by increasing costs for labor and materials. Our operating costs have increased, and may continue to increase, due to the recent growth in inflation due to, among other things, the continuing impacts of the pandemic, the Russia/Ukraine conflict and related international response, and the uncertain economic environment. Although we have been successful in offsetting the majority of our increased costs with increased pricing for our products and services to date, we cannot assure continued success in this regard, and unrecovered increased operating costs in future periods would adversely impact our margins. Further, our customers may choose to reduce their business and results of operations, including by causingwith us to cease the manufacturing of one or more products for a period of time, which could also lead to loss of customers, as well as reputational, competitive, or business harm.if we increase our pricing. In addition, a significant outbreak of contagious diseasesuncertainty in the human population could result in a widespread health crisis that could adversely affectglobal economy (including the economiesseverity and duration of global inflation and/or recession) and financial markets of many countries, resulting in an economic downturn that could affectmay impact current and future demand for our end customers' products and services, and consequently, our operations. We cannot predict future trends in turn adversely impactthe rate of inflation or other negative economic factors or associated increases in our operating results. See "Recent Developments — COVID-19" above.costs. We continue to monitor the dynamics and impacts of the global economic and financial environment and work to manage our priorities, costs and resources to anticipate and prepare for any changes we deem necessary.
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Production from China has become less cost-competitive than other low-cost countries in the U.S. from other countries. Increased tariffs, and/or changes to international trade agreements, including the revised trade agreement among the U.S., Canada and Mexico (USMCA), which has not yet been ratified by Canada, may cause our U.S. customers to insource programs previously outsourced to us, transfer manufacturing to locations within our global network that are not impacted by such actions (potentially increasing production costs), and/or shift their business to other EMS providers. Additionally, tariffs on imported components for use in our U.S. production could have an adverse impact on demand for such production. Retaliatory tariffs could reduce demand for our U.S.-based production or make such production less profitable. We assessed the impact of current tariffs on our global network, and discussed such tariffs with impacted customers.recent periods. In connection therewith, we have transferred numerous customer programs, in 2019, primarily located in China, to countries unaffected by these tariffs (including Thailand). Remaining transfers were completedHowever, as tariffs are typically borne by the customers, we anticipate further actions from non-China-based customers to exit China to avoid these added costs. We review our site production strategies on an ongoing basis, including with respect to our production in early 2020. These transfers resultedChina. We have increased the resilience of our global network to manage this dynamic, including our recent expansion efforts in new investmentsNorth America and costs to realign our manufacturing footprint, including expansion in non-affected countries, and reductions of operations in impacted geographies. Although such costs were not material in 2019,Asia. However, given the uncertainty regarding the scope and duration of these (or further) trade actions, the uncertainty of the impact of the USMCA, if ratified, on our business,recent U.S. technology export controls with respect to China, whether trade tensions will escalate further, and whether our customers will continue to bear the cost of the tariffs and/or avoid such costs by in-sourcing or shifting business to other providers, their impact on the demand for our services, our operations and results for future periods cannot be currently quantified, but may be material. We will continue to monitor the scope and duration of trade actions by the U.S. and other governments on our business.business, including China's recent policy supporting its private sector businesses and recent U.S. technology export control regulations.
Uncertainties resulting from government policies or legislation, and/or increased political tensions between countries, may adversely affect our business, results of operations and financial condition. In general, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, taxation, manufacturing, clean energy, the healthcare industry, and/or development and investment in the jurisdictions in which we, and/or our customers or suppliers operate, could materially adversely affect our business, results of operations and financial condition. See Item 3(D), Key Information — Risk Factors, "Our operations have been and could continue to be adversely affected by events outside our control" and "U.S. policies or legislation could have a material adverse effect on our business, results of operations and financial condition" of our 2022 Annual Report, of which this MD&A is a part, for further detail.
We rely on a variety of contracted or common carriers to transport raw materials and components from our suppliers to us, and to transport our products to our customers. The use of contracted or common carriers is subject to a number of risks, including increased costs due to rising energy prices and labor, vehicle and insurance costs, and hijacking and theft resulting in losses of shipments, delivery delays resulting from port congestion and labor shortages and other factors beyond our control. We have experienced (and continue to experience) shipping surcharges on ocean freight, premiums on air freight, and increased transit times in receiving certain raw materials as a result of shipping delays due to, among other things, additional safety requirements imposed by port authorities, closures of or congestion at ports, reduced availability of commercial transportation, border restrictions and capacity constraints for air freight as a result of COVID-19, which have had an adverse impact on our ability to obtain materials and, at times, deliver our products in a timely manner, and consequently, our results of operations. Although we attempt to mitigate our liability for any losses resulting from these risks through the use of multiple carriers and modes of transport, as well as insurance, any costs or losses relating to shipping delays that cannot be mitigated, avoided or passed on to our customers could reduce our profitability, require us to manufacture replacement products or damage our relationships with our customers.
If a key supplier (or any company within such supplier's supply chain) experiences financial or other difficulties, this may affect its ability to supply us with materials, components or services, which could halt or delay the production of a customer's products, and/or have a material adverse impact on our operations, financial results and customer relationships.
Insufficient customer liquidity may result in significant delays in or defaults on payments owed to us. In addition, customer financial difficulties or changes in demand for our customers' products may result in order cancellations and higher than expected levels of inventory, which could have a material adverse impact on our operating results and working capital performance. We may not be able to return or resell this inventory, or we may be required to hold the inventory for an extended period of time, any of which may result in our having to record additional inventory reserves. We may also be unable to recover all of the amounts owed to us by a customer, including amounts to cover unused inventory or capital investments we incurred to support that customer's business. Our failure to collect amounts owed to us and/or the loss of one or more major customers could have a material adverse effect on our operating results, financial position and cash flows. See "Capital Resources — Financial instruments and financial risks" below for a discussion of customer credit risk reviews we conduct. No significant credit adjustments were recorded in 2022 or to date.
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Our inventory levels have increased in recent periods, due in part to the growth of our business, as well as strategic inventory purchases we have made in light of ongoing materials constraints. In connection therewith, we continue to work with our customers mayto obtain cash deposits to help mitigate the impact of increased inventory. See Item 3(D), Key Information — Risk Factors, "Our products and services involve inventory risk" of our 2022 Annual Report, of which this MD&A is a part, for further detail.
Customer decisions to shift production between EMS providers, or to change the amount of business they outsource or the concentration or location of their EMS suppliers. These customer decisionssuppliers, have impacted and may continue to impact, among other items, our revenue and margins, the need for future restructuring, the level of capital expenditures and our cash flows.
In June 2022, a fire occurred at our Batam, Indonesia facility. We expect to fully recover our tangible losses through insurance coverage. See note 26 to the 2022 AFS. Whereas we previously anticipated that certain unfulfilled revenues would shift to 2023, we returned to pre-incident operating levels by year-end.
Summary of Key Operating Results and Financial Information
Our consolidated financial statements2022 AFS have been prepared in accordance with IFRS as issued by the IASB and accounting policies we adopted in accordance with IFRS. Such consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at December 31, 20192022 and 20182021 and the financial performance, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2019. On January 1, 2019, we adopted IFRS 16, Leases,2022. See "Recently issued accounting standards and no restatement of comparative period financial information was required in connection therewith. See "Recently adopted accounting standards"amendments" in note 2 to our 2019 AFS. 2022 AFS for a description of recently adopted accounting standards. See "Recent Developments — Segment Environment" above for a discussion of materials constraints and COVID-19 impacts on our financial results for 2020 to 2022.
The following tables set forth certain key operating results and financial information for the periods indicated (in millions, except per share amounts and percentages).:
| Year ended December 31 | |||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | % Change 2021 v. 2020 | % Change 2022 v. 2021 | |||||||||||||||||||||||||
| Revenue | $ | 5,748.1 | $ | 5,634.7 | $ | 7,250.0 | (2) | % | 29 | % | |||||||||||||||||||
| Gross profit | 437.6 | 487.0 | 636.3 | 11 | % | 31 | % | ||||||||||||||||||||||
| Selling, general and administrative expenses (SG&A) | 230.7 | 245.1 | 279.9 | 6 | % | 14 | % | ||||||||||||||||||||||
| Other charges, net of recoveries | 23.5 | 10.3 | 6.7 | (56) | % | (35) | % | ||||||||||||||||||||||
| Net earnings | 60.6 | 103.9 | 145.5 | 71 | % | 40 | % | ||||||||||||||||||||||
| Diluted earnings per share | $ | 0.47 | $ | 0.82 | $ | 1.18 | 74 | % | 44 | % | |||||||||||||||||||
| Year ended December 31 | |||||||||||||||||
| 2017 | 2018 | 2019 | % Change 2018 v. 2017 | % Change 2019 v. 2018 | |||||||||||||
| Revenue | $ | 6,142.7 | $ | 6,633.2 | $ | 5,888.3 | 8 | % | (11 | )% | |||||||
| Gross profit | 418.5 | 430.5 | 384.7 | 3 | % | (11 | )% | ||||||||||
| Selling, general and administrative expenses (SG&A) | 203.2 | 219.0 | 227.3 | 8 | % | 4 | % | ||||||||||
| Other charges (recoveries) | 37.0 | 61.0 | (49.9 | ) | 65 | % | (182 | )% | |||||||||
| Net earnings | 105.5 | 98.9 | 70.3 | (6 | )% | (29 | )% | ||||||||||
| Diluted earnings per share | $ | 0.73 | $ | 0.70 | $ | 0.53 | (4 | )% | (24 | )% | |||||||
| Year ended December 31 | |||||||||||||||||
| Segment revenue* as a percentage of total revenue: | 2020 | 2021 | 2022 | ||||||||||||||
| ATS revenue (% of total revenue) | 36 | % | 41 | % | 41 | % | |||||||||||
| CCS revenue (% of total revenue) | 64 | % | 59 | % | 59 | % | |||||||||||
| Segment revenue* as a percentage of total revenue: | Year ended December 31 | ||||
| 2017 | 2018 | 2019 | |||
| ATS revenue (% of total revenue) | 32% | 33% | 39% | ||
| CCS revenue (% of total revenue) | 68% | 67% | 61% | ||
| Year ended December 31 | Year ended December 31 | |||||||||||||||||||||||||||||||||||||||
| Segment income and segment margin*: | 2017 | 2018 | 2019 | Segment income and segment margin*: | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | Segment Margin | Segment Margin | Segment Margin | |||||||||||||||||||||||||||||||||||
| ATS segment | $ | 96.8 | 4.9% | $ | 102.5 | 4.6% | $ | 64.2 | 2.8% | ATS segment | $ | 69.7 | 3.3% | $ | 105.0 | 4.5% | $ | 140.9 | 4.7% | |||||||||||||||||||||
| CCS segment | 120.4 | 2.9% | 111.4 | 2.5% | 93.9 | 2.6% | CCS segment | 129.3 | 3.5% | 128.9 | 3.9% | 217.1 | 5.1% | |||||||||||||||||||||||||||
* Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue), each of which are defined in "Operating Results — Segment income and margin" below.
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| December 31 2018 | December 31 2019 | December 31 2021 | December 31 2022 | |||||||||||||||
| Cash and cash equivalents | $ | 422.0 | $ | 479.5 | Cash and cash equivalents | $ | 394.0 | $ | 374.5 | |||||||||
| Total assets | 3,737.7 | 3,560.7 | Total assets | 4,666.9 | 5,628.0 | |||||||||||||
| Borrowings under term loans | 598.3 | 592.3 | ||||||||||||||||
| Borrowings under revolving credit facility* | 159.0 | — | ||||||||||||||||
Borrowings under term loans(1) | Borrowings under term loans(1) | 660.4 | 627.2 | |||||||||||||||
Borrowings under revolving credit facility(2) | Borrowings under revolving credit facility(2) | — | — | |||||||||||||||
(2) excluding ordinary course letters of creditcredit.
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
Cash provided by operating activities | $ | 239.6 | $ | 226.8 | $ | 297.9 | |||||||||||
| SVS repurchase activities: | |||||||||||||||||
Aggregate cost (1) of SVS repurchased for cancellation (2) | $ | 0.1 | $ | 35.9 | $ | 34.6 | |||||||||||
# of SVS repurchased for cancellation (in millions)(3) | 0.0062 | 4.4 | 3.4 | ||||||||||||||
| Weighted average price per share for repurchases | $ | 7.45 | $ | 8.21 | $ | 10.45 | |||||||||||
Aggregate cost (1) of SVS repurchased for delivery under SBC plans(4) | $ | 19.1 | $ | 20.6 | $ | 44.9 | |||||||||||
# of SVS repurchased for delivery under SBC plans (in millions)(5) | 2.9 | 1.9 | 3.9 | ||||||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Cash provided by operating activities | $ | 127.0 | $ | 33.1 | $ | 345.0 | |||||
| SVS repurchase activities: | |||||||||||
| Aggregate cost (including transaction costs) of SVS repurchased for cancellation | $ | 19.9 | $ | 75.5 | $ | 67.3 | |||||
| Number of SVS repurchased for cancellation (in millions) | 1.9 | 6.8 | 8.3 | ||||||||
| Weighted average price per share for repurchases | $ | 10.58 | $ | 11.10 | $ | 8.15 | |||||
| Aggregate cost (including transaction costs) of SVS repurchased for delivery under stock-based compensation (SBC) plans | $ | 16.7 | $ | 22.4 | $ | 9.2 | |||||
| Number of SVS repurchased for delivery under SBC plans (in millions) | 1.4 | 2.1 | 1.2 | ||||||||
(2) For 2021, excludes an accrual of $7.5 million recorded as at December 31, 2021 for the estimated contractual maximum number of permitted SVS repurchases (Contractual Maximum Quantity) for cancellation under an ASPP entered into in December 2021; for 2020, excludes an accrual of $15.0 million recorded as at December 31, 2020 for the estimated Contractual Maximum Quantity under an ASPP entered into in December 2020.
(4) For 2021, excludes an accrual of $33.8 million recorded as at December 31, 2021 for the foregoing information is set forthestimated Contractual Maximum Quantity under "Operating Results" below.an ASPP entered into in December 2021 with respect to SVS delivery obligations under our SBC plans.
(5)Includes 3.9 million, 0.7 million and nil SVS repurchases for SBC delivery obligations under ASPPs for such purpose in 2022, 2021 and 2020, respectively.
Other performance indicators:
In addition to the key operating results and financial information described above, management reviews the following measures (which are not measures defined under IFRS): measures:
| 1Q18 | 2Q18 | 3Q18 | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Cash cycle days: | Cash cycle days: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Days in A/R | 62 | 57 | 60 | 62 | 71 | 65 | 61 | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Days in accounts receivable (A/R) | Days in accounts receivable (A/R) | 76 | 66 | 69 | 73 | 73 | 65 | 56 | 57 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Days in inventory | 57 | 56 | 59 | 61 | 74 | 73 | 68 | 67 | Days in inventory | 90 | 83 | 89 | 103 | 116 | 118 | 115 | 115 | |||||||||||||||||||||||||||||||||||||||||||||
| Days in accounts payable (A/P) | (62) | (60) | (65) | (65) | (70) | (64) | (60) | (60) | Days in accounts payable (A/P) | (69) | (64) | (70) | (78) | (84) | (85) | (78) | (72) | |||||||||||||||||||||||||||||||||||||||||||||
| Days in cash deposits* | (2) | (1) | (1) | (2) | (6) | (9) | (8) | (8) | Days in cash deposits* | (15) | (14) | (16) | (23) | (29) | (29) | (30) | (36) | |||||||||||||||||||||||||||||||||||||||||||||
| Cash cycle days | 55 | 52 | 53 | 56 | 69 | 65 | 61 | 62 | Cash cycle days | 82 | 71 | 72 | 75 | 76 | 69 | 63 | 64 | |||||||||||||||||||||||||||||||||||||||||||||
| Inventory turns | 6.4x | 6.6x | 6.2x | 6.0x | 5.0x | 5.0x | 5.4x | 5.5x | Inventory turns | 4.0x | 4.4x | 4.1x | 3.5x | 3.2x | 3.1x | 3.2x | 3.2x | |||||||||||||||||||||||||||||||||||||||||||||
* RepresentsWe receive cash deposits made byfrom certain of our customers primarily to cover our riskhelp mitigate the impact of higher inventory levels carried due to materials constraints, and to reduce risks related to excess and/or obsolete inventory. As a result of the recent increased use of cash deposits to mitigate higher inventory levels, commencingSee "Customer Cash Deposits" in the first quarter of 2019 (Q1 2019), we deduct cash deposit days in our calculation of cash cycle days, and have restated the prior period comparatives shown above to conform to the current presentation.table below.
| 2021 | 2022 | ||||||||||||||||||||||||||||
| (in million) | March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | |||||||||||||||||||||
| A/R Sales | $ | 92.2 | $ | 79.1 | $ | 91.5 | $ | 45.8 | $ | 162.8 | $ | 225.4 | $ | 367.3 | $ | 245.6 | |||||||||||||
| Supplier Financing Programs* (SFPs) | 84.5 | 70.0 | 47.6 | 98.0 | 150.9 | 166.6 | 147.1 | 105.6 | |||||||||||||||||||||
| Total | $ | 176.7 | $ | 149.1 | $ | 139.1 | $ | 143.8 | $ | 313.7 | $ | 392.0 | $ | 514.4 | $ | 351.2 | |||||||||||||
| Customer Cash Deposits | $ | 190.3 | $ | 207.3 | $ | 264.7 | $ | 434.0 | $ | 461.7 | $ | 525.7 | $ | 623.6 | $ | 825.6 | |||||||||||||
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| 2018 | 2019 | ||||||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | March 31 | June 30 | September 30 | December 31 | ||||||||||||||||||
| A/R Sales (in millions) | $ | 113.0 | $ | 113.0 | $ | 113.0 | $ | 130.0 | $ | 130.0 | $ | 136.6 | $ | 130.0 | $ | 90.6 | |||||||||
| Supplier Financing* (in millions) | 77.8 | 76.0 | 81.0 | 50.0 | 24.9 | 11.5 | 25.8 | 50.4 | |||||||||||||||||
| Total (in millions) | $ | 190.8 | $ | 189.0 | $ | 194.0 | $ | 180.0 | $ | 154.9 | $ | 148.1 | $ | 155.8 | $ | 141.0 | |||||||||
* Represents A/R sold to third party banks in connection with the uncommitted supplier financing programsSFPs of two customers in Q4 2019,through Q3 2021 (one ATS segment customer and one CCS segment customer), and of three customers thereafter (one CCS segment customer and two ATS segment customers, including a PCI customer).
The amounts we sell under our A/R sales program and the supplier financing program of one customer prior thereto.SFPs can vary from quarter to quarter depending on our working capital and other cash requirements, including by geography. See "Operating Results — Finance Costs" and "Liquidity — Cash requirements" below.
Days in A/R is defined as the average A/R for the quarter divided by the average daily revenue. Days in inventory, days in A/P and days in cash deposits are calculated by dividing the average balance for each item for the quarter by the average daily cost of sales. Cash cycle days is defined as the sum of days in A/R and days in inventory minus the days in A/P and days in cash deposits. Inventory turns are determined by dividing 365 by the number of days in inventory. A lower number of days in A/R, days in inventory, and cash cycle days, and a higher number of days in A/P, days in cash deposits, and inventory turns generally reflect improved cash management performance.
Cash cycle days decreased by 11 days in Q4 2022 compared to Q4 2021, due primarily to lower days in A/R and higher days in cash deposits, partially offset by higher days in inventory and lower days in A/P. Days in A/R increased 1 day from the fourth quarter of 2018 (Q4 2018) to 63 days for Q4 20192022 decreased 16 days from Q4 2021 to 57 days, primarily due to a decreasehigher revenue in Q4 2022, partially offset by the impact of higher average A/R in Q4 2022. Our average A/R balance in Q4 2022 increased compared to Q4 2021 primarily due to higher revenue fromin Q4 20182022, offset in part by the effect of higher A/R sold through our A/R sales program and customer SFPs in Q4 2022 compared to Q4 2019 and the timing of collections. Day2021. Days in inventory for Q4 2022 increased 612 days from Q4 20182021 to 67115 days for Q4 2019 primarily due to lowerhigher average inventory levels in Q4 2022, offset in part by higher cost of sales for Q4 20192022 compared to Q4 2018, despite lower average2021. We carried higher inventory levels at the end of Q4 2019.2022 compared to Q4 2021 primarily as a result of materials purchased in Q4 2022 to support the strong growth of our business and to secure supply given global supply chain constraints and longer lead times for certain components. Higher cost of sales in Q4 2022 compared to Q4 2021 was due to our business growth. Days in A/P decreased 56 days from Q4 20182021 to 6072 days in Q4 20192022 mainly due to higher cost of sales in Q4 2022, partially offset by the effect of higher average A/P in Q4 2022. Higher average A/P in Q4 2022 resulted from higher levels of inventory purchases in Q4 2022. We received cash deposits from certain customers to help alleviate the impact of such inventory purchases on our cash flows (see chart above). Days in cash deposits increased 13 days from Q4 2021 to 36 days in Q4 2022 primarily due to an increase in cash deposits received in Q4 2022, offset in part by the effect of higher cost of sales. The increase in cash deposits is consistent with the increased inventory purchases noted above. Our customer cash deposit balance fluctuates depending on the levels of inventory we have been asked to procure by certain customers (to secure supply for future demand), or as we utilize the inventory in production.
Cash cycle days increased by 1 day in Q4 2022 compared to Q3 2022 due to higher days in A/R and lower days in A/P, offset by higher days in cash deposits. Days in A/R for Q4 2022 increased 1 day sequentially primarily due to higher average A/R balances in Q4 2022 compared to Q3 2022, partially offset by the effect of higher revenue in Q4 2022. Our average A/R balance in Q4 2022 increased compared to Q3 2022 due to higher revenue in Q4 2022 and less A/R sold through our A/R sales program and customer SFPs. Days in inventory for Q4 2022 remained flat sequentially as the effect of higher average inventory levels in Q4 2022 offset the effect of higher cost of sales. We carried higher inventory levels at the end of Q4 2022 compared to Q3 2022 mainly to support growth of our business.Higher cost of sales in Q4 2022 compared to Q3 2022 was due to our business growth. Days in A/P for Q4 2022 decreased 6 days sequentially primarily due to lower average A/P balanceslevels at the end of Q4 2022 compared to Q3 2022 and the timing of payments, partially offset by the impact of reducedhigher cost of sales from in Q4 20182022. Average A/P levels in Q4 2022 decreased compared to Q4 2019.Q3 2022 due to timing of payments. Days in cash deposits for Q4 2022increased 6 days from Q4 2018 to 8 days in Q4 2019sequentially primarily due to higher average cash deposits we received from customers in 2019 to help reduce our working capital requirements. Customer cash deposits were $121.9 million asdeposit levels at December 31, 2019,the end of Q4 2022 compared to $57.9 million as at December 31, 2018. Although there were 8 daysQ3 2022.The increase in cash deposits in Q4 2019, we continue to expect this number to decrease inis consistent with the near term as we work with our customers to reduce ourincreased inventory levels. The components of cash cycle days were consistent or relatively consistent sequentially.purchases noted above.
We believe that cash cycle days (and the components thereof) and inventory turns are useful measures in providing investors with information regarding our cash management performance and are accepted measures of working capital management efficiency in our industry. These are not measures of performance under IFRS, and may not be defined and calculated in the same manner by other companies. These measures should not be considered in isolation or as an alternative to working capital as an indicator of performance.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, and the reported amounts of assets, and liabilities, revenue, and expenses, and related disclosures with respect to contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts (including, in recent periods, the prolonged impact of global supply chain constraints, and additionally in the second to the fourth quarter of 2022, the Batam Fire), historical experience and various other factors that we believe are reasonable under the circumstances. The economic environment could also impactimpacts certain estimates and discount rates necessary to prepare our consolidated financial statements, including significant estimates and discount rates applicable to the determination of the recoverable amounts used in ourthe impairment testing of our non-financial assets (see notes 7, 8, and 9 to our 2019 AFS).assets. Our assessment of these factors forms the basis for our judgments on the carrying values of our assets and liabilities, and the accrual of our costs and expenses. Actual results could differ materially from theseour estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. Revisions are recognized in the period in which the estimates are revised and may also impact future periods as well. periods.
Our review of the estimates, judgments and assumptions used in the preparation of our financial statements for 2022 included those relating to, among others: our determination of the timing of revenue recognition, the determination of whether indicators of impairment existed for our assets and cash generating units (CGUs2), our measurement of deferred tax assets and liabilities, our estimated inventory provisions and expected credit losses, customer creditworthiness, and the determination of the fair value of assets acquired and liabilities assumed in connection with a business combination. Any revisions to estimates, judgments or assumptions may result in, among other things, impairments to our assets or CGUs, and/or adjustments to the carrying amount of our A/R and/or inventories, or to the valuation of our deferred tax assets, any of which could have a material impact on our financial performance and financial condition. See "Operating Results — Other charges, net of recoveries" for a description of offsetting charges and receivables in connection with the Batam Fire.
Significant accounting policies and methods used in the preparation of our consolidated financial statements are described in note 2 to our 20192022 AFS. The following is a discussion of those accounting policiesestimates which management considers to be "critical," defined as accounting policiesestimates made in accordance with IFRS that management believesinvolve a significant level of estimation uncertainty, and have had, or are both most importantreasonably likely to have, a material impact on the portrayal of ourCompany's financial condition andor results and require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.operations.
Key sources of estimation uncertainty and judgment: We have applied significant estimates, judgmentjudgments and assumptions in the following areas which we believe could have a significant impact on our reported results and financial position: our determination of the timing of revenue recognition; our measurement of income taxes; the determination of our cash generating units (CGUs*); whether events or changes in circumstances are indicators that an impairment review of our assets or CGUs should be conducted; the measurement of our CGUs' recoverable amounts, which includes estimating future growth, profitability, and discount and terminal growth rates, and the fair value of any real property;rates; and the allocation of the purchase price and other valuations related to our business acquisitions.
Revenue recognition:
Where products are custom-made to meet a customer's specific requirements, and such customer is obligated to compensate us for the work performed to date, we recognize revenue over time as production progresses to completion, or as services are rendered. We generally estimate revenue for our work in progress based on costs incurred to date plus a reasonable profit margin for eligible products for which we do not have alternative uses. We apply significant estimates, judgment and assumptions in interpreting our customer contracts, determining the timing of revenue recognition and measuring work in progress.
Impairment of goodwill, intangible assets, property, plant and equipment, and right-of-use (ROU) assets:
We review the carrying amounts of goodwill, intangible assets, property, plant and equipment, and ROU assets for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets, or the related CGU or CGUs, may not be recoverable. We determined that no triggering event had occurred in 2022 that would require an impairment assessment for our assets or CGUs. In addition to an assessment of triggering events during the year, we conduct an annual impairment assessment of CGUs with goodwill in the fourth quarter of the year.year (Annual Impairment
2CGUs are the smallest identifiable group of assets that cannot be tested individually and generate cash inflows that are largely independent of those of other assets or groups of assets, and can be comprised of a single site, a group of sites, or a line of business.
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Assessment). Judgment is required in the determination of our CGUs and whether events or changes in circumstances are indicators that a review for impairment should be conducted.
We recognize an impairment loss when the carrying amount of an asset, CGU or group of CGUs exceeds its recoverable amount. The recoverable amount of an asset, CGU or group of CGUs is measured as the greater of its expected value-in-use and its estimated fair value less costs of disposal. The process of determiningDetermining the recoverable amount is subjective and requires management to exercise significant judgment in estimating future growth,revenue, profitability, discount and terminal growth rates, the fair value of any real property, and in projecting future cash flows, among other factors. Future events and changing market conditions may impact our assumptions as to prices, costs or other factors that may result in changes into our estimates of future cash flows. Our expected value-in-use is determined based on a discounted cash flow analysis. Determining the estimated fair value less costs of disposal requires valuations and use of appraisals. Where applicable, we engage independent brokers to obtain market prices to estimate our real property and other asset values. At each reporting date, we review for indicatorsassess whether triggering events that could change theour estimates we used to determineof the recoverable amount of the relevant assets.assets have occurred. Failure to realize the assumed revenues at an appropriate profit margin of a CGU could result in impairment losses in such CGU in future periods.
Business combinations:
We use judgment to determine the estimates used to value identifiable assets and liabilities, and the fair value of contingent consideration and other contingencies, if applicable, at the acquisition date. We may engagehave engaged third parties to determine the fair value of certain acquired inventory, property, plant and equipment and intangible assets. We use estimates to determine cash flow projections, including the period of expected future benefit, and future growth and discount rates, among other factors, to value acquired intangible assets and contingent consideration. The fair value of acquired tangible assets are measured by applying the market, cost or replacement cost, or the income approach (using discounted cash flows and forecasts by management), as appropriate.
Operating Results
Our product and service volumes, revenue and annual and quarterly operating results are affected by, among other factors: the level and timing of customer orders; our customer and business mix and the types of products or services we provide; the rate at which, the costs associated with, and the execution of, new program ramps; demand volumes and the seasonality of our business; price competition and other competitive factors; the mix of manufacturing or service value-add; manufacturing capacity, utilization and efficiency; the degree of automation used in the assembly process; the availability of components or labor; the location of qualified personnel; costs and inefficiencies of transferring programs between sites; program completions or losses, or customer disengagements and the timing and the margin of follow-on business or any replacement business; the impact of foreign exchange fluctuations; the performance of third-party providers; our ability to manage inventory, production location and equipment effectively; our ability to manage changing labor, component, energy and transportation costs effectively; fluctuations in variable compensation costs; the timing of our expenditures in anticipation of forecasted sales levels; and the timing of any acquisitions and related integration costs. Significant period-to-period variations can also result from the timing of new programs reaching full production or programs reaching end-of-life, the timing of follow-on or next generation programs and/or the timing of existing programs being fully or partially transferred internally or to a competitor. See "Overview — Overview of business environmentenvironment" and Recent Developments""Recent Developments" above for a discussion of the impact of recent events and market conditions impactingon our segments and our business.businesses.
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Operating results expressed as a percentage of revenue:
| Year ended December 31 | |||||||||||||||||||||||||
| 2017 | 2018 | 2019 | Year ended December 31 | ||||||||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||||||||||
| Revenue | 100.0 | % | 100.0 | % | 100.0 | % | Revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of sales | 93.2 | 93.5 | 93.5 | Cost of sales | 92.4 | 91.4 | 91.2 | ||||||||||||||||||
| Gross profit | 6.8 | 6.5 | 6.5 | Gross profit | 7.6 | 8.6 | 8.8 | ||||||||||||||||||
| SG&A | 3.3 | 3.3 | 3.9 | SG&A | 4.0 | 4.3 | 3.9 | ||||||||||||||||||
| Research and development costs | 0.4 | 0.5 | 0.4 | Research and development costs | 0.5 | 0.7 | 0.6 | ||||||||||||||||||
| Amortization of intangible assets | 0.1 | 0.2 | 0.5 | Amortization of intangible assets | 0.4 | 0.4 | 0.6 | ||||||||||||||||||
| Other charges (recoveries) | 0.6 | 0.9 | (0.8 | ) | |||||||||||||||||||||
| Other charges, net of recoveries | Other charges, net of recoveries | 0.4 | 0.2 | 0.1 | |||||||||||||||||||||
| Finance costs | 0.2 | 0.4 | 0.8 | Finance costs | 0.7 | 0.6 | 0.8 | ||||||||||||||||||
| Earnings before income tax | 2.2 | 1.2 | 1.7 | Earnings before income tax | 1.6 | 2.4 | 2.8 | ||||||||||||||||||
| Income tax expense (recovery) | 0.5 | (0.3 | ) | 0.5 | |||||||||||||||||||||
| Income tax expense | Income tax expense | 0.5 | 0.6 | 0.8 | |||||||||||||||||||||
| Net earnings | 1.7 | % | 1.5 | % | 1.2 | % | Net earnings | 1.1 | % | 1.8 | % | 2.0 | % | ||||||||||||
Revenue:
Revenue of $5.9$7.3 billion for 2019 decreased 11%2022 increased 29% compared to 2018.2021. ATS segment revenue and CCS segment revenue each increased 29% in 2022 compared to 2021.
Revenue of $5.6 billion for 2021 decreased 2% compared to 2020. ATS segment revenue increased 3%11% in 20192021 compared to 2018,2020, and CCS segment revenue decreased 19%9% in 20192021 compared to 2018.2020.
The following table sets forth segment revenue from our reportable segments, as well as segment and end market revenue as a percentage of total revenueinformation (in millions, except percentages) for the periods indicated (in millions, except percentages):indicated:
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||
| % of total | % of total | % of total | ||||||||||||||||||||||||
| ATS segment revenue | 2,086.3 | 36 | % | 2,315.1 | 41 | % | 2,979.0 | 41 | % | |||||||||||||||||
| CCS segment revenue | ||||||||||||||||||||||||||
| Communications | 2,434.8 | 42 | % | 2,259.9 | 40 | % | 2,865.0 | 40 | % | |||||||||||||||||
| Enterprise | 1,227.0 | 22 | % | 1,059.7 | 19 | % | 1,406.0 | 19 | % | |||||||||||||||||
| 3,661.8 | 64 | % | 3,319.6 | 59 | % | 4,271.0 | 59 | % | ||||||||||||||||||
| Total revenue | 5,748.1 | 100 | % | 5,634.7 | 100 | % | 7,250.0 | 100 | % | |||||||||||||||||
| 2017 | 2018 | 2019 | |||||||||||||||
| % of total | % of total | % of total | |||||||||||||||
| ATS segment revenue | $ | 1,958.6 | 32% | $ | 2,209.7 | 33% | $ | 2,285.6 | 39% | ||||||||
| CCS segment revenue | $ | 4,184.1 | 68% | $ | 4,423.5 | 67% | $ | 3,602.7 | 61% | ||||||||
| Communications | 2,654.6 | 43 | % | 2,724.2 | 41 | % | 2,346.4 | 40 | % | ||||||||
| Enterprise | 1,529.5 | 25 | % | 1,699.3 | 26 | % | 1,256.3 | 21 | % | ||||||||
| Total revenue | $ | 6,142.7 | 100% | $ | 6,633.2 | 100% | $ | 5,888.3 | 100% | ||||||||
ATS segment revenue represented 39% of total revenue for 2019,2022 increased $663.9 million (29%) compared to 33% for 2018,2021, due to the strong performance of most of our ATS businesses, supported by solid demand, new program ramps and 32% for 2017. improved availability of materials. Approximately two thirds of such revenue growth was driven by our Industrial business. In 2022, we had an estimated aggregate adverse revenue impact of approximately $17 million from supply chain constraints across our ATS segment (2021 — approximately $73 million).
ATS segment revenue for 20192021 increased $75.9$228.8 million (3%(11%) compared to 2018, reflecting aggregate2020, due primarily to strong revenue growth in our industrial, healthtech,HealthTech and Capital Equipment businesses (aggregate growth of approximately 30% compared to 2020), driven by new program ramps and continued demand strength in the semiconductor market, and returning growth in our base Industrial business. These increases were partially offset by adverse demand impacts related to COVID-19 in our commercial aerospace business and the adverse impacts of materials constraints. We estimated adverse revenue impacts for 2021 of approximately $73 million on our ATS segment revenue as a result of supply chain constraints, and approximately $23 million in 2020 as a result of supply chain constraints (due in part to COVID-19) and Workforce Constraints. For both years, these disruptions had the most significant adverse impact on our Industrial and A&D businesses in the mid-teens percentage range. These increases were offset in large part by significant year-over-year reductions in demand in our capital equipment business (notwithstanding capital equipmentrevenues.
CCS segment revenue improvements in Q4 2019 sequentially andfor 2022 increased $951.4 million (29%) compared to Q4 2018,2021, due to strength in both our Communications and new revenue from our November 2018 Impakt acquisition), and by planned disengagements from non-strategic energy programs (which disengagements are now complete). Although capital equipmentEnterprise end markets. Supply chain constraints did not have a material adverse impact on CCS segment revenue in 2019 benefited from our Impakt acquisition, the favorable2022 (2021 — estimated adverse revenue impact was significantly lower than expectedof approximately $54 million). Communications end market
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revenue for 2022 increased $605.1 million (27%) compared to 2021 primarily due to the recent downturn in semiconductor and display demand. Revenue growth in our A&DHPS business and improved availability of materials. Enterprise end market revenue for 2019 as2022 increased $346.3 million (33%) compared to 20182021, driven by increased customer demand and new program ramps. Our HPS revenue for 2022 increased 59% (to $1.83 billion) compared to 2021, and accounted for 25% of our total 2022 revenue. Growth in our HPS business was driven by strong demand including from Atrenne, but was negatively impacted by production delays caused by the materials constraints in certain high reliability parts and machined components described above.
CCS segment revenue represented 61% of total revenue for 2019,2021 decreased $342.2 million (9%) compared to 67%2020, primarily due to our disengagement from programs with Cisco Systems, Inc. (Cisco Disengagement), which represented an approximate $500 million decline in 2021 compared to 2020, and the adverse impact of materials constraints, partly offset by strong demand from service provider customers, including in our HPS business. We estimated adverse impacts for 2018, and 68% for 2017.2021 of approximately $54 million on our CCS segment revenue for 2019 decreased $820.8as a result of supply chain constraints (2020 — approximately $58 million (19%) comparedas a result of supply chain constraints (due in part to 2018.COVID-19) and Workforce Constraints). Communications end market revenue for 20192021 decreased $377.8$174.9 million (7%) compared to 2020 primarily due to the Cisco Disengagement, partially offset by demand increases from service providers, including in our HPS business. Enterprise end market revenue for 2021 decreased $167.3 million (14%) compared to 2018, primarily2020, due to continuingprogram-specific demand softness from certain of our traditional OEM customers (some of which is anticipated to continue into 2020), partially offset by demand strength and new program revenue in support of data center growth. Enterprise end market revenue for 2019 decreased $443.0 million (26%) compared to 2018, just over $400 million of which was due to planned program disengagements resulting from our CCS Review, partially offset by new program ramps.
We depend on a small number of customers for a substantial portion of our revenue. In the aggregate, our top 10 customers represented 65%66% of total revenue for 2019 (2018 — 70%; 2017 — 71%).
| Segment | Year ended December 31 | ||||||||
| 2017 | 2018 | 2019 | |||||||
| Cisco Systems, Inc. | CCS | 18 | % | 14 | % | 12 | % | ||
| Dell Technologies | CCS | * | 10 | % | * | ||||
| Juniper Networks, Inc. | CCS | 13 | % | * | * | ||||
| Total | 31 | % | 24 | % | 12 | % | |||
We generally enter into master supply agreements with our customers that provide the framework for our overall relationship. Theserelationship, although such agreements typically do not typically guarantee a particular level of business or fixed pricing. Instead, we bid
on a program-by-program basis and typically receive customer purchase orders for specific quantities and timing of products. We cannot
assure that our current customers will continue to award us with follow onfollow-on or new business. Customers may also cancel contracts, and volume levels can be changed or delayed, any of which could have a material adverse impact on our results of operations, and working capital performance including(including requiring us to carry higher than expected levels of inventory.inventory, particularly in a supply-constrained environment, to enable us to meet demand requirements), and result in lower asset utilization and lower margins. We cannot assure the replacement of completed, delayed, cancelled or reduced orders, or that our current customers will continue to utilize our services, or renew their long-term manufacturing or services contracts with us on acceptable terms or at all. In addition, in any given quarter, we can experience quality and process variances related to materials, testing or other manufacturing or supply chain activities. Although we are successful in resolving the majority of these issues, the existence of these variances could have a material adverse impact on the demand for our services in future periods from any affected customers. Further, some of our customer agreements require us to provide specific price reductions to our customers over the term of the contracts, which has significantly impacted revenuea significant impact on our revenues and our margins. As longer-term contracts are becoming more prevalent, we anticipate that these adverse effects will increasingly impact our business in future periods. RecentContinuing market shifts to generic, cloud-baseddisaggregated solutions and open hardware platforms are also adversely impacting demand from our traditional OEM Communications customers. See "Overview — Recent Developments"
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Gross profit:
The following table shows gross profit and gross margin (gross profit as a percentage of total revenue) for the periods indicated:
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Gross profit (in millions) | $ | 437.6 | $ | 487.0 | $ | 636.3 | |||||||||||
| Gross margin | 7.6 | % | 8.6 | % | 8.8 | % | |||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Gross profit (in millions) | $ | 418.5 | $ | 430.5 | $ | 384.7 | |||||
| Gross margin | 6.8 | % | 6.5 | % | 6.5 | % | |||||
Gross profit for 2019 decreased $45.82022 increased $149.3 million (31%), compared to 2021, primarily due to the strong revenue growth in both segments noted above, partially offset by the effect of higher inventory write-downs in 2022 ($30.5 million, approximately two-thirds of which related to our ATS segment), compared to 2021 ($4.9 million, consisting of $7.2 million in inventory write-downs pertaining to our ATS segment, offset in part by $2.3 million of valuation recoveries in our CCS segment). Increases in inventory write-downs in 2022 compared to 2021 resulted from reduced demand for certain aged inventory. Gross profit in 2022 was adversely impacted by approximately $4 million of Constraint Costs recorded in cost of sales, all within our ATS segment (2021 — approximately $31 million of Constraint Costs recorded in cost of sales, mitigated by an aggregate of $9 million of COVID Subsidies and Customer Recoveries (collectively COVID Recoveries) in cost of sales).
Gross margin increased to 8.8% in 2022 from 8.6% in 2021 primarily driven by operating leverage due to higher volumes in both our ATS and CCS segments, partially offset by the impact of the higher inventory write-downs in 2022 compared to 2021 noted above.
Gross profit for 2021 increased $49.4 million (11%), compared to 2018, most significantly2020, primarily due to lower revenue levelsa higher concentration of HPS business, growth in our CCSATS segment, and weaker ATS segment performance, including losseslower variable spend, which more than offset the reduced profits in our capital equipment business and inefficiencies in our A&D business resulting from materials constraints with respect to the availability of high reliability parts and machined components. Despite overall lower revenue, however, gross margin of 6.5% for 2019 was flat compared to 2018, as favorable changes in mix and productivity improvements in our CCS segment were offset by weaker ATS segment performance. In addition, gross&D. Gross profit for 2018 was negatively impacted by higher2021 also included a $12.1 million reduction in net inventory provisions ($13.5 million) as compared to 2019 ($4.12020 (2021— $4.9 million; 2020 — $17.0 million), described below.
. Gross profit for 2018 increased $12.0in 2021 was adversely impacted by approximately $31 million (3%), comparedof Constraint Costs recorded in cost of sales, mitigated by an aggregate of $9 million of COVID Recoveries in cost of sales. Approximately 70% of both the Constraints Costs and COVID Recoveries recorded in 2021 pertained to 2017. The increaseour ATS segment. We recorded $33 million of Constraint Costs in gross profit was attributable to higher revenue levels in both our CCS and ATS segments compared to 2017. Despite the increase in revenue for 2018 compared to 2017, gross margin decreased from 6.8% in 2017 to 6.5% for 2018. The decrease in gross margin resulted primarily from unfavorable changes in overall program mix (including as a result of demand softness in our capital equipment business), increased pricing pressures primarily in our CCS segment, approximately $10 million in higher provisions we recorded for certain aged inventory during 2018, and the recognition of a $1.6 million fair value adjustment with respect to the inventory acquired from Atrenne through cost of sales in 2020, mitigated by an aggregate of $30 million of COVID Recoveries in cost of sales. Approximately 60% of both the second quarter of 2018. Inventory provisions for 2018 of $13.5 million (2017 — $3.3 million) resultedConstraint Costs and COVID Recoveries recorded in 2020 pertained to our ATS segment.
Gross margin increased to 8.6% in 2021 from 7.6% in 2020 primarily from an increase in our overall aged inventory levels, more than half of which related to customersdriven by growth in our ATS segment. These negative impacts more than offset the increase in gross profit in 2018 as compared to 2017 described above.segment, and improved CCS performance, including higher HPS revenue concentration.
SG&A for 20192022 of $227.3$279.9 million (3.9% of total revenue) increased $8.3$34.8 million compared to $219.0$245.1 million (3.3%(4.3% of total revenue) for 2018, primarily due to a $9.1 million increase in SG&A resulting from the 2018 addition of the operations of Impakt and Atrenne (ATS segment), and $2.9 million in higher foreign exchange losses, offset in part by lower variable spend.
SG&A for 2021 of $245.1 million (4.3% of total revenue) increased $14.4 million compared to $230.7 million (4.0% of total revenue) for 2020, primarily due to higher variable compensation, lower COVID Subsidies recorded in SG&A (2021 — $3 million; 2020 — $7 million), and approximately $2 million in SG&A resulting fromattributable to the 2018 addition of the operations of Impakt and Atrenne.PCI acquisition.
Segment income and margin:
Segment performance is evaluated based on segment revenue (set forth above), segment income and segment margin (segment income as a percentage of segment revenue). Revenue is attributed to the segment in which the product is manufacturedmanufactured or the service is performed. Segment income is defined as a segment’ssegment's net revenue less its cost of sales and its allocable portion of selling, generalSG&A and administrative expenses and research and developmentR&D expenses (collectively, Segment Costs). Identifiable Segment Costs are allocated directly to the applicable segment while other Segment Costs, including indirect costs and certain corporate charges, are allocated to our segments based on an analysis of the relative usage or benefit derived by each segment from such costs. Segment income excludes Finance Costs (defined under "Liquidity""Finance Costs" below), employee SBC expense, amortization of intangible assets (excluding computer software), and Other Charges, (recoveries) (definednet of recoveries (described under "Non-IFRS measures""Other charges, net of recoveries" below), other solar charges in 2017 (consisting of non-cash charges to write-down the carrying value of our then-remaining solar panel inventory and A/R balances), and an acquisition inventory fair value adjustment in 2018, as these costs and charges/recoveries are managed and reviewed by our CEOChief Executive Officer at the company level.level3. See the reconciliation of segment income to our earnings before income taxes for 2020 — 2022 in note 25 to the 20192022 AFS. Our segments do not record inter-segment revenue. Although segment income and segment margin are used to evaluate the performance of our segments, we may incur operating costs in one segment that may also benefit the other segment. Our accounting policies for segment reporting are the same as those applied to the companyCompany as a whole.
ATS segment income for 2019 decreased $38.32022 increased $35.9 million (37%(34%) compared to 2018.2021. ATS segment margin decreasedincreased from 4.6%4.5% in 20182021 to 2.8%4.7% in 2019. The decrease in ATS segment income and margin for 2019 as compared to 2018 was due primarily to the significantly lower demand in, and the high level of fixed costs associated with, our capital equipment business, which more than offset the positive contributions to segment income in 2019 arising from our industrial and healthtech businesses. We incurred losses of approximately $20 million in our capital equipment business in 2019. See "Overview — Recent Developments" above for a discussion of improved sequential quarterly performance in our capital equipment business in Q4 2019 and our near term expectations. Although A&D revenue increased in 2019 compared to 2018, the limited availability of certain high reliability parts and machined components negatively impacted our A&D profitability for 2019 compared to the prior year.
ATS segment income for 2021 increased $35.3 million (51%) compared to 2020. ATS segment margin increased from 3.3% in 2020 to 4.5% in 2021. The increase in ATS segment income for 2021 as compared to 2020 was primarily due to the revenue increase described above, which more than offset the reduced profit contribution from our A&D business. The increase in ATS segment margin for 2021 compared to 2020 was primarily due to profitable growth in our Capital Equipment business.
CCS segment income for 2022 increased $88.2 million (68%) compared to 2021 as a result of the revenue increase described above. CCS segment margin increased from 2.5%3.9% in 20182021 to 2.6%5.1% in 2019, as a result of favorable changes2022, primarily due to improved leverage from higher volumes and improved mix due to growth in program mix. Despite the lower revenue, CCS Review disengagements and our cost productivity initiatives had a beneficial impact on ourHPS business. The increase in CCS segment income and margin was partially offset by the impact of the higher inventory write-downs in 2019. See "Overview — Recent Developments"above for a discussion of anticipated impacts of our CCS Review on our operations and financial results.2022 compared to 2021 noted above.
CCS segment income for 20182021 decreased $9.0$0.4 million (7%(0.3%) compared to 2017.2020 as a result of the lower revenue levels described above, driven by the Cisco Disengagement. Despite the lower revenue levels, CCS segment margin decreasedincreased from 2.9%3.5% in 20172020 to 2.5%3.9% in 2018. Despite the increase in2021, primarily due to more favorable mix, driven by our CCS segment revenue for 2018 compared to 2017, CCS segment incomeportfolio reshaping activities, and margin for 2018, as compared to 2017, were negatively impacted by increased pricing pressures from some of our significant customers, unfavorable changes in program mix, including a higher concentration of lower margin business comparedrevenue from our HPS business.
3In December 2022, we entered into a total return swap agreement. In future periods, related fair value adjustments (TRS FVAs) will be excluded in our determination of segment income, as similar to employee SBC expense, they will be managed and reviewed by our Chief Executive Officer at the prior year (particularly incompany level. However, as the first quarterimpact of 2018)TRS FVAs on our 2022 AFS was di minimis, andno such exclusion was applicable for the inventory provisions recorded in 2018 (discussed above). These decreases
year.
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SBC expense:
Our employee and director SBC expense variesmay fluctuate from period to period.period to account for, among other things, new grants, forfeitures resulting from employee terminations or resignations, and the recognition of accelerated SBC expense for employees eligible for retirement (generally in the first quarter of the year associated with our annual grants). The portion of suchour employee SBC expense that relates to performance-based compensation generally varies depending on ouris subject to adjustment in any period to reflect changes in the estimated level of achievement of pre-determined performance goals and financial targets.
The following table shows employee SBC expense (with respect to stock options, restricted share units (RSUs) and performance share units (PSUs) granted to employees) and director SBC expense (with respect to DSUsdeferred share units (DSUs) and RSUs issued to directors as compensation) for the periods indicated (in millions):
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Employee SBC expense in cost of sales | $ | 11.1 | $ | 13.0 | $ | 20.3 | |||||||||||
| Employee SBC expense in SG&A | 14.7 | 20.4 | 30.7 | ||||||||||||||
| Total | $ | 25.8 | $ | 33.4 | $ | 51.0 | |||||||||||
Director SBC expense in SG&A (1) | $ | 2.0 | $ | 2.1 | $ | 2.2 | |||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Employee SBC expense in cost of sales | $ | 14.6 | $ | 14.7 | $ | 14.6 | |||||
| Employee SBC expense in SG&A | 15.5 | 18.7 | 19.5 | ||||||||
| Total | $ | 30.1 | $ | 33.4 | $ | 34.1 | |||||
| Director SBC expense in SG&A | $ | 2.2 | $ | 2.0 | $ | 2.4 | |||||
On December 15, 2022, we entered into a total return swap (TRS) agreement (TRS Agreement) to manage our cash flow requirements and exposure to fluctuations in the share price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. See "Liquidity — Cash requirements — TRS" below for further detail.
Other charges, (recoveries):net of recoveries:
In addition to the items set forth below, other charges, net of recoveries for 2022 included approximately $95 million in aggregate charges representing write-downs to inventories, a building and equipment resulting from the Batam Fire, as well as equivalent amounts in recoveries, as we expect to fully recover the written-down amounts pursuant to the terms and conditions of our insurance policies. As a result, such event had no net impact on other charges, net of recoveries during 2022. In Q4 2022, we recovered $31 million of our inventory losses through insurance proceeds. See note 26 to the 2022 AFS.
(i) Restructuring charges:charges, net of recoveries:
| Year ended December 31 | ||||||||||||
| 2017 | 2018 | 2019 | ||||||||||
| Restructuring charges | $ | 28.9 | $ | 35.4 | $ | 37.9 | ||||||
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Restructuring charges, net of recoveries (in millions) | $ | 25.8 | $ | 10.5 | $ | 8.4 | |||||||||||
We perform ongoing evaluations of our business, operational efficiency and cost structure, and implement restructuring actions as we deem necessary. We recorded an aggregateOur restructuring activities in 2022 consisted primarily of $81.3 millionactions to adjust our cost base to address reduced levels of demand in restructuring charges from the commencementcertain of our CEI in Q4 2017 through its completion at the end of 2019, including the charges recorded below. Aggregate charges under the CEI were above the high end of our previously disclosed range of $50 to $75 million, as we accelerated certain other cost actions, including those related to the Cisco Disengagement. The CEI included actions related to our CCS Reviewbusinesses and our capital equipment business, and resulted in reductions to our workforce, as well as the consolidation of certain sites to better align capacity and infrastructure with current and anticipated customer demand, related transfers of customer programs and production, re-alignment of business processes, management reorganizations, and other associated activities.geographies.
We recorded restructuring charges of $37.9$8.4 million in 2019, all in connection with our CEI,2022, consisting of cash charges of $28.1$7.5 million, primarily for employee termination costs, and non-cash charges of $0.9 million, consisting of the write-down of ROU assets in connection with vacated properties and assets related to disengaging programs. Approximately two thirds of 2022 restructuring charges were associated with our CCS segment. Our restructuring provision at December 31, 2022 was $5.8 million (December 31, 2021 — $6.1 million; December 31, 2020 — $4.7 million), which we recorded in the current portion of provisions on our consolidated balance sheet.
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We recorded restructuring charges of $10.5 million in 2021, consisting of cash charges of $9.8 million, primarily for employee termination costs, and net non-cash charges of $0.7 million (consisting of non-cash restructuring charges of $1.5 million and non-cash restructuring recoveries of $0.8 million). The non-cash charges consisted primarily of the write-down of equipment related to disengaged programs. The non-cash recoveries primarily reflect gains on the sale of surplus equipment. Approximately one half of our 2021 restructuring charges were associated with our ATS segment, and included actions related to our A&D business.
We recorded restructuring charges of $25.8 million in 2020, consisting of cash charges of $23.3 million, primarily for employee termination costs, and non-cash charges of $2.5 million. The non-cash restructuring charges recorded in 2019 represented the write-down of certain equipment, primarily related to our capital equipment business
We may also implement additional future restructuring actions or divestitures as a result of changes in our business, the marketplace and/or our exit from less profitable, under-performing, non-core or non-strategic operations. In addition, an increase in the frequency of customers transferring business to our EMS competitors, changes in the volumes they outsource, pricing pressures, or requests to transfer their programs among our sites or to lower-cost locations, may also result in our taking future restructuring actions. We may incur higher operating expenses during periods of transitioning programs within our network or to our competitors. Any such restructuring activities, if undertaken, at all, could adversely impact our operating and financial results, and may require us to further adjust our operations.
(ii) Transition Costs (Recoveries):
Transition Costs and Transition Recoveries are defined under the caption "Non-IFRS Financial Measures" below. We recorded $1.5 million of Transition Costs in 2022, related primarily to the disposal of assets reclassified as held for sale in Q1 2022. We recorded $3.6 million of Transition Recoveries in 2022, reflecting the gain on the subsequent disposal of such assets held for sale. We incurred Transition Costs of $1.2 million in 2021 (2020 — de minimis), pertaining to the transfer of manufacturing lines from closed sites to other sites within our global network, and no Transition Recoveries in either 2021 or 2020.
(iii) Asset impairment:
See notes 2(j) and (iii) in 2019, to write-down certain equipment related primarily8 to our capital equipment business and disengaged programs, as well as certain ROU assets related to vacated properties, in each case in connection with our restructuring actions. See paragraph (i) above.
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Our goodwill balance is allocated to the following CGUs (in millions):
| December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
Capital Equipment (1) | $ | 132.3 | $ | 131.9 | $ | 131.7 | |||||
A&D (2) | 3.7 | 3.7 | 66.3 | ||||||||
Atrenne (3) | 62.6 | 62.6 | N/A | ||||||||
PCI (4) | — | 126.0 | 123.8 | ||||||||
| $ | 198.6 | $ | 324.2 | $ | 321.8 | ||||||
| December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
Capital equipment (1) | $ | 19.5 | $ | 130.7 | $ | 132.0 | |||
A&D (2) | 3.7 | 3.7 | 3.7 | ||||||
Atrenne (3) | — | 64.0 | 62.6 | ||||||
| $ | 23.2 | $ | 198.4 | $ | 198.3 | ||||
(2)Consists of goodwill attributable to our 2016 acquisition of Lorenz, Inc. and Suntek Manufacturing Technologies, SA de CV, collectively known as Karel Manufacturing, and commencing in 2022, also includes goodwill attributable to our 2018 acquisition of Atrenne Integrated Solutions, Inc. (Atrenne). Our Atrenne CGU merged into our A&D CGU in 2022, and is no longer a separate CGU (described below). As a result, our 2022 Annual Impairment Assessment for our A&D CGU includes our Atrenne business.
(3)In 2020 and 2021, consists of goodwill attributable to our 2018 acquisition of Atrenne. Commencing in 2022, our Atrenne CGU merged into our A&D CGU, and is no longer a separate CGU. See footnote (2) above.
(4) For 2021, consists of our preliminary allocation of goodwill attributable to our 2021 acquisition of PCI. For 2022, consists of our final allocation of goodwill attributable to such acquisition, completed in Q1 2022.
During 2022, we merged our Atrenne CGU into our A&D CGU due to a change in the pattern of cash inflows resulting from the following factors: (i) a reallocation of manufacturing equipment and implementation of program transfers among these businesses to better address customer requirements; (ii) the integration of certain business processes; and (iii) the consolidation of their management reporting structures. Given the common customers and site usage of these businesses, we have centralized relevant resource allocation between them into a combined A&D CGU, such that core manufacturing assets are shared to generate revenues on an integrated basis and fulfill orders for common customers. As a result, the individual manufacturing sites no longer generate independent cash inflows.
As part of our Annual Impairment Assessment of CGUs with goodwill, assessment, we also performed a sensitivity analysis for the relevant CGUs in order to identify the impact of changes in key assumptions, including projected growth rates, profitability, discount and terminal growth rates. We did not identify any key assumptions where a reasonable possible change would have resulted in material impairments to the above goodwill balances in 2017, 2018 and 2019. In 2019, although our capital equipment CGU generated a net operating loss, our assumptions for this CGU for our 2019 Annual Impairment Assessment reflect our expectation of market recovery in the capital equipment business.2020, 2021 or 2022. Future growth in revenue and margins arefor these CGUs is supported by new business awarded recently, near-term customer forecasts, improved demand and performance commencing in Q4 2019, our expectation of profitability in Q1 2020, assumptions for additional future program wins based on our current revenue pipeline, margin improvements based on restructuring actions completed during 2019,implemented and external industry outlooks. Assumptions for our 2022 Annual Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. See "Critical Accounting Policies and Estimates" above.
COVID-19; and (iii) our PCI CGU include expected synergies as we continue to integrate PCI into our other businesses. See "Critical Accounting Estimates" above.
(iv) Losses on post-employment benefit plan (Post-employment Benefit Plan Losses):
We incur consulting, transaction and integration costs relating to potential and completed acquisitions, including with respect to Atrenne and Impakt.acquisitions. We also incurred $2.2 million inincur charges in 2019or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with acquisitions, when applicable. Collectively, these costs, charges and releases are referred to as Acquisition Costs (Recoveries).
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We recorded Acquisition Costs in 2022 of $0.4 million, all related to our acquisition of PCI. We recorded net Acquisition Costs in 2021 of $6.1 million, consisting of $7.3 million in costs related to acquisition activities, including the acquisition of PCI, offset in part by a $1.2 million release related to certain indirect tax liabilities previouslyrecorded in connection with our acquisition of Impakt acquisition. Collectively, these costs and charges are referred to as Acquisition Costs. During 2019, wein November 2018. We recorded $3.9$0.2 million (2018 — $11.0 million; 2017 — $4.5 million) in Acquisition Costs. See note 3 to our 2019 AFS.of Acquisition Costs in 20192020 related to potential acquisitions.
Other consists of legal recoveries of $10.5 million in 2021 and 2017 were offset$2.5 million in part by legal recoveries2020, for prior component parts, in connection with the settlement of class action lawsuits in which we were a plaintiff. Additionally,No such legal recoveries were recorded in 2022.
Losses on pension annuity purchases:
To mitigate the 2017 recoveriesactuarial and investment risks of $1.1our defined benefit pension plans, we purchase annuities from time to time (using existing plan assets) from third party insurance companies for certain, or all, plan participants. The purchase of annuities by the pension plan substantially hedges the financial risks associated with the related pension obligations. In August 2020, the trustees of our defined benefit pension plan for employees in the United Kingdom (U.K.) purchased annuities to hedge the pension benefits payable to newly-retired members of such plan. The 2020 annuity purchase resulted in a non-cash loss of $0.2 million were partially offset by costsin 2020, which we recorded in other comprehensive income (loss) (OCI) and simultaneously re-classified to deficit.
Finance Costs:
Finance Costs consist of interest expense and fees related to our credit facility (including debt issuance and related amortization costs), our interest rate swap agreements, the TRS Agreement, our A/R sales program, customer SFPs, and interest expense on our lease obligations, net of interest income earned. During 2022, we paid Finance Costs of $50.0 million (2021 — $26.0 million; 2020 — $29.5 million), including $0.8 million in debt issuance costs paid in 2022 (2021 — $3.6 million; 2020 — $0.6 million). The increase in Finance Costs paid in 2022 compared to 2021 was primarily due to approximately $9 million in higher interest paid under our A/R sales program and customer SFPs in 2022, and approximately $17 million in higher interest paid in 2022 under our credit facility, offset in part by $2.8 million in lower debt issuance costs paid in 2022.
We paid higher interest under our A/R sales program, customer SFPs, and credit facility in 2022 compared to 2021 due to higher amounts of A/R sold and higher borrowings under our credit facility, as well as increased interest rates. In December 2021, we increased our term loan borrowings under our credit facility to fund a portion of the PCI acquisition price. In addition, we have increased the amount of intra-quarter borrowings and repayments (in each case drawn and repaid in full during the same quarter) under the revolving portion of our credit facility (Intra-Quarter Borrowings/Repayments). In 2022, our Intra-Quarter Borrowings/Repayments ranged from $228 million to $359 million (2021 — nil to $290 million; 2020 — $10 million to $57 million). We also amended our A/R sales program in September 2022, to increase the prior limit of $300.0 million to $405.0 million, in order to allow increased A/R sales thereunder. We believe that our combined use of A/R sales and Intra-Quarter Borrowings/Repayments is an effective way to manage our short-term liquidity and working capital requirements. Such requirements increased in 2022 compared to 2021 as a result of the growth of our business, as well as the higher inventory levels we maintained to secure supply given global supply chain constraints and longer lead times for unrelated legal matters.certain components. See "Liquidity — Cash requirements" below.
The decrease in Finance Costs paid from 2021 to 2020 was primarily due to lower amounts outstanding under our credit facility for most of the year (until December 2021 when borrowings increased to fund a portion of the PCI acquisition), a reduction in interest rates compared to 2020, and lower amounts of swap interest due to the cancellation of a portion of the notional amount of our interest rate swaps in December 2020 and September 2021.
Income taxes:
For 2019,2022, we had a net income tax expense of $29.5$58.1 million on earnings before tax of $99.8$203.6 million, compared to a net income tax recoveryexpense of $17.0$32.1 million on earnings before tax of $81.9$136.0 million for 2018,2021, and a net income tax expense of $27.6$29.6 million on earnings before tax of $133.1$90.2 million for 2017. Our 2019 earnings before tax included the Property Gain (discussed above), which had no net tax impact, as such gain was offset by the utilization of previously unrecognized tax losses.2020.
Our net income tax expense of $29.5 million for 20192022 was favorablyadversely impacted by $6.4a $3.5 million in tax benefitstaxable foreign exchange impact (Currency Impact) arising primarily from return-to-provision adjustments for changes in estimates relatedthe weakening of the Chinese renminbi relative to prior years, based on changes in facts or circumstances,the U.S. dollar and an aggregate of $4.5a $3.3 million in reversals of certain previously-recorded tax liabilities and uncertainties, offset in part by $6.0 million of deferred tax expense arising fromrelated to taxable temporary differences associated with the anticipated repatriation of undistributed
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earnings (Repatriation Expense) from certain of our Chinese and Thai subsidiaries. We currently expect to repatriate cashsubsidiaries, offset in part by $4.9 million in favorable reversals of tax uncertainties in one of our Asian subsidiaries. The withholding tax of $10.3 million associated with the repatriation of undistributed earnings from theseour certain Chinese subsidiaries in 2022 (realized as current tax) was fully offset by the near future and have recorded areversal of previously accrued deferred tax liability in connection therewith. Upon repatriatingtaxes from the cash, we will reverse this deferred tax liability and record a current income tax expense for withholding taxes.then-anticipated repatriation of such undistributed earnings. Our functional and reporting currency is the U.S. dollar; however, our income tax expense is based primarily on taxable income determined in the currency of the country of origin. As a result, foreign currency translation differences impactCurrency Impacts affect our income tax expense from period to period. While our net income tax expense included taxable foreign exchange impacts (Currency Impacts) from fluctuations in foreign currencies relative to the U.S. dollar during each quarter of 2019, overall net Currency Impacts for 2019 were not significant.
Our net income tax expense for 2017 of $27.6 million 2021 was favorably impacted by the recognition of a $4.3$7.6 million deferred tax recovery recorded in connection with the revaluation of certain temporary differences using the future effective tax rate of our Thailand subsidiary in connection with the then-upcoming transition from a 100% income tax benefit (Solar Benefit)exemption to a 50% exemption in 2022 under an applicable tax incentive, largely offset by a $6.0 million Repatriation Expense related to certain of our solar assets (discussed below), as well as favorable Currency Impacts resultingChinese subsidiaries. In 2021, we expected to repatriate cash from the strengtheningcertain of the Malaysian ringgitour Chinese subsidiaries and Chinese renminbi relative to the U.S. dollar, which were offsetrecorded a $15.3 million deferred tax liability in part by $4.0connection therewith. Upon such repatriation in 2022, we reversed $10.3 million inof this deferred tax liability and recorded a current income tax expense relatedfor withholding taxes in an equal amount. Taxable foreign exchange impacts were not significant in 2021.
Our net income tax expense for 2020 included $18.3 million of tax expenses relating to taxable temporary differencescurrent and future withholding taxes associated with the then-anticipated repatriationrepatriations of undistributed earnings from certain of our Chinese and Thai subsidiaries and a $2.0that occurred in 2020 or were then-anticipated to occur in the foreseeable future, offset in large part by the following favorable impacts: (i) $4.1 million in tax benefits related to return-to-provision adjustments for changes in estimates related to prior years based on changes in facts or circumstances, (ii) the recognition of $2.6 million of previously unrecognized deferred income tax expense relatedassets of our Japanese subsidiary, (iii) $5.1 million in favorable Currency Impacts arising primarily from the strengthening of the Chinese renminbi relative to the U.S. Tax Cutsdollar, and Jobs Act (discussed below). In connection with our exit from the solar panel manufacturing business, we withdrew one(iv) a $5.7 million reversal of tax uncertainties in certain of our tax incentivesAsian subsidiaries in Thailand (which related solely to such operations) during the second quarter of 2017. The withdrawal of this incentive allowed us to apply tax losses arising from the disposition of our solar assets against other taxable profits in Thailand, resulting in the recognition of the Solar Benefit in 2017 and ultimately realized in 2018.Q1 2020.
We conduct business operations in a number of countries, including countries where tax incentives have been extended to encourage foreign investment or where income tax rates are low. Our effective tax rate can vary significantly from period to period for various reasons, including as a result of the mix and volume of business in various tax jurisdictions, and in jurisdictions with tax holidays, and tax incentives that have been negotiated with the respective tax authorities (see discussion below). Our effective tax rate can also vary due to the impact of restructuring charges, foreign exchange fluctuations, operating losses, cash repatriations, certain tax exposures, the time period in which losses may be used under tax laws and whether management believes it is probable that future taxable profit will be available to allow us to recognize deferred income tax assets.
Certain countries in which we do business grant tax incentives to attract and retain our business. Our tax expense could increase significantly if certain tax incentives from which we benefit are retracted. A retraction could occur if we fail to satisfy the conditions on which these tax incentives are based, or if they are not renewed or replaced upon expiration. Our tax expense could also increase if tax rates applicable to us in such jurisdictions are otherwise increased, or due to changes in legislation or administrative practices. Changes in our outlook in any particular country could impact our ability to meet the required conditions.
If the recent global minimum tax agreement is implemented in the jurisdictions in which we do business, it could, among other things, increase cash taxes, increase audit risk, and increase our worldwide corporate effective tax rate. In addition, the Organization for Economic Cooperation and Development continues to issue guidelines and proposals related to Base Erosion and Profit Shifting which may result in legislative changes that could reshape international tax rules in numerous countries and negatively impact our effective tax rate. We cannot predict the outcome of any specific legislative proposals or initiatives, and we cannot provide assurance that any such legislation or initiative will not apply to us. Legislation or other changes in international tax laws could increase our tax liability or adversely affect our overall profitability and results of operations. We will continue to monitor the progress of global tax reform agreements and initiatives.
Our tax incentives currently consist of tax exemptions for the profits of our Thailand and Laos subsidiaries. We have three income tax incentives (including an incentive that commenced in Thailand with varying exemption periods (one of our previous Thailand tax incentives expired2022) in October 2019). TwoThailand. One of these incentives initially allowallows for a 50% income tax exemption until its expiration in 2027. The second incentive allows for a 100% income tax exemption (includingand distribution taxes), which after eight years transition to a 50% income tax exemption for the next fiveeight years, (excluding distribution taxes). One of these incentivesand expires in 2020, and the other will transition to the 50% exemption in 2022 and expire in 2027. We obtained a new Thailand2028. The third incentive in Q4 2019, which allows for a 100% income tax exemption (including distribution taxes)for six years, and expires in 2028. Our tax incentive in Laos allows for a period 100% income tax exemption until 2025, and a reduced income tax rate
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of eight years, and will expire in 2027.8% thereafter. Upon full expiry of each of the incentives, taxable profits associated with such expired tax incentives become fully taxable. Based on our anticipated 2020 levels of business in Thailand, we estimate an increase to our effective tax rate by approximately 1% as a result of the 2019 and 2020 expiry of two of our Thailand tax incentives, assuming that our efforts to transition some or all of such businesses to other remaining incentives are unsuccessful. Our tax expense could increase significantly if certain tax incentives from which we benefit are retracted.retracted or expire.
We received an approval from the Malaysian authorities in 2020 for an income tax incentive for one of our Malaysian subsidiaries, which provided a 50% income tax exemption for a period of five years (a significant portion of which applied to previous periods) for certain product sets manufactured by such subsidiary. In 2022, Malaysian authorities determined that this incentive would cover the tax periods from 2016 to 2021, but the applicable benefit was not significant in any such year.
In certain jurisdictions, primarily in the Americas and Europe, we currently have significant net operating losses and other deductible temporary differences, some of which we expect will be used to reduce taxable income in these jurisdictions in future periods, although not all are currently recognized as deferred tax assets. In addition, the tax benefits we are able to record related to restructuring charges and SBC expenses aremay be limited, as a significant portion of such amounts are incurred in jurisdictions with unrecognized loss carryforwards. Tax benefits we are able to record related to the accounting amortization of intangible assets are also limited based on the structure of our recent acquisitions. We review our deferred income tax assets at each reporting date and reduce them to the extent we believe it is no longer probable that we will realize the related tax benefits.
We develop our tax filing positions based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions currently in effect in the jurisdictions in which we have assets or conduct business, all of which are subject to change or differing interpretations, possibly with retroactive effect. We are subject to tax audits in various jurisdictions which could result in additional tax expense in future periods relating to prior results. Reviews by tax authorities generally focus on, but are not limited to, the validity of our inter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and significant judgment. Any such increase in our income tax expense and related interest and/or penalties could have a significant adverse impact on our future earnings and future cash flows.
In 2017, the Brazilian Ministry of Science, Technology, Innovation and Communications issued assessments seeking to disqualify certain research and development (R&D) expenses of our Brazilian subsidiary for the years 2006 to 2009, which entitled2009. As of the end of Q1 2022, this matter was completely resolved with no adjustment to our Brazilian subsidiary (which ceased operationsoriginal filing positions for any relevant year.
In Q3 2021, the Romanian tax authorities issued a final tax assessment in 2009)the aggregate amount of approximately 31 million Romanian leu (approximately $7 million at period-end exchange rates), for additional income and value-added taxes for one of our Romanian subsidiaries for the 2014 to charge reduced sales2018 tax leviesyears. In order to its customers. The assessments againstadvance our Brazilian subsidiary, which (includingcase to the appeals phase and reduce or eliminate potential interest and penalties) total approximately 39 million Brazilian real (approximately $10 million at year-end exchange rates) forpenalties, we paid the Romanian tax authorities the full amount assessed in Q3 2021 (without agreement to all or any portion of such years, remain under appeal. Although we cannot predict the outcome of this matter, weassessment). We believe that our R&D activities for the periodoriginally-filed tax return positions are supportable,in compliance with applicable Romanian tax laws and it is probable thatregulations, and intend to vigorously defend our position will be sustained upon full examination by the appropriate Brazilian authorities and, ifthrough all necessary upon consideration by the Brazilianappeals or other judicial courts. Our position is supported by our Brazilian legal advisers. There were no changes in the status of this matter during 2018 or 2019.processes.
The successful pursuit of assertions made by any taxinggovernment authority, including tax authorities, could result in our owing significant amounts of tax or other reimbursements, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse tax ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and in excess of amounts accrued.
Net earnings:
Net earnings for 2019 decreased $28.62022 increased $41.6 million compared to 2018.2021. The decreaseincrease was primarily due to $45.8$149.3 million in lowerhigher gross profit, $8.3offset in part by $34.8 million in higher SG&A, expenses, $14.2$14.6 million in higher amortization of intangible assets (with respect to SG&A and intangibles amortization, both primarily(substantially due to our Atrenne and Impakt acquisitionsthe PCI acquisition in 2018)November 2021), $25.1$28.0 million in higher Finance Costs, (defined in "Liquidity — Finance Costs" below) in 2019 as compared to 2018, and $46.5$26.0 million in higher income tax expenses (primarily due to the $49.6 million Impakt Benefit recorded in 2018), partially offset by the $102.0 million Property Gain in Q1 2019.expense.
Net earnings for 2018 decreased $6.62021 increased $43.3 million compared to 2017.2020. The decreaseincrease was primarily due to $24.0$49.4 million in higher gross profit and an aggregate of $19.2 million in lower other charges, (primarily restructuring charges, Acquisition Costsnet of recoveries and Toronto Transition Costs), $14.3 million in higher Finance Costs, (defined in "Liquidity — Finance Costs" below), and $6.5 million in higher amortization of intangibles in 2018 as compared to 2017, offset in part by $44.6$14.4 million in lower income taxeshigher SG&A expense and $8.5 million in 2018higher R&D costs (in support of our HPS business) in 2021 as compared to 2017 (primarily due to the $49.6 million Impakt Benefit).2020.
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Liquidity and Capital Resources
Liquidity
The following tables set forth key liquidity metrics for the periods indicated (in millions):
| December 31 | December 31 | |||||||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 515.2 | $ | 422.0 | $ | 479.5 | Cash and cash equivalents | $ | 463.8 | $ | 394.0 | $ | 374.5 | |||||||||||||||
| Borrowings under credit facility* | 187.5 | 757.3 | 592.3 | Borrowings under credit facility* | 470.4 | 660.4 | 627.2 | |||||||||||||||||||||
* excluding ordinary course letters of credit.
| Year ended December 31 | ||||||||||||||||||||||||||||
| Year ended December 31 | 2020 | 2021 | 2022 | |||||||||||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||||||||||||||
| Cash provided by operating activities | $ | 127.0 | $ | 33.1 | $ | 345.0 | Cash provided by operating activities | $ | 239.6 | $ | 226.8 | $ | 297.9 | |||||||||||||||
| Cash provided by (used in) investing activities | (89.3 | ) | (545.6 | ) | 38.7 | |||||||||||||||||||||||
| Cash used in investing activities | Cash used in investing activities | (51.0) | (364.3) | (108.9) | ||||||||||||||||||||||||
| Cash provided by (used in) financing activities | (79.7 | ) | 419.3 | (326.2 | ) | Cash provided by (used in) financing activities | (204.3) | 67.7 | (208.5) | |||||||||||||||||||
| Changes in non-cash working capital items (included in operating activities above): | Changes in non-cash working capital items (included in operating activities above): | |||||||||||||||||||||||||||
| A/R | $ | (6.3 | ) | $ | (155.4 | ) | $ | 153.7 | A/R | $ | (40.7) | $ | (102.4) | $ | (133.3) | |||||||||||||
| Inventories | (139.6 | ) | (224.0 | ) | 97.7 | Inventories | (99.3) | (521.9) | (717.3) | |||||||||||||||||||
| Other current assets | (2.0 | ) | 7.6 | 16.5 | Other current assets | (0.5) | (11.5) | (51.6) | ||||||||||||||||||||
| A/P, accrued and other current liabilities and provisions | 51.8 | 227.0 | (158.8 | ) | A/P, accrued and other current liabilities and provisions | 117.0 | 556.9 | 813.4 | ||||||||||||||||||||
| Working capital changes | $ | (96.1 | ) | $ | (144.8 | ) | $ | 109.1 | Working capital changes | $ | (23.5) | $ | (78.9) | $ | (88.8) | |||||||||||||
Cash provided by operating activities:
In 2019,2022, we generated $345.0$297.9 million of cash from operating activities compared to $33.1$226.8 million in 2018.2021. The $311.9$71.1 million increase in cash from operating activities in 20192022 as compared to 20182021 was primarily due to $253.9$41.6 million higher net earnings in 2022 compared to 2021 and the following non-cash add-backs to net earnings: (i) $18.5 million in lowerhigher depreciation and amortization (due to the PCI acquisition in November 2021), (ii) $28.0 million in higher Finance Costs, and (iii) $17.6 million in higher employee SBC expense, partially offset by $9.9 million in higher working capital requirements. LowerHigher working capital requirements werefor 2022 as compared to 2021 primarily due to cash improvements of: (i) $309.1reflect a $30.9 million reduction in A/R cash flows, which resulted primarily from the timing of collections; (ii) $321.7a $195.4 million reduction in inventory cash flows and a $40.1 million reduction in other current assets cash flows, which reflect successfulmore than offset a $256.5 million improvement in A/P cash flows. The decrease in A/R cash flows in 2022 compared to 2021 was due to the timing of collections and a higher A/R balance as of December 31, 2022 (driven by higher revenue in Q4 2022 compared to Q4 2021), partially offset by the impact of increased A/R sold through our A/R sales program and customer SFPs. The decrease in inventory management,cash flows in 2022 compared to 2021 was due to higher inventory levels carried at the end of 2022. We carried higher inventory levels to support the strong growth of our business and to secure supply given continuing global supply chain constraints and longer lead times for certain components. However, a significant portion of our inventory purchases were covered by cash deposits received from our customers, which helped to alleviate the impact of such purchases on our cash flows. The decrease in other current assets cash flows in 2022 compared to 2021 was due to a delay in the recovery of indirect taxes in certain jurisdictions and the timing of vendor deposit payments. The improvement in A/P cash flows in 2022 as compared to 2021 was due to an increase in cash deposits received from customers to cover inventory purchases, as well as the impacttiming of disengaged programs, offset in part by the impactpayments (see "Summary of materials
In 2018,2021, we generated $33.1$226.8 million of cash from operating activities compared to $127.0$239.6 million in 2017.2020. The $12.8 million decrease of $93.9 millionin cash from operating activities in 2021 as compared to 2020 was primarily due to $48.7$55.4 million in higher working capital requirements, and $51.2offset in significant part by $43.3 million higher net earnings in lower earnings before income taxes in 2018 as2021 compared to 2017.2020. Higher working capital requirements werefor 2021 as compared to 2020 primarily due to cash reductions of (i) $149.1reflect a $61.7 million reduction in A/R cash flows due to higher amounts and the timing of revenue earned during 2018; and (ii) $84.4a $422.6 million reduction in inventory cash flows, which reflected demand reductions from certain of our customers in each of our segments, materials constraints primarily from CCS segment suppliers during 2018, and requirements to support new program ramps, each factor causing us to carry highermore than expected levels of inventory at December 31, 2018 compared to 2017; offset in part by a $175.2$439.9 million improvement in A/P cash flows. The reduction in A/R cash flows which reflects increasedwas due to the timing of collections, as well as higher A/R levels carried at the end of 2021 compared to the end of 2020, resulting from higher revenue earned in Q4 2021 compared to Q4 2020. The reduction in
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inventory cash flows was due to higher inventory levels carried at the end of 2021 compared to the end of 2020. We carried higher inventory levels at the end of 2021 primarily to support the ramping of new programs and anticipated future demand, including for our HPS business, to help secure supply to mitigate the impact of global supply chain constraints and longer lead times for certain components, and as a result of the PCI acquisition. However, a significant portion of our inventory purchases during 2018.were covered by cash deposits received from our customers, which helped to alleviate the impact of such purchases on our cash flows. Improvement in A/P cash flows was due to an increase in these cash deposits, as well as timing of payments.
From time to time, we extend payment terms applicable to certain customers, and/or provide longer payment terms to new customers or with respect to new programs. If this becomes more prevalent, it could adversely impact our working capital requirements, and increase our financial exposure and credit risk.customers. To substantially offset the effect of extended payment terms for particular customers on our working capital, we participate in twothree customer supplier financing programs (SFPs) (one with a CCS segment customer, and commencing in Q4 2019, one with an ATS segment customer),SFPs, pursuant to which we sell A/R from such customers to third-party banks on an uncommitted basis to receive earlier payment. At December 31, 2019, we sold $50.4 millionSee "Summary of A/R under the SFPs, consisting of $18.3 million under the SFP with the CCS segment customerKey Operating Results and $32.1 million under the SFP with the ATS segment customer (December 31, 2018 — $50.0 million under the SFP with the CCS segment customer). The decrease inFinancial Information" above and "Capital Resources" below for amounts of A/R sold under the CCS customer SFP in 2019 as compared to 2018 ($31.7 million) reflects our disengagement from various programs with that customer as a result of our CCS Review. We pay discount charges with respect to thesesuch arrangements which we record as finance costs in our consolidated statement of operations.during recent periods.
Non-IFRS adjusted free cash flow:
Non-IFRS adjusted free cash flow is defineda non-IFRS financial measure without a standardized meaning and may not be comparable to similar measures presented by other companies. Non-IFRS adjusted free cash flow was previously referred to as non-IFRS free cash flow, but has been renamed. Its composition remains unchanged. We define non-IFRS adjusted free cash flow as cash provided by or used in operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), lease payments, (including lease payments under IFRS 16), repayments from a former solar supplier (2017), and Finance Costs (defined below) paid (excluding debt issuance costs paid and Waiver Feesany credit agreement waiver fees paid). As a measure of liquidity, and consistent with the inclusion of our Toronto relocation capital expenditures and Toronto Transition Costs in non-IFRS free cash flow in the periods incurred, we have included the $113.0 million in proceeds from the sale of our Toronto real property (Toronto Proceeds) in non-IFRS free cash flow in 2019 (the year of receipt). We incurreddo not consider debt issuance costs in connection with our current credit facility (upon execution and subsequent security arrangements), as well as $2.0paid ($0.8 million in Waiver Fees2022; $3.6 million in Q4 2019, neither of which we consider2021; $0.6 million in 2020) or such waiver fees (when applicable) to be part of our core operating expenses. As a result, we modified our non-IFRS free cash flow calculation: (i) commencing in Q1 2019, to exclude debt issuanceongoing financing expenses, these costs are excluded from total Finance Costs paid ($2.9 million in 2019; $12.9 million in 2018; nil in 2017); and (ii) in Q4 2019, to exclude the Waiver Fees (which are recorded in other charges). Prior period comparatives have been restated, where applicable, to conform to the current presentation. In addition, as of January 1, 2019, as a result of our adoption of IFRS 16 (Leases), we modified our non-IFRS free cash flow calculation to subtract lease payments under IFRS 16, as such payments were previously (but are no longer) reported in cash provided by (used in) operations. IFRS 16 did not require the restatement of prior period financial statements. Accordingly, and in order to preserve comparability with prior calculations, commencing in Q1 2019, such lease payments are subtracted from cash provided by (used in) operations in our determination of non-IFRS adjusted free cash flow. Note, however, that non-IFRS adjusted free cash flow does not represent residual cash flow available to Celestica for discretionary expenditures. Management uses non-IFRS adjusted free cash flow as a measure, in addition to IFRS cash provided by or used in operations (described above), to assess our operational cash flow performance. We believe non-IFRS adjusted free cash flow provides another level of transparency to our liquidity.
A reconciliation of this measurenon-IFRS adjusted free cash flow to cash provided by operating activities measured under IFRS is set forth below (in millions):below:
| Year ended December 31 | |||||||||||||||||
| (in millions) | 2020 | 2021 | 2022 | ||||||||||||||
| IFRS cash provided by operations | $ | 239.6 | $ | 226.8 | $ | 297.9 | |||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (51.0) | (49.6) | (108.9) | ||||||||||||||
| Lease payments | (33.7) | (40.0) | (46.0) | ||||||||||||||
| Finance Costs paid (excluding debt issuance costs paid) | (28.9) | (22.4) | (49.2) | ||||||||||||||
| Non-IFRS adjusted free cash flow | $ | 126.0 | $ | 114.8 | $ | 93.8 | |||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| (restated) | (restated) | ||||||||||
| IFRS cash provided by operations | $ | 127.0 | $ | 33.1 | $ | 345.0 | |||||
| Purchase of property, plant and equipment, net of sales proceeds | (101.8 | ) | (78.5 | ) | 36.0 | ||||||
| Lease payments | (6.5 | ) | (17.0 | ) | (38.2 | ) | |||||
| Repayments from former solar supplier | 12.5 | — | — | ||||||||
| Finance costs paid (excluding debt issuance costs and Waiver Fees paid) | (10.2 | ) | (23.1 | ) | (41.6 | ) | |||||
| Non-IFRS free cash flow | $ | 21.0 | $ | (85.5 | ) | $ | 301.2 | ||||
Our non-IFRS adjusted free cash flow (defined above) of positive $301.2$93.8 million for 2019 increased $386.72022 decreased $21.0 million compared to 2018,2021, due primarily due to a $59.3 million increase in cash flows used to purchase property, plant and equipment (as described below) and $26.8 million in higher Finance Costs paid (excluding debt issuance costs paid) (see "Operating Results — Finance Costs" above), partially offset by $71.1 million in higher cash generated from operating activities (discussed above) and the $113.0 million in Toronto Proceeds received in March 2019 (included in "purchase of property, plant and equipment, net of sales proceeds" in the tableoperations (as described above).
Our non-IFRS adjusted free cash flow of negative $85.5$114.8 million for 20182021 decreased $106.5$11.2 million compared to 2017,2020, due primarily due to $12.8 million in lower cash generated from operating activities in 2018 (discussed2021 (as described above) as. In addition, the higher lease payments in 2021 compared to 2017, as well as higher interest costs incurred on our higher borrowings in 2018 compared to 2017, and $11.3 million of lease payments (including accrued interest and fees) we made to settle outstanding solar equipment leases in the first quarter of 2018. These decreases2020 were offset by $20.4 million in lower capital expenditures in 2018 as compared to 2017 (see "CashFinancing Costs.
Cash used in investing activities" below). In addition, 2017 benefited from the repayment of $12.5 million of advances from a former solar supplier.
Our capital expenditures for 20192022 were $80.5$109.0 million (2018(2021 — $82.2$52.2 million; 20172020 — $102.6$52.8 million), primarily to enhance our manufacturing capabilities in various geographies and to support new customer programs, (2019 — splitincluding expanding our footprint at certain of our U.S., Southeast Asia and Mexico facilities (split approximately evenly between our segments; 2018 — approximately two-thirdssegments in each such year). Our capital expenditures in 2022 included expenditures to support growth in our HPS business and our ATS segment. Our capital expenditures for 2021 included the expansion of an Atrenne facility in the equipment additions wereU.S. (Minnesota) to
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accommodate additional capacity for our A&D customers and customers in other highly regulated markets, and to support CCS segment growth, particularly our HPS business (including additional manufacturing lines at our former Cisco facility). Our capital expenditures for 2020 included the expansion of our ATS segment; 2017 — split approximately evenly betweenAtrenne facilities in the U.S. to accommodate additional capacity for our segments).defense customers and our A&D licensing business. Overall capital expenditures in 2021 and 2020 were lower than originally anticipated, as a result of delays or the shifting of programs or spending to future periods. We fund our capital expenditures from cash on hand and through the financing arrangements described below. See footnote (iii) to the "Additional Commitments" table below for information with respect to commitments for capital expenditures as of December 31, 2019. Our capital expenditures for 2019 included $5.0 million related to our temporary corporate headquarters (nil prior thereto), and $1.2 million in building improvements and new machinery at our new Toronto manufacturing site (2018 — approximately $15 million; 2017 — nil). Capital expenditures in 2017 also included expanding one of our production sites in Romania to support new ATS customers. We fund our capital expenditures from cash on hand and through2022.
On November 1, 2021, we completed the financing arrangements described under "Capital Resources" below. From time-to-time, we receive cash proceeds from the sale of surplus equipment and property (2019 — $116.5 million; 2018 — $3.7 million; 2017 — $0.8 million). The Toronto Proceeds were reported as cash provided by investing activities in 2019.
Cash provided by (used in) financing activities:
See "Summary of Key Operating Results and Financial Information" above for a table detailing repurchases of SVS under our NCIBs for 2017 to 2019.during each of 2020, 2021 and 2022.
We are party to a credit agreement (Credit Facility) with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which as of a December 6, 2021 amendment thereto, includes a term loan in the original principal amount of $350.0 million (Initial Term Loan), a term loan in the original principal amount of $365.0 million (Incremental Term Loan), and a $600.0 million revolving credit facility (Credit Facility) providing(Revolver). Prior to such amendment, the Credit Facility included the Initial Term Loan, a $350.0 million term loan (Initialin the original principal amount of $250.0 million (Terminated Term Loan), the outstanding borrowings under which were fully repaid on December 6, 2021 with a portion of the proceeds of the Incremental Term Loan, and acommitments of $450.0 million revolver (Revolver). In November 2018, we added a $250.0 million term loan (Incremental Term Loan).under the Revolver. The Initial Term Loan and the Incremental Term Loan are collectively referred to as the Term Loans. Prior
The Initial Term Loan matures in June 2025. The Incremental Term Loan and the Revolver each mature on March 28, 2025, unless either (i) the Initial Term Loan has been prepaid or refinanced or (ii) commitments under the Revolver are available and have been reserved to repay the Initial Term Loan in full, in which case the Incremental Term Loan and Revolver
each mature on December 6, 2026.
The Incremental Term Loan requires quarterly principal repayments of $4.5625 million, and each of the Term Loans requires a lump sum repayment of the remainder outstanding at maturity. The Initial Term Loan required quarterly principal repayments of $0.875 million, all of which were paid by the first half of 2020. We are also required to make annual prepayments of outstanding obligations under the Credit Facility we(applied first to the Term Loans, then to the Revolver, in the manner set forth in the Credit Facility) ranging from 0% — 50% (based on a defined leverage ratio) of specified excess cash flow (ECF) for the prior fiscal year. A mandatory prepayment of $107.0 million (ECF Amount) was required and paid during the first half of 2020 based on this provision. No prepayments based on ECF were party to a credit facility (Prior Facility) that consistedrequired in 2021 or 2022, or will be required in 2023. In addition, prepayments of a $300.0 million revolver (Prior Revolver) and a $250.0 million term loan (Prior Term Loan). The Prior Facility is describedoutstanding obligations under the "Capital Resources" sectionCredit Facility (applied as described above) may also be required in the amount of our Annual Reportspecified net cash proceeds received above a specified annual threshold (including proceeds from the disposal of certain assets). No Credit Facility prepayments based on Form 20-F fornet cash proceeds were required in 2020, 2021 or 2022, or will be required in 2023. Any outstanding amounts under the year ended December 31, 2018.Revolver are due at maturity.
In 2022, we made the scheduled principal repayments of $4.5625 million each quarter under the Incremental Term Loan, and voluntarily prepaid $15.0 million under the Initial Term Loan in Q4 2022. In addition, we made Intra-Quarter Borrowings/Repayments during 2022 ranging from $228 million to $359 million.
During Q1 2019, we borrowed $48.0 million under the Revolver, primarily to fund share repurchases, and later during that quarter, repaid $110.0 million of the outstanding amount under the Revolver, using the Toronto Proceeds. During the second and third quarters of 2019,2021, we repaid an aggregate of $97.0 million (representing the remainder) of the amount outstanding under the Revolver. During 2019, we made aggregate scheduled principal repayments of $6.0$30.0 million under the Terminated Term Loans.
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During Q1 2020, we made the scheduled quarterly principal repayment of $0.875 million under the Initial Term Loan, and also prepaid an aggregate of $60.0 million under the Terminated Term Loan. On April 27, 2020, we prepaid $47.0 million under the Initial Term Loan. These two prepayments were first applied to all remaining scheduled quarterly principal repayments of $1.7the Initial Term Loan and Terminated Term Loan prior to maturity, as applicable, and thereafter to remaining applicable principal amounts outstanding thereunder. These prepayments also represented payment in full of the ECF Amount. In June 2020, we prepaid an additional $1.5 million under the Initial Term Loan and $12.5 million under the PriorTerminated Term Loan.
| Revolver* | Term loans | ||||||||||
| Outstanding balances as of December 31, 2019 | $ | — | $ | 592.3 | |||||||
| Amount repaid in Q1 2020 | — | (60.9) | |||||||||
| Amount repaid in Q2 2020 | — | (61.0) | |||||||||
| Outstanding balances as of December 31, 2020 | $ | — | $ | 470.4 | |||||||
| Amount repaid in Q1 2021 | — | (30.0) | |||||||||
| Amount borrowed in Q4 2021 | 220.0 | 365.0 | |||||||||
| Amount repaid in Q4 2021 | (220.0) | (145.0) | |||||||||
| Outstanding balances as of December 31, 2021 | $ | — | $ | 660.4 | |||||||
| Amount repaid in Q1 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q2 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q3 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q4 2022 | — | (19.5625) | |||||||||
| Outstanding balances as of December 31, 2022 | $ | — | $ | 627.2 | |||||||
*In addition to borrowings for the acquisition of PCI, we made Intra-Quarter Borrowings/Repayments during certain quarters of 2020, 2021 and 2022 (as described above). Intra-Quarter Borrowings/Repayments other than those related amortization costs),to the acquisition of PCI, are offset against each other, and are excluded from this table.
Interest expense under the Credit Facility, including the impact of our interest rate swap agreements (described below), was $38.3 million in 2022 (2021 — $20.7 million; 2020 — $26.0 million). We paid higher interest under our A/R sales programCredit Facility in 2022 compared to the prior two years, as a result of higher intra-quarter borrowings under the Revolver to address short-term working capital needs, higher average Term Loan borrowings due to increased borrowings in Q4 2021 to fund a portion of the PCI acquisition price, and SFPs,increased interest rates. Any further increase in prevailing interest rates, margins, or amounts borrowed, would cause this amount to increase. Under the Credit Facility, we are required to pay a commitment fee on the unused portion of the Revolver, which is calculated based on a defined consolidated leverage ratio and commencingthe daily balance outstanding. Commitment fees paid during 2022 were $1.4 million (2021 — $1.8 million; 2020 — $1.9 million). We incurred debt issuance costs of $0.6 million in Q1 2019, interest expense2022 (2021 — $4.0 million; 2020 — $0.3 million) in connection with security arrangements under, and/or the amendment of, the Credit Facility. Debt issuance costs are deferred on our lease obligations under IFRS 16, netconsolidated balance sheet and amortized to Finance Costs. In December 2021, we accelerated the amortization of interest income earned. Finance Costs do not include the $2.0$2.6 million of Waiver Fees,unamortized deferred financing costs upon termination of the Terminated Term Loan, which we recorded in other charges in Q4 2019 (seecharges. See "Operating Results" above). During 2019, we paidResults — Finance Costs" above for a description of Finance Costs of $44.5 million (2018 — $36.0 million; 2017 — $10.2 million) including debt issuance costs paid of $2.9 million (2018 — $12.9 million; 2017 — nil) in connection with2022, 2021 and 2020.
Interest rates for outstanding borrowings under the Credit Facility (upon execution and subsequent security arrangements). The increaseas of December 31, 2022, are described under "Capital Resources" below.
Lease payments:
During 2022, we paid $46.0 million (2021 — $40.0 million; 2020 — $33.7 million) in Finance Costs from 2018 to 2019 was primarily due to higher interest expense under our Credit Facility resulting from higher average borrowings throughout 2019lease payments. Lease payments in 2020 were lower compared to 2018,2022 and higher interest rates particularly in the first half of 2019 compared to 2018. Finance Costs increased in 2018 as compared to 20172021 primarily as a result of higher interest expense due to increased borrowings to fund our 2018 acquisitions, higher fees associated with the increased saletenant improvement allowances of A/R$4.2 million received in 2018 as compared to 2017, and higher interest costs in 2018 as compared to 2017 due to rising interest rates (as a result of increases in LIBOR). (see "Cash Requirements" below).
Cash requirements:
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of inventory for new programs and anticipated customer demand, timing of payments and A/R collections, and customer forecasting variations. The international scope of our operations may also create working capital requirements in certain countries while other countries generate cash in excess of working capital needs. Moving cash between countries on a short-term basis to fund working capital is not always expedient due to local currency regulations, tax considerations, and other factors. To meet our working capital requirements and to provide short-term liquidity, we maytypically draw on the Revolver (including through Intra-Quarter Borrowings/Repayments), sell A/R through our A/R sales program, orand participate in thecustomer SFPs, while available.when permitted. The timing and the amounts we borrow or repay under these facilities can vary significantly from month-to-month depending upon our cash requirements. As at December 31, 2019, other than ordinary course lettersDue to higher working capital requirements in 2022 resulting from the growth of credit, no amounts were outstanding underour business, as well as the Revolver (December 31, 2018 — $159.0 million outstanding under the Revolver; December 31, 2017 — no amounts outstanding under the Prior Revolver). At December 31, 2019, $90.6 million (December 31, 2018 — $130.0 million; December 31, 2017 — $80.0 million) ofhigher inventory levels we maintained to secure supply given global supply chain constraints and longer lead times for certain components, we increased Intra-Quarter Borrowings/Repayments and A/R were sold undersales through our A/R sales program and $50.4customer SFPs compared to prior years. Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we continue to believe that our current and projected sources of liquidity will be sufficient to fund our anticipated liquidity needs for the next twelve months and beyond. Specifically, we continue to believe that cash flow from operating activities, together with cash on hand, availability under the Revolver ($582.0 million at December 31, 2022), potential availability under uncommitted intraday and overnight bank overdraft facilities, and cash from accepted sales of A/R, were sold under the SFPs, consisting of $18.3 million under the SFP with the CCS segment customerwill be sufficient to fund our anticipated working capital needs, planned capital spending, and $32.1 million under the SFP with the ATS segment customer (December 31, 2018 — $50.0 million sold under the SFP with the CCS segment customer; December 31, 2017 — $52.3 million sold under the SFP with the CCS customer), in each case as a cost-effective alternative to drawing additional amounts on our Revolver to meet our ordinary courseother cash requirements (including any required SBC share repurchases, debt repayments and to offset the effect of extended payment terms for particular customers on our working capital.interest expense). See "Capital Resources" below. Notwithstanding the foregoing, although we anticipate that we will be able to repay or refinance outstanding obligations under our Credit Facility when they mature (our primary current long-term cash liquidity requirement), there can be no assurance we will be able to do so, or that the terms of any such refinancing will be favorable. In addition, we may require additional capital in the future to fund capital expenditures, acquisitions (including contingent consideration payments), strategic transactions or other investments. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our objectives, operating performance, economic and capital market conditions and other relevant circumstances. Our operating performance may also be affected by matters discussed under the Risk Factors section of our 2022 Annual Report, of which this MD&A is a part. These risks and uncertainties may adversely affect our long-term liquidity.
Contractual Obligations:
As at December 31, 2022, we had known contractual obligations that require future payments as follows (in millions):
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||||||||
Borrowings under Credit Facility(i) | $ | 627.2 | $ | 18.25 | $ | 18.25 | $ | 298.7 | $ | 292.0 | $ | — | $ | — | |||||||||||||||||||||||||||
Lease obligations(ii) | 199.6 | 42.7 | 30.9 | 25.5 | 21.2 | 16.8 | 62.5 | ||||||||||||||||||||||||||||||||||
Pension plan contributions(iii) | 15.5 | 15.5 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Non-pension post-employment plan payments | 53.9 | 4.3 | 4.2 | 4.2 | 4.4 | 4.9 | 31.9 | ||||||||||||||||||||||||||||||||||
Binding purchase order obligations (iv) | 4,388.1 | 4,161.3 | 207.8 | 19.0 | — | — | — | ||||||||||||||||||||||||||||||||||
| Purchase obligations under IT support agreements | 103.1 | 25.3 | 20.6 | 15.6 | 12.2 | 11.4 | 18.0 | ||||||||||||||||||||||||||||||||||
Total(v) | $ | 5,387.4 | $ | 4,267.4 | $ | 281.8 | $ | 363.0 | $ | 329.8 | $ | 33.1 | $ | 112.4 | |||||||||||||||||||||||||||
(i) Represents annual amortization of the Incremental Term Loan, as well as principal repayment obligations at maturity (June 2025 for our borrowings under the Initial Term Loan and an assumed maturity date of December 2026 for the Incremental Term Loan), based on amounts outstanding as of December 31, 2022, but excludes related interest and fees. See "Liquidity — Cash provided by (used in) financing activities — Financing and Finance Costs" above for maturity dates, prepayment obligations, and annual interest and commitment fees paid under the Credit Facility in 2020 - 2022. See "Capital Resources" below and note 11 to our 2022 AFS for a description of the Credit Facility, including amounts outstanding thereunder, and applicable interest rates and margins. No mandatory principal prepayments of the Term Loans based on specified ECF or net cash proceeds will be required for 2023, but we are currently unable to determine whether any such prepayments will be required thereafter. Payment defaults under the Credit Facility will incur interest on unpaid amounts at an annual rate equal to the sum of (i) 2%, plus (ii) the rate per annum otherwise applicable to such unpaid amounts, or if no rate is specified or available, the rate per annum applicable to Base Rate revolving loans. If an event of default occurs and is continuing (and is not waived), the Administrative Agent may declare all amounts under the Credit Facility to be immediately due and payable, and may cancel the lenders' commitments to make further advances thereunder.
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(ii) Consists of lease payments associated with lease liabilities recognized on our consolidated balance sheet as of December 31, 2022, as well as lease payments under our lease of certain space in Richardson, Texas (Texas Lease) from April 2027 through March 2032 ($0.9 million in 2027 and $5.6 million thereafter). The Texas Lease was not recognized as a liability as of December 31, 2022 on our consolidated balance sheet because the lease has not yet commenced. In addition, in connection with the 2019 sale of our Toronto real property, we entered into a 10-year lease for our then-anticipated corporate headquarters to be built by the purchaser of such property on the site of our former location. Commencement of this lease was targeted to be in May 2023, but has been delayed due to construction issues. Upon commencement, the estimated annual basic rent for the space will be approximately $2.1 million Canadian dollars for each of the first five years, and approximately $2.2 million Canadian dollars for each of the remaining five years. These lease payments are excluded from the table above due to the uncertainty of the timing of the lease commencement date.
(iii) Based on our latest actuarial valuations, we estimate our funding requirement for 2023 to be $15.5 million (2022 — funding requirement of $14.5 million; 2021 — funding requirement of $15.4 million). See note 18 to our 2022 AFS. A significant deterioration in the asset values or asset returns could lead to higher than expected future contributions. Adjustments to actuarial valuation measurements may also result in higher future cash contributions. We fund our pension contributions from cash on hand. Although we have defined benefit plans that are currently in a net unfunded position, we do not expect our pension obligations will have a material adverse impact on our future results of operations, cash flows or liquidity.
(iv) Consists of anticipated payments for purchase obligations recognized on our consolidated balance sheet as of December 31, 2022 ($1,440.8 million recorded in A/P and $466.6 million recorded in accrued and other current liabilities, both included in the amount for 2023) and $2,480.7 million in outstanding purchase orders not recognized on our consolidated balance sheet as of December 31, 2022, as the related services or purchases were not rendered or received (as applicable) as of December 31, 2022. A substantial portion of these purchase orders are for standard inventory items which we have procured for specific customers based on their purchase orders or forecasts, under which such customers have contractually assumed liability for such material, if not consumed. In some cases, we have cash deposits from customers to help mitigate our exposure in connection with acquired inventory.
(v) This table excludes $51.7 million of long-term deferred income tax liabilities and $32.5 million of provisions and other non-current liabilities primarily pertaining to warranties and asset retirement obligations, as we are unable to reliably estimate the timing of any future payments related thereto. However, long-term liabilities included on our consolidated balance sheet include these items. In addition, at December 31, 2022, our interest rate swap agreements require us to pay a fixed rate of interest with respect to an aggregate of $330.0 million outstanding under the Term Loans. These payments, however, are partially offset by related interest we receive, based on the variable interest rates swapped. As the offsets are not determinable and vary from quarter to quarter, this table also excludes the interest payments on our interest rate swap agreements. Further, we have entered into the TRS Agreement with respect to a notional amount of 3.0 million SVS to manage our cash flow requirements and exposure to fluctuations in the price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. Under the TRS Agreement, the counterparty is obligated to make a payment to us upon its termination (in whole or in part) or expiration (Settlement) based on the increase (if any) in the value of the TRS (as defined in such agreement) over the agreement's term, in exchange for periodic payments made by us based on the counterparty's SVS purchase costs (or the trade date value of the notional amount if the counterparty elects not to make hedging SVS purchases) and a variable interest rate plus a specified margin. Similarly, if the value of the TRS decreases over the term of such agreement, we are obligated to pay the counterparty the amount of such decrease upon Settlement. As the interest payments will vary from period to period and the value of our SVS upon Settlement cannot be determined at this time, this table also excludes the interest and or other payments that may be payable by us with respect to the TRS Agreement.
Additional Commitments:
As at December 31, 2022, we had additional commitments that expire as follows (in millions):
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | |||||||||||||||||||||||||||||||||||
Foreign currency contracts and swaps(i) | $ | 684.7 | $ | 684.7 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||
Letters of credit, letters of guarantee and surety bonds(ii) | 41.8 | 14.5 | 4.7 | 0.1 | 18.0 | — | 4.5 | ||||||||||||||||||||||||||||||||||
Capital expenditures(iii) | 9.7 | 9.7 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 736.2 | $ | 708.9 | $ | 4.7 | $ | 0.1 | $ | 18.0 | $ | — | $ | 4.5 | |||||||||||||||||||||||||||
(i) Represents the aggregate notional amounts of our forward currency contracts and swaps.
(ii) Includes $18.0 million in letters of credit issued under our Revolver, with an assumed maturity of December 2026. See "Liquidity — Cash provided by (used in) financing activities — Financing and Finance Costs" above for maturity dates of obligations under the Credit Facility.
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(iii) As partat December 31, 2022, management had approved $52.5 million for capital expenditures, primarily for machinery and equipment to support new customer programs (approximately 40% which is committed for the Americas, approximately 50% of which is committed for Asia, and the remainder of which is committed for Europe). Of such approved amount, $9.7 million in purchase orders had been issued to third-party vendors as of December 31, 2022. Our capital spending varies each period based on, among other things, the timing of new business wins and forecasted sales levels. Based on our current plans, we anticipate capital spending for 2023 to be approximately 1.5% to 2.0% of revenue, and expect to fund these expenditures from cash on hand and through the financing agreements described below under "Capital Resources." Our intended 2023 capital spending includes expenditures to support growth in both of our strategic initiativessegments.
Cash outlays for our contractual obligations and commitments identified in the tables above are expected to scale be funded from cash on hand and diversify our ATS revenue basethrough the financing arrangements described below under "Capital Resources."
Financing Arrangements:
The Incremental Term Loan requires quarterly principal repayments of $4.5625 million, and expand our capabilitieseach of the Term Loans requires a lump sum repayment of the remainder outstanding at maturity. As described above, we are also required to make annual prepayments of outstanding obligations under the Credit Facility based on specified ECF and net cash proceeds. Although no such prepayments will be required in our ATS segment, we have increased our levels2023, such prepayments may be required in future years. Any outstanding amounts under the Revolver are due at maturity. See "Liquidity — Cash provided by (used in) financing activities — Financing and Finance Costs" above for annual interest expense and commitment fees under the Credit Facility, as well as a description of third-party indebtedness in orderIntra-Quarter Borrowings/Repayments. Interest rates applicable to fund acquisitions and working capital needs. However, weborrowings under the Credit Facility are described under "Capital Resources" below.
We do not believe that the aggregate amounts outstanding under our Credit Facility as at December 31, 2019 (described2022 ($627.2 million under "Capital Resources" below)the Term Loans, and $18.0 million in ordinary course letters of credit), had or the $107.0 million mandatory Term Loan prepayment requirement in 2020 (described below)will have had (or will have) a significantmaterial adverse impact on our liquidity, our results of operations or financial condition. At December 31, 2019, we had $428.8 million available undercondition (unless our Revolver for future borrowings, reflecting outstanding borrowings (none) and letters of credit (December 31, 2018 — $269.7 million available; December 31, 2017 — $276.8 million available). We believe that cash flow from operating activities (notwithstanding anticipated CCS segment revenue declines described in the "Overview" above), together with cash on hand, remaining availability under the Revolver, intra-day and overnight bank overdraft facilities, and cash from the sale of A/R, will continue to be sufficient to fund our currently anticipated working capital needs and planned capital spending (including the commitments described elsewhere herein)debt obligations mature without refinancing). In addition, since all Intra-Quarter Borrowings/Repayments are borrowed and repaid in the same period, we do not believe that such borrowings had (or that any such future borrowings will have) a material adverse impact on our liquidity, results of operations or financial condition. See "Capital Resources" below for a description of our available sources of liquidity.
However, our current level of leverage is acceptable for a company of our sizeoutstanding indebtedness, and that we will remain in compliance with restrictive and financial covenants under the Credit Facility.
At December 31, 2022, $245.6 million of A/R were sold under our current A/R sales program (December 31, 2021 — $45.8 million). We have increased, and may continue to increase (if deemed desirable), the amounts we offer to sell under, our A/R sales program to manage our short-term ordinary course cash requirements (which increased in 2022 compared to recent years as described above). In order to allow for such increased A/R sales, in September 2022, we amended our A/R sales program to increase the prior limit of $300.0 million to $405.0 million. In addition, to offset the impact of extended payment terms for particular customers on our working capital, we also participate in three customer SFPs, pursuant to which we sell A/R from such customers to third-party banks on an uncommitted basis to receive earlier payment. At December 31, 2022, an aggregate of $105.6 million of A/R were sold under the SFPs (December 31, 2021 — $98.0 million). See "Capital Resources" below for a discussiondescription of our A/R sales program and SFPs.
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TRS:
On December 15, 2022, we entered into the TRS Agreement with a third-party bank with respect to a notional amount of 3.0 million of our SVS (Notional Amount) to manage our cash flow requirements and exposure to fluctuations in the price of our SVS in connection with the settlement of certain covenant waivers obtainedoutstanding equity awards under our SBC plans. The counterparty under the TRS Agreement is obligated to make a payment to us upon its termination (in whole or in Q4 2019.
As at December 31, 2019,2022, a significant portion of our cash and cash equivalents was held by foreign subsidiaries outside of Canada, a large part of which may be subject to withholding taxes upon repatriation under current tax laws. Cash and cash equivalents held by subsidiaries, related to undistributed earnings that are considered indefinitely reinvested outside of Canada (whichwhich we do not intend to repatriate in the foreseeable future)future, are not subject to these withholding taxes. We repatriated approximately $253 million of cash in 2022 from various of our foreign subsidiaries, and remitted related previously-accrued withholding taxes (approximately $12 million). We currently expect to repatriate an aggregate of approximately $117$64 million of cash in the foreseeable future from various foreign subsidiaries, in the near term, and have recorded any anticipated futurerelated withholding taxes as deferred income tax liabilities.liabilities (approximately $6 million). While some of our subsidiaries are subject to local governmental restrictions on the flow of capital into and out of their jurisdictions (including in the form of cash dividends, loans or advances to us), which is required or desirable from time to time to meet our international working capital needs and other business objectives (as described above), these restrictions have not had (and are not reasonably likely to have) a material impact on our ability to meet our cash obligations. At December 31, 2019,2022, we had approximately $344$297 million (December 31, 20182021 — $355$250 million) of cash and cash equivalents held by foreign subsidiaries outside of Canada that we do not intend to repatriate in the foreseeable future.
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||||||||
Borrowings under Credit Facility(i) | $ | 592.3 | $ | 113.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 6.0 | $ | 455.3 | ||||||||||||||
| Lease obligations* | 134.9 | 34.1 | 27.4 | 22.1 | 17.1 | 11.2 | 23.0 | |||||||||||||||||||||
Pension plan contributions(ii) | 13.1 | 13.1 | — | — | — | — | — | |||||||||||||||||||||
| Non-pension post-employment plan payments | 44.3 | 4.4 | 2.9 | 3.3 | 4.0 | 3.7 | 26.0 | |||||||||||||||||||||
Binding purchase order obligations (iii) | 919.7 | 919.7 | — | — | — | — | — | |||||||||||||||||||||
Purchase obligations under IT support agreements | 134.8 | 24.4 | 18.6 | 14.9 | 14.5 | 12.6 | 49.8 | |||||||||||||||||||||
Total(iv) | $ | 1,839.1 | $ | 1,108.7 | $ | 54.9 | $ | 46.3 | $ | 41.6 | $ | 33.5 | $ | 554.1 | ||||||||||||||
| forecasted sales levels. See footnote (iii) |
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||||||||
Foreign currency contracts and swaps(i) | $ | 523.9 | $ | 523.9 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Letters of credit, letters of guarantee and surety bonds(ii) | 34.5 | 26.5 | 3.4 | — | — | — | 4.6 | |||||||||||||||||||||
Capital expenditures(iii) | 6.0 | 6.0 | — | — | — | — | — | |||||||||||||||||||||
| Total | $ | 564.4 | $ | 556.4 | $ | 3.4 | $ | — | $ | — | $ | — | $ | 4.6 | ||||||||||||||
We have funded and intend to continue to fund our shareSVS repurchases under our NCIBs from cash on hand, borrowings under our revolving facilities,the Revolver, or a combination thereof. See "Cash provided by (used in) financing activities" above.
Restructuring Provision:
Our restructuring provision as of February 21, 2023 is approximately $5 million. We expect to incur incremental restructuring charges in connection2023. We have funded and intend to continue to fund our restructuring provisions from cash on hand.
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Lease Obligations:
At December 31, 2022, we recognized a total of $162.4 million of lease obligations (December 31, 2021 — $138.6 million; December 31, 2020 — $122.7 million). Also see footnote (ii) to the "Contractual Obligations" table above. All lease obligations are expected to be funded with cash on hand and through the sale of certain businesses and real property. The maximum potential liability from these indemnifications cannot be reasonably estimated. In some cases, we have recourse against other parties to mitigate our risk of loss from these indemnifications. Historically, we have not made significant payments relating to these types of indemnifications.financing arrangements described below under "Capital Resources."
Litigation and contingencies:contingencies (including indemnities):
In the normal course of our operations, we may be subject to lawsuits, investigations and other claims, including environmental, labor, product, customer disputes, and other matters. Management believes that adequate provisions have been recorded where required. Although it is not always possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of all such pending matters will not have a material adverse impact on our financial performance, financial position or liquidity. See "Operating Results — Income Taxes" above for a description of a Brazilian salesan ongoing Romanian income and value-added tax matter.
We provide routine indemnifications, the terms of which range in duration and scope, and often are not explicitly defined, including for third-party intellectual property infringement, certain negligence claims, and for our directors and officers. We have also provided indemnifications in connection with the sale of certain assets. The maximum potential liability from these indemnifications cannot be reasonably estimated. In some cases, we have recourse against other parties or insurance to mitigate our risk of loss from these indemnifications. Historically, we have not made significant payments relating to these types of indemnifications.
Capital Resources
Our capital resources consist of cash provided by operating activities, access to the Revolver, uncommitted intraday and overnight bank overdraft facilities, an uncommitted A/R sales program, (our previous A/R sales program terminated January 15, 2020, and was replaced with a new A/R sales program effective March 2020, as described below), thethree uncommitted SFPs, and our ability to issue debt or equity securities. We regularly review our borrowing capacity and make adjustments, as permitted, for changes in economic conditions and changes in our requirements. We centrally manage our funding and treasury activities in accordance with corporate policies, and our main objectives are to ensure appropriate levels of liquidity, to have funds available for working capital or other investments that we determine are required to grow our business, to comply with debt covenants, to maintain adequate levels of insurance, and to balance our exposures to market risks.
At December 31, 2019,2022, we had cash and cash equivalents of $479.5$374.5 million (December 31, 20182021 — $422.0$394.0 million), of which approximately 93% was cash and 7% was cash equivalents, consisting of bank deposits. Thethe majority of our cash and cash equivalentswhich was denominated in U.S. dollars, and the remainder was held primarily in Chinese renminbi and the Euro.dollars. We also held cash and cash equivalents in the following currencies: BritishBritish pound sterling, Brazilian real, Canadian dollar, Chinese renminbi, Czech koruna, Euro, Hong Kong dollar, Indian rupee, Indonesian rupiah, Japanese yen, Korean won, Lao kip, Malaysian ringgit, Mexican peso, PhilippinesPhilippine peso, Romanian leu, Singapore dollar, Taiwan dollar, and Thai baht. Our cash and cash equivalents are subject to intra-quarterintra-quarter swings, generally related to the timing of A/R collections, inventory purchases and payments, and other capital uses.
The Credit Facility has an accordion feature that allows us to increase the term loans and/or revolving loan commitments thereunder by approximately $110$150.0 million, plus an unlimited amount to the extent that a specified leverage ratio on a pro forma basis does not exceed specified limits, in each case on an uncommitted basis and subject to the satisfaction of certain
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terms and conditions. The Revolver also includes a $50.0 million sub-limit for swing line loans, providing for short-term borrowings up to a maximum of ten business days, as well as a $150.0 million sub-limit for letters of credit, in each case subject to the overall Revolver credit limit. The Revolver permits us and certain designated subsidiaries to borrow funds (subject to specified conditions) for general corporate purposes, including for capital expenditures, certain acquisitions, and working capital needs.
Borrowings under the Revolver bear interest, depending on the currency of the borrowing and our election for such currency, at LIBOR, Base Rate, Canadian Prime, an Alternative Currency Daily Rate, or Basean Alternative Currency Term Rate (each as defined in the Credit Facility) plus a specified margin. The margin orfor borrowings under the Revolver and the Incremental Term Loan ranges from 1.50% — 2.25% for LIBOR borrowings and Alternative Currency borrowings, and between 0.50% — 1.25% for Base Rate and Canadian Prime borrowings, in each case depending on the case of any bankers' acceptance, at the B/A Discount Raterate we select and our consolidated leverage ratio (as defined in the Credit Facility). The margin for borrowings under the Revolver ranges from 0.75% to 2.5%,Commitment fees range between 0.30% and 0.45% depending on the rate we select and our consolidated leverage ratio. The Initial Term Loan currently bears interest at LIBOR plus 2.125%. The Incremental Term Loan currently bears interest at LIBOR plus 2.5%2.0%. The Credit Facility provides that whenSee "Financial instruments and financial risks" below for a description of the Administrative Agent, the majority of lenders or the Company determines that LIBOR is unavailable or being replaced, the Administrative Agent and the Company may amend the underlying credit agreement to reflect a successor rate. Once LIBOR becomes unavailable, if no successor rate has been established, loansprovisions under the Credit Facility. Prior to the amendments to our Credit Facility will convertin December 2021, the margin for borrowings under the Revolver ranged from 0.75% to Base Rate loans.2.5%, commitment fees ranged between 0.35% and 0.50%, in each case depending on the rate we selected and our consolidated leverage ratio, the Initial Term Loan bore interest at LIBOR plus 2.125%, and the Terminated Term Loan bore interest at LIBOR plus 2.5%.
At December 31, 2022, the interest rate risk related to $297.2 million of the original swap agreements, starting in August 2021 for the Initial Term Loan and December 2020 for the Incremental Term Loan. These options to cancel are aligned with our risk management strategy for our Term Loans as they allow us to make voluntary prepayments of outstanding amounts without premium or penalty, subject to certain conditions. Our unhedged borrowings under the Credit Facility at Decemberwas unhedged (December 31, 2019 are $242.3 million,2021 — $460.4 million), consisting in each case of unhedged amounts outstanding under the Term Loans (noLoans. Other than ordinary course L/Cs, no amounts were outstanding under the Revolver as at December 31, 2019).2022 or December 31, 2021. A one-percentage point increase in relevant interest rates would increase interest expense, based on outstanding borrowings under the outstanding unhedged borrowingsCredit Facility at December 31, 2019,2022, and including the impact of our interest rate swap agreements, by $2.4$3.0 million annually. See note 21(b)20(b) to our 20192022 AFS for further information regarding our interest rate swap agreements.
We are required to comply with certain restrictive covenants under the Credit Facility, including those relating to the incurrence of certain indebtedness, the existence of certain liens, the sale of certain assets, (excluding real property then-held for sale), specified investments and payments, sale and leaseback transactions, and certain financial covenants relating to a defined interest coverage ratio and leverage ratio that are tested on a quarterly basis. At December 31, 2022, we were in compliance with all restrictive and financial covenants under the Credit Facility. Our Credit Facility also prohibits share repurchases for cancellation if our leverage ratio (as defined in such facility) exceeds a specified amount (Repurchase Restriction). At December 31, 2019, we were in compliance with all restrictive and financial covenants under the Credit Facility. As previously disclosed, we had been in non-compliance with certain restrictive covenants related to the Repurchase Restriction with respect to approximately $17.0 million in excess purchases made in May 2019 under our NCIB. These defaults, as well as related cross defaults, were waived in October 2019. The Repurchase Restriction is not currently in effect.effect, nor was it in effect during 2020 to 2022. The obligations under the Credit Facility are guaranteed by us and certain specified subsidiaries. Subject to specified exemptions and limitations, all assets of the guarantors are pledged as security for the obligations under the Credit Facility. The Credit Facility contains customary events of default. If an event of default occurs and is continuing (and is not waived), the administrative agentAdministrative Agent may declare all amounts outstanding under the Credit Facility to be immediately due and payable and may cancel the lenders’lenders' commitments to make further advances thereunder. In the event of a payment or other specified defaults, outstanding obligations accrue interest at a specified default rate.
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At December 31, 2019,2022, we had $21.2$18.0 million outstanding in letters of credit under the Revolver (December 31, 20182021 — $21.3$21.0 million). We also arrange letters of credit and surety bonds outside of the Revolver. At December 31, 2019,2022, we had $13.3$23.8 million of such letters of credit and surety bonds outstanding (December 31, 20182021 — $14.4$27.1 million).
At December 31, 2019,2022, we also had a total of $142.5$198.5 million in uncommitted bank overdraft facilities available for intraday and overnight operating requirements (December 31, 20182021 — $132.8$198.5 million). There were no amounts outstanding under these overdraft facilities at December 31, 20192022 or December 31, 2018.2021.
The timing and the amounts we borrow and repay under our revolving creditRevolver (including Intra-Quarter Borrowings/Repayments) and overdraft facilities, or sell under the SFPs or our A/R sales program, can vary significantly from month-to-month depending uponon our working capital and other cash requirements.See "Operating Results — Finance Costs" and "Liquidity — Cash requirements" above.
Our strategy on capital risk management has not changed significantly since the end of 2018.2021. Other than the restrictive and financial covenants associated with our Credit Facility noted above, we are not subject to any contractual or regulatory capital requirements. While some of our international operations are subject to government restrictions on the flow of capital into and out of their jurisdictions, these restrictions have not had a material impact on our operations or cash flows.
Financial instruments:
We are exposed to a variety of risks associated with financial instruments and otherwise.
Currency risk: Due to the global nature of our operations, we are exposed to exchange rate fluctuations on our financial instruments denominated in various currencies. Although the majority of our cash balances, pricing to customers, and materials costs are denominated in U.S. dollars, a significant portion of our non-materials costs (including payroll, pensions, site costs, costs of locally sourced supplies and inventory, and income taxes) are denominated in various other currencies. As a result, we may experience foreign exchange gains or losses on translation or transactions due to currency fluctuations. The majority of our currency risk is driven by operationalsuch costs, including income tax expense, incurred in local currencies by our subsidiaries. As part of our risk management program, we attempt to mitigate currency risk through a hedging program using forecasts of our anticipated future cash flows and balance sheet exposuresmonetary assets and monetary liabilities denominated in foreign currencies. We enter into foreign exchangecurrency forward contracts to hedge our cash flow exposures and swaps to hedge our exposures of monetary assets and monetary liabilities (Economic Hedges), generally for periods of up to 12 months, to lock in the exchange rates for future foreign currency transactions, which is intended to reduce the variability offoreign currency risk related to our operating costs and future cash flows denominated in local currencies. WhileEconomic Hedges are based on our forecasts of the future position of anticipated monetary assets and monetary liabilities denominated in foreign currencies, and therefore may not mitigate the full impact of any translation impacts in the future. As for our cash flow hedges, while these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates on our operating costs and cash flows, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates. Although our functional currency is the U.S. dollar, currency risk on our income tax expense arises as we are generally required to file our tax returns in the local currency for each particular country in which we have operations. While our hedging program is designed to mitigate currency risk vis-à-vis the U.S. dollar, we remain subject to taxable foreign exchange impacts in our translated local currency financial results relevant for tax reporting purposes. We do not use derivative financial instruments for speculative purposes.
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See note 20 to our 2022 AFS for a listing of our foreign currency forwards and swaps to trade U.S. dollars in exchange for specified currencies at December 31, 2022. The fair value of the outstanding contracts at December 31, 2022 was a net unrealized gain of $5.2 million (December 31, 2021 — net unrealized gain of $1.2 million), resulting from fluctuations in foreign exchange rates between the contract execution and the period-end date. There can be no assurance that our hedging transactions will be successful in mitigating our foreign exchange risk.
We cannot predict changes in currency exchange rates, the impact of exchange rate changes on our operating results, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Such changes including ascould have a result of Brexit or other global events impacting currency exchange rates could materially adversely affectmaterial effect on our business, results of operations and financial condition.
Interest rate risk: Borrowings under the Credit Facility bear interest at specified rates, plus specified margins (as described(described above). We have entered into 5-year interest rate swap agreements with a syndicate of third-party banks in each of August and December 2018 to partially hedge against our exposures to interest rate variability on our Term Loans. The derivative instruments swap the variable interest rates with fixed rates of interest on an aggregate of $350.0 millionwith respect to a portion of the total borrowingsamounts outstanding under the Term Loans. The swap agreements include options that allows us to cancel up to $75.0Loans (described above). Unhedged borrowings ($297.2 million of the notional amount of each swap agreement, starting in August 2021 with respect to the Initial Term Loan and December 2020 with respect to the Incremental Term Loan.
On December 15 2022, we entered into the TRS Agreement. See "Liquidity — Cash requirements — TRS" above for a description of the TRS Agreement. Interest payments under the TRS Agreement are based on a variable interest rate (secured overnight financing rate (SOFR)). The TRS Agreement had a de minimis impact on our consolidated financial statements for 2022. Also see "Equity price risk" below and note 20 to the 2022 AFS.
Global reform of major interest rate benchmarks is currently underway, including the anticipated replacement of some Interbank Offered Rates (including LIBOR) with alternative nearly risk-free rates. We have obligations under our Credit Facility and certain derivative instruments, that are indexed to LIBOR (LIBOR Agreements). The interest rates under these agreements are subject to change when relevant LIBOR benchmark rates cease to exist. There remains uncertainty over the timing and methods of transition to such alternate rates. The Credit Facility has not yet been amended to reflect a successor rate, and our interest rate swap agreements have not yet been amended and/or transitioned to a successor rate. Remaining LIBOR settings are expected to cease after June 30, 2023. However, it remains uncertain what replacement rates will be used. See note 20 to our 2022 AFS for a discussion of the status of LIBOR successor provisions under our various LIBOR Agreements, and potential related hedge ineffectiveness under our interest rate swap agreements.
While we expect that reasonable alternatives to LIBOR benchmarks will be implemented in advance of their cessation date, we cannot assure that this will be the case. If relevant LIBOR benchmarks are no longer available and the alternative reference rate is higher, interest rates under the affected LIBOR Agreements would increase, which would adversely impact our interest expense, our financial performance and cash flows. We will continue to monitor developments with respect to the cessation of LIBOR, and will evaluate potential impacts on our LIBOR Agreements, processes, systems, risk management methodology and valuations, financial reporting, taxes, and financial results. However, we are currently unable to predict what the future replacement rates or consequences on our operations or financial results will be.
Equity price risk:See "Liquidity — Cash requirements — TRS" above for a description of the TRS Agreement. If the value of the TRS (as defined in the TRS Agreement) decreases over the term of the TRS Agreement, we are obligated to pay the counterparty the amount of such decrease upon Settlement. As a result, the TRS Agreement is subject to equity price risk. At December 31, 2022, the counterparty to the TRS had acquired 400,205 SVS at a weighted average price of $10.97. The TRS had a de minimis impact on our consolidated financial statements for 2022.
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Credit risk: Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our credit risk of counterparty non-performance iscontinues to be relatively low, however,low. We are in regular contact with our customers, suppliers and logistics providers, and have not experienced significant counterparty credit-related non-performance during 2022 or to date. However, if a key supplier (or any company within such supplier's supply chain) or customer experiences financial difficulties or fails to comply with their contractual obligations, this could result in a significant financial loss to us. IfWe would also suffer a significant financial loss if an institution from which we purchased foreign currency exchange contracts or swaps, interest rate swaps, or annuities for our pension plans, or which is a counterparty to our TRS Agreement, defaults on their contractual obligations, this would result in a financial loss to us, as we retain ultimate responsibility for the payment of benefits to plan participants unless and until such pension plans are wound-up.obligations. With respect to our financial market
activities, we have adopted a policy of dealing only with credit-worthy counterparties we deem to be creditworthy to help mitigate the risk of financial loss from defaults. We monitor the credit risk of the counterparties with whom we conduct business, through a combined process of credit rating reviews and portfolio reviews.
We also provide unsecured credit to our customers in the normal course of business. Customer exposures that potentially subject us to credit risk include our A/R, inventory on hand, and non-cancellable purchase orders in support of customer demand. From time to time, we extend the payment terms applicable to certain customers, and/or provide longer payment terms when deemed commercially reasonable. Longer payment terms which have become more prevalent, could adversely impact our working capital requirements, and increase our financial exposure and credit risk. We attempt to mitigate customer credit risk by monitoring our customers’customers' financial condition and performing ongoing credit evaluations as appropriate. In certain instances, we obtain letters of credit or other forms of security from our customers. We may also purchase credit insurance from a financial institution to reduce our credit exposure to certain customers. We consider credit risk in determining our allowance for doubtful accounts, and we believe that such allowance, as adjusted from time to time, is adequate. The carrying amount of financial assets recorded in our consolidated financial statements, net ofNo significant adjustments were made to our allowance for doubtful accounts representsduring 2022 in connection with our estimate of maximum exposure to credit risk.on-going assessments and monitoring initiatives. At December 31, 2019, less than 2%2022, approximately 1% of our gross A/R arewere over 90 days past due (2018(December 31, 2021 — approximately 1%less than 2%). A/R are net of an allowance for doubtful accounts of $4.2$7.9 million at December 31, 20192022 (December 31, 20182021 — $5.3$5.7 million).
Liquidity risk: Liquidity risk is the risk that we may not have cash available to satisfy our financial obligations as they come due. The majority of our financial liabilities recorded in accounts payable, accrued and other current liabilities and provisions are due within 90 days. We manage liquidity risk by maintaining a portfolio of liquid funds and investments and having access to a revolving credit facility, uncommitted intraday and overnight bank overdraft facilities, an A/R sales program and ourthree customer SFPs. Since our A/R sales program and thecustomer SFPs are each on an uncommitted, basis, there can be no assurance that any participant bank will purchase allany of the A/R that we wish to sell thereunder. However, wesell. We believe, however, that cash flow from operating activities, together with cash on hand, cash from the saleaccepted sales of A/R, and borrowings available under the Revolver and potentially available under uncommitted intraday and overnight bank overdraft facilities are sufficient to fund our currently anticipated financial obligations.obligations, and will remain available in the current environment. See "Cash requirements" above.
Commodity price risk:We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products. These components are impacted by global pricing pressures, general economic conditions, market conditions, geopolitical issues, weather, changes in tariff rates, and other factors which are neither predictable nor within our control. While generally we have been able to offset inflation and other changes in the costs of key operating resources through price increases, productivity improvements, greater economies of scale, supplier negotiations and global sourcing initiatives, there can be no assurance that we will be able to continue to do so in the future. We do not engage in hedging activities for commodity price risk. Competitive conditions may limit our pricing flexibility, and macroeconomic conditions may make additional price increases imprudent. Increases in commodity prices that we cannot recover from our customers would adversely impact our operating results. We are also exposed to fluctuations in transportation costs, which have increased based on freight carrier capacity and fuel prices. We manage transportation costs by optimizing logistics and supply chain planning. We continue to invest in supply chain initiatives to address industry-wide capacity challenges.
See note 2120 to our 2019the 2022 AFS in Item 18 for further details.detail.
Related Party Transactions
Onex Corporation (Onex) beneficially owns, controls, or directs, directly or indirectly, all of our outstanding multiple voting shares (MVS). Accordingly, Onex has the ability to exercise significant influence over our business and affairs and generally has the power to determine all matters submitted to a vote of our shareholders where the SVS and MVS vote together as a single class. Mr. Gerald Schwartz, the Chairman of the Board President and Chief Executive Officer of Onex, indirectly owns shares representing the majority of the voting rights of the shares of Onex.
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Onex has entered into an agreement with Celestica and with Computershare Trust Company of Canada (as successor to the Montreal Trust Company of Canada), as trustee for the benefit of the holders of the SVS, for the purpose of ensuringto ensure that thesuch holders of SVS will not be deprived of any rights under applicable take-over bid legislation to which they would be otherwise entitled in the event of a take-over bid (as that term is defined in such legislation) under circumstances in which any applicable securities legislation)legislation would have required the same offer or a follow-up offer to be made to holders of SVS if the sale had been a sale of SVS rather than MVS, and SVS were of a single class of shares.but otherwise on the same terms. Subject to certain permitted forms of sale, such as identical or better offers to all holders of SVS, Onex has agreed that it, and any of its affiliates that may hold MVS from time to time, will not sell any MVS, directly or indirectly, pursuant to such a take-over bid (as that term is defined under applicable securities legislation) under circumstances in which any applicable securities legislation would have required the same offer or a follow-up offer to be made to holders of SVS if the sale had been a sale of SVS rather than MVS, but otherwise on the same terms. bid.
We are party to a Services Agreement with Onex for the services of Mr. Tawfiq Popatia, an officer of Onex, as a director of Celestica, pursuant to which Onex receives an annual fee of $235,000, payable in DSUs in equal quarterly installments in arrears, as compensation for such services. This agreementThe Services Agreement automatically renews for successive one-year terms unless either party provides a notice of intent not to renew. Under such agreement, the annual fee payable to Onex is $235,000, payable in DSUs in equal quarterly installments in arrears. The Services Agreement terminates automatically and the rights of Onex to receive compensation (other than accrued and unpaid compensation) will terminate (a) 30 days after the first day on which Onex ceases to hold at least one MVS of Celestica or any successor company or (b) the date Mr. Popatia ceases to be a director of Celestica for any reason.
Outstanding Share Data
As of February 19, 2020,21, 2023, we had 110,451,453102,884,648 outstanding SVS and 18,600,193 outstanding MVS. As of such date, we also had 345,577 outstanding393,472 outstanding stock options, 5,028,2474,236,472 outstanding RSUs, 4,887,256 4,919,556outstanding PSUs assuming vesting of 100% of the target amount granted (PSUs that will vest range from 0% to 200% of the target amount granted), and 1,841,7372,075,811 outstanding DSUs; each vested option or unit entitling the holder thereof to receive one SVS (or in certain cases, cash) pursuant to the terms thereof, subject to certain time or performance-based vesting conditions.
Controls and Procedures
Evaluation of disclosure controls and procedures:
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Exchange Act) designed to ensure that information we are required to disclose in the reports that we file or submit under the U.S. Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the U.S. Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Management, under the supervision of and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2019.2022. Based on that evaluation, our principal executive officer and principal financial officer have concluded that, as of December 31, 2019,2022, our disclosure controls and procedures are effective to meet the requirements of Rules 13a-15(e) and 15d-15(e) under the U.S. Exchange Act.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Due to inherent limitations in all such systems, no evaluation of controls can provide absolute assurance that all control issues within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.
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Changes in internal control over financial reporting:
We did not identify any change in our internal control over financial reporting in connection with our evaluation thereof that occurred during the year ended December 31, 20192022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
During 2019,2022, we completed the integration of the processes and controls relating to ImpaktPCI (acquired in November 2018)2021) into our existing system of internal control over financial reporting. This integration did not result in any change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Reference is made to our Management’sManagement's Report on Internal Control over Financial Reporting on page F-1 of our 2022 Annual Report, on Form 20-F for the year ended December 31, 2019.of which this MD&A is a part. Our auditors, KPMG LLP, an independent registered public accounting firm, have issued an audit report on our internal control over financial reporting as of December 31, 2019,2022, which appears on page F-2 of such 2022 Annual Report.
Unaudited Quarterly Financial Highlights
Q4 2022 compared to Q4 2021:
Revenue of $2.04 billion for Q4 2022 increased $530.5 million, or 35% compared to Q4 2021, due to growth in both our segments. ATS segment revenue increased $188.7 million (30%) in Q4 2022 compared to Q4 2021, driven by the strong performance of our Industrial and A&D businesses, supported by solid demand, new program ramps and improved materials availability. Compared to Q4 2021, CCS segment revenue in Q4 2022 increased $341.8 million (39%), primarily due to strong performance in both our Communications and Enterprise end markets. Our Communications end market revenue increased $202.5 million (34%) in Q4 2022 as compared to the prior year period, driven by strong performance in our HPS business and improved materials availability. HPS revenue for Q4 2022 was approximately $491 million (24% of total Q4 2022 revenue), and increased 40% from Q4 2021. The growth in HPS was driven by market share gains and strong demand from service providers as they continue to make significant investments in expanding data center capacity. Our Enterprise end market revenue increased $139.3 million (49%) in Q4 2022 compared to the prior year period, driven by increased customer demand and new program ramps. Gross profit increased $44.1 million in Q4 2022 compared to Q4 2021 due to higher revenue in Q4 2022 compared to Q4 2021, partially offset by $12.1 million in higher inventory write-downs in Q4 2022 compared to Q4 2021 (resulting from reduced demand for certain aged inventory). Gross margin for Q4 2022 decreased to 9.1% compared to 9.4% for Q4 2021 due to higher variable compensation and the higher inventory write-downs. CCS segment income for Q4 2022 increased to $71.6 million from $38.9 million in Q4 2021 due to higher CCS segment revenue in Q4 2022 compared to Q4 2021. CCS segment margin for Q4 2022 increased to 5.9% of segment revenue compared to 4.4% for Q4 2021, as a result of higher operational productivity driven by improved materials flow and volume leverage and improved mix driven by growth in our HPS business. ATS segment income for Q4 2022 increased to $36.2 million from $35.4 million in Q4 2021 primarily as a result of the increase of ATS segment revenue, offset in part by upfront investments associated with new program ramps, as well as the effect of $7.1 million in higher inventory write-downs in Q4 2022 compared to Q4 2021. ATS segment margin decreased from 5.6% of segment revenue for Q4 2021 to 4.4% for Q4 2022, driven by demand shifts in our Capital Equipment business, as well as the impact of the offsets to the ATS segment income increase described above. Net earnings increased to $42.4 million for Q4 2022 compared to net earnings of $31.9 million in Q4 2021, due primarily to the $44.1 million of higher gross profit in Q4 2022, offset in part by $11.6 million in higher SG&A expense, $11.0 million in higher Finance Costs and $10.2 million in higher income tax expense in Q4 2022 as compared to Q4 2021.
Q4 2022 compared to Q3 2022:
Revenue for Q4 2022 increased $119.3 million, or 6% compared to Q3 2022. ATS segment revenue increased $56.0 million (7%) sequentially, driven by recovery from the Batam Fire and increased demand. CCS segment revenue increased $63.3 million (5%) sequentially. Communications end market revenue decreased $17.2 million (2%) in Q4 2022 compared to Q3 2022, driven by a 5% sequential decrease in HPS revenue due to a reduction in demand, partially offset by improved materials availability. Enterprise end market revenue increased $80.5 million (23%) sequentially, due to improved materials availability and seasonality. Gross profit increased $18.5 million in Q4 2022 as compared to Q3 2022, primarily as a result of higher revenue in Q4 2022. Gross margin increased to 9.1% in Q4 2022 compared to 8.7% in Q3 2022, driven by higher
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volumes and improved performance in our ATS segment due to the recovery from the Batam Fire. CCS segment income increased sequentially by $11.4 million to $71.6 million for Q4 2022 due to higher CCS segment revenue in Q4 2022. CCS segment margin for Q4 2022 increased to 5.9% of segment revenue compared to 5.2% for Q3 2022, primarily due to volume leverage and improved operational productivity. ATS segment income decreased sequentially by $1.8 million to $36.2 million in Q4 2022, and ATS segment margin decreased from 5.0% in Q3 2022 to 4.4% for Q4 2022, in each case primarily due to higher inventory provisions, resulting from reduced demand for certain aged inventory. Net earnings of $42.4 million for Q4 2022 decreased $3.3 million from Q3 2022 net earnings of $45.7 million, due primarily to the $11.0 million in higher SG&A expense, $2.9 million in higher R&D expense, $1.8 million in higher Finance Costs and $4.7 million in higher income tax expense in Q4 2022 as compared to Q3 2022, offset in part by the $18.5 million of higher gross profit in Q4 2022.
Selected Q4 2022 IFRS results (in millions, except percentages and per share amounts)amount, or as otherwise noted):
| 2018 | 2019 | ||||||||||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||
| Revenue | $1,499.7 | $1,695.2 | $1,711.3 | $1,727.0 | $1,433.1 | $1,445.6 | $1,517.9 | $1,491.7 | |||||||||||||||||
| Gross margin | 6.2 | % | 6.2 | % | 6.6 | % | 6.9 | % | 6.1 | % | 6.8 | % | 6.4 | % | 6.8 | % | |||||||||
| Net earnings (loss) | $ | 14.1 | $ | 16.1 | $ | 8.6 | $ | 60.1 | $ | 90.3 | $ | (6.1 | ) | $ | (6.9 | ) | $ | (7.0 | ) | ||||||
| Weighted average # of basic shares | 142.2 | 139.6 | 139.0 | 136.8 | 135.7 | 131.1 | 128.5 | 128.5 | |||||||||||||||||
| Weighted average # of diluted shares | 143.5 | 140.7 | 140.3 | 138.0 | 136.6 | 131.1 | 128.5 | 128.5 | |||||||||||||||||
| # of shares outstanding | 139.6 | 139.3 | 137.4 | 136.3 | 131.6 | 128.4 | 128.4 | 128.8 | |||||||||||||||||
| IFRS earnings (loss) per share: | |||||||||||||||||||||||||
| basic | $ | 0.10 | $ | 0.12 | $ | 0.06 | $ | 0.44 | $ | 0.67 | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
| diluted | $ | 0.10 | $ | 0.11 | $ | 0.06 | $ | 0.44 | $ | 0.66 | $ | (0.05 | ) | $ | (0.05 | ) | $ | (0.05 | ) | ||||||
| IFRS revenue (in billions) | $ | ||||
| IFRS | $ | ||||
| IFRS | |||||
| IFRS SG&A | $ | ||||
| IFRS net earnings | $42.4 | ||||
| IFRS EPS* (diluted) | $0.35 | ||||
* IFRS loss per shareEPS for Q4 20192022 included an aggregate charge of $0.20$0.21 (pre-tax) per share for employee SBC expense, amortization of intangible assets (excluding computer software), Transition Costs (described below) and restructuring charges. See "Operating Results" above and "Non-IFRS Financial Measures" below for per-item charges. This aggregate charge is abovewas at the high end of our Q4 20192022 guidance range of between $0.12$0.15 to $0.180.21 per share for these items, primarily due to higher-than-expected restructuring charges (see "Overview" above).items.
Q4 20192022 actual compared to Q4 2019 guidance:
2022 guidance (in millions, except percentages and per share amounts, or as otherwise noted):
| Q4 | |||||||||||
| Guidance | Actual | ||||||||||
| IFRS revenue (in billions) | $ | $ | |||||||||
| Non-IFRS operating | |||||||||||
| Non-IFRS adjusted SG&A* | $64 to $66 | $68.5 | |||||||||
| Non-IFRS adjusted net earnings* | N/A | $68.4 | |||||||||
| Non-IFRS adjusted | |||||||||||
| $ | $ | ||||||||||
* These non-IFRS financial measures do not have standardized meanings and may not be comparable to similar measures presented by other companies. The most directly comparable IFRS financial measures to non-IFRS operating margin, non-IFRS adjusted SG&A, non-IFRS adjusted net earnings and non-IFRS adjusted EPS are earnings from operations as a percentage of revenue, SG&A, net earnings, and EPS, respectively (set forth above). See "Non-IFRS Financial Measures" below for, among other things, the definitions of these non-IFRS financial measures, a reconciliation of such non-IFRS financial measures to the most directly-comparable IFRS financial measures, and a description of recent modifications to the IFRS financial measures to which non-IFRS operating earnings and non-IFRS operating margin are reconciled. Prior period reconciliations and calculations included herein reflect the current presentation. "Non-IFRS Financial Measures" below also includes a description of our anticipated modification of specified non-IFRS financial measures (by the addition of a newly-applicable exclusion) for future periods.
For Q4 2019,2022, our revenue was aboveand non-IFRS adjusted EPS exceeded the mid-pointhigh end of our guidance range, primarily due to program-specific demand strength inranges, and our Enterprise end market. CCS segment revenue was above our expectations, as stronger-than-expected demand in our Enterprise end market was offset in part by lower-than-expected Communications end market revenue resulting from continued program-specific weakness. ATS segment revenue was in line with our expectations. Non-IFRSnon-IFRS operating margin for Q4 2019 was aboveexceeded the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, and non-IFRS adjusted EPS was atdriven by continued strong demand across the high endmajority of our guidance range, drivenbusinesses and improved materials availability in each case by favorable program mix. Non-IFRS adjusted EPS also included a $0.01 per share favorable Currency Impact arising primarily from the strengthening of the Chinese renminbi and the Thai bahtsome markets relative to the U.S. dollar.expectations. Non-IFRS adjusted SG&A for Q4 2019 exceeded2022 was higher than our guidance range by $0.4 million.due to the impact of foreign exchange. Our IFRS effective tax rate for Q4 2022 was 32%. Our non-IFRS adjusted effective tax rate for Q4 20192022 was 27% (lower23%, higher than our anticipated estimate of approximately 35%)21%, driven primarilymainly due to Repatriation Expense, partially offset by the Currency Impact described above.favorable jurisdictional profit mix.
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Select 2022 results compared to 2021 (in millions, except percentages and per share amounts, or as otherwise noted):
| 2022 | 2021 | ||||||||||
| IFRS revenue (in billions) | $7.25 | $5.63 | |||||||||
| IFRS earnings from operations | $263.3 | $167.7 | |||||||||
| IFRS earnings from operations as a % of revenue | 3.6% | 3.0% | |||||||||
| Non-IFRS operating earnings* | $358.0 | $233.9 | |||||||||
| Non-IFRS operating margin* | 4.9% | 4.2% | |||||||||
| IFRS net earnings | $145.5 | $103.9 | |||||||||
| IFRS EPS (diluted) | $1.18 | $0.82 | |||||||||
| Non-IFRS adjusted net earnings* | $234.4 | $164.3 | |||||||||
| Non-IFRS adjusted EPS * | $1.90 | $1.30 | |||||||||
| IFRS cash provided by operations | $297.9 | $226.8 | |||||||||
| Non-IFRS adjusted free cash flow* | $93.8 | $114.8 | |||||||||
* These non-IFRS financial measures do not have standardized meanings and may not be comparable to similar measures presented by other companies. A discussion of non-IFRS financial measures included herein, a range for adjusted EPS (which is a non-IFRS measure and is defined below). Management considers non-IFRS adjusted EPS to be an important measure for investors to understand our core operating performance. A reconciliation of historical non-IFRS adjusted netfinancial measures to the most directly-comparable IFRS financial measures, and a description of recent modifications to the IFRS financial measures to which non-IFRS operating earnings to IFRS net earningsand non-IFRS operating margin are reconciled, is set forth in "Non-IFRS Financial Measures" below. Prior period reconciliations and calculations included herein reflect the current presentation."Non-IFRS Financial Measures" below also describes our anticipated modification of specified non-IFRS financial measures (by the addition of a newly-applicable exclusion) for future periods.
Non-IFRS measures:Financial Measures:
Management uses adjusted net earnings and the other non-IFRS financial measures (including ratios based on IFRS financial measures) described herein to (i) to assess operating performance and the effective use and allocation of resources, (ii) to provide more meaningful period-to-period comparisons of operating results, (iii) to enhance investors' understanding of the core operating results of our business, and (iv) to set management incentive targets. We believe the non-IFRS financial measures we present herein are useful to investors, as they enable investors to evaluate and compare our results from operations in a more consistent manner (by excluding specific items that we do not consider to be reflective of our ongoing operating results)core operations), to evaluate cash resources that we generate from our business each period, and to provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of a non-IFRS adjusted tax expense and a non-IFRS adjusted effective tax rate providesprovide improved insight into the tax effects of our ongoing businesscore operations, and isare useful to management and investors for historical comparisons and forecasting. These non-IFRS financial measures result largely from management's determination that the facts and circumstances surrounding the excluded charges or recoveries are not indicative of the ordinary course of the ongoing operation of our business.core operations.
We believe investors use both IFRS and non-IFRS financial measures to assess management's past, current and future decisions associated with our priorities and our allocation of capital, as well as to analyze how our business operates in, or responds to, swings in economic cycles or to other events that impact our core operations.
Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies. companies that report under IFRS, or who report under U.S. GAAP and use non-GAAP financial measures to describe similar financial metrics. Prior to Q2 2022, non-IFRS adjusted free cash flow was referred to as non-IFRS free cash flow, but has been renamed. Its composition remains unchanged. In addition, prior to Q2 2022, non-IFRS operating earnings (adjusted EBIAT) was reconciled to IFRS earnings before income taxes, and non-IFRS operating margin was reconciled to IFRS earnings before income taxes as a percentage of revenue, but commencing in Q2 2022, are reconciled to IFRS earnings from operations, and IFRS earnings from operations as a percentage of revenue, respectively (as the most directly comparable IFRS financial measures). This modification did not impact either resultant non-IFRS financial measure. Since non-IFRS adjusted return on invested capital (adjusted ROIC) is based on non-IFRS operating earnings, in comparing this measure to the most directly-comparable financial measure determined using IFRS measures (which we refer to as IFRS ROIC), commencing in Q3 2022, our calculation of IFRS ROIC is based on IFRS earnings from operations (instead of IFRS earnings before income taxes). This modification did not impact the determination of non-IFRS adjusted ROIC. Prior period reconciliations and calculations included herein reflect the current presentation.
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In Q4 2022, we entered into the TRS Agreement. Similar to SBC expense, quarterly fair value adjustments of our TRS (TRS FVAs) will be classified in SG&A expenses and costs of sales in our consolidated statement of operations, and will be excluded in our determination of the following non-IFRS financial measures included herein: adjusted gross profit, adjusted gross margin, adjusted SG&A, adjusted SG&A as a percentage of revenue, non-IFRS operating earnings, non-IFRS operating margin, adjusted net earnings and adjusted EPS (for the reasons described below). TRS FVAs will also impact the determination of our non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate. However, as the impact of TRS FVAs on our consolidated financial statements for Q4 2022 and the full year 2022 was de minimis, no such exclusion was applicable to such non-IFRS financial measures in either period.
Non-IFRS financial measures are not measures of performance under IFRS and should not be considered in isolation or as a substitute for any standardized measure under IFRS.IFRS financial measure. The most significant limitation to management's use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS financial measures are nonetheless charges or credits that are recognized under IFRS and that have an economic impact on us. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of our performance, and reconciling non-IFRS financial measures back to the most directly comparable IFRS financial measures.measures determined under IFRS.
The economic substance of these exclusions (where applicable to the periods presented) and management's rationale for excluding them from non-IFRS financial measures is provided below:
Employee SBC expense, which represents the estimated fair value of stock options, RSUs and PSUs granted to employees, is excluded because grant activities vary significantly from quarter-to-quarter in both quantity and fair value. In addition, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude employee SBC expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do.
TRS FVAs represent mark-to-market adjustments to our TRS, as the TRS is recorded at fair value at each quarter end. We exclude the impact of these non-cash fair value adjustments (both positive and negative), as they reflect fluctuations in the market price of our SVS from period to period, and not our ongoing operating performance. In addition, we believe that excluding these non-cash adjustments permits a better comparison of our core operating results to those of our competitors.
Amortization charges (excluding computer software) consist of non-cash charges against intangible assets that are impacted by the timing and magnitude of acquired businesses. Amortization of intangible assets varies among our competitors, and we believe that excluding these charges permits a better comparison of core operating results with those of our competitors who also generally exclude amortization charges in assessing operating performance.
Other Charges, net of recoveries, consist of:of, when applicable: Restructuring Charges, net of recoveries (defined below); Transition Costs (Recoveries) (defined below); net Impairment charges (defined below); Acquisition Costs;Costs (Recoveries); legal settlements (recoveries); specified credit facility-related charges (consisting of the accelerated amortization of unamortized deferred financing costs recorded during the second quarter of 2018,charges; and Waiver Fees incurred in Q4 2019); and the Post-employment Benefit Plan Losses incurred in Q4 2019.post-employment benefit plan losses. We exclude these charges, net of recoveries, because we believe that they are not directly related to ongoing operating results and do not reflect expected future operating expenses after completion of these activities or incurrence of the relevant costs. Our competitors may record similar charges at different times, and we believe these exclusions permit a better comparison of our core operating results with those of our competitors who also generally exclude these types of charges, net of recoveries, in assessing operating performance.
Restructuring Charges, net of recoveries, consist of costs relating to: employee severance, lease terminations, site closings and consolidations, write-downs of owned property and equipment which are no longer used and are available for sale, and reductions in infrastructure.
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Transition Costs consist of:of costs recorded in connection with: (i) the transfer of manufacturing lines from closed sites to other sites within our global network; and (ii) the sale of real properties unrelated to restructuring actions (Property Dispositions). Transition Costs in prior periods also included costs recorded in connection with the relocation of our Toronto manufacturing operations and the move of our corporate headquarters into and out of a temporary location during, and upon completion, of the construction of space in a new office building at our former location (all in connection with the 2019 sale of our former Toronto real property) (collectively, Torontoproperty. Transition Costs) and (ii) costs recorded in connection with the transfer of certain capital equipment manufacturing lines from closed sites to other sites within our global network in response to the current capital equipment demand environment (Internal Relocation Costs).Transition Costs consist of direct relocation and duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition periods, as well as cease-use and other costs incurred in connection with idle or vacated portions of the relevant premises that we would not have incurred but for these relocations, transfers and transfers.dispositions. Transition
Recoveries consist of theany gains recorded in connection with Property Gain.Dispositions. We believe that excluding these costs and recoveries including Internal Relocation Costs, which commenced in Q3 2019, permits a better comparison of our core operating results from period-to-period, as these costs willor recoveries do not reflect our ongoing operations once these relocations and manufacturing line transfersspecified events are complete, and the recovery pertains only to Q1 2019.complete.
Impairment charges, which consist of non-cash charges against goodwill, intangible assets, property, plant and equipment, and ROU assets, result primarily when the carrying value of these assets exceeds their recoverable amount.
Non-core tax impacts are excluded, as we believe that these costs or recoveries do not reflect core operating performance and vary significantly among those of our competitors who also generally exclude these costs or recoveries in assessing operating performance.
The following table sets forth, for the periods indicated, the various non-IFRS financial measures discussed above, and a reconciliation of non-IFRS financial measures to the most directly comparable financial measures determined under IFRS measures (in millions, except percentages and per share amounts):
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| Three months ended December 31 | Year ended December 31 | ||||||||||||||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||||||||||||||||
| IFRS revenue | $ | 1,512.1 | $ | 2,042.6 | $ | 5,634.7 | $ | 7,250.0 | |||||||||||||||||||||||||||
| IFRS gross profit | $ | 142.1 | 9.4 | % | $ | 186.2 | 9.1 | % | $ | 487.0 | 8.6 | % | $ | 636.3 | 8.8 | % | |||||||||||||||||||
| Employee SBC expense | 3.6 | 5.6 | 13.0 | 20.3 | |||||||||||||||||||||||||||||||
| Non-IFRS adjusted gross profit/adjusted gross margin | $ | 145.7 | 9.6 | % | $ | 191.8 | 9.4 | % | $ | 500.0 | 8.9 | % | $ | 656.6 | 9.1 | % | |||||||||||||||||||
| IFRS SG&A | $ | 65.5 | 4.3 | % | $ | 77.1 | 3.8 | % | $ | 245.1 | 4.3 | % | $ | 279.9 | 3.9 | % | |||||||||||||||||||
| Employee SBC expense | (5.6) | (8.6) | (20.4) | (30.7) | |||||||||||||||||||||||||||||||
| Non-IFRS adjusted SG&A | $ | 59.9 | 4.0 | % | $ | 68.5 | 3.4 | % | $ | 224.7 | 4.0 | % | $ | 249.2 | 3.4 | % | |||||||||||||||||||
| IFRS earnings from operations | $ | 49.9 | 3.3 | % | $ | 81.6 | 4.0 | % | $ | 167.7 | 3.0 | % | $ | 263.3 | 3.6 | % | |||||||||||||||||||
| Employee SBC expense | 9.2 | 14.2 | 33.4 | 51.0 | |||||||||||||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 7.8 | 9.2 | 22.5 | 37.0 | |||||||||||||||||||||||||||||||
| Other Charges, net of recoveries | 7.4 | 2.8 | 10.3 | 6.7 | |||||||||||||||||||||||||||||||
Non-IFRS operating earnings (adjusted EBIAT)/non-IFRS operating margin (1) | $ | 74.3 | 4.9 | % | $ | 107.8 | 5.3 | % | $ | 233.9 | 4.2 | % | $ | 358.0 | 4.9 | % | |||||||||||||||||||
| IFRS net earnings | $ | 31.9 | 2.1 | % | $ | 42.4 | 2.1 | % | $ | 103.9 | 1.8 | % | $ | 145.5 | 2.0 | % | |||||||||||||||||||
| Employee SBC expense | 9.2 | 14.2 | 33.4 | 51.0 | |||||||||||||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 7.8 | 9.2 | 22.5 | 37.0 | |||||||||||||||||||||||||||||||
| Other Charges, net of recoveries | 7.4 | 2.8 | 10.3 | 6.7 | |||||||||||||||||||||||||||||||
Adjustments for taxes (2) | (1.1) | (0.2) | (5.8) | (5.8) | |||||||||||||||||||||||||||||||
| Non-IFRS adjusted net earnings | $ | 55.2 | $ | 68.4 | $ | 164.3 | $ | 234.4 | |||||||||||||||||||||||||||
| Diluted EPS | |||||||||||||||||||||||||||||||||||
| Weighted average # of shares (in millions) | 124.8 | 122.4 | 126.7 | 123.6 | |||||||||||||||||||||||||||||||
| IFRS earnings per share | $ | 0.26 | $ | 0.35 | $ | 0.82 | $ | 1.18 | |||||||||||||||||||||||||||
| Non-IFRS adjusted EPS | $ | 0.44 | $ | 0.56 | $ | 1.30 | $ | 1.90 | |||||||||||||||||||||||||||
| # of shares outstanding at period end (in millions) | 124.7 | 121.6 | 124.7 | 121.6 | |||||||||||||||||||||||||||||||
| IFRS cash provided by operations | $ | 65.8 | $ | 101.3 | $ | 226.8 | $ | 297.9 | |||||||||||||||||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (14.3) | (32.3) | (49.6) | (108.9) | |||||||||||||||||||||||||||||||
Lease payments (3) | (10.0) | (9.9) | (40.0) | (46.0) | |||||||||||||||||||||||||||||||
Finance Costs paid (excluding debt issuance costs paid) (3) | (5.9) | (16.5) | (22.4) | (49.2) | |||||||||||||||||||||||||||||||
Non-IFRS adjusted free cash flow (3) | $ | 35.6 | $ | 42.6 | $ | 114.8 | $ | 93.8 | |||||||||||||||||||||||||||
IFRS ROIC % (4) | 11.1 | % | 15.7 | % | 10.0 | % | 12.9 | % | |||||||||||||||||||||||||||
Non-IFRS adjusted ROIC % (4) | 16.6 | % | 20.7 | % | 13.9 | % | 17.5 | % | |||||||||||||||||||||||||||
| Three months ended December 31 | Year ended December 31 | ||||||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||||
| IFRS revenue | $ | 1,727.0 | $ | 1,491.7 | $ | 6,633.2 | $ | 5,888.3 | |||||||||||||||
| IFRS gross profit | $ | 120.0 | 6.9 | % | $ | 101.8 | 6.8 | % | $ | 430.5 | 6.5 | % | $ | 384.7 | 6.5 | % | |||||||
| Employee SBC expense | 3.8 | 2.7 | 14.7 | 14.6 | |||||||||||||||||||
Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 123.8 | 7.2 | % | $ | 104.5 | 7.0 | % | $ | 446.8 | 6.7 | % | $ | 399.3 | 6.8 | % | |||||||
| IFRS SG&A | $ | 59.6 | 3.5 | % | $ | 57.1 | 3.8 | % | $ | 219.0 | 3.3 | % | $ | 227.3 | 3.9 | % | |||||||
| Employee SBC expense | (4.6 | ) | (4.7 | ) | (18.7 | ) | (19.5 | ) | |||||||||||||||
| Non-IFRS adjusted SG&A | $ | 55.0 | 3.2 | % | $ | 52.4 | 3.5 | % | $ | 200.3 | 3.0 | % | $ | 207.8 | 3.5 | % | |||||||
| IFRS earnings (loss) before income taxes | $ | 20.1 | 1.2 | % | $ | (0.4 | ) | — | % | $ | 81.9 | 1.2 | % | $ | 99.8 | 1.7 | % | ||||||
| Finance costs | 9.2 | 11.3 | 24.4 | 49.5 | |||||||||||||||||||
| Employee SBC expense | 8.4 | 7.4 | 33.4 | 34.1 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.1 | 5.8 | 11.6 | 24.6 | |||||||||||||||||||
| Other Charges (recoveries) | 16.9 | 19.6 | 61.0 | (49.9 | ) | ||||||||||||||||||
Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
Non-IFRS operating earnings (adjusted EBIAT) (1) | $ | 59.7 | 3.5 | % | $ | 43.7 | 2.9 | % | $ | 213.9 | 3.2 | % | $ | 158.1 | 2.7 | % | |||||||
| IFRS net earnings (loss) | $ | 60.1 | 3.5 | % | $ | (7.0 | ) | (0.5 | )% | $ | 98.9 | 1.5 | % | $ | 70.3 | 1.2 | % | ||||||
| Employee SBC expense | 8.4 | 7.4 | 33.4 | 34.1 | |||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.1 | 5.8 | 11.6 | 24.6 | |||||||||||||||||||
| Other Charges (recoveries) | 16.9 | 19.6 | 61.0 | (49.9 | ) | ||||||||||||||||||
| Acquisition inventory fair value adjustment | — | — | 1.6 | — | |||||||||||||||||||
Adjustments for taxes (2) | (50.8 | ) | (2.1 | ) | (56.7 | ) | (7.6 | ) | |||||||||||||||
| Non-IFRS adjusted net earnings | $ | 39.7 | $ | 23.7 | $ | 149.8 | $ | 71.5 | |||||||||||||||
| Diluted EPS | |||||||||||||||||||||||
| Weighted average # of shares (in millions) * | 138.0 | 128.5 | 140.6 | 131.8 | |||||||||||||||||||
| IFRS earnings (loss) per share * | $ | 0.44 | $ | (0.05 | ) | $ | 0.70 | $ | 0.53 | ||||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.29 | $ | 0.18 | $ | 1.07 | $ | 0.54 | |||||||||||||||
| # of shares outstanding at period end (in millions) | 136.3 | 128.8 | 136.3 | 128.8 | |||||||||||||||||||
| (restated) | (restated) | ||||||||||||||||||||||
| IFRS cash provided by (used in) operations | $ | (1.9 | ) | $ | 76.5 | $ | 33.1 | $ | 345.0 | ||||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (18.8 | ) | (14.2 | ) | (78.5 | ) | 36.0 | ||||||||||||||||
Lease payments (3) | (0.9 | ) | (8.8 | ) | (17.0 | ) | (38.2 | ) | |||||||||||||||
Finance costs paid (excluding debt issuance costs and Waiver Fees paid) (3) | (8.8 | ) | (9.7 | ) | (23.1 | ) | (41.6 | ) | |||||||||||||||
Non-IFRS free cash flow (3) | $ | (30.4 | ) | $ | 43.8 | $ | (85.5 | ) | $ | 301.2 | |||||||||||||
IFRS ROIC % (4) | 5.0 | % | (0.1 | )% | 5.8 | % | 5.8 | % | |||||||||||||||
Non-IFRS adjusted ROIC % (4) | 15.0 | % | 10.6 | % | 15.1 | % | 9.2 | % | |||||||||||||||
(1) Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess performance related to our core operations. Non-IFRS adjusted EBIAToperating earnings is defined as earnings (loss)from operations before income taxes, finance costs (defined below), employee SBC expense, TRS FVAs (defined above), amortization of intangible assets (excluding computer software), and Other Charges, (recoveries)net of recoveries (defined above), and in applicable periods, acquisition inventory fair value adjustments. Finance costs consist of interest expense and fees related to our credit facility (including debt issuance and related amortization costs), our interest rate swap agreements, our A/R sales program and the SFPs, and, commencing in Q1 2019, interest expense on our lease obligations under IFRS 16, net of interest income earned. Waiver Fees are recorded in Other Charges.. See "Operating Results — Other charges, (recoveries)"net of recoveries" for separate quantification and discussion of the components of Other Charges, (recoveries).net of recoveries.
(2) The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments and non-core tax impacts (described in the table(see below).
The following table sets forth a reconciliation of our IFRS tax expense and IFRS effective tax rate to our non-IFRS adjusted tax expense and our non-IFRS adjusted effective tax rate for the periods indicated, in each case determined by excluding the tax benefits or costs associated with the listed items (in millions, except percentages) from our IFRS tax expense for such periods:
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| Three months ended | Year ended | Three months ended | Year ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31 | December 31 | December 31 | December 31 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | Effective tax rate | 2019 | Effective tax rate | 2018 | Effective tax rate | 2019 | Effective tax rate | 2021 | Effective tax rate | 2022 | Effective tax rate | 2021 | Effective tax rate | 2022 | Effective tax rate | |||||||||||||||||||||||||||||||||||||||||||
| IFRS tax expense and IFRS effective tax rate | $ | (40.0 | ) | (199 | )% | $ | 6.6 | (1,650 | )% | $ | (17.0 | ) | (21 | )% | $ | 29.5 | 30 | % | IFRS tax expense and IFRS effective tax rate | $ | 9.7 | 23 | % | $ | 19.9 | 32 | % | $ | 32.1 | 24 | % | $ | 58.1 | 29 | % | |||||||||||||||||||||||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Employee SBC expense | 1.1 | 0.4 | 2.3 | 1.0 | Employee SBC expense | (0.1) | (1.0) | 2.8 | 2.5 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other Charges | 0.7 | 1.8 | 1.4 | 3.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-core tax impact related to tax uncertainties* | — | — | — | 3.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-core tax impact related to fair value adjustments on acquisitions ** | 49.6 | — | 53.3 | (1.5 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-core tax impacts related to restructured sites*** | (0.6 | ) | (0.1 | ) | (0.3 | ) | 1.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | Amortization of intangible assets (excluding computer software) | 0.5 | 0.7 | 0.5 | 3.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Charges, net of recoveries | Other Charges, net of recoveries | 0.7 | 0.5 | 1.4 | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-core tax impact related to restructured sites* | Non-core tax impact related to restructured sites* | — | — | 1.1 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 10.8 | 21 | % | $ | 8.7 | 27 | % | $ | 39.7 | 21 | % | $ | 37.1 | 34 | % | Non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate | $ | 10.8 | 16 | % | $ | 20.1 | 23 | % | $ | 37.9 | 19 | % | $ | 63.9 | 21 | % | |||||||||||||||||||||||||
* Consists of the reversalreversals of certain tax uncertainties acquired in connection with a prior acquisition that became statute-barred in 2019.
(3) Management uses non-IFRS adjusted free cash flow as a measure, in addition to IFRS cash provided by (used in) operations, to assess our operational cash flow performance. We believe non-IFRS adjusted free cash flow provides another level of transparency to our liquidity. Non-IFRS adjusted free cash flow is defined as cash provided by (used in) operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), lease payments (including $8.9 million in Q4 2019 and $35.3 million for the full year 2019, respectively, for lease payments under IFRS 16), and finance costsFinance Costs paid (excluding any debt issuance costs and Waiver Feeswhen applicable, credit facility waiver fees paid). As a measure of liquidity, and consistent with the inclusion of our Toronto relocation capital expenditures and Toronto Transition Costs in non-IFRS free cash flow in the periods incurred, we have included the $113.0 million in proceeds from the sale of our Toronto real property in non-IFRS free cash flow in Q1 2019 (the period of receipt). We incurreddo not consider debt issuance costs in connection with our Credit Facility (upon executionpaid (nil and subsequent security arrangements), as well as Waiver Fees$0.8 million in Q4 2019, neither of which we consider2022 and the full year 2022, respectively; $3.6 million in Q4 2021 and the full year 2021) or such waiver fees (when applicable) to be part of our core operatingongoing financing expenses. As a result, we modified our non-IFRS free cash flow calculation: (i) commencing in Q1 2019, to exclude debt issuancethese costs are excluded from total finance costsFinance Costs paid ($0.5 million and $2.9 million in Q4 2019 and the full year 2019, respectively, and $5.5 million and $12.9 million in Q4 2018 and the full year 2018, respectively); and (ii) in Q4 2019, to exclude the $2.0 million in Waiver Fees. Prior period comparatives have been restated, where applicable, to conform to the current presentation. In addition, as of January 1, 2019, as a result of our adoption of IFRS 16 (Leases), we modified our non-IFRS free cash flow calculation to subtract lease payments under IFRS 16, as such payments were previously (but are no longer) reported in cash provided by (used in) operations. IFRS 16 did not require the restatement of prior period financial statements. Accordingly, and in order to preserve comparability with prior calculations, commencing in Q1 2019, such lease payments are subtracted from cash provided by (used in) operations in our determination of non-IFRS adjusted free cash flow. See footnote (4) below. Note, however, that non-IFRS adjusted free cash flow however, does not represent residual cash flow available to Celestica for discretionary expenditures.
(4) Management uses non-IFRS adjusted ROIC as a measure to assess the effectiveness of the invested capital we use to build products or provide services to our customers, by quantifying how well we generate earnings relative to the capital we have invested in our business. Non-IFRS adjusted ROIC is calculated by dividing annualized non-IFRS adjusted EBIAT by average net invested capital.capital for the period. Net invested capital (calculated in the table below) is derived from IFRS financial measures, and is defined as total assets less: cash, ROU assets, (described below), accounts payable, accrued and other current liabilities, provisions,, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter and a five-point average to calculate average net invested capital for the year. Average net invested capital for Q4 2022 is the average of net invested capital as at September 30, 2022 and December 31, 2022, and average net invested capital for the full year 2022 is the average of net invested capital as at December 31, 2021, March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022. A comparable financial measure underto non-IFRS adjusted ROIC determined using IFRS measures would be determinedcalculated by dividing annualized IFRS earnings (loss) before income taxesfrom operations by average net invested capital (which we have set forth infor the charts above and below), however, this measure (which we have called IFRS ROIC), is not a measure defined under IFRS. In connection with our adoption of IFRSperiod.
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The following table sets forth, for the periods indicated, our calculation of IFRS ROIC % and non-IFRS adjusted ROIC % (in millions, except IFRS ROIC % and non-IFRS adjusted ROIC %).
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31 | December 31 | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||||||||
| IFRS earnings from operations | $ | 49.9 | $ | 81.6 | $ | 167.7 | $ | 263.3 | |||||||||||||||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | |||||||||||||||||||||||||
| Annualized IFRS earnings from operations | $ | 199.6 | $ | 326.4 | $ | 167.7 | $ | 263.3 | |||||||||||||||||||||
| Average net invested capital for the period | $ | 1,794.9 | $ | 2,085.4 | $ | 1,682.2 | $ | 2,040.3 | |||||||||||||||||||||
IFRS ROIC % (1) | 11.1 | % | 15.7 | % | 10.0 | % | 12.9 | % | |||||||||||||||||||||
| Three months ended | Year ended | ||||||||||||||||||||||||||||
| December 31 | December 31 | ||||||||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 74.3 | $ | 107.8 | $ | 233.9 | $ | 358.0 | |||||||||||||||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | |||||||||||||||||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 297.2 | $ | 431.2 | $ | 233.9 | $ | 358.0 | |||||||||||||||||||||
| Average net invested capital for the period | $ | 1,794.9 | $ | 2,085.4 | $ | 1,682.2 | $ | 2,040.3 | |||||||||||||||||||||
Non-IFRS adjusted ROIC % (1) | 16.6 | % | 20.7 | % | 13.9 | % | 17.5 | % | |||||||||||||||||||||
| December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | December 31 2022 | |||||||||||||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||||||||||||
| Total assets | $ | 4,666.9 | $ | 4,848.0 | $ | 5,140.5 | $ | 5,347.9 | $ | 5,628.0 | |||||||||||||||||||
| Less: cash | $ | 394.0 | 346.6 | 365.5 | 363.3 | 374.5 | |||||||||||||||||||||||
| Less: ROU assets | $ | 113.8 | 109.8 | 133.6 | 128.0 | 138.8 | |||||||||||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | $ | 2,202.0 | 2,347.4 | 2,612.1 | 2,797.5 | 3,003.0 | |||||||||||||||||||||||
Net invested capital at period end (1) | $ | 1,957.1 | $ | 2,044.2 | $ | 2,029.3 | $ | 2,059.1 | $ | 2,111.7 | |||||||||||||||||||
| December 31 2020 | March 31, 2021 | June 30, 2021 | September 30, 2021 | December 31 2021 | |||||||||||||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||||||||||||
| Total assets | $ | 3,664.1 | $ | 3,553.4 | $ | 3,745.4 | $ | 4,026.1 | $ | 4,666.9 | |||||||||||||||||||
| Less: cash | 463.8 | 449.4 | 467.2 | 477.2 | 394.0 | ||||||||||||||||||||||||
| Less: ROU assets | 101.0 | 98.4 | 100.5 | 115.4 | 113.8 | ||||||||||||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,478.4 | 1,407.0 | 1,575.8 | 1,800.8 | 2,202.0 | ||||||||||||||||||||||||
Net invested capital at period end (1) | $ | 1,620.9 | $ | 1,598.6 | $ | 1,601.9 | $ | 1,632.7 | $ | 1,957.1 | |||||||||||||||||||
| Three months ended | Year ended | ||||||||||||||||||
| December 31 | December 31 | ||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||
| IFRS earnings (loss) before income taxes | $ | 20.1 | $ | (0.4 | ) | $ | 81.9 | $ | 99.8 | ||||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | |||||||||||||||
| Annualized IFRS earnings (loss) before income taxes | $ | 80.4 | $ | (1.6 | ) | $ | 81.9 | $ | 99.8 | ||||||||||
| Average net invested capital for the period | $ | 1,594.1 | $ | 1,647.0 | $ | 1,413.6 | $ | 1,719.7 | |||||||||||
IFRS ROIC % (1) | 5.0 | % | (0.1 | )% | 5.8 | % | 5.8 | % | |||||||||||
| Three months ended | Year ended | ||||||||||||||||||
| December 31 | December 31 | ||||||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 59.7 | $ | 43.7 | $ | 213.9 | $ | 158.1 | |||||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | |||||||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 238.8 | $ | 174.8 | $ | 213.9 | $ | 158.1 | |||||||||||
| Average net invested capital for the period | $ | 1,594.1 | $ | 1,647.0 | $ | 1,413.6 | $ | 1,719.7 | |||||||||||
Non-IFRS adjusted ROIC % (1) | 15.0 | % | 10.6 | % | 15.1 | % | 9.2 | % | |||||||||||
| December 31 2018 | March 31 2019 | June 30 2019 | September 30 2019 | December 31 2019 | |||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||
| Total assets | $ | 3,737.7 | $ | 3,688.1 | $ | 3,633.7 | $ | 3,557.6 | $ | 3,560.7 | |||||||||
| Less: cash | 422.0 | 457.8 | 436.5 | 448.9 | 479.5 | ||||||||||||||
| Less: right-of-use assets | — | 115.8 | 116.2 | 107.8 | 104.1 | ||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,512.6 | 1,344.8 | 1,349.2 | 1,342.3 | 1,341.7 | ||||||||||||||
Net invested capital at period end (1) | $ | 1,803.1 | $ | 1,769.7 | $ | 1,731.8 | $ | 1,658.6 | $ | 1,635.4 | |||||||||
| December 31 2017 | March 31 2018 | June 30 2018 | September 30 2018 | December 31 2018 | |||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||
| Total assets | $ | 2,964.2 | $ | 2,976.0 | $ | 3,212.2 | $ | 3,316.1 | $ | 3,737.7 | |||||||||
| Less: cash | 515.2 | 435.7 | 401.4 | 457.7 | 422.0 | ||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 1,228.6 | 1,278.1 | 1,413.8 | 1,473.3 | 1,512.6 | ||||||||||||||
Net invested capital at period end (1) | $ | 1,220.4 | $ | 1,262.2 | $ | 1,397.0 | $ | 1,385.1 | $ | 1,803.1 | |||||||||
(1) See footnote 4 ofon the previous table.page.
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Recently issued accounting pronouncements:
See note 2 to the 20192022 AFS for a discussion of our adoption of Interest Rate Benchmark (IBOR) Reform (Phase 1 amendments to IFRS 16, Leases9, IAS 39, and IFRS 7) effective January 1, 2020, and our adoption of IBOR Reform (Phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4, and IFRS 16) effective January 1, 2021. The Phase 1 IBOR Reform amendments did not have a significant impact on our disclosures or the amounts reported in our consolidated financial statements for the year ended December 31, 2020. The Phase 2 IBOR Reform amendments did not have a significant impact on our disclosures or the amounts reported in our consolidated financial statements for the year ended December 31, 2021. We will continue to monitor relevant developments, and will evaluate the impact of the Phase 2 amendments on our consolidated financial statements as IBOR reform progresses.
See note 2 to the 2022 AFS for a discussion of our adoption of Definition of accounting estimates (Amendments to IAS 8), Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes) and IFRS 17 Insurance Contracts. We adopted each of these standards as of January 1, 2019. We have adopted all applicable standards, amendments and interpretations issued under IFRS and effective as of January 1, 2020.2023. We do not believeanticipate that any suchthe adoption of these standards amendments(individually or interpretationsin the aggregate) will have had a material impact on our consolidated financial statements. In addition, weAlso see note 2 to the 2022 AFS for a discussion of our anticipated adoption of Classification of liabilities as current or non-current (Amendments to IAS 1). We will adopt this standard as of January 1, 2024, and are in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements. We do not believe that there are any other recently issued accounting pronouncements that are not yet effective that will have a material impact on our consolidated financial statements upon adoption.
Research and development, patents and licenses, etc.
The information required by this item is set forth above in Item 4(B) "Information on the Company — Business Overview — Research and Technology Development."
Trend Information
The information required by this item is set forth above in "Overview," "Operating Results," and "Liquidity and Capital Resources," in Item 3(D), Key Information — Risk Factors, and in Item 4(B), Information on the Company — Business Overview.
See "Critical Accounting Estimates" above.
Off-Balance Sheet Arrangements
Not applicable.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
Each director of Celestica is elected by the shareholders to serve until the close of the next annual meeting of shareholders or until a successor is elected or appointed, unless such office is earlier vacated in accordance with the Corporation's by-laws. The following table sets forth certain information regarding the current directors and executive officers of Celestica as of February 19,21, 2023.
| Name | Age | Director Since | Position with Celestica | Residence | |||||||||||||||||||
Michael M. Wilson(1) | 71 | 2011 | Chair of the Board | Alberta, Canada | |||||||||||||||||||
| Robert A. Cascella | 68 | 2019 | Director | Florida, U.S. | |||||||||||||||||||
| Deepak Chopra | 59 | 2018 | Director | Ontario, Canada | |||||||||||||||||||
Françoise Colpron(2) | 52 | 2022 | Director | Michigan, U.S. | |||||||||||||||||||
| Daniel P. DiMaggio | 72 | 2010 | Director | Georgia, U.S. | |||||||||||||||||||
Jill Kale(3) | 63 | 2022 | Director | Maryland, U.S. | |||||||||||||||||||
| Laurette T. Koellner | 68 | 2009 | Director | Florida, U.S. | |||||||||||||||||||
Luis A. Müller | 53 | 2021 | Director | California, U.S. | |||||||||||||||||||
Carol S. Perry (4) | 72 | 2013 | Director | Ontario, Canada | |||||||||||||||||||
| Tawfiq Popatia | 48 | 2017 | Director | Ontario, Canada | |||||||||||||||||||
| Robert A. Mionis | 59 | 2015 | Director, President and Chief Executive Officer | New Hampshire, U.S. | |||||||||||||||||||
| Name | Age | Executive Officer Since | Position with Celestica | Residence | |||||||||||||||||||
| Mandeep Chawla | 46 | 2017 | Chief Financial Officer | Ontario, Canada | |||||||||||||||||||
Todd C. Cooper(5) | 53 | 2018 | President, ATS | Connecticut, U.S. | |||||||||||||||||||
Yann Etienvre(5) | 49 | 2022 | Chief Operations Officer | Massachusetts, U.S. | |||||||||||||||||||
| Jason Phillips | 48 | 2019 | President, CCS | North Carolina, U.S. | |||||||||||||||||||
(1)Mr. Wilson was appointed Chair of the Board effective January 29, 2020.
(2)Ms. Colpron was appointed as a director effective October 1, 2022.
| Name | Age | Director Since | Position with Celestica | Residence | |||
Michael M. Wilson(1) | 68 | | 2011 | Chair of the Board | Alberta, Canada | ||
Robert A. Cascella(2) | 65 | 2019 | Director | Florida, U.S. | |||
| Deepak Chopra | 56 | 2018 | Director | Ontario, Canada | |||
| Daniel P. DiMaggio | 69 | | 2010 | Director | Georgia, U.S. | ||
| Laurette T. Koellner | 65 | | 2009 | Director | Florida, U.S. | ||
| Carol S. Perry | 69 | | 2013 | Director | Ontario, Canada | ||
| Tawfiq Popatia | 45 | | 2017 | Director | Ontario, Canada | ||
| Eamon J. Ryan | 74 | | 2008 | Director | Ontario, Canada | ||
| Robert A. Mionis | 56 | | 2015 | Director, President and Chief Executive Officer | New Hampshire, U.S. | ||
(4)Ms. Perry is not standing for re-election to the Board of Directors at the 2023 Meeting.
| Name | Age | Executive Officer Since | Position with Celestica | Residence | |||
| Mandeep Chawla | 43 | 2017 | Chief Financial Officer | Ontario, Canada | |||
| Todd C. Cooper | 50 | 2018 | Chief Operations Officer | Connecticut, U.S. | |||
| Elizabeth L. DelBianco | 60 | 1998 | Chief Legal and Administrative Officer and Corporate Secretary | Ontario, Canada | |||
| John ("Jack") J. Lawless | 59 | 2015 | President, ATS | Georgia, U.S. | |||
| Jason Phillips | 45 | 2019 | President, CCS | North Carolina, U.S. | |||
The following is a brief biography of each of Celestica's directors, director nominees and executive officers:
Michael M. Wilson. Mr. Wilson is a corporate director andChair of the Board. He has served on the Board since 2011. Mr. Wilson was appointed Chair of the Board effective January 29, 2020.2011, and has been a corporate director since 2013. Until his retirement in December 2013, he was the President and Chief Executive Officer, and a director, of Agrium Inc. (a public agricultural crop inputs company that has subsequently merged with Potash Corporation of Saskatchewan Inc. to form Nutrien Ltd.), and. He has over 30 years of international and executive management experience. Prior to joining Agrium Inc., Mr. Wilson served as President of Methanex Corporation (a public company), and held various senior positions in North America and Asia during his 18 years with The Dow Chemical Company (a public company). Mr. Wilson also currently serves (since 2014) on the board of directors of Air Canada and Suncor Energy Inc., and previously served on the board of directors of Finning International Inc. (each a public company), and was also the past Chair of the Calgary Prostate Cancer Centre. He holds a degree in Chemical Engineering from the University of Waterloo.
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Robert A. Cascella. Mr. Cascella is currently an Executive Vice President and Executive Committee member ofretired from Royal Philips, a public Dutch multinational healthcare company. He is also thecompany, in 2021, where he most recently served as Special Advisor and Strategic Business Development Leader. From 2015 to 2020, he served as Executive Vice President of Royal Philips and Chief Executive Officer (CEO) of the Philips PrecisionPhilips' Diagnosis business,and Treatment businesses, including businesses serving Radiology, Cardiology and Oncology, as well as Enterprise Diagnostic Informatics. HeMr. Cascella also served on Philips' Executive Committee from 2016 to 2021.Since 2022, he has served on the board of directors of Koru Medical Systems, Inc., a Nasdaq listed company that designs, manufactures and markets proprietary portable and innovative medical devices. In addition, since 2021, he has served on the board of directors of Neuronetics, Inc., a Nasdaq-listed medical device company, Mirion Technologies, a NYSE-listed provider of nuclear and radiation measurement and detection systems, and Metabolon Inc., a private company using metabolomics to assist in the discovery of biomarkers. Mr. Cascella served as the President and CEOChief Executive Officer of Hologic, Inc., a public medical device and diagnostics company, from 2003
to 2013. He has also held senior leadership positions at CFG Capital, NeoVision Corporation and Fischer Imaging Corporation. Mr. Cascella served on Hologic, Inc.’s's board of directors from 2008 to 2013. He also previously served on the board of Tegra Medical and acted as chair of the boards of Dysis Medical and MirandaMirada Medical. He holds a Bachelor’sBachelor's degree in Accounting from Fairfield University. Mr. Cascella is National Association of Corporate Directors ("NACD") Directorship certified.
Deepak Chopra. Mr. Chopra most recently served as President and Chief Executive Officer of Canada Post Corporation from February 2011 to March 2018. He has more than 30 years of global experience in the financial services, technology, logistics and supply-chain industries. Mr. Chopra worked for Pitney Bowes Inc., aan NYSE-traded technology company known for postage meters, mail automation and location intelligence services, for more than 20 years. He served as President of Pitney Bowes Canada and Latin America from 2006 to 2010. He held a number of increasingly senior executive roles internationally, including President of its new Asia Pacific and Middle East region from 2001 to 2006 and Chief Financial Officer for the Europe, Africa and Middle East (EAME) region from 1998 to 2001. He has previously served on the boards of Canada Post Corporation, Purolator Inc., SCI Group, the Canada Post Community Foundation, the Toronto Region Board of Trade and the Conference Board of Canada. He currently sits on the board of The North West Company Inc., a TSX-traded retailer.Toronto Stock Exchange (TSX)-traded retailer (since 2018), The Descartes Systems Group Inc. a TSX and Nasdaq-listed logistics company (since 2020), and Sun Life Financial Inc., a TSX and NYSE-listed international financial services organization (since 2021). Mr. Chopra is a Fellow of the Institute of Chartered Professional Accountants of Canada and has a Bachelor’sBachelor's degree in Commerce (Honours) and a Master’sMaster's Degree in Business Management (PGDBM).
Françoise Colpron. Ms. Colpron is a corporate director. She most recently served as Group President, North America of Valeo SA (Valeo), a global automotive supplier listed on the Paris Stock Exchange, from 2008 to 2022, where she was responsible for the activities of the Group in the United States, Mexico and Canada. She joined Valeo in 1998 in the legal department and has had several roles, first as Legal Director for the Climate Control branch in Paris, and then General Counsel for North and South America from 2005 to 2015. Before joining Valeo, Ms. Colpron began her career as a lawyer at Ogilvy Renault in Montréal (now part of the Norton Rose Group). Ms. Colpron currently serves on the Board of Directors of Sealed Air Corporation, a NYSE-listed global packaging solutions company (since 2019), and Chairs its Organization and Compensation Committee. Ms. Colpron earned a Civil Law degree from the Université de Montréal, and is a member of both the Quebec and Michigan bar associations. She has also received ESG Leadership certification from Diligent Institute and Competent Boards.
Daniel P. DiMaggio. Mr. DiMaggio is a corporate director. Prior to retiring in 2006, he spent 35 years with United Parcel Services (UPS) (a public company), most recently as Chief Executive Officer of the UPS Worldwide Logistics Group. Prior to leading UPS' Worldwide Logistics Group, Mr. DiMaggio held a number of positions at UPS with increasing responsibility, including leadership roles for the UPS International Marketing Group, as well as the Industrial Engineering function. In addition to his senior leadership roles at UPS, Mr. DiMaggio was a member of the board of directors of Greatwide Logistics Services, Inc. and CEVA Logistics (a public company). He holds a Bachelor of Science degree from the Lowell Technological Institute (now the University of Massachusetts Lowell).
Jill Kale. Ms. Kale is a corporate director. She most recently served as Sector President of Cobham Advanced Electronic Solutions (CAES), a global A&D company, from 2012 to 2019. She currently sits on the Board of Directors of iDirect Government, LLC, a wholly owned subsidiary of ST Engineering iDirect, Inc. (since 2022), which provides secure satellite-based voice, video and data applications, and the Board of Directors of Hensoldt, Inc., the U.S. affiliate of Hensoldt AG, a German defense company (since 2021). Ms. Kale has a Bachelor of Science degree in Industrial Engineering from Rutgers University and a Master of Business Administration degree from George Washington University.
Laurette T. Koellner. Ms. Koellner is a corporate director. She most recently served as Executive Chairman of International Lease Finance Corporation, an aircraft leasing subsidiary of American International Group, Inc. (AIG) from 2012 until its sale in 2014. Ms. Koellner retired as President of Boeing International, a division of The Boeing Company, in 2008.
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While at Boeing, she was President of Connexion by Boeing and a member of the Office of the Chairman, and served as the Executive Vice President, Internal Services, Chief Human Resources and Administrative Officer, President of Shared Services, and Corporate Controller. Ms. Koellner currently serves on the board of directors of Papa John's International, Inc. (since 2014), The Goodyear Tire & Rubber Company (since 2015), and Nucor Corporation (since 2015), all public companies. Ms. Koellner previously served on the board of directors and was the Chair of the Audit Committee of Hillshire Brands Company (a public company, formerly Sara Lee Corporation and now merged with Tyson Foods, Inc.), and on the board of directors of AIG (a public company). She holds a Bachelor of Science degree in Business Management from the University of Central Florida and a Master of Business Administration from Stetson University, as well as a Certified Professional Contracts Manager designation from the National Contracts Management Association.
Luis A. Müller. Dr. Müller has 25 years of business and technical leadership in the semiconductor industry. In 2014, he assumed his current role as Chief Executive Officer and board member of Cohu, Inc. a Nasdaq-listed global leader in back-end semiconductor equipment and services. Prior to joining Cohu, Dr. Müller cofounded Kinetrix, Inc. and later joined Teradyne, a Nasdaq-listed advanced test solutions company, when it acquired Kinetrix. Dr. Müller has a PhD in mechanical engineering from the Massachusetts Institute of Technology and a BS and MS in mechanical engineering from Universidade Federal Santa Catarina. He also holds a NACD Cyber-Risk Oversight certificate.
Carol S. Perry. Ms. Perry is a corporate director. She is Chair ofmost recently served on the Independent Review CommitteeCommittees of the mutual funds managed by 1832 Asset Management L.P., a mutual fund manager and wholly-owned affiliate of The Bank of Nova Scotia. She also serves as Chair of the Independent Review CommitteesScotia (2011-2020), and of investment funds managed by Jarislowsky Fraser Limited and MD Financial Management Inc., which are subsidiaries of The Bank of Nova Scotia.Scotia (2018-2020). Previously, she was a Commissioner of the Ontario Securities Commission, and has served on adjudicative panels and acted as a director and Chair of its Governance and Nominating Committee. With over 20 years of experience in the investment industry as an investment banker, Ms. Perry held senior positions with leading financial services companies including RBC Capital Markets, Richardson Greenshields of Canada Limited and CIBC World Markets and later founded MaxxCap Corporate Finance Inc., a financial advisory firm. She is a former director of Softchoice Corporation, Atomic Energy of Canada Limited and DALSA Corporation. Ms. Perry has a Bachelor of Engineering Science (Electrical) degree from the University of Western Ontario and a Master of Business Administration degree from the University of Toronto. She also holds the professional designation ICD.D from the Institute of Corporate Directors.
Tawfiq Popatia. Mr. Popatia has been a Senior Managing Director of Onex* since 20142020 and leads its efforts in automation, aerospace and defense, and other transportation-focused industries, havingindustries. He joined the firmOnex in 2007.2007, and has led several of Onex Partners' investments in these sectors. He previously served as a Managing Director of Onex from 2014 to 2020. Prior to joining Onex, Mr. Popatia worked at the private equity firm of Hellman & Friedman LLC and in the Investment Banking Division of Morgan Stanley & Co. Mr. Popatia currently serves on the boards of WestJet, a Canadian airline, Advanced Integration Technology, an aerospace automation company, and BBAM, a provider of commercial jet aircraft leasing, financing and management. He previously served on the board of Spirit AerosystemsAeroSystems (a public company), and is a former Employer Trustee of the International Association of Machinists National Pension Fund. Mr. Popatia holds a Bachelor of Science degree in Microbiology and a Bachelor of Commerce degree in Finance from the University of British Columbia.
Robert A. Mionis. Mr. Mionis has been President and Chief Executive OfficerCEO of the Corporation since August 1, 2015. Mr. Mionis is responsible for the Corporation's overall leadership, strategy and vision. In conjunction with the Board of Directors, he develops the Corporation's overall strategic plan, including the corporate goals and objectives as well as our approach to risk management. He is focused on positioning the Corporation for long-term profitable growth and ensuring the success of Celestica's customers around the world. From July 2013 until August 2015, he was an Operating Partner at Pamplona Capital Management (Pamplona), a global private equity firm, where he supported several companies across a broad range of industries, including the industrial, aerospace, healthcare and automotive industries. Before joining Pamplona, Mr. Mionis served as President and CEO of StandardAero, leading the company through a period of significant revenue and profitability growth. Over the course of his career, he has held a number of operational and service roles at companies in the aerospace, industrial and semiconductor markets, including General Electric and Axcelis Technologies (each a public company), AlliedSignal, and Honeywell. Mr. Mionis has been servingserved on the board of directors of Shawcor Ltd., a TSX-listed energy services company, since 2018.from 2018 through 2021. He holds a Bachelor of Science in Electrical Engineering from the University of Massachusetts.
Mandeep Chawla. Mr. Chawla has been Chief Financial Officer (CFO) of the Corporation since October 2017. Mr. Chawla is responsible for the planning and management of short and long-term financial performance and reporting activities. He assists the CEO in setting the strategic direction and financial goals of the Corporation, and manages overall capital allocation activities in order to maximize shareholder value. He provides oversight on risk management and governance
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matters, and leads the communication and relationship management activities with key financial stakeholders. Since joining Celestica in 2010, Mr. Chawla has held progressively senior roles in the Corporation before assuming the role of CFO in 2017. Prior to joining Celestica, he held senior financial management roles with MDS Inc., Tyco International, and General Electric. Mr. Chawla was appointed to the Board of Directors of Sleep Country Canada Holdings Inc., a TSX-listed mattress and bedding retailer, effective August 20, 2020, and he is currently the Chair of its Audit Committee. Mr. Chawla holds a Master of Finance degree from Queen's University and a Bachelor of Commerce degree from McMaster University. He is a CPA, CMA.
Todd C. Cooper. Mr. Cooper joined Celestica as Chief Operations Officer in 2018. He is2018, and held that role until January 1, 2022, when he was appointed President, ATS. As Chief Operations Officer, Mr. Cooper was responsible for driving operational and supply chain excellence, quality and technology innovation throughout the Corporation, as well as for the enablement of processes that drive value creation. As part of his role, he leadsHe also led the Corporation's operations, supply chain, quality, global business services and information technology teams. As President, ATS, Mr. Cooper is responsible for strategy development, deployment and after-market services teams.execution of Celestica's A&D, Capital Equipment, HealthTech, Industrial and Energy businesses, as well as for PCI. Mr. Cooper has over 25 years of experience in operations leadership and advisory roles, including considerable experience in developing and implementing operational strategies to drive large-scale improvements for global organizations. Prior to joining Celestica, Mr. Cooper led supply chain, procurement, logistics, and sustainability value creation efforts at KKR, a global investment firm, from 2008 to 2018. Prior to that, he was the Vice President of Global Sourcing in Honeywell's Aerospace Division. He previously held various management roles at Storage Technology Corporation, McKinsey & Company, and served as a Captain in the U.S. Army. He holds a Bachelor of Science in Engineering from the United StatesU.S. Military Academy at West Point, a Master of Science in Mechanical Engineering from the Massachusetts Institute of Technology and an MBA from the MIT Sloan School of Management.
Jason Phillips. Mr. Phillips was appointed President, CCS, effective January 1, 2019. In this role, he is responsible for strategy and technology development, deployment and execution for Celestica's enterprise and communications businesses,businesses. His responsibilities include the strategic development and execution of our HPS business (which includes firmware/software enablement across all primary IT infrastructure data center technologies and aftermarket services) and HPS network, including our JDM offering.new center of excellence in Richardson, Texas, which expands our HPS footprint and increases our North America manufacturing capacity. Mr. Phillips has over 25 years of industry experience and joined Celestica in 2008 and heldholding progressively senior roles within the Corporation’sCorporation's CCS business, most recently as Senior Vice President, Enterprise and Cloud Solutions. Prior to joining Celestica, he held the role of Vice President and General Manager, Personal Communications at Elcoteq, and spent five years at Solectron in senior roles spanning sales, global account management, business unit leadership, and operations. Mr. Phillips holds a Bachelor of Science in Business Administration from the University of North Carolina, Chapel Hill.
There are no family relationships among any of the foregoing persons, and there are no arrangements or understandings with any person pursuant to which any of our directors or executive officers were selected.
None of the directors of the Corporation during 2019, or2022, current directors or 2023 Meeting nominees serve together as directors of other corporations.
The following table identifies the functional competencies, expertise and qualifications of the Corporation's current directors and2023 Meeting nominees pursuant to a skills matrix developed by the Nominating and Corporate Governance Committee to identify functional competencies, expertise and qualifications that our Board would ideally possess:
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B. Compensation
Director Compensation
Director compensation is set by the Board on the recommendation of the Human Resources and Compensation Committee (the “HRCC”)(HRCC) and in accordance with director compensation guidelines and principles established by the Nominating and Corporate Governance Committee.Committee (NCGC). Under these guidelines and principles, the Board seeks to maintain director compensation at a level that is competitive with director compensation at comparable companies, and requires a substantial portion of such compensation to be taken in the form of DSUs (or, at a director’sdirector's election, RSUs, if the Director Share Ownership Guidelines described below have been met). The director fee structure for 20192022 is set forth in Table 1 below.
Table 1: Directors’Directors' Fees(1)
| Element | Director Fee Structure for | ||||
Annual Board Retainer(3) | $360,000 $235,000 | ||||
Travel Fees(4) | $2,500 | ||||
| Annual Retainer for the Audit Committee Chair | $20,000 | ||||
| Annual Retainer for the HRCC Chair | $15,000 | ||||
Annual Retainer for the | |||||
(1) Does not include Mr. Mionis, President and CEO of the Corporation, whose compensation is set out in Table 16. Does not include fees payable to Onex for the service of Mr. Popatia as a director, which are described in footnote 11 to Table 2.
(2) Directors may also receive further retainers and meeting fees for participation on ad hoc committees. No incremental fees were paid to directors for their participation on the Director Search Committee in 2022. The Board has the discretion to grant supplemental equity awards to individual directors as deemed appropriate (no such discretion was exercised in 2022). (3) Paid on a quarterly basis. (4) Payable only to directors who travel outside of their home state or province to attend a Board or Committee meeting. (5) The Chair of the Board also served as the Chair of the NCGC in 2022, for which no additional fee was paid. 98 |
DSU/RSU Election
| Annual Fee Election | ||||||||||||||
| Prior to Satisfaction of Director Share Ownership Guidelines | After Satisfaction of Director Share Ownership Guidelines | |||||||||||||
| Option 1 | Option 2 | Option 1 | Option 2 | Option 3 | ||||||||||
| 100% DSUs | (i) 25% Cash + 75% DSUs or (ii) 50% Cash + 50% DSUs | (i) 100% DSUs or (ii) 100% RSUs | (i) 25% Cash + 75% DSUs or (ii) 50% Cash + 50% DSUs | (i) 25% Cash + 75% RSUs or (ii) 50% Cash + 50% RSUs | ||||||||||
Subject to the terms of the Directors’Directors' Share Compensation Plan, each DSU represents the right to receive one SVS or an equivalent value in cash (at the Corporation’sCorporation's discretion) when the director (a) ceases to be a director of the Corporation and (b) is not an employee of the Corporation or a director or employee of any corporation that does not deal at arm’s‑lengtharm's-length with the Corporation (collectively, “Retires”)Retires). RSUs granted to directors are governed by the terms of the Corporation’sCorporation's Long-Term Incentive Plan (“LTIP”)(LTIP). Each quarterly grant of RSUs will vest in instalments of one-third per year on the first, second and third anniversary dates of the grant. Each vested RSU entitles the holder thereof to one SVS; however, if permitted by the Corporation under the terms of the grant, a director may elect to receive a payment of cash in lieu of SVS. Unvested RSUs will vest immediately on the date that the director Retires. The date used in valuing DSUs and RSUs that vest on retirement for settlement purposes iswill be settled on the date that is 45 days following the date on which the director Retires, or the following business day if the 45th day is not a business day (Valuation Date), or as soon as practicable thereafter. SuchThe amount used to cash-settle DSUs and RSUs, as applicable, are(if applicable) will be based on the closing price of the SVS on the Valuation Date. DSUs will in all cases be redeemed and payable on or prior to the 90th day following the date on which the director Retires.
Grants of DSUs and RSUs to directors are credited quarterly in arrears. The number of DSUs and RSUs, as applicable, granted is calculated by multiplying the amount of such director’sdirector's Annual Fees for the quarter by the percentage of the Annual Fees that the director elected to receive in the form of DSUs or RSUs, as applicable, and dividing the product by the closing price of the SVS on the NYSENew York Stock Exchange (NYSE) on the last business day of the quarter.quarter for DSUs and the closing price of the SVS on the NYSE on the trading day preceding the date of grant for RSUs.
All compensation paid in 20192022 by the Corporation to its directors is set out in Table 2, except for the compensation of Mr. Mionis, President and CEO of the Corporation, which is set out in Table 15. In 2019, the16. The Board (excluding Mr. Popatia – see footnote 10 to Table 2) earned totalan aggregate of $1,916,046 in Total Annual Fees in the amountrespect of $2,170,000,2022, including total grants of $1,396,250$1,021,671 in DSUs and $125,000$367,500 in RSUs.RSUs (excluding fees paid to Mr. Mionis, whose compensation is set out in Table 16, and fees payable to Onex for the service of Mr. Popatia as a director, which are described in footnote 11 to Table 2).
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Table 2: Director Fees Earned in Respect of 20192022
| Name | Annual Fees Earned | Allocation of Annual Fees(1)(2) | |||||||||||||||||||||
| Annual Board Retainer | Annual Committee Chair Retainer | Travel Fees(3) | Total Fees | DSUs(4) | RSUs(4) | Cash(5) | |||||||||||||||||
| Robert A. Cascella | $235,000 | $15,000(6) | $7,500 | $257,500 | $128,750 | — | $128,750 | ||||||||||||||||
| Deepak Chopra | $235,000 | — | — | $235,000 | $117,500 | — | $117,500 | ||||||||||||||||
Françoise Colpron(7) | $58,750 | — | $2,500 | $61,250 | $30,625 | $30,625 | |||||||||||||||||
| Daniel P. DiMaggio | $235,000 | — | $5,000 | $240,000 | $180,000 | — | $60,000 | ||||||||||||||||
Jill Kale(8) | $19,796 | — | — | $19,796 | $19,796 | — | — | ||||||||||||||||
| Laurette T. Koellner | $235,000 | $20,000(9) | $5,000 | $260,000 | $130,000 | — | $130,000 | ||||||||||||||||
| Luis A. Müller | $235,000 | — | $5,000 | $240,000 | $180,000 | — | $60,000 | ||||||||||||||||
Carol S. Perry(10) | $235,000 | — | — | $235,000 | $235,000 | — | — | ||||||||||||||||
Tawfiq Popatia(11) | — | — | — | — | — | — | — | ||||||||||||||||
| Michael M. Wilson | $360,000 | — | $7,500 | $367,500 | — | $367,500 | — | ||||||||||||||||
| Name | Annual Fees Earned | Allocation of Annual Fees(1)(2) | ||||||
| Annual Board Retainer | Annual Committee Chair Retainer | Ad Hoc Committee Fees | Travel Fees | Total Fees | DSUs(3) | RSUs(4) | Cash(5) | |
Robert A. Cascella(6) | $235,000 | – | – | $10,000 | $245,000 | $122,500 | – | $122,500 |
| Deepak Chopra | $235,000 | – | – | – | $235,000 | $117,500 | – | $117,500 |
| Daniel P. DiMaggio | $235,000 | – | – | $10,000 | $245,000 | $183,750 | – | $61,250 |
William A. Etherington(7) | $360,000 | – | – | – | $360,000 | $360,000 | – | – |
Laurette T. Koellner(8) | $235,000 | $20,000(9) | $20,000 | $10,000 | $285,000 | $132,500 | – | $152,500 |
Carol S. Perry(8) | $235,000 | – | $20,000 | – | $255,000 | $235,000 | – | $20,000 |
Tawfiq Popatia(10) | – | – | – | – | – | – | – | – |
Eamon J. Ryan(8) | $235,000 | $15,000(11) | $20,000 | – | $270,000 | – | $125,000(12) | $145,000 |
Michael M. Wilson(8) | $235,000 | – | $30,000 | $10,000 | $275,000 | $245,000 | – | $30,000 |
(2) For 2022, the directors elected to receive their Annual Fees as follows:
| Director | Cash | DSUs | RSUs | ||||||||
| Robert A. Cascella | 50% | 50% | — | ||||||||
| Deepak Chopra | 50% | 50% | — | ||||||||
| Françoise Colpron | 50% | 50% | — | ||||||||
| Daniel P. DiMaggio | 25% | 75% | — | ||||||||
| Jill Kale | — | 100% | — | ||||||||
| Laurette T. Koellner | 50% | 50% | — | ||||||||
| Luis A. Müller | 25% | 75% | — | ||||||||
| Carol S. Perry | — | 100% | — | ||||||||
| Michael M. Wilson | — | — | 100% | ||||||||
(5) Amounts in this column represent the portion of 2022 Annual Fees paid in cash.
| Director | Cash | DSUs | RSUs |
| Robert A. Cascella | 50% | 50% | - |
| Deepak Chopra | 50% | 50% | - |
| Daniel P. DiMaggio | 25% | 75% | - |
| William A. Etherington | - | 100% | - |
| Laurette T. Koellner | 50% | 50% | - |
| Carol S. Perry | - | 100% | - |
| Eamon J. Ryan | 50% | - | 50% |
| Michael M. Wilson | - | 100% | - |
(7) Ms. Colpron was appointed to the Board, and each committee of which she is a member, effective October 1, 2022.
(8) Ms. Kale was appointed to the Board, and each committee of which she is a member, effective December 1, 2022. For December 1, 2022 to December 31, 2022, Ms. Kale received a prorated quarterly annual Board retainer.
(9) Represents the annual retainer for the Chair of the Audit Committee.
(10) Ms. Perry is not standing for re-election to the Board at the Meeting. (11)Mr. Popatia is an officer of Onex and did not receive any compensation in his capacity as a director |
Directors' Ownership of Securities
Outstanding Share‑BasedShare-Based Awards
Information concerning all outstanding share‑basedshare-based awards as of December 31, 20192022 made by the Corporation to each director proposed for election at the Meeting (other than Mr. Mionis, whose information is set out in Table 16)17), including awards granted prior to 2019,2022, is set out in
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Table3. Such awards consist of DSUs and commencing in 2019, RSUs. DSUs that were granted prior to January 1, 2007 may be settled in the form of SVS issued from treasury, SVS purchased in the open market, or an equivalent value in cash (at the discretion of the Corporation). DSUs granted after January 1, 2007individuals set forth below may only be settled in SVS purchased in the open market or an equivalent value in cash (at the discretion of the Corporation). RSUs granted to directors are governed by the terms of the LTIP. Each vested RSU entitles the holder thereof to one SVS; however, if permitted by the Corporation under the terms of the grant, a director may elect to receive a payment of cash in lieu of SVS. In 2005, the Corporation amended the
Table 3: Outstanding Share‑BasedShare-Based Awards
| Number of Outstanding Securities | Market Value of Outstanding Securities(1) ($) | |||||||||||||
| Name | DSUs (#) | RSUs (#) | DSUs ($) | RSUs ($) | ||||||||||
| Robert A. Cascella | 63,596 | — | $716,727 | — | ||||||||||
| Deepak Chopra | 80,198 | — | $903,831 | — | ||||||||||
Françoise Colpron(2) | 2,717 | — | $30,621 | — | ||||||||||
| Daniel P. DiMaggio | 280,040 | — | $3,156,051 | — | ||||||||||
Jill Kale(2) | 1,756 | — | $19,790 | — | ||||||||||
| Laurette T. Koellner | 279,931 | — | $3,154,822 | — | ||||||||||
| Luis A. Müller | 23,399 | — | $263,707 | — | ||||||||||
| Carol S. Perry | 245,300 | — | $2,764,531 | — | ||||||||||
Tawfiq Popatia(3) | — | — | — | — | ||||||||||
| Michael M. Wilson | 283,131 | 63,194 | $3,190,886 | $712,196 | ||||||||||
| Name | Number of Outstanding Securities(1) | Market Value of Outstanding Securities(2) ($) | ||
DSUs (#) | RSUs (#) | DSUs ($) | RSUs ($) | |
Robert A. Cascella(3) | 16,081 | – | $132,990 | – |
| Deepak Chopra | 28,227 | – | $233,437 | – |
| Daniel P. DiMaggio | 211,053 | – | $1,745,408 | – |
| Laurette T. Koellner | 230,081 | – | $1,902,770 | – |
| Carol S. Perry | 154,551 | – | $1,278,137 | – |
Tawfiq Popatia(4) | – | – | – | – |
| Eamon J. Ryan | 262,768 | 16,409 | $2,173,091 | $135,702 |
| Michael M. Wilson | 222,176 | – | $1,837,396 | – |
(2) Mses. Colpron and Kale were appointed to the Meeting (other than Mr. Mionis, whose information is set out in Table 16), such director’s direct or indirect beneficial ownershipBoard of or control or direction over, sharesDirectors effective October 1, 2022 and December 1, 2022, respectively.
(3) No share-based awards inhave been made to Mr. Popatia; however, 340,737 DSUs have been issued to Onex (and are outstanding) pursuant to the Services Agreement since its inception, including 23,173 DSUs issued to Onex for the services of Mr. Popatia as a director of the Corporation as of February 19, 2020, and any changes therein since February 13, 2019 (the date of disclosure in the Corporation’s 2018 Annual Report on Form 20-F (the “2018 Annual Report”).2022. For further information see footnote 11 to Table 2.
Director Share Ownership Guidelines
Each director's holdings of securities are reviewed annually as of December 31. The following table sets out whether each director standing for election at our 2023 Annual Meeting of Shareholders was in order to reflect the change from a retainer plus meeting fee structure to a fixed compensation arrangement for directors. Prior to the change, directors who served on the Board for five years were required to hold five times the previous base retainer. The Director Share Ownership Guidelines were thus modified to reflect the consolidation of the meeting fees into the single fixed annual retainer amount. The current shareholding requirement of 150% (187.5% for the Chair) of the annual retainer results in directors being required to hold shares or share-based awards in an amount substantially similar to five times the previous meeting fee amounts. We believecompliance with the Director Share Ownership Guidelines continue to require our directors to hold a meaningful levelas of shares or share-based awards in accordance with good governance practices.December 31, 2022.
Table 4: Shareholding Requirements
| Shareholding Requirements | |||||||||||
Director(1) | Target Value as of December 31, 2022 | Value as of December 31, 2022(2) | Met Target as of December 31, 2022 | ||||||||
| Robert A. Cascella | $352,500 | $716,727 | Yes | ||||||||
| Deepak Chopra | $352,500 | $903,831 | Yes | ||||||||
Françoise Colpron(3) | $352,500 | $30,621 | N/A | ||||||||
| Daniel P. DiMaggio | $352,500 | $3,156,051 | Yes | ||||||||
Jill Kale(3) | $352,500 | $19,790 | N/A | ||||||||
| Laurette T. Koellner | $352,500 | $3,154,822 | Yes | ||||||||
Luis A. Müller(3) | $352,500 | $263,707 | N/A | ||||||||
| Michael M. Wilson | $675,000 | $3,903,082 | Yes | ||||||||
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(1) As President and CEO of the Corporation, Mr. Mionis is subject to the Executive Share Ownership Guidelines — see Executive Share Ownership. As an officer of Onex, Mr. Popatia is not subject to the Director Share Ownership Guidelines. Directors have five years from January 1, 2016 or from the time of their appointment to the Board, as applicable, to comply with the Director Share Ownership Guidelines. Although applicable directors subject to the Director Share Ownership Guidelines will not be deemed to have breached such Guidelines by reason of a decrease in the market value of the Corporation’sCorporation's securities, such directors are required to purchase further securities within a reasonable period of time after such occurrence to comply with the Director Share Ownership Guidelines. Each director’s holdings
(2) The value of securities are reviewed annually asthe aggregate number of SVS, DSUs and/or unvested RSUs held by each director is determined using a share price of $11.27, which was the closing price of the SVS on the NYSE on December 31. The following table sets out, for each applicable director proposed for election at30, 2022, the Meeting, whether such director was in compliancelast trading day of the year.
(3) Ms. Colpron, Ms. Kale and Dr. Müller were appointed to the Board of Directors effective October 1, 2022, December 1, 2022, and August 31, 2021, respectively and will be required to comply with the Director Share Ownership Guidelines aswithin five years of December 31, 2019.their respective appointments.
Director Attendance
Director(1) | Shareholding Requirements | ||
Target Value as of December 31, 2019 | Value as of December 31, 2019(2) | Met Target as of December 31, 2019 | |
Robert A. Cascella(3) | $352,500 | $132,990 | Not yet applicable |
Deepak Chopra(4) | $352,500 | $233,437 | Not yet applicable |
| Daniel P. DiMaggio | $352,500 | $1,745,408 | Yes |
| Laurette T. Koellner | $352,500 | $1,902,770 | Yes |
| Carol S. Perry | $352,500 | $1,278,137 | Yes |
| Eamon J. Ryan | $352,500 | $2,308,793 | Yes |
| Michael M. Wilson | $352,500 | $1,837,396 | Yes |
respective committee meetings. The following table sets forth the attendance of directors at Board meetings and at meetings of those standing committees of which they are members, from January 1, 20192022 to February 19, 2020.21, 2023. All then-members of the Board attended the Corporation’s last annual meetingCorporation's 2022 Annual Meeting of shareholders.Shareholders except for Mr. Popatia (2022 AGM).
Table 6: Directors’5: Directors' Attendance at Board and Committee Meetings
| Director | Board | Audit Committee | HRCC | NCGC | Meetings Attended % | |||||||||||||||
| Board | Committee | |||||||||||||||||||
| Robert A. Cascella | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
| Deepak Chopra | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
Françoise Colpron(1) | 3 of 3 | 2 of 2 | 3 of 3 | 2 of 2 | 100% | 100% | ||||||||||||||
| Daniel P. DiMaggio | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
Jill Kale(1) | 2 of 2 | 1 of 1 | 2 of 2 | 1 of 1 | 100% | 100% | ||||||||||||||
| Laurette T. Koellner | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
| Robert A. Mionis | 8 of 8 | — | — | — | 100% | — | ||||||||||||||
| Luis A. Müller | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
| Carol S. Perry | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
| Tawfiq Popatia | 7 of 8 | — | — | — | 88% | — | ||||||||||||||
| Michael M. Wilson | 8 of 8 | 6 of 6 | 6 of 6 | 5 of 5 | 100% | 100% | ||||||||||||||
| Meetings Attended % | ||||||
| Director | Board | Audit | Human Resources and Compensation | Nominating and Corporate Governance | Board | Committee |
Robert A. Cascella(1) | 7 of 8 | 5 of 5 | 4 of 5 | 3 of 3 | 87% | 92% |
| Deepak Chopra | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
| Daniel P. DiMaggio | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
William A. Etherington(2) | 8 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 88% | 100% |
| Laurette T. Koellner | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
| Robert A. Mionis | 9 of 9 | – | – | – | 100% | – |
| Carol S. Perry | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
| Tawfiq Popatia | 8 of 9 | – | – | – | 88% | – |
| Eamon J. Ryan | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
| Michael M. Wilson | 9 of 9 | 6 of 6 | 6 of 6 | 4 of 4 | 100% | 100% |
(1) Mses. Colpron and Kale were appointed to the Board of Directors, and each of the Audit, HRCC and NCGC committees, effective October 1, 2022 and December 1, 2022, respectively.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis sets out the policies of the Corporation for determining compensation paid to the Corporation’sCorporation's CEO, its Chief Financial Officer (“CFO”),CFO, and the three other most highly compensated executive officers in 2022 (collectively, the “NamedNamed Executive Officers”Officers or “NEOs”)NEOs). The NEOs who are the subject of this Compensation Discussion and Analysis are:
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  | Robert A. Mionis | ||||
Mr. Mionis is responsible for | |||||
Prior to joining Celestica in 2015, Mr. Mionis was an Operating Partner at Pamplona, a global private equity firm where he supported several companies across a broad range of industries, including the industrial, aerospace, healthcare and automotive industries. Before joining Pamplona, Mr. Mionis served as President and CEO of StandardAero, leading the company through a period of significant revenue and profitability growth. Over the course of his career, he has held a number of operational and service roles at companies in the aerospace, industrial and semiconductor markets, including General Electric, Axcelis Technologies, AlliedSignal and Honeywell. From 2018 to 2021, Mr. Mionis served on the board of Shawcor Ltd., a Canadian oilfield services company listed on the TSX. Mr. Mionis is a member of the Board of Directors. | |||||
  | Mandeep Chawla | ||||
Mr. Chawla is responsible for the planning and management of short and long-term financial performance and reporting activities. He assists the CEO in setting the long-term strategic direction and financial goals of the Corporation, and manages overall capital allocation activities in order to maximize shareholder value. He provides oversight on risk management and governance matters, and leads the communication and relationship management activities with key financial stakeholders. | |||||
Mr. Chawla joined Celestica in 2010 and held progressively senior roles in the Corporation before assuming the role of CFO in 2017. Prior to joining Celestica, he held senior financial management roles with MDS Inc., Tyco International, and General Electric. Mr. Chawla was appointed to the Board of Directors of Sleep Country Canada Holdings Inc., a TSX-listed mattress and bedding retailer, effective August 20, 2020, and he is currently the Chair of its Audit Committee. Mr. Chawla holds a Master of Finance degree from Queen’s University and a Bachelor of Commerce degree from McMaster University. He is a CPA, CMA. | |||||
  | Jason Phillips — President, Mr. Phillips was appointed President, CCS, effective January 1, 2019. In this role, he is responsible for strategy and technology development, deployment and execution for Celestica's enterprise and communications businesses. His responsibilities include the strategic development and execution of our HPS business (which includes firmware/software enablement across all primary IT infrastructure data center technologies and aftermarket services) and HPS network, including our new center of excellence in Richardson, Texas, which expands our HPS footprint and increases our North America manufacturing capacity. | ||||
| Mr. Phillips has over 25 years of industry experience and joined Celestica in 2008 holding progressively senior roles within the Corporation’s CCS business, most recently as Senior Vice President, Enterprise and Cloud Solutions. Prior to joining Celestica, he held the role of Vice President and General Manager, Personal Communications at Elcoteq, and spent five years at Solectron in senior roles spanning sales, global account management, business unit leadership, and operations. Mr. Phillips holds a Bachelor of Science in Business Administration from the University of North Carolina, Chapel Hill. | |||||
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 | Todd C. Cooper — President, ATS Commencing in 2022, Mr. | ||||
 | ||
Mr. Cooper has over 25 He holds a Bachelor of Science in Engineering from the | ||
  | |||||
Yann Etienvre — Chief Operations Officer Mr. after-market services teams. | |||||
Mr. | |||||
A description and explanation of the significant elements of compensation awarded to the foregoing NEOs during 20192022 is set out in the section Compensation Discussion and Analysis – 2019forth below under 2022 Compensation Decisions.
Note Regarding Non-IFRS Financial Measures
This Compensation Discussion and Analysis contains references to non-IFRS operating margin, adjusted ROIC, andreturn on invested capital (ROIC), adjusted free cash flow, and adjusted earnings per share (EPS), each of which is a non International Financial Reporting Standards (“IFRS”) measure.non-IFRS financial measure (including non-IFRS financial ratios). With respect to all references to these measures (wherever used herein), please note the following:
•Non-IFRS operating margin is defined as non-IFRS operating earnings divided by revenue. Non-IFRS operating earnings is defined as earnings (loss)from operations before income taxes, Finance Costs (defined below), employee stock-based compensationSBC expense, amortization of intangible assets (excluding computer software), and Other Charges, (recoveries) (definednet of recoveries (as defined below), and acquisition inventory fair value adjustments (“FVAs”).
•Non-IFRS adjusted ROIC is determined by dividing annualized non-IFRS operating earnings by average net invested capital, which is derived from IFRS financial measures and is defined as total assets less: cash, right-of-use (“ROU”) assets, accounts payable, accrued and other current liabilities and provisions, and income taxes payable, using a five-point average to calculate average net invested capital for the year. In connection with our adoption of
•Non IFRS 16, Leases (“IFRS 16”) as of January 1, 2019, we recognize ROU assets and related lease obligations on the applicable lease commencement dates. As IFRS 16 did not require the restatement of prior period financial statements, and in order to preserve comparability with prior calculations, commencing in the first quarter of 2019, we excluded the impact of our ROU assets from our calculation of net invested capital.
•Non-IFRS adjusted EPS is determined by dividing non-IFRS adjusted net earnings by the number of diluted weighted average shares outstanding. Non-IFRS adjusted net earnings is a non-IFRS financial measure and is defined as IFRS 16, as such payments were previously (but are no longer) reported in cash provided by (used
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net earnings (loss) before employee SBC expense, amortization of intangible assets (excluding computer software), Other Charges, net of recoveries, and adjustments for taxes (representing the tax effects of our non-IFRS adjustments and non-core tax impacts (tax adjustments related to acquisitions, and certain other tax costs or recoveries related to restructuring actions or restructured sites)).
•Finance Costs consist of interest expense and fees related to the Corporation’sour credit facility (including debt issuance and related amortization costs, but not waiver fees, which are recorded in Other Charges)costs), our interest rate swap agreements, our TRS Agreement, our accounts receivable sales program and customer supplier financing programs, and beginning in the first quarter of 2019, interest expense on our lease obligations, under IFRS 16, net of interest income earned.
•Other Charges, (recoveries)net of recoveries consist of restructuring charges, net of recoveries, transition costs (costs related to: (i) manufacturing line transfers from closed sites; (ii) the sale of real properties unrelated to restructuring actions; and (iii) in prior periods, the relocation of our Toronto manufacturing operations and corporate headquarters in connection with the move2019 sale of our corporate headquarters into and out of a temporary location; and certain capital equipment manufacturing line transfers); transition recoveries (the gain on the sale of ourformer Toronto real property); net impairment charges; Acquisition Costs (as defined below); legal settlements (recoveries); and specified credit facility-related charges.
•Acquisition Costs consist of acquisition-related consulting, transaction and integration costs, and charges or releases related to the subsequent re-measurementremeasurement of indemnification assets; legal settlements (recoveries); credit facility-related charges (consistingassets or the release of the accelerated amortization of unamortized deferred financing costsindemnification or other liabilities recorded during the second quarter of 2018, and fees incurred in the fourth quarter of 2019 in connection with waiversacquisitions.
Prior to Q2 2022, non-IFRS adjusted free cash flow was referred to as non-IFRS free cash flow, but has been renamed. Its composition remains unchanged. In addition, prior to Q2 2022, non-IFRS operating earnings was reconciled to IFRS earnings before income taxes, and non-IFRS operating margin was reconciled to IFRS earnings before income taxes as a percentage of specified covenant defaults under our credit facility (and related cross defaults));revenue, but commencing in Q2 2022, are reconciled to IFRS earnings from operations, and post-employment benefit plan losses incurredIFRS earnings from operations as a percentage of revenue, respectively (as the most directly comparable IFRS financial measures). This modification did not impact either resultant non-IFRS financial measure. Since non-IFRS adjusted ROIC is based on non-IFRS operating earnings, in comparing this measure to the most directly-comparable financial measure determined using IFRS measures (which we refer to as IFRS ROIC), commencing in the fourththird quarter of 2019 related to changes in labor regulations in Thailand.2022, our calculation of IFRS ROIC is based on IFRS earnings from operations (instead of IFRS earnings before income taxes). This modification did not impact the determination of non-IFRS adjusted ROIC. Prior period reconciliations and calculations included herein reflect the current presentation.
See “Non-IFRS measures” in the Corporation’s Management’s Discussion and Analysis for the first three quarters of 2019 (included in Forms 6-K available at www.sec.gov) and"Non-IFRS Financial Measures" in Item 5 of this Annual Report for, among other things, a discussion of the exclusions used to determine these non-IFRS financial measures and ratios, how these non-IFRS financial measures and ratios are used, as well asand a reconciliation of historical non-IFRS operating margin, non-IFRS adjusted ROIC,financial measures and non-IFRS free cash flowratios to the most directly comparable IFRS measures.financial measures and ratios, which reconciliations are incorporated herein by reference. These non-IFRS financial measures and ratios do not have any standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies.
Compensation Objectives
The Corporation’sCorporation's executive compensation philosophy is to attract, motivate and retain the leaders who drive the success of the Corporation. In light of this philosophy, we have designed our executive compensation programs and practices to pay for performance,pay-for-performance, adhere to the Corporation's risk profile, of the Corporation, align the interests of executives and shareholders, incentivize executives to work as a team to achieve our strategic objectives, ensure direct accountability for annual and long-term operating results, and the Corporation’s long-term financial performance and to reflect both business strategy and market norms. The HRCC reviews compensation policies and practices regularly, considers related risks, and makes any adjustments it deems necessary to ensure theour compensation policies are not reasonably likely to have a material adverse effect on the Corporation.
A substantial portion of the compensation of our executives is linked to the Corporation’sCorporation's performance. The HRCC establishes total target compensation and certain elements of compensation (base salary, short-term incentives and long-term incentives) for the NEOs with reference to the median compensation of a comparator group of Celestica’s competitors, major suppliers, customers,the Comparator Group (defined under Comparator Group below), and other major international technology companies that generally fall in the range of 50% to 200% of Celestica’s revenue (such group, the “Comparator Group”). However, neither each element of compensation nor total compensation is expectedfactors including experience, internal pay equity, work location, tenure, and role. Rather than setting pay formulaically to match the median of suchexactly, the Comparator Group exactly.is primarily used for setting an anchor point by which to test the reasonableness of compensation. NEOs have the opportunity for higher compensation for performance that exceeds target performance goals, and will receive lower compensation for performance that is below target performance goals.
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| What We Do | What We Don't Do | ||||||||||
| Pay-for-performance | ✔ | No repricing of options | X | ||||||||
| Focus on long-term compensation using a balanced mix of compensation elements | ✔ | No hedging or pledging by executives of Celestica securities | X | ||||||||
| Ensure the mix of executive compensation balances long-term success, annual performance, and adequate fixed compensation | ✔ | No steep payout cliffs at certain performance levels that may encourage short-term business decisions to meet payout thresholds | X | ||||||||
| Consider market norms and competitive pay practices | ✔ | No multi-year guarantees | X | ||||||||
| Mitigate undue risk in compensation programs | ✔ | No uncapped incentive plans | X | ||||||||
| Retain an independent advisor to the HRCC | ✔ | ||||||||||
| Stress-test compensation plan designs | ✔ | ||||||||||
| Apply stringent share ownership policies and post- employment hold period for the CEO's shares | ✔ | ||||||||||
| Clawback incentive-based compensation under specified circumstances | ✔ | ||||||||||
| Maintain equity plans that provide for change of control treatment for outstanding equity based on a “double trigger” requirement | ✔ | ||||||||||
| Set minimum corporate profitability requirement for CTI payments | ✔ | ||||||||||
| Establish caps on PSU payout factors | ✔ | ||||||||||
| Provide annual shareholder "say-on-pay" advisory vote | ✔ | ||||||||||
The 20192022 compensation package was designed to:
•ensure executives are compensated fairly and in a way that does not result in the Corporation incurring undue risk or encouraging executives to take inappropriate risks;
•provide competitive fixed compensation (i.e., base salary and benefits), as well as a substantial amount of at-risk pay through our annual and equity‑basedequity-based incentive plans;
•reward executives through both annual cash incentives and long-term equity‑based incentives, forfor: achieving short-term operational and financial results that meet or exceedthrough annual cash incentives based on the Corporation’s business planCorporation's Annual Operating Plan (AOP); achieving long-term operational and that are superior to those of direct competitors in the electronics manufacturing services (“EMS”) industry and, in addition, in the
•align the interests of executives and shareholders through long-term equity‑basedequity-based compensation;
•recognize tenure and utilize a multi-year approach for setting and transitioning target compensation for executives who are new in their role;
•reflect internal equity, recognize fair and appropriate compensation levels relative to differing roles and responsibilities, and encourage executives to work as a team to achieve corporate results; and
•ensure direct accountability for the annual operating results and the long-term financial performance of the Corporation.
Independent Advice
The HRCC, which has the sole authority to retain and terminate an executive compensation consultant to the HRCC, has engaged Willis Towers Watson (the “Compensation Consultant”)(Compensation Consultant) since October 2006 as its independent compensation consultant to assist in identifying appropriate comparator companies against which to evaluate the Corporation’sCorporation's compensation levels, to provide data about those companies, and to provide observations and advice with respect to the Corporation’sCorporation's compensation practices versus those of the Comparator Groupchosen comparator companies and the market in general.
The Compensation Consultant also provides advice (upon request) to the HRCC on the policy recommendations prepared by management and keeps the HRCC apprised of market trends in executive compensation. The Compensation Consultant attended portions of all HRCC meetings held in 2019,2022, in person, or by telephone or virtually, as requested by the Chair of the HRCC. At each of its meetings, the HRCC held an in camerasession with the Compensation Consultant without any member of management being present. Decisions made by the HRCC, however, are the responsibility of the HRCC and may reflect factors and considerations supplementary to the information and advice provided by the Compensation Consultant.
Each year, the HRCC reviews the scope of activities of the Compensation Consultant and, if it deems appropriate, approves the corresponding budget. During such review, the HRCC also considers the independence factors required to be
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considered by the NYSE prior to the selection or receipt of advice from a compensation consultant. After consideration of such independence factors and prior to engaging the Compensation Consultant in 2019,2022, the HRCC determined that the Compensation Consultant was independent. The Compensation Consultant meets with the Chair of the HRCC and management at least annually to identify any initiatives requiring external support and agenda items for each HRCC meeting throughout the year. The Compensation Consultant reports directly to the Chair of the HRCC and is not engaged by management. The Compensation Consultant may, with the approval of the HRCC, assist management in reviewing and, where appropriate, developing and recommending compensation programs to align the Corporation’sCorporation's practices with competitive practices. Any such service in excess of $25,000 provided by the Compensation Consultant relating to executive compensation must be pre‑approvedpre-approved by the Chair of the HRCC. In addition, any non-executive compensation consulting service in excess of $25,000 must be submitted by management to the HRCC for pre-approval, and any services that will cause total non‑executivenon-executive compensation consulting fees to exceed $25,000 in aggregate in a calendar year must also be pre‑approvedpre-approved by the HRCC.
The following table sets out the fees paid by the Corporation to the Compensation Consultant in each of the past two years:
Table 7:6: Fees of the Compensation Consultant
| Year Ended December 31 | ||||||||
| 2022 | 2021 | |||||||
Executive Compensation-Related Fees(1) | C$312,108 | C$272,238 | ||||||
All Other Fees(2) | C$— | C$14,980 | ||||||
| Year Ended December 31 | ||
| 2019 | 2018 | |
Executive Compensation-Related Fees(1) | C$262,059 | C$328,828 |
| All Other Fees | – | – |
(2) Other fees for 2021 included a competitive market analysis for certain of our businesses.
Compensation Process
Executive compensation is determined as part of an annual process followed by the HRCC, as supported by the Compensation Consultant. The HRCC reviews and approves compensation for the CEO and the other NEOs, including base salaries, target annual incentive awards under the CTI and equity‑basedequity-based incentive grants. The HRCC evaluates the performance of the CEO relative to financial and business goals and objectives approved by the Board from time to time for such purpose. The HRCC reviews data for the Comparator Group and other competitive market data, and consults with the Compensation Consultant before exercising its independent judgment to determine appropriate compensation levels. The CEO reviews the performance evaluations of the other NEOs with the HRCC and provides compensation recommendations. The HRCC considers these recommendations, reviews market compensation information, consults with the Compensation Consultant, and then exercises its independent judgment to determine if any adjustments are required prior to approval of the compensation of such other NEOs. The CEO and the other NEOs are not present at the HRCC meetings when their respective compensation is discussed.
The HRCC generally meets five times a year, in January, April, July, October and December. The annual executive compensation process is as follows:typically follows the calendar outlined below:
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| January | •Determine achievement of the corporate performance factor (based on the Corporation's year end results as approved by the Audit Committee) and the individual performance factors for CTI payments for the previous year •Determine achievement of performance for the PSUs that •Approve corporate performance objectives for the CTI for the current year •Approve performance goals for PSUs granted in the current year •Review individual target compensation levels and approve base salary, target under the CTI and long-term incentives for the current year •Conduct risk assessment of compensation programs •Review scope of activity of Compensation Consultant and approve fees for the current year •Review executive compensation disclosure •Review the corporate goals and objectives relevant to CEO compensation and evaluate CEO performance in light of the financial and business goals and objectives approved by the Board for the previous year •Review and approve total compensation package for CEO for the current year, including stress-test of performance-based compensation | ||||
| April | •Annual compensation policy review and pension plan review •Assess performance of Compensation Consultant •Diversity and inclusion update | ||||
| July | •Review and consider shareholder feedback from say-on-pay vote •Review trends and •Review and approve Comparator Group for the following year (based on the recommendation of the Compensation Consultant) •Review talent management strategy and succession plans •Conduct pay-for-performance alignment review | ||||
| October | •Review market benchmark reports for the CEO and other NEOs •Review | ||||
| December | •Review •Review preliminary compensation recommendations and performance objectives for the following year, including base salary recommendations and the value and mix of equity-based incentives (NEO compensation recommendations are developed by the CEO. The CEO's compensation recommendations are determined by the HRCC in consultation with the Compensation Consultant and the CHRO). By reviewing the compensation proposals in advance, the HRCC is afforded sufficient time to discuss and provide input regarding proposed compensation changes prior to the January meeting at which time the HRCC approves the compensation proposals, revised as they deem appropriate, based on input provided at the December meeting. •Preliminary evaluation of individual performance relative to objectives | ||||
HRCC Discretion
The HRCC may exercise its discretion to either award compensation absent attainment of a relevant performance goal or similar condition, or to reduce or increase the size of any award or payout to any NEO. The HRCC did not exercise such discretion for 2019any NEO compensation with respect to any NEO.
Compensation Risk Assessment and Governance Analysis
The HRCC, in performing its duties and exercising its powers under its mandate, considers the implications of the risks associated with the Corporation’sCorporation's compensation policies and practices. This includes: identifying any such policies or practices that encourage executive officers to take inappropriate or excessive risks; identifying risks arising from such policies and practices that are reasonably likely to have a material adverse effect on the Corporation; and considering the risk implications of the Corporation’sCorporation's compensation policies and practices and any proposed changes to them.
The Corporation’sCorporation's compensation programs are designed with a balanced approach aligned with its business strategy and risk profile. A number of compensation practices have been implemented to mitigate potential compensation policy risk.It is the HRCC’sHRCC's view that the Corporation’s 2019Corporation's 2022 compensation policies and practices did not promote excessive risk-taking that would be reasonably likely to have a material adverse effect on the Corporation, and that appropriate risk mitigation features are in place within the Corporation’sCorporation's compensation program. In reaching its opinion, the HRCC reviewed key risk-mitigating features in the Corporation’sCorporation's compensation governance processes and compensation structure including the following:
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| Governance | |||||
| Corporate Strategy Alignment | •Our executive compensation program is designed to link executive compensation outcomes with the execution of business strategy and align with shareholder interests. | ||||
| Compensation Decision-Making Process | • | ||||
| Shareholder Engagement | •We have a shareholder outreach program through which we solicit feedback on our corporate governance, executive compensation program, and other matters. | ||||
| Non-binding Shareholder Advisory Vote on Executive Compensation | • | ||||
Annual Review of Incentive Programs | •Each year, •When new compensation programs are considered, they are | ||||
| External Independent Compensation Advisor | •On an ongoing basis, the HRCC retains the services of an independent compensation advisor to provide an external perspective as to marketplace changes and best practices related to compensation design, governance and compensation risk management. | ||||
Overlapping Committee Membership | •All of | ||||
| Compensation Program Design | |||||
Review of Incentive Programs | •At appropriate intervals, | ||||
| Fixed versus Variable Compensation | •For the NEOs, a significant portion of target total direct compensation is delivered through variable compensation (CTI and •The majority of the value of target variable compensation is delivered through grants under •The mix of variable compensation provides a strong pay-for-performance relationship. •The NEO compensation package provides a competitive base level of compensation through salary, and mitigates the risk of encouraging the achievement of | ||||
"One-company" Annual Incentive Plan | •Celestica’s | ||||
Balance of Financial Performance Metrics as well as Absolute and Relative Performance Metrics | •The CTI ensures a balanced assessment of performance with ultimate payout tied to measurable corporate financial metrics. •Individual performance is assessed based on business results, teamwork and key accomplishments, and market performance is captured through RSUs as well as PSUs (which vest based on performance relative to both absolute and relative financial targets). | ||||
| Minimum Performance Requirements and Maximum Payout Caps | •A corporate profitability requirement must be met for any payout to occur under the CTI. •Additionally, target performance on a second performance measure must be achieved for payment above •Each of the CTI payouts and PSU | ||||
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| Share Ownership Requirement | • •This practice also mitigates against executives taking inappropriate or excessive risks to improve •In the event of the cessation of Mr. Mionis’ employment with | ||||
Anti-hedging and Anti-pledging Policy | •Executives and directors are prohibited from: entering into speculative transactions and transactions designed to hedge or offset a decrease in the market value of | ||||
• | |||||
| "Double Trigger" | |||||
•The LTIP and Celestica Share Unit Plan | |||||
| Severance Protection | • | ||||
| Pay-For-Performance Analysis | •Periodic scenario-testing of the executive compensation programs is conducted, including a pay-for-performance analysis. | ||||
Comparator Group
While the Corporation is incorporated and headquartered in Canada, ourwe have a global business is global,strategy and we compete for executive talent worldwideworldwide. We operate a network of sites and centers of excellence strategically located in North America, Europe and Asia, with companies inspecialized end-to-end supply chain capabilities tailored to meet specific market and customer product lifecycle requirements.
The EMS industry is highly competitive, and certain of our businesses are extensively technical and highly specialized requiring a highly skilled leadership team.
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2022 Comparator Group
Our approach to executive pay benchmarking reflects our strategic direction, the technology industry. Ourevolution of our business model, and external market conditions. It is important for the comparator group that is used to benchmark compensation (Comparator Group) to reflect the global recruiting strategy has been evidenced byscale of executive talent required to drive our strategic vision, our market for executive talent and the fact that severalfinancial characteristics and our highly specialized and diversified operations.
A majority of our current executive officers were not recruited from Canada; and in fact, the Corporation’sCanadian market. Our three most recent CEOs (including Mr. Mionis) and three of the four other NEOs have come from the United States. There areU.S. We have no EMS competitor companiescompetitors in the Comparator Group that are headquartered in Canada. ForCanada, and non-EMS companies competitors of similar size and scopethat are based exclusively within Canada woulddo not provide the desired global perspective. As a result,EMS business and operational knowledge required for the determinationcomplexity of our business.
In determining the Comparator Group is not bound by geographic limitations and instead includes a representation from a broad group of relevant companiesfor 2022, the HRCC considered the following criteria, which are publicly traded and against which the Corporation competes for executive leaders. Most of the companies in the current Comparator Group are based in the United States. The Comparator Group chosen in 2018 was used to establish 2019 executive compensation. ARRIS International was acquired at the end of 2018 and was subsequently removed from the Comparator Group in 2019. The Comparator Group chosen in 2019 to establish 2020 executive compensation was reviewed and approvedwere prepared by the HRCC, and is set out in Table 8 below.
Compensation Consultant:
•Since revenue is the financial measure that is most strongly correlated with executive pay: ◦Companies with revenue generally in the range of 50% to 200% of the Corporation's revenue were considered ◦Celestica’s revenue was above the median of the Comparator Group •Other financial measures were reviewed in addition to revenue, such as market capitalization, earnings before interest and taxes (EBIT) margin and other financial indicators which align with our strategic direction •These financial attributes ensure the alignment of executive pay with that of companies with similar financial characteristics as well as affordability of incentive plans | ||||||
•Companies with similar scope, complexity and global operations •Consideration was given to Celestica's U.S.-based market for executive talent | ||||||
•Similarly sized industry comparables were further refined based on other financial indicators •Technology companies associated with the EMS industry | ||||||
•Analysis of the comparator groups of certain peer companies within the EMS industry | ||||||
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Based on these criteria, the Compensation Consultant recommended and the HRCC approved the following Comparator Group, which is comprised of U.S.-based technology companies, to be used in the determination of 2022 executive compensation:
Table 7: Comparator Group
| Ciena Corp. | ON Semiconductor Corporation | ||||
| CommScope Holdings Company, Inc. | Plexus Inc. | ||||
| Curtiss-Wright Corporation | Sanmina Corporation | ||||
| Diebold Nixdorff, Incorporated | ScanSource Inc. | ||||
| Juniper Networks, Inc. | Seagate Technology PLC | ||||
| Keysight Technologies Inc. | Trimble Inc. | ||||
| NCR Corporation | Xerox Holdings Corporation | ||||
Additionally, broader market compensation survey data for other similarly‑sizedsimilarly-sized organizations as well as U.S. technology companies and Canadian market datageneral industry companies with global operations provided by the Compensation Consultant iswas analyzed in accordance with a process approved by the HRCC. The HRCC also considered suchproxy disclosure for companies in the Comparator Group, as well as survey data, among other factors, in making compensation decisions. In addition to the survey data, proxy disclosure of the Comparator Group companiesdecisions for the most recently completed fiscal year was considered when determining the compensation of the CEO and the other NEOs.
2023 Comparator Group
As part of the annual executive compensation process, the HRCC reviewed the Comparator Group in July 2022 with respect to 2023 executive compensation, and no changes were made.
Anti-Hedging and Anti-Pledging Policy
Our Insider Trading Policy prohibits executives from, among other things, entering into speculative transactions and transactions designed to hedge or offset a decrease in the market value of securities of the Corporation. Accordingly, executive officers may not sell short the Corporation’sCorporation's securities, buy or sell put or call options on the Corporation’sCorporation's securities, or purchase financial instruments (including prepaid variable contracts, equity swaps, collars or units of exchange funds) which are designed to hedge or offset a decrease in the market value of the Corporation’sCorporation's securities. Executive officers are also prohibited from purchasing the Corporation’sCorporation's securities on margin, borrowing against the Corporation’sCorporation's securities held in a margin account, or pledging the Corporation’sCorporation's securities as collateral for a loan. The directors of the Corporation also must comply with the provisions of the Insider Trading policy which prohibit hedging and/or pledging of the Corporation’sCorporation's securities.
Additionally, the Executive Policy Guidelines include provisions which provide that all incentive compensation paid or awarded to executives (including the NEOs) may be subject to clawback in the event an executive has committed a material breach of certain post-employment provisions (non-competition, non- solicitation or disclosure of confidential information). The clawbacks include reduction of the Corporation during number or value of, or cancellation and termination, of all or any portion of any incentive compensation that 12-month period.was awarded or granted to the executive or vested, in each case in the two-year period prior to the date of breach and/or disgorgement or reimbursement of all or any portion of any incentive compensation paid, awarded or granted to such executive, as well as proceeds realized from any such award or grant, in each case in the two year period prior to the date of breach.
For the purposes of these clawbacks and recoupment, incentive compensation means, without limitation, short-term cash incentives, equity-based incentives and any other incentive-based compensation.
In addition, under the terms of the stock option grants and the PSU and RSUall equity grants made to employees (including the NEOs) under the LTIP and the CSUP, a NEO is required by the Corporation to repay an amount equal to the market value of the shares (or in the case of options, the intrinsic value realized by the executive) at the time of release, net of taxes, is required to be repaid to the Corporation if, within 12 months of the release date, the executive:there was a breach of certain post-employment provisions (non- competition, non-solicitation or disclosure of confidential information).
Executives who are terminated for cause also forfeit all unvested RSUs, PSUs and stock options as well as all vested and unexercised stock options.
Executive Share Ownership
| Name | Executive Share Ownership Guidelines | Share and Share Unit Ownership (Value)(1) | Share and Share Unit Ownership (Multiple of Salary) | ||||||||
Robert A. Mionis(2) | $4,750,000 (5 × salary) | $24,066,037 | 25.3x | ||||||||
| Mandeep Chawla | $1,650,000 (3 × salary) | $4,243,899 | 7.7x | ||||||||
| Jason Phillips | $1,455,000 (3 × salary) | $5,182,047 | 10.7x | ||||||||
| Todd C. Cooper | $1,455,000 (3 × salary) | $7,009,681 | 14.5x | ||||||||
| Yann Etienvre | $1,455,000 (3 × salary) | $1,816,014 | 3.7x | ||||||||
(1) Consists of: (i) SVS beneficially owned as of December 31, 2022, (ii) all unvested RSUs held as of December 31, 2022, and (iii) PSUs that settled on February 4, 2023 at 200% of target, which, on December 31, 2022, was the Corporation's anticipated payout and at vesting was the actual payout; the value of which was determined using a share price of $11.27, the closing price of SVS on the NYSE on December 30, 2022, the last trading day of the year.
(2) For additional details regarding Mr. Mionis' share and share unit ownership, see Table 17 and Item 6.E. of this Annual Report.
The CEO Employment Agreement provides that, in the event of the cessation of Mr. Mionis' employment with the Corporation for any reason, he will be required to retain the share ownership level set out in the Executive Share Ownership Guidelines on his termination date for the 12-month period immediately following his termination date.
Compensation Elements for the Named Executive Officers
| Elements | Rationale | ||||
| Base Salary | Provides a fixed level of compensation intended to reflect the scope of an | ||||
| Annual Cash Incentives | Aligns executive performance with the | ||||
| Equity-Based Incentives | |||||
●RSUs | Provides a strong incentive for long-term executive retention | ||||
●PSUs | Aligns | ||||
| Benefits | Designed to help ensure the health and wellness of executives | ||||
| Pension | Designed to assist executives in saving for their retirement | ||||
| Perquisites | Perquisites are provided to executives on a case-by-case basis as considered appropriate and in the interests of the Corporation | ||||
Compensation Element Mix
In order to ensure that our executive compensation program is market competitive, we annuallyperiodically review the program design and annually review pay levels of companies in the Comparator Group and other competitive market data. We assess
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total target direct compensation (base salary, annual cash incentive and equity grants) as well as specific elements of compensation when reviewing market information relative to our executive compensation program. The HRCC uses the median of the Comparator Group as a guideline when determining total target direct compensation, but is not bound to any target percentile for any specific element of compensation. In addition to the Comparator Group,competitive market data, we also consider executive compensation in the context of an executive's level of responsibility, experience, performance relative to their internal peers where responsibilities and experience vary and we conduct a vertical compensation analysis in which we look at various internal business organizations or functions and compare levels of compensation with a view to succession within such organization or function.planning. In determining appropriate positioning relative to the Comparator Group and internal peers, we utilize a multi-year approach for setting and transitioning target compensation for executives who are new in their role.
The at‑riskat-risk portion of total compensation varies by role and executive level, but has the highest weighting at the most senior levels of management. CTI awards and certain equity‑basedequity-based incentive plan awards are contingent upon the Corporation’sCorporation's financial and operational performance and are therefore at-risk. By making a significant portion of total target direct compensation variable, the Corporation intends to continue to align NEO compensation with shareholder interests.
At-Risk Compensation
The relative weightingvast majority of compensation paid to the NEOs is in the form of compensation elements forthat is variable and at-risk based on performance. A significant component of our executive at-risk pay is equity-based incentives, whose value is linked directly to the CEOvalue of our SVS, ensuring alignment with the interests of shareholders. Further, CTI awards are contingent upon the Corporation's financial and the other NEOs (average) for 2019 is set forth below.operational performance and are therefore also at-risk.
 |  |
Base Salary
The objective of base salary is to attract, reward and retain top talent. Base salaries for executive positions are determined with consideration given to the market median of the Comparator Group. Base salaries are reviewed annually and adjusted if appropriate, to reflect individual performance, relevant knowledge, experience and the executive’sexecutive's level of responsibility within the Corporation.
Celestica Team Incentive Plan
The CTI is a broad-based annual incentive program for all eligible employees, including the NEOs. The objective of the CTI is to motivate employees to achieve our short-term corporate goals, and to reward all eligible employees, includingthem accordingly. The payout amount for each participant in the NEOs, for theCTI is based on actual achievement of annual objectives. CTI awards for the NEOs arelevels with respect to: (i) a corporate performance factor (CPF), which is based on the achievement of pre‑determined CPFspecified corporate goals; and (ii) an individual performance factor (“IPF”) goals and are paid in cash.(IPF), which is based on achievement of individual performance goals. Payouts can vary from 0% for performance below a threshold up to a maximum capped at 200% of the Target Award (defined(as defined below). Awards depending on performance.
Payments under the CTI are made in cash and are determined in accordance with the following formula:
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| CPF | The CPF can vary from 0% to 200%, depending on the level of (1) a separate minimum corporate profitability requirement must be achieved for the CPF to exceed zero; and (2) target non-IFRS operating margin must be achieved for any other measures under the CPF to pay above target. The CTI Parameters are set in addition to the achievement of CPF The CPF must be greater than zero for an executive to | ||||
| IPF | Individual contribution is recognized through the IPF component of the CTI. At the beginning of the performance period, eligible employees, including the NEOs, set individual specific goals and objectives to be achieved during the year which include both quantitative and qualitative objectives. NEOs also review their goals and objectives with the CEO in order to align the goals and objectives of the executive leadership team, and once finalized are approved by the CEO. The goals and criteria include, for example, individual performance relative to segment or company business results, ESG metrics, teamwork, leadership, execution of responsibilities and key accomplishments. At the end of the year, an NEO's IPF is determined through the annual performance review process The IPF can increase an | ||||
| Target | The | ||||
| Target Award | The Target Award is a NEO's Target Incentive multiplied by their base salary. | ||||
| Maximum Award | Although the combination of a CPF of 200% and an IPF of 1.5x may mathematically result in | ||||
Equity-Based Incentives
The Corporation’s equity‑basedCorporation's equity-based incentives for the NEOs consist of RSUs, PSUs and/or stock options. The objectives of equity‑basedequity-based compensation are to:
•align the NEOs’NEOs' interests with those of shareholders and incent appropriate behaviour for long‑termlong-term performance;
•reward the NEOs’NEOs' contributions to the Corporation’s long‑termCorporation's long-term success; and
•enable the Corporation to attract, motivate and retain qualified and experienced employees.
At the January meeting, the HRCC determines the dollar value and mix of the equity‑basedequity-based grants to be awarded to the NEOs, if any. On the grant date, the dollar value is converted into the number of units that will be granted using the closing price of the SVS on the trading day prior to the grant date. The annual grants are made following the blackout period that ends not less than 48 hours after the Corporation’s year‑endCorporation's year-end results have been released. The mix of equity-based incentives is reviewed and approved by the HRCC each year, and is based on factors including competitive grant practices, balance between performance incentive and retention value, and the effectiveness of each equity vehicle for motivating and retaining critical leaders.
Target equity‑basedequity-based incentives are determined using a variety of factors, including the median awards of the Comparator Group, as a guideline; however, consideration is also given towell as individual performance, experience and anticipated contribution when determining actual awards.to the Corporation's strategy. In establishing the grant value of the annual equity awards for each of the NEOs, we start by assessing the median total target direct compensation of the equivalent position at companies in the Comparator Group. This data is then compared over a number of years for additional context and market trends. The HRCC also considers individual performance, the need to retain experienced and talented leaders to execute the Corporation’sCorporation's business strategies and the executive’sexecutive's potential to contribute to long-term shareholder value. Also considered are the executive’sexecutive's role and responsibilities, internal equity and the level of
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previous long-term incentive awards. Once all of these factors are taken into consideration, the grant value of the annual equity-based awards for the NEOs is set.
In addition to the annual equity grants, management may award equity-based incentives in order to attract new executive hires and to retain current executives in special circumstances. Generally, any such grant isSuch grants are reviewed in advance with the ChairChairs of the Board and HRCC, and isare subject to ratification by the HRCC. No such grants were made to NEOs in 2019 with the exception of a one-time award to Mr. Phillips of 22,124 RSUs – see 2019 Compensation Decisions below for a description of this award.2022.
RSUs
NEOs may be granted RSUs under either the LTIP or the CSUP as part of the Corporation’sCorporation's annual equity grant. Such awards may be subject to vesting requirements, including time-based or other conditions as may be determined by the HRCC in its discretion. RSUs granted by the Corporation generally vest in instalments of one-third per year, over three years, based on continued employment with the Corporation. The payout value of the award is based on the number of RSUs being released and the market price of the SVS at the time of release. The Corporation has the right under the CSUP to settle RSUs in either cash or SVS. Under the LTIP, the Corporation may, at the time of grant, authorize grantees to settle vested RSUs either in cash or in SVS (on a one-for-one basis). Absent such permitted election, grants under the LTIP will be settled in SVS. If the Corporation has authorized a settlement in SVS or cash, the holder can choose which of these the holder receives. See Executive Compensation of Named Executive Officers –— Equity Compensation Plans.
PSUs
NEOs may be granted PSUs under the LTIP or the CSUP as part of the Corporation’sCorporation's annual equity grant. The vesting of such awards requires the achievement of specified performance‑basedperformance-based conditions over a specified time period, as determined by the HRCC in its discretion. PSUs granted by the Corporation generally vest at the end of a three‑yearthree-year performance period subject to pre‑determinedpre-determined performance criteria. The payout value of the award is based on the number of PSUs that vest (which ranges from 0% to 200% of the target amount granted) and the market price of the SVS at the time of release. The Corporation has the right under the CSUP to settle vested PSUs in either cash or SVS (on a one-for-one-basis). Under the LTIP, the Corporation may, at the time of grant, authorize grantees to settle PSUs either in cash or in SVS. Absent such permitted election, grants under the LTIP will be settled in SVS. If the Corporation has authorized a settlement in SVS or cash, the holder can choose which of these the holder receives. See Executive Compensation of Named Executive Officers –— Equity Compensation Plans.
Stock Options
NEOs may be granted stock options under the LTIP.LTIP (no stock options have been granted to the NEOs after 2015). The exercise price of a stock option is the closing market price on the business day prior to the date of the grant. Stock options granted by the Corporation generally vest at a rate of 25% annually on each of the first four anniversaries of the date of grant and expire after a ten‑yearten-year term. The LTIP is not an evergreen plan and no stock options have been re‑priced.
re-priced.
Other Compensation
Benefits
NEOs participate in the Corporation’sCorporation's health, dental, pension, life insurance and long-term disability programs. Benefit programs are determined with consideration given to market median levels in the local geographic region.
Perquisites
Perquisites are provided to executives on a case-by-case basis as considered appropriate in the interests of the Corporation. NEOs are entitled to an annual comprehensive medical examination at a private health clinic. Where applicable, tax equalization is provided to certainall NEOs as an integral part of the Corporation’sCorporation's Short-Term Business Travel Program and is designed to maintain an individual’sindividual's tax burden at approximately the same level it would have otherwise been had they remained in their home country. Due largely to variables such as timing and tax rate differences between Canada and the U.S., tax equalization amounts may vary from year to year. While the Corporation is incorporated and headquartered in Canada, our business is global and we compete for executive talent worldwide andworldwide. In addition, our executives are often required to travel extensively. As a result, we believe it is appropriate to make tax equalization payments in order to attract and retain non-Canadian executive officers with specific capabilities as well as to ensure that our executives do not incur any additional tax burden as a result of the business travel necessitated by the global nature of our business. Our U.S.-based NEOs have shared access to housing in Canada that the Corporation provides.
Each element of compensation is considered independently of the other elements. However, the total package is reviewed to ensure that the achievement of target levels of corporate and individual performance will result in total compensation that is generally comparable to the median total compensation of the Comparator Group.
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Base Salary
The base salaries for the NEOs were reviewed during 2019, taking into account individual performance2022, and experience, levelno changes were made as it was determined their respective base salaries were appropriately aligned with the median base salaries of responsibility and median competitive data.executives with similar roles within the Comparator Group.
The following table sets forth the annual base salary for the NEOs for the years ended December 31, 20172020 through December 31, 2019:2022:
Table 9: NEO Base Salary Changes
| NEO | Year | Salary ($) | % Increase | ||||||||
Robert A. Mionis President and Chief Executive Officer | 2022 | $950,000 | — | ||||||||
| 2021 | $950,000 | — | |||||||||
| 2020 | $950,000 | — | |||||||||
Mandeep Chawla Chief Financial Officer | 2022 | $550,000 | — | ||||||||
| 2021 | $550,000 | 10% | |||||||||
| 2020 | $500,000 | 9% | |||||||||
Jason Phillips President, CCS | 2022 | $485,000 | — | ||||||||
| 2021 | $485,000 | 5% | |||||||||
| 2020 | $460,000 | — | |||||||||
Todd C. Cooper President, ATS | 2022 | $485,000 | — | ||||||||
| 2021 | $485,000 | 5% | |||||||||
| 2020 | $460,000 | — | |||||||||
Yann Etienvre Chief Operations Officer | 2022 | $485,000 | — | ||||||||
| 2021 | — | — | |||||||||
| 2020 | — | — | |||||||||
| NEO | Year | Salary ($) |
| Robert A. Mionis | 2019 | $950,000 |
| 2018 | $950,000 | |
| 2017 | $950,000 | |
| Mandeep Chawla | 2019 | $460,000 |
| 2018 | $450,000 | |
| 2017 | $450,000 | |
| Jack J. Lawless | 2019 2018 2017 | $460,000 $460,000 $460,000 |
| Todd C. Cooper | 2019 | $460,000 |
| 2018 | $460,000 | |
| 2017 | - | |
| Jason Phillips | 2019 | $460,000 |
| 2018 | $350,000 | |
| 2017 | $350,000 | |
Annual Incentive Award (CTI)
The CPF component of the CTI calculation for 20192022 was based on the achievement of the Corporation relative to specified corporate financial targets as set forth in Table 10below.for the year (2022 Targets). The targets2022 Targets were revenue and non-IFRS operating margin, for 2019, which were the sameas these measures used in 2018. These measures were approved by the HRCC as they were determined to be aligned with the Corporation’sCorporation's continuing key objectives of driving profitable growth on both a “top line”"top line" and “bottom line”"bottom line" basis. As both measures were deemed to be equally important, the same weight was given to each target. The 2019 financial targetssame measures and associated weight were established at levels consistent with the Corporation’s Annual Operating Plan for 2019, which was approved by the Board. As described above,used in 2021.
The CTI Parameters ensure that no minimum CTI payments are guaranteed.
The percentage achievement for each measureof the 2022 Targets was then determined by interpolating between the factor that corresponds to threshold, target and maximum, as applicable. Each achievement factor was then multiplied by its weight (50%) in order to determine the weighted achievement.
Table 10: Company Performance Factor
| Measure | Weight | Threshold | Target | Maximum | Achieved Results | CPF | ||||||||||||||
| IFRS revenue | 50% | $5,840M | $6,345M | $6,850M | $7,250M | 170% | ||||||||||||||
| Non-IFRS operating margin | 50% | 3.75% | 4.50% | 5.25% | 4.9% | |||||||||||||||
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| Measure | Weight | Threshold | Target | Maximum | Achieved Results | Weighted Achievement |
| Non-IFRS operating margin | 50% | 2.7% | 3.6% | 4.5% | 2.7% | 15% |
| IFRS revenue | 50% | $5,800M | $6,300M | $6,800M | $5,888M | 19% |
| CPF | 34% | |||||
The IPF can increase an executive’sexecutive's CTI award by a factor of up to 1.5x or reduce the CTI award to zero depending on individual performance (an IPF of less than 1.0 will result in a reduction of the CTI award otherwise payable). Notwithstanding the foregoing, CTI payments are subject to an overall maximum cap of 200% of the Target Award. The IPF is determined through the annual performance review process.
At the beginning of each year, the HRCC and the CEO agree on performance goals for the CEO that are then approved by the Board. Goals for the other NEOs that align with the CEO’sCEO's goals are then established and agreed to between the CEO and the respective NEOs. The performance of the CEO and the other NEOs is measured against the established goals butand also contains subjectivequalitative elements, such that criteria for, and the amount of, the IPF remains at the discretion of the HRCC. However, the CPF must be greater than zero for an executive to be entitled to any CTI payment.
CEO
In assessing Mr. Mionis’Mionis' individual performance, the HRCC considers the Corporation’sCorporation's objectives and results achieved, personal performance objectives as determined annually, as well as other factors the CommitteeHRCC considers relevant to the role of CEO. Key results that were considered in determining Mr. Mionis’Mionis' IPF for 20192022 are included below:
| Objective | ||||||
• •Exceeded bookings targets in •Strengthened supply chain partnerships and helped customers navigate the | ||||||
| Return to Growth | •Revenue of $7.25 billion marked a return to top-line revenue growth • •While the challenging supply chain environment contributed to increased inventory levels, a substantial portion of • •Growth in the Lifecycle Solutions portfolio enabled increased diversification and greater exposure to markets with stickier customer relationships, high growth profiles and accretive margins | |||||
• • •Enhanced information security and data loss prevention controls •Oversaw programs focused on employee wellness and safety | ||||||
• | ||||||
•Focused on talent bench strength and succession readiness for the broader organization •ESG program continued to earn external industry recognition such as a Platinum rating from EcoVadis, a trusted provider of business sustainability ratings for global supply chains •Deepened our engagement with our employees with the launch of "Employee Value Proposition" intended to also support talent attraction •As co-chair of Celestica's Diversity and | ||||||
2022 was capped at two times the Target Award in accordance with the CTI plan design.
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Other NEOs
The performance of the NEOs (otherother than the CEO)CEO is assessed at year-end relative to objective measures that align with the targets for the CEO. The CEO assesses each NEO’sother NEO's contributions to the Corporation’sCorporation's results, including such NEO’sNEO's contributions as a part of the senior leadership team. Based on the CEO’sCEO's assessment, the HRCC considered each NEO to have met or exceeded expectations for 20192022 based on each of their individual performance and contribution to corporate goals and objectives.
Factors considered in the evaluation of each NEO’sNEO's IPF included the following:
• •Effectively led risk management initiatives on a • • | |||||
• •HPS achieved revenues of $1.83 billion, representing 59% year-over-year revenue growth •Maturing CCS strategy to include service provider customers for our differentiated offerings •Established a software design center of excellence in | |||||
| Todd C. Cooper | • • | ||||
•Led successful new program ramps in our Industrial and •Realized targeted synergies with the integration of PCI | |||||
| Yann Etienvre | •Completed the strategic reorganization of the Operations organization to streamline operational efficiencies and enhance productivity •Leveraged the Celestica Operating System to drive continuous improvements and consistent processes and implemented new initiatives such as “Flawless Launch” to support program ramps •Deployed the "Elevate Safety" program which significantly enhanced employee safety | ||||
The following table sets forth information with respect to the potential and actual awards under the CTI for participatingthe NEOs during 2019:2022:
Table 11: 20192022 CTI Awards
| Name | Target Incentive %(1) | Potential Award for Below Threshold Performance | Potential Award for Threshold Performance(2) | Potential Award for Target Performance(2) | Potential Maximum Award(2) | Amount Awarded | Amount Awarded as a % of Base Salary |
| Robert A. Mionis | 125% | $0 | $296,875 | $1,187,500 | $2,375,000 | $383,562 | 40% |
| Mandeep Chawla | 80% | $0 | $91,507 | $366,027 | $732,054 | $118,227 | 26% |
| Jack J. Lawless | 80% | $0 | $92,000 | $368,000 | $736,000 | $118,864 | 26% |
| Todd C. Cooper | 80% | $0 | $92,000 | $368,000 | $736,000 | $118,864 | 26% |
| Jason Phillips | 80% | $0 | $87,627 | $350,510 | $701,020 | $113,215 | 26% |
| Name | Target Incentive %(1) | Potential Award for Below Threshold Performance | Potential Award for Threshold Performance(2) | Potential Award for Target Performance(2) | Potential Maximum Award(3) | Amount Awarded | Amount Awarded as a % of Base Salary | ||||||||||||||||
| Robert A. Mionis | 150% | $0 | $356,250 | $1,425,000 | $2,850,000 | $2,850,000(4) | 300% | ||||||||||||||||
| Mandeep Chawla | 100% | $0 | $137,500 | $550,000 | $1,100,000 | $1,100,000(4) | 200% | ||||||||||||||||
| Jason Phillips | 80% | $0 | $97,000 | $388,000 | $776,000 | $776,000(4) | 160% | ||||||||||||||||
| Todd C. Cooper | 80% | $0 | $97,000 | $388,000 | $776,000 | $659,600 | 136% | ||||||||||||||||
| Yann Etienvre | 80% | $0 | $97,000 | $388,000 | $776,000 | $725,560 | 150% | ||||||||||||||||
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(1) The Target Incentive for each NEO was not changed from 2021 except for Mr. Mionis whose Target Incentive was increased from 125% to 150%, in order to better align his target short-term incentives with those of CEOs within the Comparator Group.
(2) Award amounts in these columns are calculated based on an IPF of 1.0.
(3) Award amounts in this column represent the maximum payout under the CTI of 2x the Target Award.
(4) Amount awarded for 2022 was capped at two times the Target Award in accordance with the CTI plan design.
In connection with his appointment as Chief Operations Officer, Mr. Etienvre was granted a one-time cash award of $475,000 during 2022. This one-time cash award was made in order to incentivize Mr. Etienvre to join the Corporation when we deemed expedient for him to transition seamlessly into a key leadership position and in recognition of the related forfeiture of a short-term incentive award from his previous employer.
NEO Equity Awards and Mix
Target equity-based incentives were determined for the NEOs with reference to the median awards of the Comparator Group.Group. Consideration was also given to individual performance, the roles and responsibilities of the NEOs, retention value and market trends. The mix of equity in respect of 20192022 compensation was comprised of 40% RSUs and 60% PSUs (in accordance(consistent with executive compensation program design changes implemented in 2018)recent years). See Compensation Elements for the Named Executive Officers –— Equity-Based Incentivesfor a general description of the process for determining the amounts of these awards.
The following table sets forth equity awards granted to the NEOs on February 6, 20191, 2022 as part of their 2019 compensation as well as the award granted to Mr. Philips on August 6, 2019:2022 compensation:
Table 12: NEO Equity Awards
| Name | RSUs (#)(1) | PSUs (#)(2) | Stock Options (#) | Value of Equity Award(3) | ||||||||||
| Robert A. Mionis | 231,325 | 346,988 | — | $7,200,000 | ||||||||||
| Mandeep Chawla | 62,651 | 93,976 | — | $1,950,000 | ||||||||||
| Jason Phillips | 54,618 | 81,928 | — | $1,700,000 | ||||||||||
| Todd C. Cooper | 54,618 | 81,928 | — | $1,700,000 | ||||||||||
| Yann Etienvre | 51,406 | 77,108 | — | $1,600,000 | ||||||||||
| Name | RSUs (#)(1) | PSUs (#)(2) | Stock Options (#) | Value of Equity Award(3) |
| Robert A. Mionis | 358,208 | 537,313 | - | $7,200,000 |
| Mandeep Chawla | 79,601 | 119,402 | - | $1,600,000 |
| Jack J. Lawless | 87,064 | 130,597 | - | $1,750,000 |
| Todd C. Cooper | 79,601 | 119,402 | - | $1,600,000 |
Jason Phillips(4) | 94,263 | 108,208 | - | $1,600,000 |
(2) Assumes achievement of 100% of target level performance.
(3) Represents the aggregate grant date fair value of the RSUs and PSUs.
The RSUs granted in 2022 vest ratably over a three-year period, commencing on the first anniversary of the date of grant. The value of the RSUs granted on February 6, 20191, 2022 was determined at the January 20192022 meeting of the HRCC. The number of RSUs granted was determined using the closing price of the SVS on February 5, 2019January 31, 2022 (the day prior to the date of grant) on the NYSE of $8.04.$12.45.
PSUs granted as set forth in the table above2022 vest at the end of a three-year period subject to pre-determined performance criteria. For such awards, each NEO was granted a target number of PSUs (“Target Grant”)(Target Grant). The number of PSUs that will actually vest ranges from 0% to 200% of the Target Grant and will be primarily based on the Corporation’sCorporation's non-IFRS operating margin in the final year of the three-year performance period (“EBIAT Result”)(OM Result), subject to modification by the Corporation’sCorporation's average annual non-IFRS adjusted ROIC achievement over the performance period (“ROIC Factor”)(ROIC Factor) and relative TSR achievement (“TSR Factor”)(TSR Factor) over the performance period in accordance with the following:
| Formula | Description | |||||||||||||
| Preliminary Vesting % based on | The percentage of PSUs that will vest based on the | |||||||||||||
| Preliminary Vesting % subject to modification by a factor of either | The | |||||||||||||
| Secondary Vesting % subject to modification by a factor ranging from | TSR measures the performance of a For purposes of determining modifications to the Secondary Vesting % based on the TSR Factor, the HRCC determined that for PSUs granted in After calculating the percentile rank for each TSR Comparator (by arranging the TSR results from highest to lowest), the Corporation’s TSR will be ranked against that of each of the TSR Comparators. The Secondary Vesting % will then be subject to modification (ranging from a decrease of 25% to an increase of 25%) by interpolating between the corresponding percentages immediately above and immediately below Celestica’s percentile position as set out in the table below, provided that the Corporation’s TSR performance cannot increase the actual number of PSUs that will vest to more than 200% of the Target Grant. | |||||||||||||
| Celestica's TSR Positioning |  | |||||||||||||
90th Percentile | 25% | |||||||||||||
50th Percentile | 0% | |||||||||||||
10th Percentile | −25% | |||||||||||||
| Summary | Total PSU Vesting Percentage = (1) Preliminary Vesting % based on (2) Preliminary Vesting % is subject to modification by a factor of either (3) Secondary Vesting % is subject to modification by a factor ranging from | |||||||||||||
Note Regarding the Use of Non-IFRS Operating Margin
Non-IFRS operating margin was utilized in 2022 as a performance measure for both the CPF of the CTI and for the vesting of PSUs (in each case along with other measures). However, for the CTI, annual non-IFRS operating margin was used to measure short-term profitable growth, whereas for PSUs, the non-IFRS operating margin target was based on the Corporation's long-term strategic plan, as it is measured in the last year of a three-year performance period. As a result, the non-
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IFRS operating margin target and the relevant time-period for achievement, are different under the CTI and PSUs, and were therefore not considered duplicative.
Performance Measures for 2023
In order to further align executive pay with our strategic focus on driving sustained growth and shareholder returns, we revisited performance measures for 2023 related to the CPF of our CTI and the vesting conditions applicable to PSUs granted in 2023. After consideration of relevant factors, including the evolution of our business over recent periods and our current strategic growth aspirations, management presented a proposal to the HRCC in October 2022 to re-design the vesting conditions applicable to PSU grants, and in December 2022 to change the corporate financial targets applicable to the CPF of the CTI.
To reflect our focus on driving profitable growth and to further strengthen the link between executive pay and our performance, the HRCC approved the following changes to our executive compensation program for 2023:
| 2022 | 2023 | Rationale for Change | |||||||||
| CTI: CPF Performance Parameters | Non-IFRS operating margin (50%) IFRS revenue (50%) | Non-IFRS operating margin (40%) IFRS revenue (40%) Non-IFRS adjusted free cash flow (20%) | The addition of non-IFRS adjusted free cash flow is intended to incentivize our executives to maximize our working capital efficiency and better position the Corporation for business growth opportunities. However, as we continue to believe that non-IFRS operating margin and revenue are equally aligned with the Corporation's continuing key objectives of driving profitable growth on both a "top line" and "bottom line" basis, we have retained a substantial (and equal) weighting of those measures for the CPF in 2023. | ||||||||
| PSU: Performance Vesting Conditions | Vesting primarily based on non-IFRS operating margin in the final year of the three-year performance period, subject to modification by average annual non-IFRS adjusted ROIC achievement over the three-year performance period and relative TSR achievement over the three-year performance period | Vesting primarily based on non-IFRS adjusted EPS performance over the three-year performance period, subject to modification by relative TSR achievement over the three-year performance period. | To incentivize a continuing focus for our executives on driving profitable growth, we introduced non-IFRS adjusted EPS as the primary performance measure for PSU vesting. We believe that utilizing non-IFRS adjusted EPS as a performance measure will further align executive compensation with our strategic priorities, and thereby with shareholder interests. TSR will continue to be utilized as a modifier to the primary performance measure. Performance will be measured over the three-year performance period in order to demonstrate alignment with shareholders on our long-term growth objectives. | ||||||||
As a result of these changes, there are no overlapping metrics between the 2023 CPF of the CTI and PSU vesting conditions.
Realized and Realizable Compensation
CEO Realized and Realizable Compensation
The following table is a look back at CEO compensation that compares the total target direct compensation awarded to Mr. Mionis for the years ended December 31, 20162018 through December 31, 20192022 to his realized and realizable compensation for each such year.
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Table 13: CEO Realized and Realizable Compensation
| Fully Realized | Not Fully Realized | ||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||
Total Target Direct Compensation(1) | $9,337,500 | $9,337,500 | $9,337,500 | $9,337,500 | $9,575,000 | ||||||||||||
Realized and Realizable Compensation(2) | $5,090,158(3) | $9,340,985(3) | $19,922,261(3) | $12,917,332 (4) | $10,317,588 (4) | ||||||||||||
| Realized and Realizable Compensation as a % of Total Target Direct Compensation | 55% | 100% | 213% | 138% | 108% | ||||||||||||
(1) The total target direct compensation value represents Mr. Mionis’Mionis' salary, target CTI award and the target value of share-based awards.awards (i.e., 100% for PSUs).
(2) The realized and realizable value for 2018 — 2020 represents actual salary paid, actual CTI award paidpayment and share-basedshare based awards at vest date value (and demonstrates fully-realized compensation, as the vesting or ifperformance period for all equity grants in such years has ended). The realized and realizable value for 2021 and 2022 represents actual salary paid, actual CTI payment, vest-date value for the vest date is afterportion of RSU grants which had vested by December 31, 2019, at $8.272022, and for the portion of share-based awards which had not vested by such date, an assumed value of $11.27 per share the(the closing price of the SVS on the NYSE on December 31, 2019,30, 2022, the last trading day of the year) and assumed vesting of PSUs at target performance of 100%, which may not be the ultimate amount earned.
(3) The following table includes the CPF for CTI awards actually paid and the vesting percentage of PSUs granted in each year:
| 2016 | 2017 | 2018 | 2019 | |
| Total Target Direct Compensation | $6,912,500 | $7,582,021 | $9,337,500 | $9,337,500 |
| Realized and Realizable Compensation | $6,327,548 | $4,367,532(1) | $7,659,534 | $8,739,522 |
| Realized and Realizable Compensation as a % of Total Target Direct Compensation | 92% | 58% | 82% | 94% |
| Year | CPF under CTI | PSUs as % of Target | ||||||
| 2018 | 80% | 26% | ||||||
| 2019 | 34% | 74% | ||||||
| 2020 | 182% | 200% | ||||||
| 2021 | 116% | |||||||
| 2022 | 170% | |||||||
(4) Mr. Mionis' 2021 and 2022 compensation has not been fully realized and a significant portion remains “at-risk” as follows (representing the December 31, 2022 value of: PSUs whose performance period does not conclude until the end of 2023 and 2024, respectively, and RSUs granted in each such year that remain unvested):
| Year | Amount Still "At-Risk" | ||||
| 2021 | $8,682,066 | ||||
| 2022 | $6,517,588 | ||||
NEO Realized and Realizable Compensation
The following table is a look back at compensation for all NEOs that compares the total target direct compensation awarded to the NEOs for the years ended December 31, 2018 through December 31, 2022 to their realized and realizable compensation for each such year.
Table 14: NEO Realized and Realizable Compensation
| Fully Realized | Not Fully Realized | ||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||
Total Target Direct Compensation(1) | $19,049,426 | $19,155,708 | $19,904,386 | $20,267,253 | $20,244,000 | ||||||||||||
Realized and Realizable Compensation(2) | $10,972,171(3) | $18,973,951(3) | $40,793,197(3) | $26,862,671 (4) | $22,350,033 (4) | ||||||||||||
| Realized and Realizable Compensation as a % of Total Target Direct Compensation | 58% | 99% | 205%(5) | 133% | 110% | ||||||||||||
(1) The total target direct compensation value represents the NEOs' salary, target CTI award and the target value of share-based awards (i.e., 100% for PSUs).
(2) The realized and realizable value for 2018 — 2020 represents actual salary paid, actual CTI payment and share based awards at vest date value (and demonstrates fully-realized compensation, as the vesting or performance period for all equity grants in such years has ended). The realized and realizable value for 2021 and 2022 represents actual salary paid, actual CTI payment, vest-date value for the portion of RSU grants which had vested by December 31, 2022, and for the portion of share-based awards which had not vested by such date, an assumed value of $11.27 per share (the closing price of the SVS on the NYSE on December 30, 2022, the last trading day of the year) and assumed vesting of PSUs at target performance of 100%, which may not be the ultimate amount earned. Compensation for 2021 and 2022 has only been partially realized, such that a significant portion remains realizable and is “at-risk” as described in footnote 4 below.
(3) The following table includes the CPF for CTI awards actually paid and the vesting percentage of PSUs granted in each year:
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| Year | CPF under CTI | PSUs as % of Target | ||||||
| 2018 | 80% | 26% | ||||||
| 2019 | 34% | 74% | ||||||
| 2020 | 182% | 200% | ||||||
| 2021 | 116% | |||||||
| 2022 | 170% | |||||||
(4) The NEOs' 2021 and 2022 compensation has not been fully realized and a significant portion remains “at-risk” as follows (representing the December 31, 2022 value of: PSUs whose performance period does not conclude until the end of 2022 and 2023, respectively, and RSUs granted in each such year that remain unvested):
| Year | Amount Still "At-Risk" | ||||
| 2021 | $16,952,593 | ||||
| 2022 | $12,808,873 | ||||
(5) Reflects actual CTI payment, as well as PSU vesting at 200% of target, based in each case on 2022 non-IFRS operating margin results, and in addition, with respect to PSUs, a 50% share price increase over the three-year performance period.
Total Shareholder Return
Table 15: TSR vs. NEO Compensation(1)
The following graph compares the five-year trend in the Corporation’sCorporation's three-year TSR to both total target direct compensation and the realized and realizable compensation for the NEOs for each year. The total target direct compensation value represents salary, target CTI award and the target value of share-based awards and option awards (if applicable) for all NEOs reported in the Corporation’s Annual Report on Form 20-F each year. The realized and realizable value represents: actual salary paid; actual CTI award paid; share-based awards at vest date value or if the vest date is after December 31, 2019, at $8.27per share, the closing price of the SVS on the NYSE on December 31, 2019; and option awards (if applicable) at their intrinsic value; which may not be the ultimate amount earned. This look back at compensation demonstrates the comparison between actual pay and total target direct compensation intended at the time of grant. The difference between total target direct compensation and realized and realizable compensation was driven by the performance of the SVS and achievement relative to CTI and PSU performance measures,targets, as well as changes in the reported NEOs in applicable years.
(1) NEO total target direct compensation value represents salary, target CTI award and volatile market environment in which we experienced uncertain market demand as well as materials shortages. We believe that this volatility in our business resulted in significant pricethe target value of share-based awards (i.e., 100% for PSUs) and volume fluctuationsoption awards (if applicable) for all NEOs reported in the marketCorporation's Annual Report on Form 20-F each year. NEO realized and realizable value represents actual salary paid, actual CTI payment and share-based awards at vest date value (and for the portion of share-based awards that had not vested as of December 31, 2022, at an assumed value of $11.27 per share, the closing price of ourthe SVS on the NYSE on December 30, 2022, the last trading day of the year, and negatively impacted our TSR for 2019. In addition to TSR, we assess our performance based on various other measures, including revenue and non-IFRS operating margin. We also measure our performance against how well we have performed relative to our objectives, which are based on a complex and necessary business transformation strategy designed to diversify the Corporation’s business, achieve portfolio optimization, streamline cost structure and drive more sustainable, long-term revenue and profitable growth. We utilize all such measures in assessing the alignment our executive pay with the Corporation’s performance. We believe that the difficult work completed in 2019 will lead to profitable growth and thereby will have a positive impact on our TSR over the long term.
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| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Celestica Total Shareholder Return (1 year) | -6% | 7% | -12% | -16% | -6% |
| Total Target Direct Compensation | $8,727,784 | $16,375,500 | $16,088,075 | $19,049,426 | $19,155,708 |
| Realized and Realizable Compensation | $7,376,294 | $14,152,017 | $9,995,006(1) | $15,608,374 | $17,790,364 |
| Realized and Realizable Compensation as a % of Total Target Direct Compensation | 85% | 86% | 62% | 82% | 93% |
EXECUTIVE COMPENSATION
This section contains references to non-IFRS operating margin and adjusted ROIC, each of which are non-IFRS measures.ratios. See Compensation Discussion and Analysis –— Note Regarding Non-IFRS Financial Measuresfor definitions of such non-IFRS measures,non- IFRS ratios, and where to find a discussion of the exclusions used to determine such measures, how they are used, as well as a reconciliation of the historical non-IFRS financial measures that are components of non- IFRS operating margin and non-IFRS adjusted ROIC to the most directly comparable IFRS financial measures. These non-IFRS measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies.
Summary Compensation Table
The following table sets forth the compensation of the NEOs for the years ended December 31, 20172020 through December 31, 2019.2022.
Table 15:16: Summary Compensation Table
| Name & Principal Position | Year | Salary ($) | Share- based Awards ($)(1)(2) | Option- based Awards ($)(3) | Non-equity Incentive Plan Compensation | Pension Value ($)(5) | All Other Compensation ($)(6) | Total Compensation ($) | ||||||||||||||||||
Annual Incentive Plans ($)(4) | ||||||||||||||||||||||||||
| Robert A. Mionis | 2022 | $950,000 | $7,200,000 | — | $2,850,000 | $202,010 | $143,962 | $11,345,972 | ||||||||||||||||||
| President and Chief | 2021 | $950,000 | $7,200,000 | — | $1,790,750 | $249,200 | $292,382 | $10,482,332 | ||||||||||||||||||
| Executive Officer | 2020 | $950,000 | $7,200,000 | — | $2,375,000 | $89,735 | $500,220 | $11,114,955 | ||||||||||||||||||
Mandeep Chawla(7) | 2022 | $550,000 | $1,950,000 | — | $1,100,000 | $100,706 | $1,979 | $3,702,685 | ||||||||||||||||||
| Chief Financial Officer | 2021 | $538,356 | $1,950,000 | — | $736,902 | $110,942 | $3,901 | $3,340,101 | ||||||||||||||||||
| 2020 | $490,492 | $1,850,000 | — | $784,787 | $46,876 | $4,399 | $3,176,554 | |||||||||||||||||||
Jason Phillips(7) | 2022 | $485,000 | $1,700,000 | — | $776,000 | $67,085 | $18,001 | $3,046,086 | ||||||||||||||||||
| President, CCS | 2021 | $479,178 | $1,700,000 | — | $569,187 | $80,342 | $26,925 | $2,855,632 | ||||||||||||||||||
| 2020 | $460,000 | $2,000,000 | — | $736,000 | $29,057 | $27,594 | $3,252,651 | |||||||||||||||||||
Todd C. Cooper(7)(8) | 2022 | $485,000 | $1,700,000 | — | $659,600 | $62,460 | $18,300 | $2,925,360 | ||||||||||||||||||
| President, ATS | 2021 | $479,178 | $1,900,000 | — | $511,379 | $80,342 | $48,664 | $3,019,563 | ||||||||||||||||||
| 2020 | $460,000 | $1,600,000 | — | $736,000 | $29,509 | $17,100 | $2,842,609 | |||||||||||||||||||
Yann Etienvre(9) | 2022 | $485,000 | $1,600,000 | — | $725,560 | $32,836 | $488,384 | $3,331,780 | ||||||||||||||||||
| Chief Operations Officer | 2021 | $43,849 | $3,525,000 | — | — | $1,399 | $560 | $3,570,808 | ||||||||||||||||||
| 2020 | — | — | — | — | — | — | — | |||||||||||||||||||
Non-equity Incentive Plan Compensation | ||||||||
| Name & Principal Position | Year | Salary ($) | Share‑ based Awards ($)(1)(2) | Option‑ based Awards ($)(3) | Annual Incentive Plans ($)(4) | Pension Value ($)(5) | All Other Compensation ($)(6) | Total Compensation ($) |
Robert A. Mionis(7) | 2019 | $950,000 | $7,200,000 | – | $383,562 | $131,850 | $691,354 | $9,356,766 |
| President and Chief Executive | 2018 | $950,000 | $7,200,000 | – | $902,500 | $132,613 | $1,051,189 | $10,236,302 |
| Officer | 2017 | $925,342 | $5,500,000 | – | $912,041 | $155,821 | $721,898 | $8,215,102 |
Mandeep Chawla(8) | 2019 | $457,534 | $1,600,000 | – | $118,227 | $61,346 | $1,462 | $2,238,569 |
| Chief Financial Officer | 2018 | $450,000 | $1,450,000 | – | $316,800 | $48,692 | $479 | $2,265,971 |
| 2017 | $287,359 | $1,025,000 | – | $359,161 | $47,234 | $493 | $1,719,247 | |
Jack J. Lawless(9) | 2019 | $460,000 | $1,750,000 | – | $118,864 | $46,357 | $19,247 | $2,394,468 |
| President, ATS | 2018 | $460,000 | $1,650,000 | – | $323,840 | $44,230 | $41,194 | $2,519,264 |
| 2017 | $447,671 | $1,500,000 | – | $297,254 | $52,975 | $34,522 | $2,332,422 | |
Todd C. Cooper(10) | 2019 | $460,000 | $1,600,000 | – | $118,864 | $52,058 | $16,800 | $2,247,722 |
| Chief Operations Officer | 2018 | $454,959 | $1,600,000 | – | $491,980 | $27,568 | $10,477 | $2,584,984 |
| 2017 | – | $2,750,000 | – | – | – | – | $2,750,000 | |
Jason Phillips(11) | 2019 | $438,137 | $1,600,000 | – | $113,215 | $31,828 | $58,826 | $2,242,006 |
| President, CCS | 2018 | $350,000 | $1,200,000 | – | $168,000 | $25,594 | $17,132 | $1,760,726 |
| 2017 | $350,000 | $600,000 | – | $174,300 | $30,053 | $16,777 | $1,171,130 | |
(1)All amounts in this column represent the grant date fair value of share-based awards. Amounts in this column for 2022 represent RSU and PSU grants made on February 1, 2022. Grants were based on a share price of $12.45, which was the closing price of the SVS on the NYSE on January 31, 2022 (the day prior to the date of the grant). Amounts in this column for 2021 represent: (i) RSU and PSU grants to all NEOs (which for Mr. Etienvre, who was not an NEO in 2021, consists of a one-time RSU grant (with a grant date fair value of $3,525,000), made on December 10, 2021 in connection with the commencement of his employment as an advisor to Celestica (see footnote 9 below) in a timely manner, and in recognition of his forfeiture of unvested equity from his previous employer) and, (ii) an additional RSU grant (with a grant date fair value of $200,000) to Mr. Cooper in order to recognize his leadership through unprecedented, prolonged conditions within our operations as a result of COVID-19.All grants in 2021 were made on February 2, 2021, and were based on a share price of $8.10, which was the closing price of the SVS on the NYSE on February 1, 2021 (the day prior to the date of the grant) except for the one-time grant made to Mr. Etienvre, which was based on a share price of $10.57, which was the closing price of the SVS on the NYSE on December 9, 2021 (the last business day prior to the date of the grant). Amounts in this column for 2020 represent RSU and PSU grants to all NEOs, and an additional grant to Mr. Phillips' of a performance award of $400,000 in PSUs, all made on February 4, 2020. The 2020 grants were based on a share price of $8.89, which was the closing price of the SVS on the NYSE on February 3, 2020 (the day prior to the date of the grant). See Compensation Discussion and Analysis — Compensation Elements for the Named Executive Officers — Equity-Based Incentives for a description of the process followed in determining the grants for 2022, and see Compensation Discussion and Analysis — 2022 Compensation Decisions — Equity-Based Incentives for a description of the vesting terms of the RSU and PSU awards. Grants made in-year are reported for such year. (2) The estimated accounting fair value of the share based awards is calculated using the market price of SVS as defined under each of the plans and in the case of PSUs, various fair value pricing models may apply. The accounting fair values for the PSU portion of the share based awards in Table 16 reflect various assumptions as to estimated vesting for such awards in accordance with applicable accounting standards. The grant date fair value of the RSU portion of the share based awards in Table 16 is the same as their accounting fair value. The grant date fair value for the PSU portion of the share based awards reflects the dollar amount of the award intended for compensation purposes, based on the market value of the underlying shares on the grant |
dates based on an assumption of the vesting of 100% of the target number of PSUs granted. The accounting fair value for all share-basedshare based awards in the table assumed a zero-forfeiturezero forfeiture rate. The number of PSUs granted in 2019 and 20182020 — 2022 that will actually vest will range from 0% to 200% of the target number granted and will be primarily based on the Corporation’s EBIATCorporation's OM Result in the final year of the three-year performance period, and then potentially modifiedsubject to modification by the Corporation’sCorporation's ROIC Factor and TSR Factor over the performance period, as described in detail under NEO Equity Awards and
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Mix above. 200% of the target amount of PSUs granted in 2020 settled in February 2023. For PSUs granted in 2019,2020 — 2022, the Corporation's TSR will beis measured relative to that of companies in the BMI Index, with the addition of Flex Ltd. For PSUs granted in 2018,Ltd, that remain publicly traded on an established U.S. stock exchange for the TSR will be measured relative to the information technology companies within the S&P 1500 Technology Index as at January 1, 2018 with the addition of Flex Ltd.entire performance period. The Corporation estimated the grant date fair value of the TSR Factor using a Monte Carlo simulation model. The number of awards expected to be earned was factored into the grant date Monte Carlo valuation for the award. The accounting grant date fair value is not subsequently adjusted regardless of the eventual number of awards that are earned based on TSR. The grant date fair value for the non-TSR-basednon-TSR based performance measurement and modifier was based on the market value of our SVS at the time of grant and may be adjusted in subsequent periods to reflect a change in the estimated level of achievement related to the applicable performance condition. 60% of the PSUs granted with respect to 2017 performance vested in January 2020 based on the level of TSR achievement over a three-year period relative to the TSR of a pre-defined comparator group. The comparator group was the companies in the S&P 1500 Technology Index for 2017, with the addition of Flex Ltd., that remained publicly traded on an established U.S. stock exchange for the entire performance period. The cost the Corporation recorded for these PSUs was determined using a Monte Carlo simulation model. The number of awards expected to be earned was factored into the grant date Monte Carlo valuation for the award. The accounting grant date fair value wasis not subsequently adjusted regardless of the eventual number of awards that were earned based on the market performance condition. 40%
(3) There were no stock options granted to the NEOs in 2020, 2021 or 2022.
(4) Amounts in this column represent CTI awards made to NEOs. See Compensation Discussion and Analysis — Compensation Elements for the Named Executive Officers — Celestica Team Incentive Plan for a description of the PSUs grantedCTI.
(5) Amounts in this column represent Celestica's contributions to defined contribution pension plans (other than 401(k) plans) on behalf of the NEOs — see Pension Plans for a full description of the plans. Contributions for Messrs. Mionis, Phillips, Cooper and Etienvre are reported in U.S. dollars. Contributions for Mr. Chawla are reported in U.S. dollars, having been converted from Canadian dollars at the average exchange rate for 2022 of $1.00 equals C$1.3014.
(6) Amounts in this column for Mr. Mionis include amounts for items provided for under the CEO Employment Agreement, which for 2022 included tax equalization payments of $110,458. For 2021, the amount in this column for Mr. Mionis included tax equalization payments of $189,260 and housing expenses of $75,080 while in Canada. For 2020, the amount in this column for Mr. Mionis included tax equalization payments of $400,602 and housing expenses of $72,196 while in Canada. Amounts in this column for Mr. Phillips for 2022 consist of a 401(k) contribution of $18,001. Amounts in this column for Mr. Phillips for 2021 include a tax equalization payment of $9,340 and a 401(k) contribution of $17,085. Amounts in this column for Mr. Phillips for 2020 consisted of a tax equalization payment of $10,121 and a 401(k) contribution of $16,973. Amounts in this column for Mr. Cooper for 2022 consisted of a 401(k) contribution of $18,300. Amounts in this column for Mr. Cooper for 2021 consisted of a tax equalization payment of $31,264 and a 401(k) contribution of $17,400. Amounts in this column for Mr. Cooper for 2020 consisted of a 401(k) contribution of $17,100. Amounts in this column for Mr. Etienvre for 2022 include the one-time cash award of $475,000 paid to him in connection with respecthis appointment as Chief Operations Officer to 2017 vestedincentivize him to join the Corporation when we deemed expedient for him to transition seamlessly into a key leadership position, and in January 2020 based onrecognition of the Corporation’s average non-IFRS adjusted ROIC performance overrelated forfeiture of a short-term incentive award from his previous employer. In accordance with the three-year vesting period relativeCorporation's Short-Term Business Travel Program, tax equalization payments for all NEOs were made to maintain each NEO's tax burden at approximately the same level it would have otherwise been had they remained in their home country. Due largely to variables such as timing and tax rate differences between Canada and the U.S., tax equalization amounts may vary from one year to the average non-IFRS adjusted ROIC of a pre-determined EMS competitor group overnext and the same period. The costnet benefit may be positive or negative in the year. While the Corporation recordedis incorporated and headquartered in Canada, our business is global, and we compete for these PSUs was determined based on the market valueexecutive talent worldwide. As a result, we believe it is appropriate to make tax equalization payments under certain circumstances in order to attract and retain non-Canadian executive officers with specific capabilities and to ensure that our executives do not incur any additional tax burden as a result of the SVS atbusiness travel necessitated by the timeglobal nature of grant,our business.
(7) In 2021, the HRCC approved increases to the base salaries of Messrs. Chawla, Phillips and such costCooper in order to align their respective base salaries with the median base salary of executives with similar roles within the Comparator Group. In April 2020, Mr. Chawla's base salary was adjusted duringincreased to better align it with the last yearmedian base salary of CFOs within the three-year performance period basedComparator Group, and to reflect the expanded scope of his responsibilities to include additional functional areas.
(8) Mr. Cooper was appointed President, ATS effective January 1, 2022.
(9) Mr. Etienvre was appointed Chief Operations Officer effective January 1, 2022 prior to which he served on management’s estimatean advisory basis in November and December of the relative level of achievement of non-IFRS adjusted ROIC, as outlined above.2021.
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The following table provides details of each stock option grant outstanding (vested and unvested) and the aggregate number of unvested share-based awards for each of the NEOs as of December 31, 2019.2022.
Table 16:17: Outstanding Option‑BasedOption-Based and Share‑BasedShare-Based Awards(1)
| Name | Option-Based Awards | Share-Based Awards | |||||||||||||||||||||||||||
| Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the- Money Options ($) | Number of Shares or Units that have not Vested (#)(2) | Payout Value of Share- Based Awards that have not Vested at Minimum ($)(3) | Payout Value of Share- Based Awards that have not Vested at Target ($)(3) | Payout Value of Share-Based Awards that have not Vested at Maximum ($)(3) | Payout Value of Vested Share-Based Awards Not Paid Out or Distributed ($) | |||||||||||||||||||||
| Robert A. Mionis | |||||||||||||||||||||||||||||
| Aug. 1, 2015 | 298,954 | C$17.52 | Aug. 1, 2025 | — | — | — | — | — | — | ||||||||||||||||||||
| Feb. 4, 2020 | — | — | — | — | 485,939 | — | $5,476,533 | $10,953,066 | — | ||||||||||||||||||||
| Feb. 2, 2021 | — | — | — | — | 770,370 | $2,671,407 | $8,682,070 | $14,692,733 | — | ||||||||||||||||||||
| Feb. 1, 2022 | — | — | — | — | 578,313 | $2,607,033 | $6,517,588 | $10,428,143 | — | ||||||||||||||||||||
| Total | 298,954 | — | — | — | 1,834,622 | $5,278,440 | $20,676,191 | $36,073,942 | — | ||||||||||||||||||||
| Mandeep Chawla | |||||||||||||||||||||||||||||
| Feb. 4, 2020 | — | — | — | — | 124,859 | — | $1,464,076 | $2,928,152 | — | ||||||||||||||||||||
| Feb. 2, 2021 | — | — | — | — | 208,641 | $752,763 | $2,446,490 | $4,140,216 | — | ||||||||||||||||||||
| Feb. 1, 2022 | — | — | — | — | 156,627 | $734,635 | $1,836,582 | $2,938,529 | — | ||||||||||||||||||||
| Total | — | — | — | — | 490,127 | $1,487,398 | $5,747,148 | $10,006,897 | — | ||||||||||||||||||||
| Jason Phillips | |||||||||||||||||||||||||||||
| Feb. 4, 2020 | — | — | — | — | 107,986 | — | $1,217,002 | $2,434,004 | — | ||||||||||||||||||||
| Feb. 2, 2021 | — | — | — | — | 181,892 | $630,748 | $2,049,923 | $3,469,098 | — | ||||||||||||||||||||
| Feb.1, 2022 | — | — | — | — | 136,546 | $615,545 | $1,538,873 | $2,462,202 | — | ||||||||||||||||||||
| Total | — | — | — | — | 426,424 | $1,246,293 | $4,805,798 | $8,365,304 | — | ||||||||||||||||||||
| Todd C. Cooper | |||||||||||||||||||||||||||||
| Feb. 4, 2020 | — | — | — | — | 107,986 | — | $1,217,002 | $2,434,004 | — | ||||||||||||||||||||
| Feb. 2, 2021 | — | — | — | — | 206,583 | $909,016 | $2,328,190 | $3,747,365 | — | ||||||||||||||||||||
| Feb. 1, 2022 | — | — | — | — | 136,546 | $615,545 | $1,538,873 | $2,462,202 | — | ||||||||||||||||||||
| Total | — | — | — | — | 451,115 | $1,524,561 | $5,084,065 | $8,643,571 | — | ||||||||||||||||||||
| Yann Etienvre | |||||||||||||||||||||||||||||
| February 2, 2021 | — | — | — | — | 280,133 | 902,028 | 3,157,099 | 5,412,170 | — | ||||||||||||||||||||
| February 1, 2022 | 128,514 | 579,346 | 1,448,353 | 2,317,360 | |||||||||||||||||||||||||
| Total | — | — | — | — | 408,647 | 1,481,374 | 4,605,452 | 7,729,530 | — | ||||||||||||||||||||
| Option‑Based Awards | Share‑Based Awards | ||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the-Money Options ($) | Number of Shares or Units that have not Vested (#)(2) | Payout Value of Share-Based Awards that have not Vested at Minimum ($)(3) | Payout Value of Share-Based Awards that have not Vested at Target ($)(3) | Payout Value of Share-Based Awards that have not Vested at Maximum ($)(3) | Payout Value of Vested Share‑Based Awards Not Paid Out or Distributed ($) | ||||||
| Robert A. Mionis | |||||||||||||||
| Aug. 1, 2015 | 298,954 | C$17.52 | Aug. 1, 2025 | – | – | – | – | – | – | ||||||
| Jan. 31, 2017 | – | – | – | – | 201,317 | – | $1,664,892 | $3,329,783 | – | ||||||
| Jan. 30, 2018 | – | – | – | – | 593,720 | $1,510,788 | $4,910,064 | $8,309,340 | – | ||||||
| Feb. 6, 2019 | – | – | – | – | 895,521 | $2,962,380 | $7,405,959 | $11,849,537 | – | ||||||
| Total | 298,954 | – | – | – | 1,690,558 | $4,473,168 | $13,980,915 | $23,488,660 | – | ||||||
| Mandeep Chawla | |||||||||||||||
| Jan. 31, 2017 | – | – | – | – | 12,811 | – | $103,983 | $207,965 | – | ||||||
| Jan. 30, 2018 | – | – | – | – | 119,568 | $298,612 | $970,493 | $1,642,374 | – | ||||||
| Feb. 6, 2019 | – | – | – | – | 199,003 | $646,094 | $1,615,240 | $2,584,386 | – | ||||||
| Total | – | – | – | – | 331,382 | $944,706 | $2,689,716 | $4,434,725 | – | ||||||
| Jack J. Lawless | |||||||||||||||
| Jan. 31, 2017 | – | – | – | – | 54,904 | – | $454,056 | $908,112 | – | ||||||
| Jan. 30, 2018 | – | – | – | – | 136,061 | $346,224 | $1,125,224 | $1,904,225 | – | ||||||
| Feb. 6, 2019 | – | – | – | – | 217,661 | $720,019 | $1,800,056 | $2,880,094 | – | ||||||
| Total | – | – | – | – | 408,626 | $1,066,243 | $3,379,336 | $5,692,431 | – | ||||||
| Todd C. Cooper | |||||||||||||||
| Dec. 15, 2017 | – | – | – | – | 177,649 | $1,469,157 | $1,469,157 | $1,469,157 | – | ||||||
| Jan. 30, 2018 | – | – | – | – | 131,937 | $335,729 | $1,091,119 | $1,846,509 | – | ||||||
| Feb. 6, 2019 | – | – | – | – | 199,003 | $658,300 | $1,645,755 | $2,633,209 | – | ||||||
| Total | – | – | – | – | 508,589 | $2,463,186 | $4,206,031 | $5,948,875 | – | ||||||
| Jason Phillips | |||||||||||||||
| Jan. 31, 2017 | – | – | – | – | 21,961 | – | $181,617 | $363,235 | – | ||||||
| Jan. 30, 2018 | – | – | – | – | 57,722 | $146,883 | $477,361 | $807,838 | – | ||||||
| May 7, 2018 | – | – | – | – | 42,052 | $347,770 | $347,770 | $347,770 | – | ||||||
| Feb. 6, 2019 | – | – | – | – | 180,347 | $596,590 | $1,491,470 | $2,386,350 | – | ||||||
| Aug. 6, 2019 | – | – | – | – | 22,124 | $182,965 | $182,965 | $182,965 | – | ||||||
| Total | – | – | – | – | 324,206 | $1,274,208 | $2,681,183 | $4,088,158 | – | ||||||
(2) Includes unvested RSUs, as well as PSUs (i) granted in 2020 that settled on February 4, 2023 at 200% of target, which, upon vesting on December 31, 2022 was the Corporation's anticipated payout and at settlement was the actual payout; and (ii) granted in 2021 and 2022, which all remain unvested, assuming achievement of 100% of target level performance.
(3) Payout values at minimum vesting include the value of RSUs only, as the minimum value of PSUs would be $0.00 if the minimum performance condition is not met. Payout value at target vesting is determined assuming vesting of 100% of the target number of PSUs granted and payout values at maximum vesting is determined assuming vesting of 200% of the target number of PSUs granted. Payout values for Mr. Chawla were determined using a share price of C$15.26, which was the closing price of the SVS on the TSX on December 30, 2022, the last trading day of the year. converted to U.S. dollars at the average exchange rate for 2022 of $1.00 equals C$1.3014. Payout values for Messrs. Mionis, Phillips, Cooper and Etienvre were determined using a share price of $11.27, which was the closing price of the SVS on the NYSE on December 30, 2022, the last trading day of the year.
The following table provides details for each NEO of the value of option‑basedoption-based and share‑basedshare-based awards that vested during 20192022 and the value of annual incentive awards earned in respect of 20192022 performance.
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Table 17:18: Incentive Plan Awards –— Value Vested or Earned in 20192022
| Name | Option-based Awards — Value Vested During the Year ($) | Share-based Awards — Value Vested During the Year ($)(1) | Non-equity Incentive Plan Compensation — Value Earned During the Year ($)(2) | ||||||||
| Robert A. Mionis | — | $8,709,722 | $2,850,000 | ||||||||
| Mandeep Chawla | — | $2,071,996 | $1,100,000 | ||||||||
| Jason Phillips | — | $2,389,014 | $776,000 | ||||||||
| Todd C. Cooper | — | $1,956,234 | $659,600 | ||||||||
| Yann Etienvre | — | $584,878 | $725,560 | ||||||||
| Name | Option‑based Awards – Value Vested During the Year ($) | Share‑based Awards – Value Vested During the Year ($)(1) | Non-equity Incentive Plan Compensation – Value Earned During the Year ($)(2) |
| Robert A. Mionis | – | $3,154,303 | $383,562 |
| Mandeep Chawla | – | $584,825 | $118,227 |
| Jack J. Lawless | – | $826,957 | $118,864 |
| Todd C. Cooper | – | $900,590 | $118,864 |
| Jason Phillips | – | $392,992 | $113,215 |
| Type of Award | Vesting Date | Price | ||||||
| PSU | February | $ | ||||||
| RSU | February | $ | ||||||
| RSU | February 4, 2022 | $12.09 | ||||||
| PSU | April 1, 2022 | $11.91 | ||||||
| RSU | December 1, 2022 | $11.15 | ||||||
| RSU | December 12, 2022 | $10.96 | ||||||
and (ii) share-based awards released in 2022 for Mr. Chawla based on the settlement prices of the SVS as follows:
| Type of Award | Vesting Date | Price | ||||||
| PSU | February 7, 2022 | C$15.05 | ||||||
| RSU | February 2, 2022 | C$16.14 | ||||||
| RSU | February 4, 2022 | C$15.44 | ||||||
| RSU | December | |||||||
Certain values in this column were converted to U.S. dollars from Canadian dollars at the average exchange rate for 20192022 of $1.00 equals C$1.3269.1.3014. With respect to previously-issued PSUs that vestedsettled in 2019,2022, the Corporation’s relative TSR (determinative for 60% of such PSUs) ranked belowoverall vesting percentage was 74% based on the 25th percentile of the TSR Comparators, resulting in zero achievement for such PSUs and the Corporation’s relativeCorporation's non-IFRS operating margin, non-IFRS adjusted ROIC (determinative for 40%and TSR performance.
(2) Consists of such PSUs) ranked 2rd amongpayments under the ROIC competitors resultingCTI made on February 17, 2023 in 125% achievement for an overall vesting levelrespect of 50%, i.e. ((60% * 0%) + (40% * 125%))2022 performance. See Compensation Discussion and Analysis — 2022 Compensation Decisions — Annual Incentive Award — Target Award. These are the same amounts as disclosed in Table 16 under the column "Non-equity Incentive Plan Compensation — Annual Incentive Plans."
No gains were realized by NEOs from exercising stock options in 2019.2022.
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Securities Authorized for Issuance Under Equity Compensation Plans
Table 18:19: Equity Compensation Plans as at December 31, 20192022(1)
| Plan Category | Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (#) | Weighted‑Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Securities Remaining Available for Future Issuance Under Equity Compensation Plans(2) (#) | |
| Equity Compensation Plans Approved by Securityholders | LTIP (Options) | 345,577 | C$16.27 | N/A(3) |
| LTIP (RSUs) | - | N/A | N/A(3) | |
LTIP (PSUs)(4) | 1,293,916 | N/A | N/A(3) | |
Total(5) | 1,639,493 | C$16.27 | 8,670,833 | |
| Issued Upon Exercise of Outstanding Options, Warrants and Rights (#) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Securities Remaining Available for Future Issuance Under Equity Compensation Plans(2) (#) | ||||
| LTIP (Options) | 393,472 | C $16.76 | N/A(3) | ||||||
| 65,989 | N/A | N/A(3) | ||||
| — | N/A | N/A(3) | |||||||||
Total(4) | C $16.76 | 9,476,554(3) | |||||||||
(1) This table sets forth information, as of December 31, 2022, with respect to SVS authorized for issuance under the LTIP, and does not include SVS purchased (or to be purchased) in the open market to settle equity awards under the LTIP or the Corporation's other equity compensation plans. The LTIP, which was approved by the Corporation's shareholders, is the only equity compensation plan pursuant to which the Corporation may issue new SVS to settle equity awards.
(2) Excluding securities that may be issued upon exercise of outstanding stock options, warrants and rights.
(3) The LTIP provides for a maximum number of securities that may be issued from treasury, but does not provide separate maximums for each type of award thereunder.
(4) The total number of securities issuable upon the exercise/settlement of outstanding grants under all equity compensation plans approved by shareholders represents 0.377% of the total number of outstanding shares at December 31, 2022 (LTIP (Options) — 0.323%; LTIP (RSUs) — 0.054%; and LTIP (PSUs) — 0.0%).
Equity Compensation Plans
Long-Term Incentive Plan
The LTIP (which was approved by the Corporation’sCorporation's shareholders) is the only securities‑basedsecurities-based compensation plan providing for the issuance of securities from treasury under which grants have been made and continue to be made by the Corporation since the companyit was listed on the TSX and the NYSE. Under the LTIP, the Board of Directors may in its discretion from time to time grant stock options, share units (in the form of RSUs and PSUs) and stock appreciation rights (“SARs”)(SARs) to employees and consultants of the Corporation and affiliated entities.entities (and all such awards other than stock options to directors).
Up to 29,000,000 SVS may be issued from treasury pursuant to the LTIP. The number of SVS that may be issued from treasury under the LTIP to directors is limited to 2,000,000; however, the Corporation decided in 2004 that stock option grants under the LTIP would no longer be made to directors. Under the LTIP, as of February 19, 2020, 19,177,16621, 2023, 19,295,501 SVS have been issued from treasury, 345,577393,472 SVS are issuable under outstanding stock options, no63,194 SVS are issuable under outstanding RSUs, and noSVS are issuable under outstanding PSUs. Accordingly, as of February 19, 2020, 9,822,83421, 2023, 9,704,499 SVS are reserved for issuance from treasury pursuant to current and potential future grants of securities‑basedsecurities-based compensation under the LTIP. In addition, the Corporation may satisfy obligations under the LTIP by acquiring SVS in the open market.
As of February 19, 2020,21, 2023, the Corporation had a “gross overhang”"gross overhang" of 7.1%7.4% under the LTIP. “Gross overhang”"Gross overhang" refers to the total number of shares reserved for issuance from treasury under equity plans at any given time relative to the total number of shares outstanding, including shares reserved for outstanding equity-based awards under the LTIP. The Corporation’s “net overhang”Corporation's "net overhang" (i.e.the total number of shares that have been reserved for issuance from treasury to satisfy outstanding equity grants to employees and outstanding RSU grants to directors relative to the total number of shares outstanding) was 0.3%0.4%.
As of December 31, 2019,2022, the Corporation had an “overhang”"overhang" for stock options of 7.0%7.4%, representing the number of shares reserved for issuance from treasury for outstanding stock options as at such date, together with shares reserved for potential future grants of stock options, relative to the total number of shares outstanding as at such date.
The Corporation had a “burn rate”"burn rate" for the LTIP for each of the years 2019, 20182022, 2021 and 2017,2020, of 0.0%, 0.0%0.1% and 1.6%0.0%, respectively. “Burn rate”"Burn rate" is calculated by dividing the number of awards granted during the applicable year (including the target amount of PSUs granted), by the weighted average number of securities outstanding for the applicable year.
The LTIP limits the number of SVS that may be (a) reserved for issuance to insiders (as defined under TSX rules for this purpose), and (b) issued within a one‑yearone-year period to insiders pursuant to stock options, rights or share units granted pursuant to the LTIP, together with SVS reserved for issuance under any other employee‑employee- related plan of the Corporation or stock options for services granted by the Corporation, in each case to 10% of the aggregate issued and outstanding SVS and
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MVS of the Corporation. The LTIP also limits the number of SVS that may be reserved for issuance to any one participant pursuant to stock options, SARs or share units granted pursuant to the LTIP, together with SVS reserved for issuance under any other employee‑relatedemployee-related equity plan of the Corporation or stock options for services granted by the Corporation, to 5% of the aggregate issued and outstanding SVS and MVS.
Vested stock options issued under the LTIP may be exercised during a period determined as provided in the LTIP, which may not exceed ten years. The LTIP also provides that, unless otherwise determined by the Board of Directors, stock options will terminate within specified time periods following the termination of employment of an eligible participant with the Corporation or affiliated entities, including in connection with a change of control. The exercise price for stock options issued under the LTIP is the closing price for SVS on the last business day prior to the grant date. The TSX closing price is used for Canadian employees and the NYSE closing price is used for all other employees. The exercise of stock options may be subject to vesting conditions, including specific time schedules for vesting and performance‑basedperformance-based conditions such as share price and financial results. The grant of stock options to, or exercise of stock options by, an eligible participant may also be subject to certain share ownership requirements.
The interest of any participant under the LTIP is generally not transferable or assignable. However, the LTIP does provide that a participant may assign his or her rights to a spouse, or a personal holding company or family trust controlled by the participant, of which any combination of the participant, the participant’sparticipant's spouse, minor children or grandchildren are shareholders or beneficiaries, as applicable.
Under the LTIP, eligible participants may be granted SARs, a right to receive a cash amount equal to the amount, if any, by which the market price of the SVS at the time of exercise of the SAR exceeds the market price of the SVS at the time of the grant. The market price used for this purpose is the weighted average price for SVS during the five trading days preceding the date of determination. The TSX market price is used for Canadian employees and the NYSE market price is used for all other employees. Such amounts may also be payable by the issuance of SVS (at the discretion of the Corporation). The exercise of SARs may also be subject to conditions similar to those which may be imposed on the exercise of stock options. To date, the Corporation has not granted any SARs under the LTIP.
Under the LTIP, eligible participants may be allocated share units in the form of PSUs or RSUs. Each vested RSU and PSU entitles the holder to receive one SVS on the applicable release date (however, the number of PSUs that may vest range from 0% to 200% of a target amount)amount granted). The issuance of such shares may be subject to vesting requirements similar to those described above with respect to the exercisability of stock options and SARs, including such time and/or performance‑basedperformance-based conditions as may be determined by the Board of Directors in its discretion. Under the LTIP, the Corporation may authorize grantees to settle vested RSUs or PSUs either in cash or SVS. Absent such permitted election, RSUs and PSUs will be settled in SVS. The number of SVS that may be issued to any one person pursuant to the share unit program shall not exceed 1% of the aggregate issued and outstanding SVS and MVS. The number of SVS that may be issued under share units in the event of termination of employment without cause, death or long-term disability is subject to pro-ration, unless otherwise determined by the Corporation. The LTIP provides for the express designation of share units as either RSUs, which have time-based vesting conditions or PSUs, which have performance-based vesting conditions over a specified period. In the event a holder of PSUs retires, unless otherwise determined by the Corporation, the pro-rated vesting of such PSUs shall be determined based on the actual performance achieved during the period specified for the grant by the Corporation.
The following types of amendments to the LTIP or the entitlements granted under it require the approval of the holders of the voting securities by a majority of votes cast by shareholders present or represented by proxy at a meeting:
(a) increasing the maximum number of SVS that may be issued under the LTIP; (b) reducing the exercise price of an outstanding stock option (including cancelling and, in conjunction therewith, regranting a stock option at a reduced exercise price); (c) extending the term of any outstanding stock option or SAR; (d) expanding the rights of participants to assign or transfer a stock option, SAR or share unit beyond that currently contemplated by the LTIP; (e) amending the LTIP to provide for other types of security-based compensation through equity issuance; (f) permitting a stock option to have a term of more than ten years from the grant date; (g) increasing or deleting the percentage limit on SVS issuable or issued to insiders under the LTIP; (h) increasing or deleting the percentage limit on SVS reserved for issuance to any one person under the LTIP (being 5% of the Corporation's total issued and outstanding SVS and MVS); |
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(i) adding to the categories of participants who may be eligible to participate in the LTIP; and
(j) amending the amendment provision,
subject to the application of the anti‑dilutionanti-dilution or re‑organizationre-organization provisions of the LTIP.
The Board may approve amendments to the LTIP or the entitlements granted under it without shareholder approval, other than those specified above as requiring approval of the shareholders, including, without limitation:
(a) clerical changes (such as a change to correct an inconsistency or omission or a change to update an administrative provision);
(b) a change to the termination provisions for the LTIP or for a stock option as long as the change does not permit the Corporation to grant a stock option with a termination date of more than ten years from the date of grant or extend an outstanding stock option's termination date beyond such date; and
(c) a change deemed necessary or desirable to comply with applicable law or regulatory requirements.
Celestica Share Unit Plan
The CSUP provides for the issuance of RSUs and PSUs in the same manner as provided in the LTIP, except that the Corporation may not issue shares from treasury to satisfy its obligations under the CSUP and there is no limit on the number of share units that may be issued as RSUs and PSUs under the terms of the CSUP. Issuances under the CSUP may be settled in cash or SVS at the discretion of the Corporation. The share units may be subject to vesting requirements, including any time-based conditions established by the Board of Directors at its discretion. The vesting of PSUs also requires the achievement of specified performance‑basedperformance-based conditions as determined by the HRCC. There is no “burn rate” for the CSUP because issuances under the CSUP are not from treasury and are therefore non-dilutive.
Pension Plans
The following table provides details of the amount of Celestica’sCelestica's contributions to its defined contribution pension plans on behalf of the NEOs, and the accumulated value thereunder as of December 31, 20192022 for each NEO.
Table 19:20: Defined Contribution Pension Plan
| Name | Accumulated Value at Start of Year ($) | Compensatory ($) | Accumulated Value at End of Year(1) ($) | ||||||||
Robert A. Mionis(2) | $1,517,880 | $202,010 | $1,373,254 | ||||||||
Mandeep Chawla(2) | $549,675 | $100,706 | $585,454 | ||||||||
| Jason Phillips | $583,149 | $67,085 | $517,344 | ||||||||
| Todd C. Cooper | $224,811 | $62,460 | $246,656 | ||||||||
| Yann Etienvre | $1,399 | $32,836 | $34,639 | ||||||||
| Name | Accumulated Value at Start of Year ($) | Compensatory ($) | Accumulated Value at End of Year(1) ($) |
Robert A. Mionis(2) | $502,862 | $131,850 | $773,018 |
Mandeep Chawla(2) | $210,841 | $61,346 | $306,224 |
| Jack J. Lawless | $143,159 | $46,357 | $239,211 |
| Todd C. Cooper | $26,141 | $52,058 | $87,360 |
| Jason Phillips | $208,069 | $31,828 | $302,381 |
(2) The difference between the Accumulated Value at Start of Year reported here and the Accumulated Value at End of Year reported in our 2021 Annual Report on Form 20-F (2021 20-F) for Messrs. Mionis and Chawla is attributable to different exchange rates used in our 2021 20-F and in this Annual Report. The exchange rate used in our 2021 20-F was $1.00 = C$1.2533.
Canadian Pension Plans
Mr. Chawla participates in the Corporation’sCorporation's registered pension plan for Canadian employees (the “Canadian(Canadian Pension Plan”)Plan) which is a defined contribution plan. The Canadian Pension Plan allows employees to choose how the Corporation’sCorporation's contributions are invested on their behalf within a range of investment options provided by third-party fund managers. Retirement benefits depend upon the performance of the investment options chosen. Mr. Chawla also participates in an unregistered supplementary pension plan (the “Canadian(Canadian Supplementary Plan”)Plan). This is also a defined contribution plan through which the Corporation provides an annual contribution of an amount equal to the difference between (i) the maximum annual contribution limit as determined in accordance with the formula set out in the Canadian Pension Plan and with Canada Revenue Agency rules and (ii) 8% of the total base salary and paid annual incentives. Notional accounts are maintained for each participant in the Canadian Supplementary Plan. Participants are entitled to select from among the investment options available
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in the Canadian Pension Plan for the purpose of determining the return on their Canadian Supplementary Plan notional accounts.
U.S. Pension Plans
Messrs. Mionis, Lawless,Phillips, Cooper and PhillipsEtienvre participate in the Corporation’sCorporation's U.S. pension plans comprised of two defined contribution retirement programs, one of which qualifies as a deferred salary arrangement under section 401(k) of the U.S. Internal Revenue Code (United States) (the “401(k) Plan”)(401(k) Plan). Under the 401(k) Plan, participating employees may defer 100% of their pre-tax earnings subject to any statutory limitations. The Corporation may make contributions for the benefit of eligible employees. The 401(k) Plan allows employees to choose how their account balances are invested on their behalf within a range of investment options provided by third-party fund managers. The Corporation contributes: (i) 3% of eligible compensation for the participant, and (ii) up to an additional 3% of eligible compensation by matching 50% of the first 6% contributed by the participant. The maximum contribution of the Corporation to the 401(k) Plan, based on the Internal Revenue Code rules and the 401(k) Plan formula for 20192022 was $19,000(plus$20,500 (plus an additional $6,000$6,500for an individual over the age of 50). Messrs. Mionis, LawlessPhillips, Cooper and CooperEtienvre also participate in a supplementary retirement plan that is also a defined contribution plan (the “U.S.(U.S. Supplementary Plan”)Plan). Under the U.S. Supplementary Plan, the Corporation contributes to the participant an annual amount equal to the difference between 8% of the participant’sparticipant's salary and paid incentive and the amount that Celestica would contribute to the 401(k) Plan assuming the participant contributes the amount required to receive the matching 50% contribution by Celestica. A notional account is maintained for Messrs. Mionis, LawlessPhillips, Cooper and Cooper,Etienvre, and they are entitled to select from among the investment options available in the 401(k) Plan for the purpose of determining the return on their notional accounts.
Termination of Employment and Change in Control Arrangements with Named Executive Officers
The Corporation has entered into employment agreements with certain of its NEOs in order to provide certainty to the Corporation and such NEOs with respect to issues such as obligations of confidentiality, non‑solicitationnon-solicitation and non‑competitionnon-competition after termination of employment, the amount of severance to be paid in the event of termination of the NEO’sNEO's employment, and to provide a retention incentive in the event of a change in control scenario.
Mr. Mionis
The CEO Employment Agreement provides that Mr. Mionis is entitled to certain severance benefits if, during a change of control period or a potential change of control period at the Corporation, he is terminated without cause or resigns for good reason as defined in his agreement (a “double trigger”"double trigger" provision) where good reason includes, without limitation, a material adverse change in position or duties or a specified reduction(s) in total compensation (including base salary, equity and CTI award). A change of control period is defined in his agreement as the 12-month period following a change of control. A potential change of control period is defined in his agreement as the period beginning upon the occurrence of a potential change of control and ending on the earlier of: (i) the end of the 6-month period following a potential change of control; and (ii) a change of control.
The amount of the severance payment for Mr. Mionis is equal to: (i) base salary up to and including the termination date; (ii) a lump sum amount equal to his target payment under the CTI prorated to the date of termination; (iii) a lump sum amount equal to any payments accrued under the CTI in respect of the fiscal year preceding the fiscal year during which his termination occurs, if any; (iv) a lump sum amount equal to two times his eligible earnings (such eligible earnings calculated as his annual base salary plus the lesser of (a) his target payment under the CTI for the fiscal year during which his termination occurs based on target achievement of the CPF of 1.0 and an IPF of 1.0, and (b) payment received under the CTI for the fiscal year preceding the fiscal year during which termination occurs); (v) vacation pay earned but unpaid up to and including the date of termination; (vi) a lump sum cash settlement of contributions to, or continuation of his pension and retirement plans for a two‑yeartwo-year period; and (vii) a one-time lump sum payment of $100,000 in lieu of all future benefits and perquisites. In addition, upon a change of control and termination without cause or for good reason (a) the stock options granted to him vest immediately, (b) the unvested PSUs granted to him vest immediately at the target level of performance specified in the terms of the PSU grant, and (c) the RSUs granted to him shall vest immediately.
Outside a change in control period, upon termination without cause or resignation for good reason as defined in his agreement, the amount of the severance payment for Mr. Mionis is equal to: (a) base salary up to and including the termination date; (ii)(b) a lump sum amount equal to any payments accrued under the CTI in respect of the fiscal year preceding the fiscal year during which his termination occurs; (iii)(c) a lump sum amount equal to two times his eligible earnings (as calculated in the paragraph above); (iv)(d) vacation pay earned but unpaid up to and including the date of termination; (v)(e) a one-time lump sum payment of $100,000 in lieu of all future benefits and perquisites; and (vi)(f) a lump sum cash settlement of contributions to, or continuation of his pension and retirement plans for a two‑yeartwo-year period. In addition, (a) vested stock options may be exercised for a period of 30 days and unvested stock options are forfeited on the termination date, (b) RSUs shall vest immediately on a pro ratabasis based on the ratio of (i) the number of full years of employment completed between the date of grant and termination of employment, to (ii) the number of years between the date of grant and the vesting date, and (c) PSUs vest based on actual performance on a pro ratabasis based on the ratio of (i) the number of full years of employment completed between the date of grant and the termination of employment, to (ii) the number of years between the date of grant and the vesting date.
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The foregoing entitlements are conferred on Mr. Mionis in part upon his fulfillment of certain confidentiality, non-solicitation and non-competition obligations for a period of two years following termination of employment. In the event of a breach of such obligations, the Corporation is entitled to seek appropriate legal, equitable and other remedies, including injunctive relief.
The following table summarizes the incremental payments and benefits to which Mr. Mionis would have been entitled upon a change in control occurring on December 31, 2019,2022, or if his employment had been terminated on December 31, 20192022 as a result of a change in control, retirement or termination without cause (or with good reason).
Table 20:21: Mr. Mionis’Mionis' Benefits
| Cash Portion | Value of Option-Based and Share-Based Awards(1) | Other Benefits(2) | Total | |||||||||||
| Termination without Cause/with Good Reason or Change in Control with Termination | $4,750,000 | — | $540,620 | $5,290,620 | ||||||||||
| Change in Control with no Termination or Retirement | — | — | — | — | ||||||||||
| Cash Portion | Value of Option-Based and Share-Based Awards(1) | Other Benefits(2) | Total | |
| Termination without Cause/with Good Reason or Change in Control with Termination | $3,705,000 | — | $397,300 | $4,102,300 |
| Change in Control with no Termination or Retirement | — | — | — | — |
(2) Other benefits consist of group health benefits and pension plan contribution.
contributions.
Messrs. Chawla, Lawless,Phillips, Cooper and PhillipsEtienvre
Messrs. Chawla, Lawless,Phillips, Cooper and PhillipsEtienvre are subject to the Executive Policy Guidelines which provide the following:
| Termination without cause | •eligible to receive a severance payment up to two times annual base salary and the lower of target or actual annual incentive for the previous year •(a) vested stock options may be exercised for a period of 30 days and unvested stock options are forfeited on the termination date, (b) RSUs shall vest immediately on a prorata basis based on the ratio of (i) the number of full years of employment completed between the date of grant and termination of employment, to (ii) the number of years between the date of grant and the vesting date, and (c) PSUs vest based on actual performance on a pro rata basis based on the ratio of (i) the number of full years of employment completed between the date of grant and the termination of employment, to (ii) the number of years between the date of grant and the vesting date | ||||
| Termination without cause within two years following a change in control of the Corporation | •eligible to receive a severance payment up to two times Eligible Earnings, subject to adjustment for factors including length of service, together with a portion of their annual incentive for the year, prorated to the date of termination •(a) all unvested stock options vest on the date of change in control, (b) all unvested RSUs vest on the date of change in control, and (c) all unvested PSUs vest on the date of change in control at target level of performance unless the terms of a PSU grant provide otherwise, or on such other more | ||||
| Termination with cause | •no severance benefit is payable •all unvested equity is forfeited on the termination date | ||||
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| Retirement | •(a) stock options continue to vest and are exercisable until the earlier of three years following retirement and the original expiry date, (b) RSUs will continue to vest on their vesting dates, and (c) PSUs vest based on actual performance on a pro rata basis based on the percentage represented by the number of days between the date of grant and the date of retirement as compared to the total number of days from the date of grant to the scheduled release date for the issuance of shares in respect of vested PSUs | ||||
| Resignation | •no severance benefit is payable •(a) vested stock options may be exercised for a period of 30 days and unvested stock options are forfeited on the resignation date and (b) all unvested RSUs and PSUs are forfeited on the resignation date | ||||
Additionally, the Executive Policy Guidelines provide that executives whose employment has been terminated will have their pension and benefits coverage treated according to the terms of the plans in which they participate.
The entitlements described in the above table are only conferred on eligible executives who fulfill certain confidentiality, non‑solicitationnon-solicitation and non‑competitionnon-competition obligations for a period of two years following termination of their employment.
The following tables summarize the incremental payments to which Messrs. Chawla, Lawless,Phillips, Cooper and PhillipsEtienvre would have been entitled upon a change in control occurring on December 31, 2019,2022, or if their employment had been terminated on December 31, 20192022 as a result of a change in control, retirement or termination without cause.
Table 21:22: Mr. Chawla’sChawla's Benefits
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |||||||||||
| Termination without Cause or Change in Control with Termination | $2,200,000 | — | — | $2,200,000 | ||||||||||
| Change in Control with no Termination or Retirement | — | — | — | — | ||||||||||
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |
| Termination without Cause or Change in Control with Termination | $1,553,600 | — | — | $1,553,600 |
| Change in Control with no Termination or Retirement | — | — | — | — |
(1) Amounts in this column assume a maximum severance payment of two times Eligible Earnings but the actual amounts payable could be less.
Table 22:23: Mr. Lawless’Phillips' Benefits
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |||||||||||
| Termination without Cause or Change in Control with Termination | $1,746,000 | — | — | $1,746,000 | ||||||||||
| Change in Control with no Termination or Retirement | — | — | — | — | ||||||||||
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |
| Termination without Cause or Change in Control with Termination | $1,567,680 | — | — | $1,567,680 |
| Change in Control with no Termination or Retirement | — | — | — | — |
(1) Amounts in this column assume a maximum severance payment of two times Eligible Earnings but the actual amounts payable could be less.
(2) No incremental amount would be received in respect of accelerated vesting of options, RSUs and PSUs, if any, on the assumption that the discount rate applied to calculate the net present value of the accelerated entitlements is not greater than the rate at which the SVS would otherwise be expected to appreciate over the period of acceleration.
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Table 23:24: Mr. Cooper’sCooper's Benefits
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |||||||||||
| Termination without Cause or Change in Control with Termination | $1,746,000 | — | — | $1,746,000 | ||||||||||
| Change in Control with no Termination or Retirement | — | — | — | — | ||||||||||
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |
| Termination without Cause or Change in Control with Termination | $1,503,960 | — | — | $1,503,960 |
| Change in Control with no Termination or Retirement | — | — | — | — |
(1) Amounts in this column assume a maximum severance payment of two times Eligible Earnings but the actual amounts payable could be less.
(2) No incremental amount would be received in respect of accelerated vesting of options, RSUs and PSUs, if any, on the assumption that the discount rate applied to calculate the net present value of the accelerated entitlements is not greater than the rate at which the SVS would otherwise be expected to appreciate over the period of acceleration.
Table 24:25: Mr. Phillips’Etienvre's Benefits
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |||||||||||
| Termination without Cause or Change in Control with Termination | $1,040,158 | — | — | $1,040,158 | ||||||||||
| Change in Control with no Termination or Retirement | — | — | — | — | ||||||||||
Cash Portion(1) | Value of Option-Based and Share-Based Awards(2) | Other Benefits | Total | |
| Termination without Cause or Change in Control with Termination | $1,256,000 | — | — | $1,256,000 |
| Change in Control with no Termination or Retirement | — | — | — | — |
(1) Amounts in this column assume a maximum severance payment of two times Eligible Earnings but the actual amounts payable could be less.
(2) No incremental amount would be received in respect of accelerated vesting of options, RSUs and PSUs, if any, on the assumption that the discount rate applied to calculate the net present value of the accelerated entitlements is not greater than the rate at which the SVS would otherwise be expected to appreciate over the period of acceleration.
Performance Graph
An investment in the Corporation on December 31, 20142017 would have resulted in a 21.1% decrease16% increase in value over the five‑yearfive-year period ended December 31, 20192022 compared with a 35.6%39% increase that would have resulted from an investment in the S&P/TSX Composite Total Return Index over the same period.
Over the same five-year period, total NEOannual compensation for the NEOs as reported in the applicable Summary Compensation (as defined below)Tables (actual salary paid, actual CTI payments and the grant-date fair value of long-term incentive awards (at target in the case of PSUs) granted in the respective years) increased by 0.9%33%. This increase is reflective of many factors, including changes in the identities of the NEOs since 2017, the increased responsibilities of certain continuing NEOs over such time period, as well as the differences in the actual CTI payments in 2017 based on a CPF of 83% versus 2022 based on a CPF of 170%.
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In 2022, Celestica's annual TSR outperformed the S&P/TSX Composite Total Return Index by 7% and outperformed the average of the companies in the 2022 Comparator Group by 22%. In the medium to long term,long-term, compensation of the Corporation’s NEOs is directly impacted by the market value of the SVS, as a significant portion of such NEO Compensationcompensation is awarded incomprised of RSUs and PSUs, the formvalue of equity-based incentives with payoutwhich are tied to the market value of the SVS.
C. Board Practices
Members of the Board are elected until the close of the next annual meeting of shareholders or until their successors are elected or appointed (unless such position is earlier vacated in accordance with the Corporation's by-laws). Each member of our senior management is appointed to serve at the discretion of our Board (subject to the terms and conditions of their respective employment agreements, if any). See Item 6(A), "Directors and Senior Management" for details for the period during which each director and executive officer has served in his/her office.such capacity. Our non-managementindependent directors regularly(as defined under Canadian rules and NYSE listing standards) meet separately in camera (i.e., (and without our chief executive officer, chief financial officerCEO, CFO or other members of management present) as part of every Board meeting to consider such matters as they deem appropriate. In accordance with NYSE listing standards, "non-management" directors are those directors who are not executive officers of the Corporation. We have designatedThe presiding director at these in camera sessions is the Chair of the Board, asor in the presiding non-managementabsence of the Chair of the Board, another independent director at all selected by those in camera sessions.attendance. The non-managementindependent directors can set their own agenda, maintain minutes, and report back to the Board as a whole. Among the items that the non-managementindependent directors meet privately in camera to review is the performance of the Corporation's executive officers. In addition, the independent directors meet separately at least once annually. Our Audit Committee,CEO. Each of our standing Board committees, which consistsconsist solely of independent non-management directors met in camera immediately following(as defined under applicable Canadian and SEC rules, and NYSE listing standards), also meet separately (without our CEO, CFO or other members of management present) as part of each Audit Committee meeting in 2019.committee meeting.
The Board has determined that Mr. Cascella, Mr. Chopra, Ms. Colpron (upon her appointment to the Board effective October 1, 2022), Mr. DiMaggio, Ms. Kale (upon her appointment to the Board effective December 1, 2022), Ms. Koellner, Dr. Müller, Ms. Perry, Mr. EtheringtonRyan (until his retirement from the Board effective January 29, 2020), Ms. Koellner, Ms. Perry, Mr. Ryanin April 2022) and Mr. Wilson, (constitutingconstituting a majority of the Board)Board, are independent directors under applicable independence standards in Canada and under NYSE listing standards.
Except for the right to receive deferred compensation, no director is entitled to benefits from Celestica under any service contracts when they cease to serve as a director. See Item 6(B), "Compensation."
Communications with the Board
Shareholders and other interested parties may confidentially communicate directly with the Chair of the Board, or all non-management directors (directors who are not executive officers of the Company) or independent directors individually or as a group, by writing to any of the foregoing c/o Investor Relations, Celestica Inc., 5140 Yonge Street, Suite 1900, Toronto, Ontario, Canada M2N 6L7; phone 416-448-2211. Any such letters will be delivered unopened to the Chair of the Board or to the appropriate addressee(s). or their designees.
Shareholders and other interested parties who have concerns or complaints relating to accounting, internal accounting controls, auditing matters, embezzlement, illegal or fraudulent conduct, securities violations or other matters may also contact the Audit Committee by writing to the address set out above or by reporting the matter through our Ethics Hotline toll free at 1-888-312-2689. Callers outside the United StatesU.S. or Canada can place a collect call to 1-503-726-2457. Alternatively, concerns or complaints can be reported using a secure on-line web-based tool at www.ethics.celestica.com.
All communications will be handled in a confidential manner, to the degree that Canadian and U.S.applicable laws allow. Communications may be made on an anonymous basis; however, in these cases the reporting individual must provide sufficient details for the matter to be reviewed and resolved. The Corporation will not tolerate any retaliation against an employee who makes a good faith report.
Board Committees
The Board has three standing committees, each with a specific mandate (charter): the Audit Committee, the Human Resources and Compensation Committee (HRCC), and the Nominating and Corporate Governance Committee.Committee (NCGC). All of
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these committees are composed solely of independent directors (as that term is defined by applicable Canadian and SEC rules and in the NYSE listing standards, as applicable).
Audit Committee
The Audit Committee in 20192022 consisted of Ms. Koellner (Chair), Mr. Cascella, Mr. Chopra, Ms. Colpron (commencing upon hisher appointment to the committee effective FebruaryOctober 1, 2019)2022), Mr. Chopra, Mr. DiMaggio, Mr. Etherington (who retired from thisMs. Kale (commencing upon her appointment to the committee and the Board effective January 29, 2020)December 1, 2022), Dr. Müller, Ms. Perry, Mr. Ryan (until his retirement from the Board in April 2022) and Mr. Wilson, all of whom the Board determined to be independent directors for audit committee purposes (as that term is defined by applicable Canadian and SEC rules and in the NYSE listing standards) and financially literate. All of the audit committee members have held executive positions with large corporations or financial services companies. The Audit Committee has a well-defined mandate which, among other things, sets out its relationship with, and expectations of, the external auditors, including the determination of the independence of the external auditors and approval of any non-audit services of the external auditor; the engagement, evaluation, remuneration and termination of the external auditor; its relationship with, and expectations of, the internal auditor function and its oversight of internal control; and the disclosure of financial and related information. In addition to fulfilling the responsibilities as set forth in its mandate, the Audit Committee has established procedures for a formal annualto review of the qualifications, expertise, resources and the overall performance of the Corporation's external auditor, including conducting a survey of each member of the Audit Committee and of certain key
The Audit Committee has established procedures for: (i) receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters and (ii) confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. A copy of the Audit Committee Mandate is available on our website at www.celestica.com(information on our website is not incorporated by reference into this Annual Report).
Members of the Audit Committee do not serve on more than three audit committees of public companies, including that of Celestica.
See Item 16A "Audit Committee Financial Expert" for a discussion of the Corporation's Audit Committee Financial Experts.
Audit Committee Report:
The Audit Committee has reviewed and discussed the audited financial statements with management;
The Audit Committee has discussed with the independent auditors the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (PCAOB) and the SEC;
The Audit Committee has received the written disclosures and the letter from the independent auditoraccountant as required by applicable requirements of the PCAOB regarding the independent auditor'saccountant's communications with the Audit Committee concerning independence, and has discussed with the independent auditoraccountant the independent auditor'saccountant's independence; and
Based on such review and discussions, the Audit Committee recommended to the Board that the audited financial statements be included in this Annual Report for the year ended December 31, 20192022 for filing with the SEC.
The Audit Committee:
Mr. Cascella
Mr. Chopra
Ms. Colpron
Mr. DiMaggio
Ms. Kale
Ms. Koellner
Dr. Müller
Ms. Perry
Mr. RyanWilson
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Human Resources and Compensation Committee
The HRCC in 20192022 consisted of Mr. RyanCascella (Chair), Mr. CascellaRyan (until his retirement from the Board in April 2022), Mr. Chopra, Ms. Colpron (commencing upon hisher appointment to the committee effective FebruaryOctober 1, 2019)2022), Mr. Chopra, Mr. DiMaggio, Mr. Etherington (who retired from thisMs. Kale (commencing upon her appointment to the committee and the Board effective January 29, 2020)December 1, 2022), Dr. Müller, Ms. Koellner, Ms. Perry and Mr. Wilson, all of whom the Board determined to be independent directors for compensation committee purposes pursuant to the applicable Canadian and SEC rules and the NYSE listing standards. In July 2019, the Corporation's Compensation Committee was renamed the Human Resources and Compensation Committee, and its mandate updated to include responsibilities for certain human resources matters. It is the responsibility of the HRCC to define and communicate compensation policies and principles that reflect and support our strategic direction, business goals and desired culture. Pursuant to its mandate, the HRCC: reviews and approves Celestica's overall reward/compensation policy, including an executive compensation policy that is consistent with competitive practice and supports organizational objectives and shareholder interests; reviews the corporate goals and objectives relevant to the compensation of the CEO, as approved by the Board, evaluates the CEO's performance in light of these goals and objectives, and sets the compensation of the CEO based on this evaluation; reviews and approves the appointment and terms of employment (or any material changes to terms of employment) and, upon recommendation of the CEO, any changes to the base salary for all senior executive positions that report to the CEO and certain other senior executive positions, as well as any separation agreement or compensation arrangement for any such executive whose employment has been terminated; reviews, modifies, and approves the elements of the Corporation's incentive-based plans and equity-based plans, including plan design, performance targets, administration and total funds/shares reserved for payment; makes recommendations to the Board regarding director compensation in accordance with principles and guidelines established by the
A copy of the HRCC Mandate is available on our website at www.celestica.com(information on our website is not incorporated by reference into this Annual Report).
Human Resources and Compensation Committee Report:
The HRCC has reviewed and discussed the Compensation Discussion and Analysis with management and based on such review and discussions, the HRCC recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report for the year ended December 31, 2019.2022.
The Human Resources and Compensation Committee:
Mr. Cascella
Mr. Chopra
Ms. Colpron
Mr. DiMaggio
Ms. Kale
Ms. Koellner
Dr. Müller
Ms. Perry
Mr. Ryan
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance CommitteeNCGC in 20192022 consisted of Mr. EtheringtonWilson (Chair) (who retired from this committee and the Board effective January 29, 2020), Mr. Cascella, Mr. Chopra, Ms. Colpron (commencing upon hisher appointment to the committee effective FebruaryOctober 1, 2019)2022), Mr. Chopra, Mr. DiMaggio, Ms. Kale (commencing upon her appointment to the committee effective December 1, 2022), Ms. Koellner, Dr. Müller, Ms. Perry, and Mr. Ryan and Mr. Wilson,(until his retirement from the Board in April 2022), all of whom were determined by the Board to be independent directors pursuant to applicable Canadian rules and NYSE listing standards. The NominatingNCGC is responsible for developing and Corporate Governance Committee recommendsrecommending governance guidelines for the Corporation (and recommending changes to the Board the criteria for selecting candidates for nominationthose guidelines), identifying individuals qualified to become members of the Board, and the individualsrecommending director nominees to be nominated for election by our shareholders.put before the shareholders at each annual meeting. The committee's mandate includes making recommendations toduties and responsibilities of the Board relating to the Corporation's approach to corporate governance;NCGC include: reviewing the Corporation's corporate governance guidelinesCorporate Governance Guidelines; creating a formal,
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rigorous and recommending appropriate changestransparent procedure for the appointment of new directors to the Board; identifying and recommending new director nominees; annually assessing the effectiveness of the Board's Diversity Policy and its effectiveness in promoting a diverse Board, and its committees.monitoring compliance with disclosure and any other requirements under applicable corporate and securities laws and regulations, as well as any applicable stock exchange requirements, regarding diversity; developing a director orientation program; developing a director continuing education program; developing position descriptions for the Chair, the CEO and the chair of each committee; developing and overseeing annual director evaluations, including assessing the performance of the Board, the committees, and individual directors and through peer review; reviewing director compensation guidelines; overseeing the Corporation's general strategy, policies and initiatives relating to ESG matters, including, among other things, sustainability, and reviewing the risks related to ESG matters; and annual director independence reviews.
A copy of the NominatingNCGC Mandate and the Corporation's Corporate Governance Committee Mandate isGuidelines are available on our website at www.celestica.com(information on our website is not incorporated by reference into this Annual Report).
D. Employees
The following table sets forth information concerning our employees (permanent and temporary) by geographic location for the past three financial years:
| Number of Employees | ||||||||||||||||||||
| Date | Americas | Europe | Asia | Total | ||||||||||||||||
| December 31, 2020 | 4,998 | 2,361 | 13,191 | 20,550 | ||||||||||||||||
| December 31, 2021 | 5,243 | 2,347 | 16,325 | 23,915 | ||||||||||||||||
| December 31, 2022 | 6,284 | 2,509 | 17,531 | 26,324 | ||||||||||||||||
| Number of Employees | ||||||||||
| Date | Americas | Europe | Asia | Total | ||||||
| December 31, 2017 | 5,900 | 2,800 | 18,800 | 27,500 | ||||||
| December 31, 2018 | 6,900 | 3,900 | 17,900 | 28,700 | ||||||
| December 31, 2019 | 5,500 | 3,100 | 16,000 | 24,600 | ||||||
Given the variable nature of our project flow and the quick response time required by our customers, it is critical that we be able to quickly adjust our production up or down to maximize efficiency. To achieve this, our approach has been to employ a skilled temporary labor force, as required. As atAt December 31, 2019, approximately 3,1002022, 5,713 temporary (contract) employees (December 31, 20182021 — 5,100;5,272; December 31, 20172020 — 4,100)2,324) were engaged by us worldwide. We used,employed, on average for the year, approximately 3,8005,438 temporary (contract) employees in 2019.2022. The total number of employees (permanent and temporary) increased by 3,365 from December 31, 2020 to December 31, 2021, and increased by 2,409 from December 31, 2021 to December 31, 2022. The increase in total number of employees (permanent and temporary) in 2021 from 2020 was primarily due to our PCI acquisition, and the increase in 2022 from 2021 was primarily due to the growth of our business.
See Item 4(B), "Business Overview" under the following captions: "Diversity and Inclusion," "COVID-19 Oversight," "Employee Engagement," "Community Engagement," and "Ethical Labor Practices" for information on our approach to those topics.
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E. Share Ownership
The following table sets forth certain information concerning the direct and beneficial ownership of shares of Celestica at February 19, 202021, 2023 by each director, each NEO,executive officer (including each non-NEO executive officer,NEO), and all directors and executive officers of Celestica as a group as of such date. The address of each shareholder named below is Celestica's principal executive office.
Name of Beneficial Owner(1)(2) | Number of Shares(3) | Percentage of Class | Percentage of All Equity Shares(4) | Percentage of Voting Power | |||||||||||||||||||
| Robert A. Cascella | 0 SVS | — | — | — | |||||||||||||||||||
| Deepak Chopra | 0 SVS | — | — | — | |||||||||||||||||||
| Françoise Colpron | 0 SVS | — | — | — | |||||||||||||||||||
| Daniel P. DiMaggio | 0 SVS | — | — | — | |||||||||||||||||||
| Jill Kale | 0 SVS | — | — | — | |||||||||||||||||||
| Laurette T. Koellner | 0 SVS | — | — | — | |||||||||||||||||||
| Luis A. Müller | 0 SVS | — | — | — | |||||||||||||||||||
| Carol S. Perry | 0 SVS | — | — | — | |||||||||||||||||||
| Tawfiq Popatia | 0 SVS | — | — | — | |||||||||||||||||||
| Michael M. Wilson | 33,533 SVS | * | * | * | |||||||||||||||||||
| Robert A. Mionis | 994,121 SVS | 1% | * | * | |||||||||||||||||||
| Mandeep Chawla | 0 SVS | * | * | * | |||||||||||||||||||
| Todd C. Cooper | 308,247 SVS | * | * | * | |||||||||||||||||||
| Yann Etienvre | 38,729 SVS | — | — | — | |||||||||||||||||||
| Jason Phillips | 158,505 SVS | * | * | * | |||||||||||||||||||
| All directors and executive officers as a group (15 persons) | 1,533,135 SVS | 1.5% | 1.3% | * | |||||||||||||||||||
*Less than 1%.
(1)As used in this table, beneficial ownership means sole or shared power to vote or direct the voting of the security, or the sole or shared investment power with respect to a security (i.e., the power to dispose, or direct a disposition, of a security). A person is deemed at any date to have beneficial ownership of any security that such person has a right to acquire within 60 days of such date. More than one person may be deemed to have beneficial ownership of the same securities. Information with respect to stock options held by each executive officer, including exercise price and expiration date, is included in footnote 3 below.
(2)Information as to shares beneficially owned or shares over which control or direction is exercised is not within Celestica's knowledge. Except as otherwise disclosed, such information has been provided by each individual.
(3)With respect to Mr. Mionis, includes SVS subject to a total of 298,954 vested stock options issued on August 1 2015, all of which have an exercise price of C$17.52 and an expiration date of August 1, 2025.
(4)Represents the percentage beneficial ownership of the Company's SVS and MVS in the aggregate.
Name of Beneficial Owner(1)(2) | Number of Shares(3) | Percentage of Class | Percentage of All Equity Shares(4) | Percentage of Voting Power | |||
| Robert A. Cascella | 0 SVS | — | — | — | |||
| Deepak Chopra | 0 SVS | — | — | — | |||
| Daniel P. DiMaggio | 0 SVS | — | — | — | |||
| Laurette T. Koellner | 0 SVS | — | — | — | |||
| Carol S. Perry | 0 SVS | — | — | — | |||
| Tawfiq Popatia | 0 SVS | — | — | — | |||
| Eamon J. Ryan | 0 SVS | — | — | — | |||
| Michael M. Wilson | 20,000 SVS | * | * | * | |||
| Robert A. Mionis | 885,997 SVS | * | * | * | |||
| Mandeep Chawla | 73,089 SVS | * | * | * | |||
| Elizabeth L. DelBianco | 200,203 SVS | * | * | * | |||
| Todd C. Cooper | 131,392 SVS | * | * | * | |||
| John ("Jack") J. Lawless | 139,196 SVS | * | * | * | |||
| Jason Phillips | 38,799 SVS | * | * | * | |||
| All directors and executive officers as a group (14 persons) | 1,488,676 SVS | 1.3% | 1.2% | * | |||
MVS and SVS have different voting rights. MVS entitle the holder to 25 votes per share and SVS entitle the holder to one vote per share. SVS represent approximately 19%18.1% of the aggregate voting rights attached to Celestica's shares. MVS represent approximately 81%81.9% of the voting rights attached to Celestica's shares. See Item 10(B), "Additional Information — Memorandum and Articles of Incorporation."
At February 19, 2020,21, 2023, 2 persons (each an executive officer)(Mr. Mionis and one employee) held stock options to acquire an aggregate of 0.345 million SVS (see393,472 SVS. The options held by Mr. Mionis are described in footnote (3) into the table above).above. Another Celestica employee was granted 94,518 stock options with an exercise price of $10.58 on November 5, 2021. These options vest ratably over a four-year period commencing on the first anniversary of the date of grant and expire on November 5, 2031. All stock options were issued pursuantunder the LTIP. No other stock options issued by the Company to our Long-Term Incentive Plan.employees are outstanding as of February 21, 2023. See Item 6(B),
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F. Disclosure of a Registrant's Action to stock options outstanding as at February 19, 2020. No other Celestica employees hold outstanding stock options.Recover Erroneously Awarded Compensation
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth certain information concerning the direct and beneficial ownership of the shares of Celestica as of February 19, 202021, 2023 by each person known to Celestica to own beneficially, directly or indirectly, 5% or more of the SVS or MVS. MVS and SVS have different voting rights (see Item 6(E) above). SVS represent approximately 19%18.1% of the aggregate voting rights attached to Celestica's shares, and MVS represent approximately 81%81.9% of the aggregate voting rights attached to Celestica's shares. See footnotes (2) and (3) below and Item 4(B) "Information on the Company — Business Overview — Controlling Shareholder Interest" above for additional information regarding our controlling shareholder, and Item 10(B), "Additional Information — Memorandum and Articles of Incorporation" for additional information regarding our share capital.
Name of Beneficial Owner(1) | Number of Shares | Percentage of Class | Percentage of All Equity Shares | Percentage of Voting Power | ||||||||||
Onex Corporation(2) | 18,600,193 MVS | 100% | 15.3% | 81.9% | ||||||||||
| 397,045 SVS | * | * | * | |||||||||||
Gerald W. Schwartz(3) | 18,600,193 MVS | 100% | 15.3% | 81.9% | ||||||||||
| 517,702 SVS | * | * | * | |||||||||||
Letko, Brosseau & Associates Inc.(4) | 12,805,785 SVS | 12.4% | 10.5% | 2.3% | ||||||||||
Pzena Investment Management, LLC (5) | 6,188,544 SVS | 6.0% | 5.1% | * | ||||||||||
| Total percentage of all equity shares and total percentage of voting power | 31.4% | 85.1% | ||||||||||||
Name of Beneficial Owner(1) | Number of Shares | Percentage of Class | Percentage of All Equity Shares | Percentage of Voting Power |
Onex Corporation(2) | 18,600,193 MVS | 100% | 14.4% | 80.8% |
| 397,045 SVS | * | * | * | |
Gerald W. Schwartz(3) | 18,600,193 MVS | 100% | 14.4% | 80.8% |
| 517,702 SVS | * | * | * | |
Letko, Brosseau & Associates Inc.(4) | 20,539,951 SVS | 18.6% | 15.9% | 3.6% |
Guardian Capital LP (5) | 6,283,478 SVS | 5.7% | 4.9% | 1.1% |
| Total percentage of all equity shares and total percentage of voting power | 35.6% | 85.6% | ||
(1)As used in this table, beneficial ownership means sole or shared power to vote or direct the voting of the security, or the sole or shared investment power with respect to a security (i.e., the power to dispose, or direct a disposition, of a security). A person is deemed at any date to have beneficial ownership of any security that such person has a right to acquire within 60 days of such date. More than one person may be deemed to have beneficial ownership of the same securities. (2)Includes 945,010 MVS held by a wholly-owned subsidiary of Onex. 814,546 of the MVS beneficially owned by Onex are subject to options granted to certain officers of Onex pursuant to certain Onex management investment plans, which options may be exercised upon specified dispositions by Onex (directly or indirectly) of Celestica's securities, with respect to which Onex has the right to vote or direct the vote ("MIP Options"), including 688,807 MIP Options granted to Mr. Schwartz (each of which MVS will, upon exercise of such options, be automatically converted into an SVS). The percentage ownership of SVS beneficially owned by Onex (assuming conversion of all MVS) was 14.7% as of February 22, 2021, and 15.2% as of February 22, 2022, and 15.6% as of February 21, 2023. |
The Corporation's Restated Articles of Incorporation (Articles) provide "coat-tail" protection to the holders of the SVS by providing that the MVS will be converted automatically into SVS upon any transfer thereof, except (i) a transfer to Onex or any affiliate of Onex or (ii) a transfer of 100% of the outstanding MVS to a purchaser who also has offered to purchase all of the outstanding SVS for a per share consideration identical to, and otherwise on the same terms as, that offered for the MVS, and the MVS held by such purchaser thereafter shall be subject to the share provisions relating to conversion (including with respect to the provisions described herein) as if all references to Onex were references to such purchaser. In addition, if (i) any holder of any MVS ceases to be an affiliate of Onex, or (ii) Onex and its affiliates, collectively, cease to have the right, in all cases, to exercise the votes attached to, or to direct the voting of, any of the MVS held by Onex and its affiliates, such MVS shall convert automatically into SVS on a one-for-one basis. For these purposes, (i) Onex includes any successor corporation resulting from an amalgamation, merger, arrangement, sale of all or substantially all of its assets, or other business combination or reorganization involving Onex, provided that such successor corporation beneficially
owns directly or indirectly all MVS beneficially owned directly or indirectly by Onex immediately prior to such transaction and is controlled by the same person or persons as controlled Onex prior to the consummation of such transaction; (ii) a corporation shall be deemed to be a subsidiary of another corporation if, but only if, (a) it is controlled by that other, or that other and one or more corporations each of which is controlled by that other, or two or more corporations each of which is controlled by that other, or (b) it is a subsidiary of a corporation that is that other's subsidiary; (iii) "affiliate" means a subsidiary of Onex or a corporation controlled by the same person or company that controls Onex; and (iv) "control" means beneficial ownership of, or control or direction over, securities carrying more than 50% of the votes that may be cast to elect directors if those votes, if cast, could elect more than 50% of the directors. For these purposes, a person is deemed to beneficially own any security which is beneficially owned by a corporation controlled by such person. In addition, if at any time the number of outstanding MVS shall represent less than 5% of the aggregate number of the outstanding MVS and SVS, all of the outstanding MVS shall be automatically converted at such time into SVS on a one-for-one basis. Onex, which beneficially owns, controls or directs, directly or indirectly all of the outstanding MVS, has entered into an agreement with Celestica and Computershare Trust Company of Canada (as successor to the Montreal Trust Company of Canada), as trustee for the benefit of the holders of the SVS, for the purpose of ensuring that the holders of SVS will not be deprived of any rights under applicable take-over bid legislation to which they would be otherwise entitled in the event of a take-over bid (as that term is defined in applicable
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securities legislation) if MVS and SVS were of a single class of shares. Subject to certain permitted forms of sale, such as identical or better offers to all holders of SVS, Onex has agreed that it, and any of its affiliates that may hold MVS from time to time, will not sell any MVS, directly or indirectly, pursuant to a take-over bid (as that term is defined under applicable securities legislation) under circumstances in which any applicable securities legislation would have required the same offer or a follow-up offer to be made to holders of SVS if the sale had been a sale of SVS rather than MVS, but otherwise on the same terms.
The address of Onex is: c/o Onex Corporation, 161 Bay Street, P.O. Box 700, Toronto, Ontario, Canada M5J 2S1.
(3)The number of shares beneficially owned, controlled or directed, directly or indirectly, by Mr. Schwartz consists of 120,657 SVS owned by a company controlled by Mr. Schwartz, and all of the 18,600,193 MVS and 397,045 SVS beneficially owned, or controlled or directed, directly or indirectly, by Onex (as described in note (2) above). Mr. Schwartz is the Chairman of the Board and Chief Executive Officer of Onex. In addition, he indirectly owns multiple voting shares of Onex carrying the right to elect a majority of the Onex board of directors. Accordingly, under applicable securities laws, Mr. Schwartz is deemed to be the beneficial owner of the Celestica shares owned by Onex; Mr. Schwartz has advised Celestica, however, that he disclaims beneficial ownership of such shares. The percentage ownership of SVS beneficially owned by Mr. Schwartz (assuming conversion of all MVS) was 14.8% as of February 22, 2021, 15.3% as of February 22, 2022, and 15.7% as of February 21, 2023.
The address of Mr. Schwartz is: 161 Bay Street, P.O. Box 700, Toronto, Ontario, Canada M5J 2S1.
(4)Letko, Brosseau & Associates Inc. (Letko) is the beneficial owner of 12,805,785 SVS and has sole voting and dispositive power over these shares. Pursuant to the Schedule 13G/A filed by Letko with the SEC on February 10, 2023, reporting beneficial ownership as of December 31, 2022: clients of Letko have the right to receive or the power to direct the receipt of dividends from, or the proceeds from sale of, the SVS reported as beneficially owned by Letko; and no clients of Letko beneficially own more than five percent of the SVS. The address of Letko is: 1800 McGill College Avenue, Suite 2510, Montréal, Québec, Canada H3A 3J6. The number of shares reported as owned by Letko in this Major Shareholders Table is based on the alternative monthly report it filed on SEDAR on February 8, 2023, reporting investment control as of January 31, 2023. The percentage ownership of SVS beneficially owned by Letko was 14.8% as of February 22, 2021, 12.5% as of February 22, 2022, and 12.4% as of February 21, 2023.
(5)Pzena Investment Management, LLC (Pzena) is the beneficial owner of 6,188,544 SVS, and has sole voting power over 4,757,532 of such shares and sole dispositive over all of such shares. Clients of the filing investment manager have the right to receive and the ultimate power to direct the receipt of dividends from, or the proceeds of sale of, such SVS. No interest of any one of such clients relates to more than 5% of the class. The number of shares reported as owned by Pzena in this Major Shareholders Table and the information in this footnote is based on the Schedule 13G/A filed by Pzena with the SEC on January 27, 2023, reporting beneficial ownership as of December 31, 2022. The address of Pzena is: 320 Park Avenue, 8th Floor, New York, NY 10022. The percentage ownership of SVS beneficially owned by Pzena was 7.0% as of February 22, 2021, 7.2% as of February 22, 2022, and 6.0% as of February 21, 2023.
There are no arrangements known to the Corporation, the operation of which may at a subsequent date result in a change ofin control of the Corporation.
Holders
As of February 19, 2020,21, 2023, based on information provided to us by our transfer agent, there were 1,6441,792 holders of record of SVS, of which 385402 holders, holding approximately 84.0%90.4% of the outstanding SVS, were resident in the United StatesU.S. and 364363 holders, holding approximately 15.9%9.5% of the outstanding SVS, were resident in Canada. These numbers are not representative of the number of beneficial holders of our SVS nor are they representative of where such beneficial holders reside, since many of such shares are held of record by brokers or other nominees. The Corporation does not have knowledge of the identities of the beneficial owners of SVS registered through intermediaries. No MVS are held in the United States.U.S.
B. Related Party Transactions
Onex, which beneficially owns, controls or directs, directly or indirectly, all of our outstanding MVS, has entered into an agreement with Celestica and with Computershare Trust Company of Canada (as successor to the Montreal Trust Company of Canada), as trustee for the benefit of the holders of the SVS, for the purpose of ensuringto ensure that thesuch holders of SVS will not be deprived of any rights under applicable take-over bid legislation to which they would be otherwise entitled in the event of a take-over bid (as that term is defined in such legislation) under circumstances in which any applicable securities legislation)legislation would have required the same offer or a follow-up offer to be made to holders of SVS if the sale had been a sale of SVS rather than MVS, and SVS were of a single class of shares.but otherwise on the same terms. Subject to certain permitted forms of sale, such as identical or better offers to all holders of SVS, Onex has agreed that it, and any of its affiliates that may hold MVS from time to time, will not sell any MVS, directly or indirectly, pursuant to such a take-over bid (as that term is defined under applicable securities legislation) under circumstances in which any applicable securities legislation would have
We are party to a Services Agreement with Onex for the services of Mr. Tawfiq Popatia, an officer of Onex, as a director of Celestica, pursuant to which Onex receives compensation for such services. This agreement automatically renews for successive one-year terms unless either party provides a notice of intent not to renew. Under such agreement, the annual fee payable to Onex is $235,000, payable in DSUs in equal quarterly installments in arrears. The Services Agreement terminates automatically and the rights of Onex to receive compensation (other than accrued and unpaid compensation) will terminate (a) 30 days after the first day on which Onex ceases to hold at least one MVS of Celestica or any successor company or (b) the date Mr. Popatia ceases to be a director of Celestica for any reason.
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Compensation arrangements with our directors and executive officers are described under Item 5, "Operating6(B), "Directors, Senior Management and Financial Review and ProspectsEmployees — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Toronto Real Property and Related Transactions" above for a description of the Property Sale Agreement (and related lease arrangements) with respect to the sale of our real property in Toronto, Ontario to the Property Purchaser, the terms of the September 2018 assignment of such agreement to the Assignee, and the consummation of such sale on March 7, 2019. Approximately 27% of the interests in the Property Purchaser are held by a privately-held partnership in which Mr. Schwartz has a material interest; and approximately 25% of the interests in the Property Purchaser are held by a partnership in which Mr. Schwartz has a non-voting interest. The Property Purchaser holds a 5% non-voting interest in the Assignee.Compensation" above.
Indebtedness of Related Parties
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See Item 18, "Financial Statements."
Export Sales
For the year ended December 31, 2019,2022, we had approximately $5.6$7.0 billion of export sales (i.e., sales to customers located outside of Canada), constituting approximately 94%97% of our $5.9$7.3 billion in total sales for the year. For further information regarding the allocation of our revenues by geographic region over the last three years, see Item 4, "Information on the Company — Business Overview — Geographies."
Litigation
We are party to litigation from time-to-time. We are not currently (nor in the recent past have we been) party to any legal or arbitration proceedings (including governmental proceedings pending or known to be contemplated) which management expects may have, (oror which have had)had in the recent past, significant effects on Celestica's financial position or profitability. There are no material proceedings in which any of our affiliates, directors, or members of senior management is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.
Information concerning the status of certain tax matters is disclosed in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Liquidity and Capital Resources — Litigation and contingencies"contingencies (including indemnities)" and note 24 to the Consolidated Financial Statements in Item 18.
Dividend Policy
We have not declared or paid any dividends to our shareholders. We intend to retain earnings for general corporate purposes to promote future growth; as such, our Board does not anticipate paying any dividends at this time. Our Board will review this policy from time-to-time, having regard to our financial condition, financing requirements and other relevant factors.
B. Significant Changes
Except as otherwise disclosed in this Annual Report, no significant change has occurred since December 31, 2019.2022.
Item 9. The Offer and Listing
A. Offer and Listing Details
Market Information
The SVS are listed on the NYSE and the TSX (in each case under the symbol "CLS").
B. Plan of Distribution
Not applicable.
C. Markets
See Item 9A. — "Offer and Listing Details" above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Incorporation
Objects and Purposes
Celestica (Ontario Corporation No. 1201522) can engage in any legal activity permitted under the OBCA. As set forth in Item 6 of our Restated Articles of Incorporation (Articles), there are no restrictions on the business we may carry on or on the powers we may exercise.
Certain Powers of Directors
Celestica's by-laws provide that the directors shall from time to time determine by resolution the remuneration to be paid to the directors, which shall be in addition to the salary paid to any officer or employee of Celestica who is also a director. The directors may also, by resolution, award special remuneration to any director in undertaking any special services on Celestica's behalf other than the normal work ordinarily required of a director of Celestica. The by-laws provide that confirmation of any such resolution by Celestica's shareholders is not required.
The Articles provide that the Board may, without shareholder authorization, from time to time in such amounts and on such terms as it deems expedient: (i) borrow money upon the credit of Celestica; (ii) issue, reissue, sell or pledge debt obligations of Celestica; (iii) give a guarantee on behalf of Celestica to secure performance of an obligation of any person; and (iv) mortgage, hypothecate, charge, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real and personal, movable and immovable, property of Celestica, including book debts, rights, powers, franchises and undertakings, to secure Celestica's obligations.
There is no provision in our Articles or by-laws imposing a requirement for retirement or non-retirement of directors under an age limit requirement. However, the Board has a retirement policy which provides that, unless the Board authorizes an exception, a director shall not stand for re-election after his or her 75th birthday.
Section 132 of the OBCA provides, among other things, that a material contract between Celestica and one or more of its directors, or between Celestica and another person of which a director of Celestica is a director or officer or in which he or she has a material interest, is neither void nor voidable by reason only of that relationship or by reason only that the director is present at or is counted to determine the presence of a quorum at a meeting of directors or committee of directors that authorized the contract, if the director disclosed his or her interest, in accordance with the applicable provisions of the OBCA, and the contract or transaction was reasonable and fair to Celestica at the time it was approved. In addition, notwithstanding the other conflict of interest provisions in Section 132 of the OBCA, where such director is acting honestly and in good faith, such contract, if it was reasonable and fair to Celestica at the time it was approved, is neither void nor voidable by reason only of the director's interest therein where the contract is confirmed or approved by special resolution at a meeting of shareholders and the nature and extent of the director's interest in the contract is disclosed in reasonable detail in the notice calling the meeting or the applicable information circular.
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Share Ownership
The OBCA provides that unless the articles of a corporation otherwise provide, a director of a corporation is not required to hold shares issued by the corporation. There is no provision in the Articles imposing a requirement that a director hold any shares issued by Celestica. Our Board, however, has established guidelines setting out minimum shareholding requirements for directors who are not employees or officers of Celestica or Onex. See the section entitled "Director Share Ownership Guidelines" under Item 6, "Directors, Senior Management and Employees — Compensation" for a summary of these minimum shareholding requirements.
Shareholder Rights and Limitations
The rights and preferences attached to our SVS and MVS, as well as additional information required by this Item 10(B), is included in Exhibit 2.3 attached hereto,to this Annual Report, which Exhibit is incorporated herein by reference thereto.
C. Material Contracts
Information with respect to material contracts, other than contracts entered into in the ordinary course of business, to which Celestica or its subsidiaries is a party, entered into duringfor the two years immediately preceding the publication of this Annual Report, is included in Item 5, "Operating and Financial Review and Prospects — MD&A — Liquidity and Capital Resources"Resources," and note 4 to the Consolidated Financial Statements in Item 6(B), "Compensation."18. These contracts include equity compensation plans,consist of agreements related to our credit facility, ourprior A/R sales program, agreement (among Celestica, specified subsidiaries, the financial institutions names therein and Deutsche Bank AG New York Branch), our March 2020 A/R sales program agreement, and our acquisition agreement for Impakt. Materialof PCI. Non-ordinary course material contracts to be performed in whole or in part at or after the filing of this Annual Report are included as exhibits to this Annual Report. See Item 19, "Exhibits."
D. Exchange Controls
Canada has no system of exchange controls. ThereWe are no Canadian restrictions onnot aware of any governmental laws, decrees, regulations or other legislation in Canada that restrict the repatriationexport or import of capital, including the availability of cash and cash equivalents for use by our affiliated companies, or earnings of a Canadian public company to non-resident investors. There are no laws of Canada or exchange restrictions affectingthat affect the remittance of dividends, interest, royalties or similarother payments to non-resident holders of Celestica's securities, although there may be Canadian and other foreign tax considerations. See Item 10(E) — "Taxation."
E. Taxation
Material Canadian Federal Income Tax Considerations
The following is a summary of the material Canadian federal income tax considerations generally applicable to a person (a "U.S. Holder"), who acquires SVS and who, for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the Canada-United States Income Tax Convention (1980) (as amended, the "Tax Treaty") at all relevant times is resident in the United StatesU.S. and is neither resident nor deemed to be resident in Canada, is eligible for benefits under the Tax Treaty, deals at arm's length and is not affiliated with Celestica, holds such SVS as capital property, and does not use or hold, and is not deemed to use or hold, the SVS in carrying on business in Canada. Special rules, which are not discussed in this summary, may apply to a U.S. Holder that is a financial institution (as defined in the Canadian Tax Act), or is an insurer to whom the SVS are designated insurance property (as defined in the Canadian Tax Act).
This summary is based on Celestica's understanding of the current provisions of the Tax Treaty, the Canadian Tax Act and the regulations thereunder, all specific proposals to amend the Canadian Tax Act or the regulations publicly announced by the Minister of Finance (Canada) prior to February 19, 2020,21, 2023, and the current published administrative policies and assessing practices of the Canada Revenue Agency.
This summary does not express an exhaustive discussion of all possible Canadian federal income tax considerations and, except as mentioned above, does not take into account or anticipate any changes in law, whether by legislative, administrative or judicial decision or action, nor does it take into account the tax legislation or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ significantly from the considerations described in this summary.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder, and no representation with respect to the Canadian federal income tax consequences to any particular holder is made. Consequently, U.S. Holders of SVS should consult their own tax advisors with respect to the income tax consequences to them having regard to their particular circumstances.
All amounts relevant in computing a U.S. Holder's liability under the Canadian Tax Act are to be computed in Canadian dollars.
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Taxation of Dividends
By virtue of the Canadian Tax Act and the Tax Treaty, dividends (including stock dividends) on SVS paid or credited or deemed to be paid or credited to a U.S. Holder who is the beneficial owner of such dividends will generally be subject to Canadian non-resident withholding tax at the rate of 15% of the gross amount of such dividends. Under the Tax Treaty, the rate of withholding tax on dividends is reduced to 5% if that U.S. Holder is a company that beneficially owns (or is deemed to beneficially own) at least 10% of the voting stock of Celestica. Moreover, under the Tax Treaty, dividends paid to certain religious, scientific, literary, educational or charitable organizations and certain pension organizations that are resident in, and generally exempt from tax in, the U.S., generally are exempt from Canadian non-resident withholding tax. Provided that certain administrative procedures are observed by such an organization, Celestica would not be required to withhold such tax from dividends paid or credited to such organization. Any such organization that has suffered withholding tax should consult its own advisors about the possibility of seeking a refund.
Disposition of SVS
A U.S. Holder will not be subject to tax under the Canadian Tax Act in respect of any gain realized on the disposition or deemed disposition of SVS unless the SVS constitute or are deemed to constitute "taxable Canadian property" other than "treaty-protected property," as defined in the Canadian Tax Act, at the time of such disposition. Generally, SVS will not be "taxable Canadian property" to a U.S. Holder at a particular time, where the SVS are listed on a designated stock exchange (which currently includes the TSX and NYSE) at that time, unless at any time during the 60-month period immediately preceding that time: (A) the U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length, partnerships of which the U.S. Holder or persons
not dealing at arm's length with the U.S. Holder holds a membership interest (directly or indirectly through another partnership) or the U.S. Holder together with all such persons or partnerships, owned 25% or more of the issued shares of any class or series of shares of the capital stock of Celestica; and (B) more than 50% of the fair market value of the SVS was derived directly or indirectly from one or any combination of (i) real or immoveableimmovable properties situated in Canada, (ii) "Canadian resource properties", (iii) "timber resource properties" and (iv) options in respect of, or interests in, property described in (i) to (iii), in each case as defined in the Canadian Tax Act. In certain circumstances set out in the Canadian Tax Act, the SVS of a particular U.S. Holder could be deemed to be "taxable Canadian property" to that holder. Even if the SVS are "taxable Canadian property" to a U.S. Holder, they generally will be "treaty-protected property" to such holder by virtue of the Tax Treaty if the value of such shares at the time of disposition is not derived principally from "real property situated in Canada" as defined for these purposes under the Tax Treaty and the Canadian Tax Act. It is expected that the value of the SVS should not be considered derived principally from such "real property situated in Canada" at any relevant time; accordingly, any gain realized by the U.S. Holder upon the disposition of the SVS generally should be exempt from tax under the Canadian Tax Act.
Material U.S. Federal Income Tax Considerations
The following discussion describes the material U.S. federal income tax consequences to United StatesU.S. Holders (as defined below). For purposes of this discussion, a United StatesU.S. Holder means a beneficial owner of SVS that is a citizen or resident of the United States,U.S., a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) that is created or organized in or under the laws of the United StatesU.S. or of any state thereof, an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source, or a trust, if either (i) a court within the United StatesU.S. is able to exercise primary supervision over the administration of the trust and one or more "United States persons" (within the meaning of Section 7701(a)(30) of the U.S. Internal Revenue Code of 1986, as amended (Internal Revenue Code)) have the authority to control all substantial decisions of the trust, or (ii) the trust has made an election under applicable U.S. Department of the Treasury regulations (Treasury Regulations) to be treated as a domestic trust for U.S. federal income tax purposes. If a partnership (or any other entity that is treated as a partnership for U.S. federal income tax purposes) holds SVS, the tax treatment of an equity owner of the partnership (or other entity that is treated as a partnership for U.S. federal income tax purposes) generally will depend upon the status of the equity owner and upon the activities of the partnership (or other entity that is treated as a partnership for U.S. federal income tax purposes). If you are an equity owner of a partnership (or other entity that is treated as a partnership for U.S. federal income tax purposes) holding SVS, we suggest that you consult with your tax advisor. This summary is for general information purposes only. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to your decision to purchase, hold or dispose of SVS. This summary considers only United StatesU.S. Holders who will own SVS as capital assets within the meaning of Section 1221 of the Internal Revenue Code. In this context, the term "capital assets" means, in general, assets held for investment by a taxpayer. A "Non-United States"Non-U.S. Holder" means a beneficial
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owner of SVS that is (i) not a United StatesU.S. Holder and (ii) not a partnership for U.S. federal income tax purposes. Certain material aspects of U.S. federal income tax relevant to Non-United StatesNon-U.S. Holders are also discussed below.
This discussion is based on current provisions of the Internal Revenue Code, current and proposed Treasury Regulations promulgated thereunder, administrative rulings and pronouncements of the U.S. Internal Revenue Service (IRS), and judicial decisions, all as of February 19, 2020,21, 2023, and all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to any particular United StatesU.S. Holder based on the United StatesU.S. Holder's individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to United StatesU.S. Holders who are subject to special treatment, including, without limitation, taxpayers who are broker dealers or insurance companies, taxpayers who have elected mark-to-market accounting, individual retirement and other tax-deferred accounts, tax-exempt organizations, financial institutions or "financial services entities," real estate investment trusts, regulated investment companies, taxpayers subject to special accounting rules under Section 451(b) of the Internal Revenue Code, taxpayers who hold SVS as part of a "straddle," "hedge" or "conversion transaction" with other investments, taxpayers owning directly, indirectly or by attribution at least 10% of the voting power or value of our share capital, and taxpayers whose functional currency (as defined in Section 985 of the Internal Revenue Code) is not the U.S. dollar.
This discussion does not address any aspect of U.S. federal gift or estate tax or state, local or non-U.S. tax laws. Additionally, the discussion does not consider the tax treatment of persons who hold SVS through a partnership or other pass-through entity (such as an S corporation). For U.S. federal income tax purposes, income earned through a non-U.S. or domestic partnership or similar entity generally is attributed to its owners. You are advised to consult your own tax advisor with respect to the specific tax consequences to you of purchasing, holding or disposing of SVS.
Taxation of Dividends Paid on SVS
Subject to the discussion of the passive foreign investment company (PFIC) rules below, in the event that we pay a dividend, a United StatesU.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on SVS, including any Canadian taxes withheld from the amount paid, on the date the distribution is received, to the extent that the distribution is paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. In addition, distributions of the Corporation's current or accumulated earnings and profits will be foreign source "passive category income" for U.S. foreign tax credit purposes and generally will not qualify for the dividends received deduction available to corporations. Distributions in excess of such earnings and profits will be applied against and will reduce the United StatesU.S. Holder's tax basis in the SVS and, to the extent in excess of such basis, will be treated as capital gain.
Distributions of current or accumulated earnings and profits paid in Canadian dollars to a United StatesU.S. Holder will be includible in the income of the United StatesU.S. Holder in a dollar amount calculated by reference to the exchange rate on the date the distribution is received. A United StatesU.S. Holder who receives a distribution of Canadian dollars and converts the Canadian dollars into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the Canadian dollar against the U.S. dollar. Such gain or loss will generally be ordinary income and loss and will generally be U.S. source gain or loss for U.S. foreign tax credit purposes. United StatesU.S. Holders should consult their own tax advisors regarding the treatment of a foreign currency gain or loss.
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Individuals, estates or trusts who receive "qualified dividend income" (excluding dividends from a PFIC) generally will be taxed at a current maximum U.S. federal income tax rate of 20% (rather than the higher tax rates generally applicable to items of ordinary income) provided certain holding period requirements are met. Subject to the discussion of the PFIC rules below, Celestica believes that dividends paid by it with respect to its SVS should constitute "qualified dividend income" for U.S. federal income tax purposes and that holders who are individuals (as well as certain trusts and estates) should be entitled to the reduced rate of tax, as applicable. Holders are urged to consult their own tax advisors regarding the impact of the "qualified dividend income" provisions of the Internal Revenue Code on their particular situations, including related restrictions and special rules.
Dividends received by certain high-income individuals, trusts and estates with income above certain thresholds will also be subject to a 3.8% unearned Medicare contribution tax on passive income.
Taxation of Disposition of SVS
Subject to the discussion of the PFIC rules below, upon the sale, exchange or other disposition of SVS, a United StatesU.S. Holder will recognize capital gain or loss in an amount equal to the difference between his or her adjusted tax basis in his or her shares and the amount realized on the disposition.
A United StatesU.S. Holder's adjusted tax basis in SVS will generally be the initial cost, but may be adjusted for various reasons including the receipt by such United StatesU.S. Holder of a distribution that was not made up wholly of earnings and profits as described above under the heading "Taxation of Dividends Paid on SVS." A United StatesU.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while a United StatesU.S. Holder who uses the accrual method of accounting generally calculates the U.S. dollar value of the sale proceeds as of the trade date, unless he or she has elected to use the settlement date to determine his or her U.S. dollar proceeds of the sale. Capital gain from the sale, exchange or other disposition of shares held more than one year is long-term capital gain. Long-term capital gain that is recognized by non-corporate taxpayers is eligible for a current maximum 20% U.S. federal income tax rate plus a 3.8% tax on passive income derived by certain high-income individuals, trusts and estates.estates with income above certain thresholds. A reduced rate does not apply to capital gains realized
by a United StatesU.S. Holder that is a corporation. Capital losses are generally deductible only against capital gains and not against ordinary income. In the case of an individual, however, unused capital losses in excess of capital gains may offset up to $3,000 annually of ordinary income. Gain or loss recognized by a United StatesU.S. Holder on a sale, exchange or other disposition of SVS generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. A United StatesU.S. Holder who receives foreign currency upon disposition of SVS and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar. United StatesU.S. Holders should consult their own tax advisors regarding the treatment of a foreign currency gain or loss.
Tax Consequences if We Are a Passive Foreign Investment Company
A non-U.S. corporation will be a passive foreign investment company, or PFIC, if, in general, either (i) 75% or more of its gross income in a taxable year, including its pro rata share of the gross income of any U.S. or foreign company in which it is considered to own 25% or more of the shares by value, is passive income or (ii) 50% or more of its assets in a taxable year (determined based on a quarterly average), and ordinarily determined based on fair market value and including its pro rata share of the assets of any company in which it is considered to own 25% or more of the shares by value, are held for the production of, or produce, passive income. If Celestica were a PFIC for any taxable year during which a United StatesU.S. Holder holds SVS and such United StatesU.S. Holder did not make an election to treat the Corporation as a "qualified electing fund" and did not make a "mark-to-market" election, each as described below, then:
•Such United StatesU.S. Holder would be subject to special and adverse tax rules with respect to any "excess distribution" received from Celestica. "Excess distributions" are amounts received by a United StatesU.S. Holder with respect to SVS in any taxable year that exceed 125% of the average distributions received by the United StatesU.S. Holder from the Corporation in the shorter of either the three previous years or his or her holding period for his or her shares before the present taxable year. Excess distributions must be allocated ratably to each day that a United StatesU.S. Holder has held SVS. A United StatesU.S. Holder must include amounts allocated to the current taxable year and to any non-PFIC years in his or her gross income as ordinary income for that year. A United StatesU.S. Holder must pay tax on amounts allocated to each prior taxable PFIC year at the highest marginal tax rate in effect for that year on ordinary income and the tax is subject to an interest charge at the rate applicable to deficiencies for income tax.
•The entire amount of gain that is realized by a United StatesU.S. Holder upon the sale or other disposition of shares would also be considered an excess distribution and would be subject to tax as described above.
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•A United StatesU.S. Holder's tax basis in shares that were acquired from a decedent that is a United States person generally would not receive a step-up to fair market value as of the date of the decedent's death but instead would be equal to the decedent's tax basis, if lower than such value.
The special PFIC rules do not apply to a United StatesU.S. Holder if the United StatesU.S. Holder makes an election to treat the Corporation as a "qualified electing fund" in the first taxable year in which Celestica is a PFIC during the period that he or she owns SVS and if we comply with reporting requirements as described below. Instead, a shareholder of a qualified electing fund is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. We have agreed to supply United StatesU.S. Holders with the information needed to report income and gain pursuant to this election in the event that we are classified as a PFIC. The election is made on a shareholder-by-shareholder basis and may be revoked only with the consent of the IRS. A shareholder makes the election by attaching a completed IRS Form 8621, reflecting the information contained in the PFIC annual information statement, to a timely filed U.S. federal income tax return. Even if an election is not made, a shareholder in a PFIC who is a United StatesU.S. Holder generally must file a completed IRS Form 8621 every year.
A United StatesU.S. Holder who owns PFIC shares that are publicly traded could elect to mark the shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC shares and the United StatesU.S. Holder's adjusted tax basis in the PFIC shares, provided, that, in the case of any loss, it can be recognized only to the extent of any net mark-to-market income recognized in prior years. On an annual basis, a United StatesU.S. Holder's adjusted tax basis in SVS will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election. SVS would be treated as publicly traded for purposes of the mark-to-market election and, therefore, such election could be made if Celestica were classified as a PFIC. A mark-to-market election
is, however, subject to complex and specific rules and requirements, and United StatesU.S. Holders are strongly urged to consult their tax advisors concerning this election if Celestica is classified as a PFIC.
Despite the fact that we are engaged in an active business, we are unable to conclude that Celestica was not a PFIC in 20192022 or in prior years, though we believe, based on our internally performed analysis, that such status is unlikely. The tests for determining PFIC status include the determination of the value of all assets of the Corporation which is highly subjective. Further, the tests for determining PFIC status are applied annually, and it is difficult to make accurate predictions of future income and assets, which are relevant to the determination as to whether we will be a PFIC in the future. Accordingly, it is possible that Celestica could be a PFIC in 20202023 or in a future year. A United StatesU.S. Holder who holds SVS during a period in which we are a PFIC will be subject to the PFIC rules, even if we cease to be a PFIC, unless he or she has made a qualified electing fund election. Although we have agreed to supply United StatesU.S. Holders with the information needed to report income and gain pursuant to this election in the event that Celestica is classified as a PFIC, if Celestica was determined to be a PFIC with respect to a year in which we had not thought that it would be so treated, the information needed to enable United StatesU.S. Holders to make a qualified electing fund election would not have been provided. United StatesU.S. Holders are strongly urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or qualified electing fund elections with respect to SVS in the event that Celestica is treated as a PFIC.
Tax Consequences for Non-United StatesNon-U.S. Holders of SVS
Except as described in "Information Reporting and Backup Withholding" below, a Non-United StatesNon-U.S. Holder will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, SVS unless:
•the item is effectively connected with the conduct by the Non-United StatesNon-U.S. Holder of a trade or business in the United StatesU.S. and, generally, in the case of a resident of a country that has an income treaty with the United States,U.S., such item is attributable to a permanent establishment in the United States;U.S.;
•the Non-United StatesNon-U.S. Holder is an individual who holds SVS as a capital asset, is present in the United StatesU.S. for 183 days or more in the taxable year of the disposition and satisfies certain other requirements; or
•the Non-United StatesNon-U.S. Holder is subject to tax pursuant to the provisions of U.S. tax law applicable to U.S. expatriates who expatriated prior to June 17, 2008.
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Information Reporting and Backup Withholding
Payments made within the United States,U.S., or by a U.S. payor or U.S. middleman, of dividends and proceeds arising from certain sales or other taxable dispositions of SVS will be subject to information reporting. Backup withholding tax, at the then applicable rate, will apply if a United StatesU.S. Holder (a) fails to furnish the United StatesU.S. Holder's correct U.S. taxpayer identification number (generally on an IRS Form W-9), (b) is notified by the IRS that the United StatesU.S. Holder has previously failed to properly report items subject to backup withholding tax, or (c) fails to certify, under penalty of perjury, that the United StatesU.S. Holder has furnished the United StatesU.S. Holder's correct U.S. taxpayer identification number and that the IRS has not notified the United StatesU.S. Holder that the United StatesU.S. Holder is subject to backup withholding tax. However, United StatesU.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a United StatesU.S. Holder's U.S. federal income tax liability, if any, or will be refunded, if the United StatesU.S. Holder follows the requisite procedures and timely furnishes the required information to the IRS. United StatesU.S. Holders should consult their own tax advisors regarding the information reporting and backup withholding tax rules.
U.S. individuals and "specified domestic entities" generally are required to report an interest in any "specified foreign financial asset" if the aggregate value of such assets owned by such person exceeds $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher threshold as may apply to a particular taxpayer pursuant to the instructions to IRS Form 8938). Stock issued by a non-U.S. corporation is treated as a specified foreign financial asset for this purpose.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Any statement in this Annual Report about any of our contracts or other documents is not exhaustive. If the contract or document is filed as an exhibit to this Annual Report or is incorporated herein by reference thereto, the contract or document is deemed to modify our description. You must review the exhibits themselves for a complete description of the contract or document.
You may access this Annual Report, including exhibits, on our website at www.celestica.com, or request a copy free of charge through our website. Requests may also be directed: (i) to clsir@celestica.com; (ii) by mail to Celestica Investor Relations, to: 5140 Yonge Street, Suite 1900, Toronto, Ontario, Canada M2N 6L7; or (iii) by telephone at 416-448-2211.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants. You may access the documents we file with or furnish to the SEC at that website (for submissions commencing November 2000, the date we began to file electronically with the SEC). Our SEC filings are also available from commercial document retrieval services.
We also file reports, statements and other information with the Canadian Securities Administrators, or the CSA, and these can be accessed electronically at the CSA's System for Electronic Document Analysis and Retrieval website (www.sedar.com).
You may access other information about Celestica on our website at www.celestica.com. Information on our website is not incorporated by reference into this Annual Report.
I. Subsidiary Information
Not applicable.
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J. Annual Report to Security Holders.
If we are required to furnish an annual report to security holders on Form 6-K, we will submit such annual report in electronic format in accordance with the EDGAR Filer Manual.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the potential loss arising from changes in market rates and market prices. Our market risk exposure results primarily from fluctuations in foreign currency exchange rates and interest rates.rates, as well as the price of our SVS.
We do not hold financial instruments for speculative trading purposes.
Exchange Rate Risk
Conducting business in currencies other than the U.S. dollar subjects us to translation and transaction risks associated with fluctuations in currency exchange rates. Although we conduct the majority of our business in U.S. dollars (our functional currency), our global operations subject us to foreign currency volatility. Our non-U.S. currency exposures consist of the British pound sterling, Brazilian real, Canadian dollar, Thai baht,Chinese renminbi, Czech koruna, Euro, Hong Kong dollar, Indian rupee, Indonesian rupiah, Japanese yen, Korean won, Lao kip, Malaysian ringgit, Mexican peso, British pound sterling, Brazilian real, Czech koruna, Chinese renminbi, Euro,Philippine peso, Romanian leu, Korean won, Lao kip, Japanese yen, Hong KongSingapore dollar, Philippine peso, Indian rupee, Taiwan dollar, and Singapore dollar. Thai baht.
As part of our risk management program, we enter into foreign exchangecurrency forward contracts and swaps, generally for periods up to 12 months, intended to hedge foreign currency transaction risk and local currency denominated balance sheet exposures. These contracts include, to varying degrees, elements of market risk. We enter into these contracts to lock in the exchange rates for future foreign currency transactions and balance sheet balances, which is intended to reduce the variability offoreign currency risk related to our operating costs and future cash flows denominated in local currencies. While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates.
Currency risk on our income tax expense arises as we are generally required to file our tax returns in the local currency for each particular country in which we have operations. Exchange rate volatility between the relevant local currency and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses in local currency for statutory financial statement purposes. In addition, we earn revenues and incur expenses in foreign currencies as part of our global operations. As a result, we are also exposed to foreign currency exchange transaction risk, such that fluctuations in currency exchange rates may significantly impact the amount of translated U.S. dollars required for expenses incurred in other currencies or received from non-
The table below presents the notional amounts (the U.S. dollar equivalent amounts of the foreign currency buy/sell contracts at hedge rates), weighted average exchange rates by expected (contractual) maturity dates, and the fair values of our outstanding foreign exchangecurrency forward contracts and swaps at December 31, 2019.2022. These notional amounts are used to calculate the contractual payments to be exchanged under the contracts. At December 31, 2019,2022, we had foreign currency contracts and swaps covering various currencies in an aggregate notional amount of $523.9$684.7 million (December 31, 20182021 — $544.2$539.5 million). These contracts had a fair value net unrealized gain of $4.5$5.2 million at December 31, 20192022 (December 31, 20182021 — $14.2$1.2 million net unrealized loss).gain), resulting from fluctuations in foreign exchange rates between the contract execution and year-end date.
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At December 31, 2019,2022, we had foreign exchangecurrency forward contracts and swaps to trade U.S. dollars in exchange for the following currencies:
| Expected Maturity Date | |||||||||||||||||||||||||||||
| 2023 | 2024 | 2025 and thereafter | Total | Fair Value Gain (Loss) (in millions) | |||||||||||||||||||||||||
| Currency Forward and Swap Agreements* | |||||||||||||||||||||||||||||
| (Contract amounts in millions) | |||||||||||||||||||||||||||||
| Receive C$/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 194.2 | $ | — | $ | — | $ | 194.2 | $ | (1.9) | |||||||||||||||||||
| Average exchange rate | 0.75 | ||||||||||||||||||||||||||||
| Receive Thai Baht/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 138.0 | — | — | $ | 138.0 | $ | 6.8 | |||||||||||||||||||||
| Average exchange rate | 0.03 | ||||||||||||||||||||||||||||
| Receive Malaysian Ringgit/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 127.8 | — | — | $ | 127.8 | $ | 1.3 | |||||||||||||||||||||
| Average exchange rate | 0.22 | ||||||||||||||||||||||||||||
| Receive Mexican Peso/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 56.6 | — | — | $ | 56.6 | $ | 0.9 | |||||||||||||||||||||
| Average exchange rate | 0.05 | ||||||||||||||||||||||||||||
| Pay British Pound Sterling/Receive U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 2.6 | — | — | $ | 2.6 | $ | (0.2) | |||||||||||||||||||||
| Average exchange rate | 1.18 | ||||||||||||||||||||||||||||
| Receive Chinese Renminbi/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 45.7 | — | — | $ | 45.7 | $ | 0.4 | |||||||||||||||||||||
| Average exchange rate | 0.15 | ||||||||||||||||||||||||||||
| Pay Euro/Receive U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 46.2 | — | — | $ | 46.2 | $ | (3.4) | |||||||||||||||||||||
| Average exchange rate | 1.04 | ||||||||||||||||||||||||||||
| Receive Romanian Leu/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 37.3 | — | — | $ | 37.3 | $ | 1.5 | |||||||||||||||||||||
| Average exchange rate | 0.20 | ||||||||||||||||||||||||||||
| Receive Singapore Dollar/Pay U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 24.7 | — | — | $ | 24.7 | $ | 1.1 | |||||||||||||||||||||
| Average exchange rate | 0.72 | ||||||||||||||||||||||||||||
| Pay Japanese Yen/Receive U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 6.8 | — | — | $ | 6.8 | $ | (0.6) | |||||||||||||||||||||
| Average exchange rate | 0.0072 | ||||||||||||||||||||||||||||
| Pay Korean Won/Receive U.S.$ | |||||||||||||||||||||||||||||
| Contract amount | $ | 4.8 | — | — | $ | 4.8 | $ | (0.7) | |||||||||||||||||||||
| Average exchange rate | 0.0008 | ||||||||||||||||||||||||||||
| Total | $ | 684.7 | $ | — | $ | — | $ | 684.7 | $ | 5.2 | |||||||||||||||||||
* Average exchange rate represents the U.S. dollar equivalent of one unit of the foreign currency, weighted based on the notional amounts of the underlying foreign currency forward and swap contracts outstanding as at December 31, 2022.
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| Expected Maturity Date | |||||||||||||||||||
| 2020 | 2021 | 2022 and thereafter | Total | Fair Value Gain (Loss) (in millions) | |||||||||||||||
| Forward Exchange and Swap Agreements | |||||||||||||||||||
| (Contract amounts in millions) | |||||||||||||||||||
| Receive C$/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 195.6 | $ | — | $ | — | $ | 195.6 | $ | 2.1 | |||||||||
| Average exchange rate | 0.76 | ||||||||||||||||||
| Receive Thai Baht/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 98.8 | — | — | $ | 98.8 | $ | 2.1 | |||||||||||
| Average exchange rate | 0.03 | ||||||||||||||||||
| Receive Malaysian Ringgit/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 54.1 | — | — | $ | 54.1 | $ | 0.4 | |||||||||||
| Average exchange rate | 0.24 | ||||||||||||||||||
| Receive Mexican Peso/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 22.4 | — | — | $ | 22.4 | $ | 0.9 | |||||||||||
| Average exchange rate | 0.05 | ||||||||||||||||||
| Receive British Pound Sterling/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 2.2 | — | — | $ | 2.2 | $ | 0.1 | |||||||||||
| Average exchange rate | 1.29 | ||||||||||||||||||
| Receive Chinese Renminbi/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 48.8 | — | — | $ | 48.8 | $ | (0.7 | ) | ||||||||||
| Average exchange rate | 0.14 | ||||||||||||||||||
| Pay Euro/Receive U.S.$ | |||||||||||||||||||
| Contract amount | $ | 26.1 | — | — | $ | 26.1 | $ | (0.5 | ) | ||||||||||
| Average exchange rate | 1.12 | ||||||||||||||||||
| Receive Romanian Leu/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 33.5 | — | — | $ | 33.5 | $ | 0.1 | |||||||||||
| Average exchange rate | 0.23 | ||||||||||||||||||
| Receive Singapore Dollar/Pay U.S.$ | |||||||||||||||||||
| Contract amount | $ | 23.9 | — | — | $ | 23.9 | $ | 0.2 | |||||||||||
| Average exchange rate | 0.74 | ||||||||||||||||||
| Pay Other/Receive U.S.$ | |||||||||||||||||||
| Contract amount | $ | 18.5 | — | — | $ | 18.5 | $ | (0.2 | ) | ||||||||||
| Average exchange rate | — | ||||||||||||||||||
| Total | $ | 523.9 | $ | — | $ | — | $ | 523.9 | $ | 4.5 | |||||||||
Interest Rate Risk
Borrowings under the Credit Facility bear interest at specified rates, plus specified margins. See note 1211 to the Consolidated Financial Statements in Item 18. Our borrowings under this facility at December 31, 20192022 totaled $592.3$627.2 million, comprised of amounts outstanding under our Term Loans, and other than ordinary course letters of credit, no amounts outstanding under the
Revolver. These borrowings expose us to interest rate risk due to the potential variability in market interest rates. Assuming our outstanding aggregate borrowings under the Credit Facility as at December 31, 20192022 as described above (December 31, 20182021 — aggregate outstanding borrowings of $757.3$660.4 million), and without accounting for the interest rate swap agreements described below, a one-percentage point increase in applicable interest rates would increase our interest expense by $5.9$6.3 million annually (December 31, 20182021 — an increase of $7.6$6.6 million annually). Assuming aggregate borrowingsIncluding the impact of $600.0 million under the Term Loans and $450.0 million under the Revolver (the credit limit thereunder without further use of the accordion feature), and without accounting for the interest rate swap agreements described below,outstanding as of December 31, 2022, a one-percentage point increase in applicablerelevant interest rates would increase our interest expense, by $10.5 million annually.
As of December 31, 2022, we are party to: (i) the Initial Swaps; (ii) the First Extended Initial Swaps; (iii) the Second Extended Initial Swaps (entered into in February 2022); (iv) the Incremental Swaps; (v) the First Extended Incremental Swaps (entered into in February 2022); and (vi) the Additional Incremental Swaps (entered into in February 2022). At December 31, 2022, the interest rate risk related to $297.2 million of borrowings under the Credit Facility was unhedged, consisting of unhedged amounts outstanding under ourthe Term Loans and otherno amounts outstanding (other than ordinary course letters of credit,credit) under the Revolver (December 31, 2021 — $460.4 million, consisting of unhedged amounts under the Term Loans and no amounts outstanding (other than ordinary course letters of credit) under the Revolver). A one-percentage point
See Item 5, "Operating and Financial Review and Prospects — MD&A —Liquidity — Cash requirements — TRS" for a description of our TRS Agreement. Interest payments on our TRS Agreement are based on a variable interest rate and the counterparty's SVS purchase costs. Based on the counterparty's SVS purchase costs at December 31, 2022, a 10% increase in the applicable interest rates applicablerate would have resulted in an insignificant increase in interest expense in 2022. Also see "Equity Price Risk" below.
See Item 5, "Operating and Financial Review and Prospects — MD&A — Capital Resources — Financial instruments and financial risks" for a discussion of risks related to the cessation of LIBOR.
Equity Price Risk
See Item 5, "Operating and Financial Review and Prospects — MD&A — Liquidity — Cash requirements — TRS" for a description of our unhedged borrowings outstanding as atTRS Agreement. If the value of the TRS (as defined in the TRS Agreement) decreases over the agreement's term, we are obligated to pay the counterparty the amount of such decrease upon Settlement. If the price of our SVS decreased by 10% (assuming Settlement on December 31, 20192022), we would increase our interest expense by $2.4 million annually (December 31, 2018 — $4.1 million). The change in our exposurehave been obligated to interest rate risk as of December 31, 2019 as compared to December 31, 2018 is attributablepay an insignificant amount to the general decrease in borrowings from 2018.counterparty.
Credit and Counterparty Risk
Management monitors the institutions that hold our cash and cash equivalents. Management's emphasis is primarily on safety of principal. Management, in its discretion, has diversified our cash and cash equivalents among banking institutions to adjust our exposure to levels they deem acceptable with respect to any one of these entities. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we cannot assure that access to these holdings will not be impacted by adverse conditions in the financial markets, or that third party institutions will retain acceptable credit ratings or investment practices.
Cash balances held at banking institutions in the United StatesU.S. with which we do business may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While management monitors the cash balances in these bank accounts, such cash balances could be impacted if the underlying banks were to become insolvent or could be subject to other adverse conditions in the financial markets.
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our risk of counterparty non-performance iscontinues to be relatively low, however,low. We are in regular contact with our customers, suppliers and logistics providers, and to date have not experienced significant counterparty credit-related non-performance. However, if a key supplier (or any company within such supplier's supply chain) or customer experiences financial difficulties or fails to comply with their contractual obligations, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign exchange contracts or swaps, interest rate swaps, annuities for our pension plans, or the counterparty to our TRS Agreement defaults on their contractual
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obligations (with respect to pension obligations, we retain ultimate responsibility for the payment of benefits to plan participants unless and until such pension plans are wound-up). With respect to our financial market activities, we have adopted a policy of dealing only with counterparties we deem to be credit-worthy counterparties to help mitigate the risk of financial loss from defaults. We monitor the credit risk of the counterparties with whom we conduct business, through a combined process of credit rating reviews and portfolio reviews. To attempt to mitigate the risk of financial loss from defaults under our foreign currency forward contracts and swaps, and our interest rate swaps, our contracts are held by counterparty financial institutions, each of which had a Standard and Poor's rating of A-2 or above at December 31, 2019. In addition, we maintain cash and short-term investments in highly-rated investments or on deposit with major financial institutions. Each financial institution with which we had our A/R sales program and the SFPs in 2019 had a Standard and Poor's short-term rating of A-2 or above and a long-term rating of BBB+ or above at December 31, 2019. The financial institution with which we have our March 2020 A/R sales program had a Standard and Poor's short term rating of A-1 and a long term rating of A+ at the time of execution of the agreement. Each financial institution from which annuities have been purchased for the defined benefit component of our Canadian pension plan had a Standard and Poor's long-term rating of A+ or above at December 31, 2019. In addition, the financial institutions from which annuities have been purchased for the defined benefit component of our U.K. pension plans are governed by local regulatory bodies. If an institution from which we purchased annuities for our pension plans defaults on their contractual obligations, this would result in a financial loss to us, as we retain ultimate
Commodity Price Risk
We are exposed to market risk with respect to commodity price fluctuations for components used in the manufacture of our products. These components are impacted by global pricing pressures, general economic conditions, market conditions, geopolitical issues, weather, changes in tariff rates, and other factors which are neither predictable nor within our control. While generally we have been able to offset inflation and other changes in the costs of key operating resources through price increases, productivity improvements, greater economies of scale, supplier negotiations and global sourcing initiatives, there can be no assurance that we will be able to continue to do so in the future. We do not engage in hedging activities for commodity price risk. Competitive conditions may limit our pricing flexibility, and macroeconomic conditions may make additional price increases imprudent. Increases in commodity prices that we cannot recover from our customers would adversely impact our operating results. We are also exposed to fluctuations in transportation costs, which have recently increased based on freight carrier capacity and fuel prices. We manage transportation costs by optimizing logistics and supply chain planning. We continue to invest in supply chain initiatives to address industry-wide capacity challenges.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
Part II.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
The information required by this Item concerning our disclosure controls and procedures, and changes in our internal control over financial reporting, is set forth in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of OperationsMD&A — Liquidity and Capital Resources — Controls and Procedures."
Management's Report on Internal Control over Financial Reporting is set forth on page F-1 of our Consolidated Financial Statements in Item 18.
The attestation report from our independent auditors, KPMG LLP (KPMG), an independent registered public accounting firm, is set forth on page F-2 of our Consolidated Financial Statements in Item 18.
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert
The Board has considered the extensive financial experience of Ms. Koellner, Mr. Chopra, Dr. Müller, and Ms. Perry, and has determined that each of them is an audit committee financial expert within the meaning of Item 16A(b) of Form 20-F, and each are independent directors, as that term is defined by the applicable Canadian and SEC rules and in the NYSE listing standards. The Board had also considered the extensive financial experience of Mr. Etherington (prior to his retirement from the Audit Committee and the Board effective January 29, 2020), and determined that during 2019 and until such retirement, he was an audit committee financial expert within the meaning of Item 16A(b) of Form 20-F, and was an independent director, as that term is defined by the applicable Canadian and SEC rules and in the NYSE listing standards.
Item 16B. Code of Ethics
The Board has adopted a Finance Code of Professional Conduct for Celestica's Chief Executive Officer, our senior finance officers, and all personnel in itsour finance organization to deter wrongdoing and promote honest and ethical conduct in the practice of financial management, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely and understandable disclosure;disclosure in reports and documents filed with, or submitted to, the SEC and in other public communications made by the Corporation; compliance with all applicable laws, rules and regulations; prompt internal reporting of violations of the code to the appropriate persons identified in the code; and accountability for adherence to the code. These professionals are expected to abide by this code as well as Celestica's BCG policy and all of our other applicable business policies, standards and guidelines.
The Finance Code of Professional Conduct and the BCG policy can be accessed electronically at www.celestica.com(information on our website is not incorporated by reference into this Annual Report). Celestica will provide a copy of such policies free of charge to any person who so requests. Requests should be directed: (i) to clsir@celestica.com; (ii) by mail to Celestica Investor Relations to: 5140 Yonge Street, Suite 1900, Toronto, Ontario, Canada M2N 6L7; or (iii) by telephone at 416-448-2211.
Item 16C. Principal Accountant Fees and Services
The external auditor is engaged to provide services pursuant to pre-approval policies and procedures established by the Audit Committee of the Board. The Audit Committee approves the external auditor's Audit Plan, the scope of the external auditor's quarterly reviews and all related fees. The Audit Committee must approve any non-audit services provided by the auditor and related fees and does so only if it considers that these services are compatible with the external auditor's independence.
Our auditors are KPMG. KPMG did not provide any financial information systems design or implementation services to us during 20182021 or 2019.2022. The Audit Committee has determined that the provision of the non-audit services by KPMG described below does not compromise KPMG's independence.
Audit Fees
KPMG billed $3.0$4.5 million in 2019 (20182022 (2021 — $2.5$3.1 million) for audit services.
Audit-Related Fees
KPMG billed no amounts$0.01 million in 2019audit-related fees in 2022 for audit-relatedfinancial statement translation services (2018and certain other specified procedures (2021 — $0.3$0.2 million for audit-related services, including pension audits andboth due diligence for acquisitions)services in connection with acquisitions and certain other specified procedures).
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Tax Fees
KPMG billed $0.1 million in 2019 (20182022 (2021 — $0.1 million) for tax compliance and tax advisory services.
All Other Fees
KPMG billed no$0.2 million in 2022 primarily for certain special assurance services required on inventory and financial statement processing services (2021 — nil other amounts in 2019 (2018 — $0.1 million for a regulatory performance audit related to compliance with government accounting standards)fees).
Pre-approval Policies and Procedures — Percentage of Services Approved by Audit Committee
All KPMG services and fees are approved by the Audit Committee as follows. The Audit Committee has established an Audit and Non-Audit Services Pre-Approval Policy to pre-approve all permissible audit and non-audit services provided by our independent auditors. On an annual basis, the Audit Committee reviews and provides pre-approval for certain types of services that may be rendered by the independent auditors and a budget for audit services for the applicable fiscal year. Upon pre-approval of the services on the initial list, management may engage the auditor for specific engagements that are within the definition of
the pre-approved services. Any significant service engagements above a certain threshold will require separate pre-approval. The policy contains a provision delegating pre-approval authority to the Chair of the Audit Committee in instances when pre-approval is needed prior to a scheduled Audit Committee meeting. The Chair of the Audit Committee is required to report on such pre-approvals at the next scheduled Audit Committee meeting. A final detailed review of all audit and non-audit services and fees is performed by the Audit Committee prior to the issuance of the audit opinion at year-end. Services representing 72% of Audit-Related Fees and 10% of All Other Fees in 2022 were provided by KPMG for which the foregoing pre-approval procedures were waived pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.
Percentage of Hours Expended on KPMG's engagement not performed by KPMG's full-time, permanent employees (if greater than 50%):
Not applicable.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Total number of SVS purchased (in millions) | (b) Average price paid per SVS | (c) Total number of SVS purchased as part of publicly announced plans or programs (in millions) | (d) Maximum number of SVS that may yet be purchased under the plans or programs (in millions) | ||||||||||||||||
January 1 — 31, 2022(1) | 2.3(2) | $11.15 | 0.2(3) | 8.8 | ||||||||||||||||
February 1 — 28, 2022(1) | 1.2(2) | $12.05 | 0.3 | 8.5 | ||||||||||||||||
March 1 — 31, 2022(1) | 0.2 | $11.75 | 0.2 | 8.3 | ||||||||||||||||
April 1 — 30, 2022(1) | — | — | — | 8.3 | ||||||||||||||||
May 1 — 31, 2022(1) | 0.9(2) | $10.71 | — | 8.3 | ||||||||||||||||
June 1 — 30, 2022(1) | 1.0 | $10.34 | 1.0(4) | 7.3 | ||||||||||||||||
July 1 — 31, 2022(1) | — | $— | — | 7.3 | ||||||||||||||||
August 1 — 31, 2022(1) | — | $— | — | 7.3 | ||||||||||||||||
September 1 — 30, 2022(1) | 0.5 | $9.92 | 0.5(5) | 6.8 | ||||||||||||||||
October 1 — 31, 2022(1) | 0.6 | $9.20 | 0.6(6) | 6.2 | ||||||||||||||||
November 1 — 30, 2022(1) | — | $— | — | 6.2 | ||||||||||||||||
December 1 — 31, 2022(7) | 0.6 | $11.13 | 0.6(8) | 8.5 | ||||||||||||||||
Total | 7.3 | $10.92 | 3.4 | 8.5 | ||||||||||||||||
Period | (a) Total number of SVS purchased (in millions) | (b) Average price paid per SVS | (c) Total number of SVS purchased as part of publicly announced plans or programs (in millions) | (d) Maximum number of SVS that may yet be purchased under the plans or programs (in millions) (3) | ||
January 1 — 31, 2019 | __ | __ | __ | 9.5 | ||
February 1 — 28, 2019 (1) | 3.8 | $8.67 | 3.8 | 5.7 | ||
March 1 — 31, 2019 (1) | 1.3 | $9.10 | 1.3 | 4.4 | ||
April 1 — 30, 2019 (1) | 0.7 | $7.21 | 0.7 | 3.7 | ||
May 1 — 31, 2019 (1)(3) | 2.5 | $7.13 | 2.5 | 1.2 | ||
| June 1 — 30, 2019 | __ | __ | __ | 1.2 | ||
| July 1 — 31, 2019 | __ | __ | __ | 1.2 | ||
| August 1 — 31, 2019 | __ | __ | __ | 1.2 | ||
| September 1 — 30, 2019 | __ | __ | __ | 1.2 | ||
| October 1 — 31, 2019 | __ | __ | __ | 1.2 | ||
November 1 — 30, 2019 (2) | 0.7 | $7.68 | 0.7 | 0.5 | ||
December 1 — 31, 2019 (2) | 0.5 | $7.67 | 0.5 | __ | ||
Total | 9.5 | $8.09 | 9.5 | |||
156
(2) From time-to-time, we enter into Automatic Share Purchase Plans (ASPPs) covering a defined period, instructing a broker to purchase in the open market a specified number of shares (subject to specified conditions) to settle vested employee awards under our stock-based compensation plans. See note footnote (2) above.SBC plans (SBC ASPPs). During 2022, 3.9 million SVS were purchased on our behalf by an independent broker under SBC ASPPs (2.1 million SVS in January 2022, 0.9 million SVS in February 2022 and 0.9 million SVS in May 2022). The maximum number of SVS we were permitted to repurchase for cancellation under the 2021 NCIB was not reduced by the number of SVS we arranged to be purchased by such independent broker.
(3) From time-to-time, we enter into ASPPs covering a defined period, instructing a broker to purchase in the open market a specified number of shares (subject to specified conditions) for cancellation under our NCIBs (NCIB ASPPs). During January 2022, we purchased 0.2 million SVS under an NCIB ASPP entered into in December 2021.
(4) During June 2022, we purchased 1.0 million SVS under an NCIB ASPP entered into in June 2022.
(5) During September 2022, we purchased 0.5 million SVS under an NCIB ASPP entered into in September 2022 (September NCIB ASPP).
(6) During October 2022, we purchased 0.6 million SVS under the September NCIB ASPP.
(7) On December 8, 2022, the TSX accepted our notice to launch, and we announced, a new normal course issuer bid (2022 NCIB). The 2022 NCIB allows us to repurchase, at our discretion, from December 13, 2022 until the earlier of December 12, 2023 or the completion of purchases thereunder, up to 8,776,134 of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. The maximum number of SVS we are permitted to repurchase for cancellation under the 2022 NCIB will be reduced by the number of SVS we arrange to be purchased by any non-independent broker in the open market during its term to satisfy delivery obligations under our SBC plans, if any. In December 2022, we repurchased in the open market a total of 0.4 million SVS for cancellation under the 2022 NCIB at a weighted average price of $11.09 per share.
(8) During December 2022, we purchased 0.2 million SVS under an NCIB ASPP entered into in December 2022.
Item 16F. Change in Registrant's Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
Corporate Governance
We are subject to a variety of corporate governance guidelines and requirements enacted by the TSX, the CSA, the NYSE and the SEC under its rules and those mandated by the United StatesU.S. Sarbanes Oxley Act of 2002 and Dodd-Frank. We are listed on the NYSE and, although we are not required to comply with all of the NYSE corporate governance requirements to which we would be subject if we were a U.S. corporation, our governance practices differ significantly in only one respect from those required of U.S. domestic issuers by the NYSE, as described below. Celestica complies with TSX rules, which require shareholder approval of share compensation arrangements involving new issuances of shares, and of certain amendments to such arrangements, but do not require such approval if the compensation arrangements involve only shares purchased by the Corporation in the open market. NYSE rules require shareholder approval of all equity compensation plans (and material revisions thereto), subject to limited exceptions, regardless of whether new issuances or treasury shares are used.
Our corporate governance guidelines can be accessed electronicallyCorporate Governance Guidelines are available on our website at www.celestica.com(information on our website is not incorporated by reference into this Annual Report).
Item 16H. Mine Safety Disclosure
Not applicable.
Item 16I.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III.
Item 17. Financial Statements
Not applicable.
Item 18. Financial Statements
The following financial statements have been filed as part of this Annual Report:
| Page | |||||
| Management's Report on Internal Control Over Financial Reporting | F-1 | ||||
| Reports of Independent Registered Public Accounting Firm (KPMG LLP, Toronto, Canada, PCAOB ID 85) | F-2, F-3 | ||||
| Consolidated Balance Sheet as at December 31, | F-5 | ||||
| Consolidated Statement of Operations for the years ended December 31, | F-6 | ||||
| Consolidated Statement of Comprehensive Income for the years ended December 31, | F-7 | ||||
| Consolidated Statement of Changes in Equity for the years ended December 31, | F-8 | ||||
| Consolidated Statement of Cash Flows for the years ended December 31, | F-9 | ||||
| Notes to the Consolidated Financial Statements | F-10 | ||||
158
Item 19. Exhibits
The following exhibits have been filed as part of this Annual Report:
| Incorporated by Reference | Incorporated by Reference | |||||||||||||||||||||||||||||||||||||||||||||||||
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | |||||||||||||||||||||||||||||||||||||
| 1.1 | 20-F | 001-14832 | March 23, 2010 | 1.10 | 1.1 | 20-F | 001-14832 | March 23, 2010 | 1.10 | |||||||||||||||||||||||||||||||||||||||||
| 1.2 | 20-F | 001-14832 | March 23, 2010 | 1.11 | 1.2 | 20-F | 001-14832 | March 23, 2010 | 1.11 | |||||||||||||||||||||||||||||||||||||||||
| 2 | Instruments defining rights of holders of equity securities or long-term debt: | 2 | Instruments defining rights of holders of equity securities or long-term debt: | |||||||||||||||||||||||||||||||||||||||||||||||
| 2.1 | See Certificate and Restated Articles of Incorporation identified above | 2.1 | See Certificate and Restated Articles of Incorporation identified above | |||||||||||||||||||||||||||||||||||||||||||||||
| 2.2 | F-3ASR | 333-221144 | October 26, 2017 | 4.1 | 2.2 | F-3ASR | 333-221144 | October 26, 2017 | 4.1 | |||||||||||||||||||||||||||||||||||||||||
| 2.3 | X | 2.3 | X | |||||||||||||||||||||||||||||||||||||||||||||||
| 4 | Certain Contracts: | 4 | Certain Contracts: | |||||||||||||||||||||||||||||||||||||||||||||||
| 4.1 | 20-F | 001-14832 | March 23, 2010 | 4.1 | 4.1 | 20-F | 001-14832 | March 23, 2010 | 4.1 | |||||||||||||||||||||||||||||||||||||||||
| 4.2 | 20-F | 001-14832 | March 13, 2017 | 4.2 | 4.2 | 20-F | 001-14832 | March 13, 2017 | 4.2 | |||||||||||||||||||||||||||||||||||||||||
| 4.3 | 20-F | 001-14832 | March 25, 2008 | 4.6 | 4.3 | 6-K | 001-14832 | July 9, 2014 | 99.1 | |||||||||||||||||||||||||||||||||||||||||
| 4.4 | 6-K | 001-14832 | July 9, 2014 | 99.1 | 4.4 | 6-K | 001-14832 | July 29, 2015 | 99.1 | |||||||||||||||||||||||||||||||||||||||||
| 4.5 | 6-K | 001-14832 | July 29, 2015 | 99.1 | 4.5 | 20-F | 001-14832 | March 7, 2016 | 4.5 | |||||||||||||||||||||||||||||||||||||||||
| 4.6 | 20-F | 001-14832 | March 7, 2016 | 4.5 | 4.6 | 20-F | 001-14832 | March 13, 2017 | 4.7 | |||||||||||||||||||||||||||||||||||||||||
| 4.7 | 20-F | 001-14832 | March 13, 2017 | 4.7 | 4.7 | 6-K | 001-14832 | July 9, 2014 | 99.2 | |||||||||||||||||||||||||||||||||||||||||
| 4.8 | 6-K | 001-14832 | July 9, 2014 | 99.2 | 4.8 | 6-K | 001-14832 | July 29, 2015 | 99.2 | |||||||||||||||||||||||||||||||||||||||||
| 4.9 | 6-K | 001-14832 | July 29, 2015 | 99.2 | 4.9 | 20-F | 001-14832 | March 7, 2016 | 4.8 | |||||||||||||||||||||||||||||||||||||||||
| 4.10 | 20-F | 001-14832 | March 7, 2016 | 4.8 | 4.10 | SC TO-I | 005-55523 | October 29, 2012 | (d)(1) | |||||||||||||||||||||||||||||||||||||||||
| 4.11 | SC TO-I | 005-55523 | October 29, 2012 | (d)(1) | 4.11 | SC TO-I | 005-55523 | October 29, 2012 | (d)(3) | |||||||||||||||||||||||||||||||||||||||||
| 4.12 | SC TO-I | 005-55523 | October 29, 2012 | (d)(3) | 4.12 | 20-F | 001-14832 | March 14, 2014 | 4.16 | |||||||||||||||||||||||||||||||||||||||||
| 4.13 | 4.13 | 20-F | 001-14832 | March 7, 2016 | 4.22 | |||||||||||||||||||||||||||||||||||||||||||||
159
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| 4.14 | 20-F | 001-14832 | March 11, 2019 | 4.27 | ||||||||||||||||||||||||||||||||||
| 4.15 | 20-F/A | 001-14832 | April 25, 2019 | 4.31 | ||||||||||||||||||||||||||||||||||
| 4.16 | 20-F/A | 001-14832 | April 25, 2019 | 4.32 | ||||||||||||||||||||||||||||||||||
| 4.17 | 20-F | 001-14832 | March 16, 2020 | 4.22 | ||||||||||||||||||||||||||||||||||
| 4.18** | 20-F | 001-14832 | March 14, 2022 | 4.23 | ||||||||||||||||||||||||||||||||||
| Incorporated by Reference | ||||||||||||
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
| 4.13 | 20-F | 001-14832 | March 14, 2014 | 4.16 | ||||||||
| 4.14 | 20-F | 001-14832 | March 7, 2016 | 4.22 | ||||||||
| 4.15 | 20-F | 001-14832 | March 11, 2019 | 4.27 | ||||||||
| 4.16 | 20-F | 001-14832 | March 11, 2019 | 4.28 | ||||||||
| 4.17 | 20-F | 001-14832 | March 11, 2019 | 4.29 | ||||||||
| 4.18 | 20-F | 001-14832 | March 11, 2019 | 4.30 | ||||||||
| 4.19 | 20-F | 001-14832 | March 11, 2019 | 4.31 | ||||||||
| 4.20 | 20-F | 001-14832 | March 11, 2019 | 4.32 | ||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| 4.19 | 20-F | 001-14832 | March 14, 2022 | 4.24 | ||||||||||||||||||||||||||||||||||
| 4.20 | 20-F | 001-14832 | March 14, 2022 | 4.25 | ||||||||||||||||||||||||||||||||||
| 4.21 | Second Amendment to the Revolving Trade Receivables Purchase Agreement, dated as of September 27, 2022, among Celestica LLC, Celestica Holdings Pte Ltd., Celestica Hong Kong Ltd., Celestica (Romania) S.R.L., Celestica Japan KK, Celestica Oregon LLC, Celestica Electronics (M.) Sdn. Bhd, Celestica Precision Machining Ltd., and Celestica International LP, as Sellers, Celestica Inc., as Servicer, and Credit Agricole Corporate and Investment Bank, New York Branch and Credit Agricole Corporate and Investment Bank (Canada Branch), as Purchasers | X | ||||||||||||||||||||||||||||||||||||
| 8.1 | X | |||||||||||||||||||||||||||||||||||||
| 11.1 | 20-F | 001-14832 | March 23, 2010 | 11.1 | ||||||||||||||||||||||||||||||||||
| 12.1 | X | |||||||||||||||||||||||||||||||||||||
| 12.2 | X | |||||||||||||||||||||||||||||||||||||
| 13.1 | X | |||||||||||||||||||||||||||||||||||||
| 15.1 | X | |||||||||||||||||||||||||||||||||||||
161
| Incorporated by Reference | ||||||||||||
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||
| 4.21 | X | |||||||||||
| 4.22 | X | |||||||||||
| 8.1 | X | |||||||||||
| 11.1 | 20-F | 001-14832 | March 23, 2010 | 11.1 | ||||||||
| 12.1 | | | | X | ||||||||
| 12.2 | | | | X | ||||||||
| 13.1 | | | | X | ||||||||
| 15.1 | | | | X | ||||||||
| 101.INS* | XBRL Instance Document | X | ||||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | X | ||||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not | |||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| Inline XBRL Taxonomy Extension Schema Document | X | |||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - formatted as Inline XBRL and | X |
* Will not be deemed "filed" for purposes of Section 18 of the U.S. Exchange Act, or otherwise subject to the liability of Section 18 of the U.S. Exchange Act, and will not be incorporated by reference into any filing under the U.S. Securities Act, or the U.S. Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
** Represents a complete amendment and restatement.
† Certain portions of this exhibit have been omitted because they are both: (i) not material; and (ii) of the type that the registrant treats as private or confidential.
162
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| CELESTICA INC. | |||||
| By: | /s/ | ||||
| Chief Legal Officer and | |||||
Date: March 16, 202013, 2023
163
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Celestica Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control system wasis designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.Board (IASB). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable accounting principles,IFRS as issued by the IASB, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 20192022 based on the criteria set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that, as of December 31, 2019,2022, the Company’s internal control over financial reporting is effective.
The Company’s independent auditors, KPMG LLP, have audited the effectiveness of our internal control over financial reporting as of December 31, 2019,2022 has been audited by KPMG LLP, Chartered Professional Accountants, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report, as stated in their report appearing on page F-2.
March 12, 20209, 2023
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders of Celestica Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Celestica Inc.’s's (the Company) internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control —– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes (collectively, the consolidated financial statements), and our report dated March 12, 20209, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| Toronto, Canada March | /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants | ||||
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors and Shareholders of Celestica Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Celestica Inc. (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and its financial performance and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 20209, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the Company's audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionsopinion on suchthe critical audit matter or on the accounts or disclosures to which it relates.
As discussed in notesNote 2(j) and 9 to the consolidated financial statements, the Company performsconducts an annual impairment testingassessment of cash generating units with goodwill on an annual basis andgoodwill. In addition, the Company also reviews the cash generating units for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying valueamount of asuch cash generating unit might exceed its recoverable amount. The goodwill balanceunits may not be recoverable. As discussed in Note 8 to the consolidated financial statements, as of December 31, 2019 amounted to $198.3 million. Of this amount, $132.02022, the Company has $321.8 million of goodwill, which includes $131.7 million related to the capital equipment cash generating unit.
F-3
We identified the evaluation of the carrying valuevaluation of goodwill relating tofor the capital equipment cash generating unit as a critical audit matter. Subjective and challenging auditor judgment was required to evaluate certain assumptions in the impairment model used in the Company’s estimate of the recoverable amount of the capital equipment cash generating unit. Specifically, certain assumptions used to estimate the recoverable amount were challenging to assess, as minor changes to the future revenue growth rate, profitability, and the discount rate assumptions could have had a significant effect on the recoverable amount.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s impairment assessment process, includingcritical audit matter. This included controls related to the approval of the future revenue growth rate, profitability, and the discount rate assumptions includedused in the impairment model. In addition, we evaluatedWe assessed the Company’s future revenue growth rates and profitability by comparing them to the underlying business strategies and growth plans,forecast, evidence of future customer demand, industry reports and historical results. We performed sensitivity analyses by changing the future revenue growth rates and profitability assumptions to assess the impact on recoverable amount. We compared the Company’s historical forecasts of the capital equipment cash generating unit to actual results to assess the Company’s ability to accurately forecast. We also involved a valuation professionalprofessionals with specialized skills and knowledge, who assisted in evaluatingthe evaluation of the discount rate, used in the valuation, by comparing it to a discount rate range that was independently developed using publicly available market data for comparable entities.
| Toronto, Canada March | /s/ KPMG LLP Chartered Professional Accountants, Licensed Public Accountants | ||||
| We have served as the Company's auditor since 1997. | |||||
F-4
CELESTICA INC.
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
| Note | December 31 2018 | December 31 2019 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 21 | $ | 422.0 | $ | 479.5 | |||
| Accounts receivable | 4 | 1,206.6 | 1,052.7 | |||||
| Inventories | 5 | 1,089.9 | 992.2 | |||||
| Income taxes receivable | 5.0 | 7.7 | ||||||
| Assets classified as held for sale | 6 | 27.4 | 0.7 | |||||
| Other current assets | 72.6 | 59.2 | ||||||
| Total current assets | 2,823.5 | 2,592.0 | ||||||
| Property, plant and equipment | 7 | 365.3 | 355.0 | |||||
| Right-of-use assets | 8 | — | 104.1 | |||||
| Goodwill | 9 | 198.4 | 198.3 | |||||
| Intangible assets | 9 | 283.6 | 251.3 | |||||
| Deferred income taxes | 20 | 36.7 | 33.6 | |||||
| Other non-current assets | 10 | 30.2 | 26.4 | |||||
| Total assets | $ | 3,737.7 | $ | 3,560.7 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility & lease obligations | 12 | $ | 107.7 | $ | 139.6 | |||
| Accounts payable | 1,126.7 | 898.0 | ||||||
| Accrued and other current liabilities | 320.4 | 370.9 | ||||||
| Income taxes payable | 20 | 42.3 | 46.7 | |||||
| Current portion of provisions | 11 | 23.2 | 26.1 | |||||
| Total current liabilities | 1,620.3 | 1,481.3 | ||||||
| Long-term portion of borrowings under credit facility & lease obligations | 12 | 650.2 | 559.1 | |||||
| Pension and non-pension post-employment benefit obligations | 19 | 88.8 | 107.1 | |||||
| Provisions and other non-current liabilities | 11 | 20.6 | 28.6 | |||||
| Deferred income taxes | 20 | 25.5 | 28.4 | |||||
| Total liabilities | 2,405.4 | 2,204.5 | ||||||
| Equity: | ||||||||
| Capital stock | 13 | 1,954.1 | 1,832.1 | |||||
| Treasury stock | 13 | (20.2 | ) | (14.8 | ) | |||
| Contributed surplus | 906.6 | 982.6 | ||||||
| Deficit | (1,481.7 | ) | (1,420.1 | ) | ||||
| Accumulated other comprehensive loss | 14 | (26.5 | ) | (23.6 | ) | |||
| Total equity | 1,332.3 | 1,356.2 | ||||||
| Total liabilities and equity | $ | 3,737.7 | $ | 3,560.7 | ||||
| Commitments, contingencies and guarantees (note 24), Transitional adjustment related to adoption of IFRS 16 (note 2), Subsequent events (notes 4, 13, 21 and 22) | ||||||||
| Note | December 31 2021 | December 31 2022 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | 20 | $ | 394.0 | $ | 374.5 | |||||||||||||||
| Accounts receivable | 4 | 1,260.3 | 1,393.5 | |||||||||||||||||
| Inventories | 5 & 26 | 1,697.0 | 2,350.3 | |||||||||||||||||
| Income taxes receivable | 8.6 | 5.9 | ||||||||||||||||||
| Other current assets | 26 | 75.4 | 202.8 | |||||||||||||||||
| Total current assets | 3,435.3 | 4,327.0 | ||||||||||||||||||
| Property, plant and equipment | 6 | 338.7 | 371.5 | |||||||||||||||||
| Right-of-use assets | 7 | 113.8 | 138.8 | |||||||||||||||||
| Goodwill | 8 | 324.2 | 321.8 | |||||||||||||||||
| Intangible assets | 8 | 382.0 | 346.5 | |||||||||||||||||
| Deferred income taxes | 19 | 47.7 | 68.9 | |||||||||||||||||
| Other non-current assets | 9 | 25.2 | 53.5 | |||||||||||||||||
| Total assets | $ | 4,666.9 | $ | 5,628.0 | ||||||||||||||||
| Liabilities and Equity | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Current portion of borrowings under credit facility & lease obligations | 11 | $ | 51.5 | $ | 52.2 | |||||||||||||||
| Accounts payable | 1,238.3 | 1,440.8 | ||||||||||||||||||
| Accrued and other current liabilities | 884.3 | 1,462.2 | ||||||||||||||||||
| Income taxes payable | 19 | 62.3 | 82.1 | |||||||||||||||||
| Current portion of provisions | 10 | 17.1 | 17.9 | |||||||||||||||||
| Total current liabilities | 2,253.5 | 3,055.2 | ||||||||||||||||||
| Long-term portion of borrowings under credit facility & lease obligations | 11 | 742.9 | 733.9 | |||||||||||||||||
| Pension and non-pension post-employment benefit obligations | 18 | 107.5 | 77.0 | |||||||||||||||||
| Provisions and other non-current liabilities | 10 | 39.8 | 32.5 | |||||||||||||||||
| Deferred income taxes | 19 | 60.2 | 51.7 | |||||||||||||||||
| Total liabilities | 3,203.9 | 3,950.3 | ||||||||||||||||||
| Equity: | ||||||||||||||||||||
| Capital stock | 12 | 1,764.5 | 1,714.9 | |||||||||||||||||
| Treasury stock | 12 | (48.9) | (18.5) | |||||||||||||||||
| Contributed surplus | 1,029.8 | 1,063.6 | ||||||||||||||||||
| Deficit | (1,255.6) | (1,076.6) | ||||||||||||||||||
| Accumulated other comprehensive loss | 13 | (26.8) | (5.7) | |||||||||||||||||
| Total equity | 1,463.0 | 1,677.7 | ||||||||||||||||||
| Total liabilities and equity | $ | 4,666.9 | $ | 5,628.0 | ||||||||||||||||
| Commitments, contingencies and guarantees (note 24), Subsequent event (note 4) | ||||||||||||||||||||
| Signed on behalf of the Board of Directors | |||||
| [Signed] Michael | [Signed] Laurette T. Koellner, Director | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CELESTICA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions of U.S. dollars, except per share amounts)
| Year ended December 31 | ||||||||||||||||||||
| Note | 2020 | 2021 | 2022 | |||||||||||||||||
| Revenue | $ | 5,748.1 | $ | 5,634.7 | $ | 7,250.0 | ||||||||||||||
| Cost of sales | 5 & 14 | 5,310.5 | 5,147.7 | 6,613.7 | ||||||||||||||||
| Gross profit | 437.6 | 487.0 | 636.3 | |||||||||||||||||
| Selling, general and administrative expenses (SG&A) | 14 | 230.7 | 245.1 | 279.9 | ||||||||||||||||
| Research and development | 29.9 | 38.4 | 46.3 | |||||||||||||||||
| Amortization of intangible assets | 8 | 25.6 | 25.5 | 40.1 | ||||||||||||||||
| Other charges, net of recoveries | 15 | 23.5 | 10.3 | 6.7 | ||||||||||||||||
| Earnings from operations | 127.9 | 167.7 | 263.3 | |||||||||||||||||
| Finance costs | 16 | 37.7 | 31.7 | 59.7 | ||||||||||||||||
| Earnings before income taxes | 90.2 | 136.0 | 203.6 | |||||||||||||||||
| Income tax expense (recovery) | 19 | |||||||||||||||||||
| Current | 32.9 | 40.9 | 88.7 | |||||||||||||||||
| Deferred | (3.3) | (8.8) | (30.6) | |||||||||||||||||
| 29.6 | 32.1 | 58.1 | ||||||||||||||||||
| Net earnings | $ | 60.6 | $ | 103.9 | $ | 145.5 | ||||||||||||||
| Basic earnings per share | $ | 0.47 | $ | 0.82 | $ | 1.18 | ||||||||||||||
| Diluted earnings per share | $ | 0.47 | $ | 0.82 | $ | 1.18 | ||||||||||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||||||||||
| Basic | 22 | 129.1 | 126.7 | 123.5 | ||||||||||||||||
| Diluted | 22 | 129.1 | 126.7 | 123.6 | ||||||||||||||||
| Year ended December 31 | ||||||||||||
| Note | 2017 | 2018 | 2019 | |||||||||
| Revenue | $ | 6,142.7 | $ | 6,633.2 | $ | 5,888.3 | ||||||
| Cost of sales | 5 & 15 | 5,724.2 | 6,202.7 | 5,503.6 | ||||||||
| Gross profit | 418.5 | 430.5 | 384.7 | |||||||||
| Selling, general and administrative expenses (SG&A) | 15 | 203.2 | 219.0 | 227.3 | ||||||||
| Research and development | 26.2 | 28.8 | 28.4 | |||||||||
| Amortization of intangible assets | 9 | 8.9 | 15.4 | 29.6 | ||||||||
| Other charges (recoveries) | 16 | 37.0 | 61.0 | (49.9 | ) | |||||||
| Earnings from operations | 143.2 | 106.3 | 149.3 | |||||||||
| Finance costs | 17 | 10.1 | 24.4 | 49.5 | ||||||||
| Earnings before income taxes | 133.1 | 81.9 | 99.8 | |||||||||
| Income tax expense (recovery) | 20 | |||||||||||
| Current | 39.1 | 39.7 | 22.8 | |||||||||
| Deferred | (11.5 | ) | (56.7 | ) | 6.7 | |||||||
| 27.6 | (17.0 | ) | 29.5 | |||||||||
| Net earnings | $ | 105.5 | $ | 98.9 | $ | 70.3 | ||||||
| Basic earnings per share | $ | 0.74 | $ | 0.71 | $ | 0.54 | ||||||
| Diluted earnings per share | $ | 0.73 | $ | 0.70 | $ | 0.53 | ||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||
| Basic | 23 | 143.1 | 139.4 | 131.0 | ||||||||
| Diluted | 23 | 145.2 | 140.6 | 131.8 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CELESTICA INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions of U.S. dollars)
| Year ended December 31 | ||||||||||||||||||||
| Note | 2020 | 2021 | 2022 | |||||||||||||||||
| Net earnings | $ | 60.6 | $ | 103.9 | $ | 145.5 | ||||||||||||||
| Other comprehensive income (loss), net of tax | 13 | |||||||||||||||||||
| Items that will not be reclassified to net earnings: | ||||||||||||||||||||
| Gains (losses) on pension and non-pension post-employment benefit plans | 18 | (9.3) | 9.3 | 33.5 | ||||||||||||||||
| Items that may be reclassified to net earnings: | ||||||||||||||||||||
| Currency translation differences for foreign operations | 4.3 | (7.7) | (6.7) | |||||||||||||||||
| Changes from currency forward derivative hedges | 8.5 | (13.5) | 7.2 | |||||||||||||||||
| Changes from interest rate swap derivative hedges | 20 | (4.4) | 9.6 | 20.6 | ||||||||||||||||
| Total comprehensive income | $ | 59.7 | $ | 101.6 | $ | 200.1 | ||||||||||||||
| Year ended December 31 | ||||||||||||
| Note | 2017 | 2018 | 2019 | |||||||||
| Net earnings | $ | 105.5 | $ | 98.9 | $ | 70.3 | ||||||
| Other comprehensive income (loss), net of tax | 14 | |||||||||||
| Items that will not be reclassified to net earnings: | ||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 19 | (18.2 | ) | (54.9 | ) | (8.7 | ) | |||||
| Items that may be reclassified to net earnings: | ||||||||||||
| Currency translation differences for foreign operations | 0.7 | 0.1 | (0.2 | ) | ||||||||
| Changes from currency forward derivatives designated as hedges | 17.3 | (15.5 | ) | 10.8 | ||||||||
| Changes from interest rate swap derivatives designated as hedges | 21 | — | (4.4 | ) | (7.7 | ) | ||||||
| Total comprehensive income | $ | 105.3 | $ | 24.2 | $ | 64.5 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CELESTICA INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in millions of U.S. dollars)
| Note | Capital stock | Treasury stock | Contributed surplus | Deficit | AOC loss (a) | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2019 | Balance — December 31, 2019 | $ | 1,832.1 | $ | (14.8) | $ | 982.6 | $ | (1,420.1) | $ | (23.6) | $ | 1,356.2 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Note | Capital stock | Treasury stock | Contributed surplus | Deficit | Accumulated other comprehensive loss (a) | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2016 | $ | 2,048.2 | $ | (15.3 | ) | $ | 862.6 | $ | (1,613.0 | ) | $ | (24.7 | ) | $ | 1,257.8 | |||||||||||||||||||||||||||||||||||||||||||||||
| Capital transactions: | 13 | Capital transactions: | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of capital stock | 30.4 | — | (16.8 | ) | — | — | 13.6 | Issuance of capital stock | 2.2 | — | (2.2) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of capital stock for cancellation | (30.3 | ) | — | 10.4 | — | — | (19.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of capital stock for cancellation (b) | Repurchase of capital stock for cancellation (b) | (0.1) | — | (15.0) | — | — | (15.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (16.7 | ) | — | — | — | (16.7 | ) | Purchase of treasury stock for stock-based plans | — | (19.1) | — | — | — | (19.1) | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation (SBC) and other | — | 23.3 | 6.8 | — | — | 30.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-settled stock-based compensation (SBC) | Equity-settled stock-based compensation (SBC) | — | 18.2 | 9.1 | — | — | 27.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income: | Total comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2017 | — | — | — | 105.5 | — | 105.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2020 | Net earnings for 2020 | — | — | — | 60.6 | — | 60.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 19 | — | — | — | (18.2 | ) | — | (18.2 | ) | Losses on pension and non-pension post-employment benefit plans | 18 | — | — | — | (9.3) | — | (9.3) | |||||||||||||||||||||||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | 0.7 | 0.7 | Currency translation differences for foreign operations | — | — | — | — | 4.3 | 4.3 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | 17.3 | 17.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2017 | $ | 2,048.3 | $ | (8.7 | ) | $ | 863.0 | $ | (1,525.7 | ) | $ | (6.7 | ) | $ | 1,370.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivative hedges | Changes from currency forward derivative hedges | — | — | — | — | 8.5 | 8.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from interest rate swap derivative hedges | Changes from interest rate swap derivative hedges | — | — | — | — | (4.4) | (4.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2020 | Balance — December 31, 2020 | $ | 1,834.2 | $ | (15.7) | $ | 974.5 | $ | (1,368.8) | $ | (15.2) | $ | 1,409.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital transactions: | 13 | Capital transactions: | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of capital stock | 14.9 | — | (14.5 | ) | — | — | 0.4 | Issuance of capital stock | 0.3 | — | (0.1) | — | — | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of capital stock for cancellation | (109.1 | ) | — | 33.6 | — | — | (75.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (22.4 | ) | — | — | — | (22.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SBC and other | — | 10.9 | 24.5 | — | — | 35.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of capital stock for cancellation(c) | Repurchase of capital stock for cancellation(c) | (70.0) | — | 41.6 | — | — | (28.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock for stock-based plans(d) | Purchase of treasury stock for stock-based plans(d) | — | (54.4) | — | — | — | (54.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-settled SBC | Equity-settled SBC | — | 21.2 | 13.8 | — | — | 35.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income: | Total comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2018 | — | — | — | 98.9 | — | 98.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 19 | — | — | — | (54.9 | ) | — | (54.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2021 | Net earnings for 2021 | — | — | — | 103.9 | — | 103.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains on pension and non-pension post-employment benefit plans | Gains on pension and non-pension post-employment benefit plans | 18 | — | — | — | 9.3 | — | 9.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | 0.1 | 0.1 | Currency translation differences for foreign operations | — | — | — | — | (7.7) | (7.7) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | (15.5 | ) | (15.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | 21 | — | — | — | — | (4.4 | ) | (4.4 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2018 | $ | 1,954.1 | $ | (20.2 | ) | $ | 906.6 | $ | (1,481.7 | ) | $ | (26.5 | ) | $ | 1,332.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivative hedges | Changes from currency forward derivative hedges | — | — | — | — | (13.5) | (13.5) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from interest rate swap derivative hedges | Changes from interest rate swap derivative hedges | 20 | — | — | — | — | 9.6 | 9.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2021 | Balance — December 31, 2021 | $ | 1,764.5 | $ | (48.9) | $ | 1,029.8 | $ | (1,255.6) | $ | (26.8) | $ | 1,463.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Capital transactions: | 13 | Capital transactions: | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of capital stock | 10.4 | — | (10.4 | ) | — | — | — | Issuance of capital stock | 0.7 | — | (0.5) | — | — | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of capital stock for cancellation | (132.4 | ) | — | 65.1 | — | — | (67.3 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock for stock-based plans | — | (9.2 | ) | — | — | — | (9.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SBC and other | — | 14.6 | 21.3 | — | — | 35.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of capital stock for cancellation(e) | Repurchase of capital stock for cancellation(e) | (50.3) | (1.8) | 25.0 | — | — | (27.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock for stock-based plans(f) | Purchase of treasury stock for stock-based plans(f) | — | (11.1) | — | — | — | (11.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-settled SBC | Equity-settled SBC | — | 43.3 | 9.3 | — | — | 52.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income: | Total comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2019 | — | — | — | 70.3 | — | 70.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 19 | — | — | — | (8.7 | ) | — | (8.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net earnings for 2022 | Net earnings for 2022 | — | — | — | 145.5 | — | 145.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains on pension and non-pension post-employment benefit plans | Gains on pension and non-pension post-employment benefit plans | 18 | — | — | — | 33.5 | — | 33.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (0.2 | ) | (0.2 | ) | Currency translation differences for foreign operations | — | — | — | — | (6.7) | (6.7) | |||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivatives designated as hedges | — | — | — | — | 10.8 | 10.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from interest rate swap derivatives designated as hedges | 21 | — | — | — | — | (7.7 | ) | (7.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2019 | $ | 1,832.1 | $ | (14.8 | ) | $ | 982.6 | $ | (1,420.1 | ) | $ | (23.6 | ) | $ | 1,356.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Changes from currency forward derivative hedges | Changes from currency forward derivative hedges | — | — | — | — | 7.2 | 7.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Changes from interest rate swap derivative hedges | Changes from interest rate swap derivative hedges | 20 | — | — | — | — | 20.6 | 20.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2022 | Balance — December 31, 2022 | $ | 1,714.9 | $ | (18.5) | $ | 1,063.6 | $ | (1,076.6) | $ | (5.7) | $ | 1,677.7 | |||||||||||||||||||||||||||||||||||||||||||||||||
(a)AOC loss (Accumulated other comprehensive loss) is net of tax. See note 13. (b)Consists of $0.1 to repurchase subordinate voting shares (SVS) for cancellation in 2020, and $15.0 accrued as of December 31, 2020 for the estimated contractual maximum quantity of permitted SVS repurchases (Contractual Maximum Quantity) for cancellation under an automatic share purchase plan (ASPP) executed in December 2020 (2020 NCIB Accrual). See note 12. (c) Consists of $35.9 paid to repurchase SVS for cancellation in 2021 and $7.5 accrued as of December 31, 2021 for the estimated Contractual Maximum Quantity for cancellation under an ASPP executed in December 2021 (2021 NCIB Accrual), offset in part by the reversal of the $15.0 2020 NCIB Accrual. See note 12. (d) Consists of $20.6 paid to repurchase SVS for delivery obligations under our SBC plans in 2021, and $33.8 accrued as of December 31, 2021 for the estimated Contractual Maximum Quantity under an ASPP executed in December 2021 for such purpose (2021 SBC Accrual). See note 12. (e) Consists of $34.6 paid to repurchase SVS for cancellation in 2022, offset in part by the reversal of the $7.5 2021 NCIB Accrual. See note 12. (f) Consists of $44.9 paid during 2022 to repurchase SVS for delivery obligations under our SBC plans, offset in part by the reversal of the $33.8 2021 SBC Accrual. See note 12. |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
CELESTICA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of U.S. dollars)
| Year ended December 31 | ||||||||||||||||||||||||||||||||
| Note | 2017 | 2018 | 2019 | Year ended December 31 | ||||||||||||||||||||||||||||
| Cash provided by (used in): | Cash provided by (used in): | Note | 2020 | 2021 | 2022 | |||||||||||||||||||||||||||
| Operating activities: | Operating activities: | |||||||||||||||||||||||||||||||
| Net earnings | $ | 105.5 | $ | 98.9 | $ | 70.3 | Net earnings | $ | 60.6 | $ | 103.9 | $ | 145.5 | |||||||||||||||||||
| Adjustments to net earnings for items not affecting cash: | Adjustments to net earnings for items not affecting cash: | |||||||||||||||||||||||||||||||
| Depreciation and amortization | 76.5 | 89.1 | 135.4 | Depreciation and amortization | 124.7 | 126.3 | 144.8 | |||||||||||||||||||||||||
| Equity-settled SBC | 13 | 30.1 | 33.4 | 34.1 | ||||||||||||||||||||||||||||
| Other charges (recoveries) | 16 | 5.7 | 1.4 | (86.1 | ) | |||||||||||||||||||||||||||
| Equity-settled employee SBC | Equity-settled employee SBC | 12 | 25.8 | 33.4 | 51.0 | |||||||||||||||||||||||||||
| Other charges | Other charges | 15 | 2.5 | 2.5 | 0.9 | |||||||||||||||||||||||||||
| Finance costs | 10.1 | 24.4 | 49.5 | Finance costs | 37.7 | 31.7 | 59.7 | |||||||||||||||||||||||||
| Income tax expense (recovery) | 27.6 | (17.0 | ) | 29.5 | ||||||||||||||||||||||||||||
| Income tax expense | Income tax expense | 29.6 | 32.1 | 58.1 | ||||||||||||||||||||||||||||
| Other | (1.6 | ) | (7.5 | ) | 24.2 | Other | 10.0 | 15.2 | (8.2) | |||||||||||||||||||||||
| Changes in non-cash working capital items: | Changes in non-cash working capital items: | |||||||||||||||||||||||||||||||
| Accounts receivable | (6.3 | ) | (155.4 | ) | 153.7 | Accounts receivable | (40.7) | (102.4) | (133.3) | |||||||||||||||||||||||
| Inventories | (139.6 | ) | (224.0 | ) | 97.7 | Inventories | (99.3) | (521.9) | (717.3) | |||||||||||||||||||||||
| Other current assets | (2.0 | ) | 7.6 | 16.5 | Other current assets | (0.5) | (11.5) | (51.6) | ||||||||||||||||||||||||
| Accounts payable, accrued and other current liabilities and provisions | 51.8 | 227.0 | (158.8 | ) | Accounts payable, accrued and other current liabilities and provisions | 117.0 | 556.9 | 813.4 | ||||||||||||||||||||||||
| Non-cash working capital changes | (96.1 | ) | (144.8 | ) | 109.1 | Non-cash working capital changes | (23.5) | (78.9) | (88.8) | |||||||||||||||||||||||
| Net income tax paid | (30.8 | ) | (44.8 | ) | (21.0 | ) | Net income tax paid | (27.8) | (39.4) | (65.1) | ||||||||||||||||||||||
| Net cash provided by operating activities | 127.0 | 33.1 | 345.0 | Net cash provided by operating activities | 239.6 | 226.8 | 297.9 | |||||||||||||||||||||||||
| Investing activities: | Investing activities: | |||||||||||||||||||||||||||||||
| Acquisitions | 3 | — | (467.1 | ) | 2.7 | Acquisitions | 3 | — | (314.7) | — | ||||||||||||||||||||||
| Purchase of computer software and property, plant and equipment | (102.6 | ) | (82.2 | ) | (80.5 | ) | Purchase of computer software and property, plant and equipment | (52.8) | (52.2) | (109.0) | ||||||||||||||||||||||
| Proceeds from sale of assets | 7 | 0.8 | 3.7 | 116.5 | Proceeds from sale of assets | 6 | 1.8 | 2.6 | 0.1 | |||||||||||||||||||||||
| Repayment of advances from solar supplier | 12.5 | — | — | |||||||||||||||||||||||||||||
| Net cash provided by (used in) investing activities | (89.3 | ) | (545.6 | ) | 38.7 | Net cash provided by (used in) investing activities | (51.0) | (364.3) | (108.9) | |||||||||||||||||||||||
| Financing activities: | Financing activities: | |||||||||||||||||||||||||||||||
| Borrowing under prior credit facility | 12 | — | 163.0 | — | ||||||||||||||||||||||||||||
| Repayments under prior credit facility | 12 | (40.0 | ) | (350.5 | ) | — | ||||||||||||||||||||||||||
| Borrowing under current credit facility | 12 | — | 759.0 | 48.0 | ||||||||||||||||||||||||||||
| Repayments under current credit facility | 12 | — | (1.7 | ) | (213.0 | ) | ||||||||||||||||||||||||||
| Borrowings under revolving loans | Borrowings under revolving loans | 11 | — | 220.0 | — | |||||||||||||||||||||||||||
| Repayments under revolving loans | Repayments under revolving loans | 11 | — | (220.0) | — | |||||||||||||||||||||||||||
| Borrowing under term loans | Borrowing under term loans | 11 | — | 365.0 | — | |||||||||||||||||||||||||||
| Repayments under term loans | Repayments under term loans | 11 | (121.9) | (175.0) | (33.2) | |||||||||||||||||||||||||||
| Lease payments | 12 | (6.5 | ) | (17.0 | ) | (38.2 | ) | Lease payments | 11 | (33.7) | (40.0) | (46.0) | ||||||||||||||||||||
| Issuance of capital stock | 13 | 13.6 | 0.4 | — | Issuance of capital stock | 12 | — | 0.2 | 0.2 | |||||||||||||||||||||||
| Repurchase of capital stock for cancellation | 13 | (19.9 | ) | (75.5 | ) | (67.3 | ) | Repurchase of capital stock for cancellation | 12 | (0.1) | (35.9) | (34.6) | ||||||||||||||||||||
| Purchase of treasury stock for stock-based plans | 13 | (16.7 | ) | (22.4 | ) | (9.2 | ) | Purchase of treasury stock for stock-based plans | 12 | (19.1) | (20.6) | (44.9) | ||||||||||||||||||||
Finance costs and waiver fees paid (a) | (10.2 | ) | (36.0 | ) | (46.5 | ) | ||||||||||||||||||||||||||
Finance costs paid (a) | Finance costs paid (a) | (29.5) | (26.0) | (50.0) | ||||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | (79.7 | ) | 419.3 | (326.2 | ) | Net cash provided by (used in) financing activities | (204.3) | 67.7 | (208.5) | |||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (42.0 | ) | (93.2 | ) | 57.5 | Net increase (decrease) in cash and cash equivalents | (15.7) | (69.8) | (19.5) | |||||||||||||||||||||||
| Cash and cash equivalents, beginning of year | 557.2 | 515.2 | 422.0 | Cash and cash equivalents, beginning of year | 479.5 | 463.8 | 394.0 | |||||||||||||||||||||||||
| Cash and cash equivalents, end of year | $ | 515.2 | $ | 422.0 | $ | 479.5 | Cash and cash equivalents, end of year | $ | 463.8 | $ | 394.0 | $ | 374.5 | |||||||||||||||||||
(a) Finance costs paid includesinclude debt issuance costs paid of $2.9$0.8 in 2019 (20182022 (2021— $3.6; 2020 — $12.9; 2017 — nil). We paid $2.0 in fees in Q4 2019 in connection with obtaining the Q4 2019 Waivers (see note 12)$0.6).
The accompanying notes are an integral part of these consolidated financial statements.
F-9
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
Celestica Inc. (Celestica) is incorporated in Ontario with its corporate headquarters located in Toronto, Ontario, Canada. Celestica’s subordinate voting shares (SVS) are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). Since the first quarter of 2018 (Q1 2018), Celestica's operating and reportable segments consist of its Advanced Technology Solutions (ATS) segment and its Connectivity & Cloud Solutions (CCS) segment. Financial information for 2017 was previously reclassified to reflect this segment structure. See note 25 for further detail.detail regarding segment information.
2. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES:
Statement of compliance:
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements were authorized for issuance by our Board of Directors on March 12, 20209, 2023.
Functional and presentation currency:
The consolidated financial statements are presented in U.S.United States (U.S.) dollars, which is also ourCelestica's functional currency. Unless otherwise noted, all financial information is presented in millions of U.S. dollars (except percentages and per share amounts).
Use of estimates and judgments:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, and the reported amounts of assets, and liabilities, revenue, and expenses, and related disclosures with respect to contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts (including, in recent periods, the prolonged impact of global supply chain constraints, and additionally in the second to the fourth quarter of 2022, the fire event disclosed in note 26), historical experience and various other factors that we believe are reasonable under the circumstances. The economic environment could also impactimpacts certain estimates and discount rates necessary to prepare our consolidated financial statements, including significant estimates and discount rates applicable to the determination of the recoverable amounts used in ourthe impairment testing of our non-financial assets. Our assessment of these factors forms the basis for our judgments on the carrying values of our assets and liabilities, and the accrual of our costs and expenses. Actual results could differ materially from our estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. Revisions are recognized in the period in which the estimates are revised and may also impact future periods as well.periods.
*CGUs are the smallest identifiable group of assets that cannot be tested individually and generate cash inflows that are largely independent of those of other assets or groups of assets, and can be comprised of a single site, a group of sites, or a line of business.
Key sources of estimation uncertainty and judgment: We have applied significant estimates, judgments and assumptions in the following areas which we believe could have a significant impact on our reported results and financial position: our determination of the timing of revenue recognition; whether events or changes in circumstances are indicators that an impairment review of our assets or CGUs should be conducted; the measurement of our CGUs' recoverable amounts, which includes estimating future growth, profitability, and discount and terminal growth rates; and the allocation of the purchase price and other valuations related to our business acquisitions.
F-10
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
We describe our use of judgment and estimation uncertainties in greater detail in the accounting policies described under “Significant Accounting Policies” below.
Recently adoptedissued accounting standards:standards and amendments:
Interest Rate Benchmark Reform (Amendments to IFRS 9 (Financial Instruments), IAS 39 (Financial Instruments: Recognition and Measurement) and IFRS 7 (Financial Instruments: Disclosures)):
In September 2019, the IASB issued amendments to IFRS 9, IAS 39, and IFRS 7, effective January 1, 2020, representing phase one of its response to the effects of the Interbank Offered Rates (IBOR) reform on financial reporting. These amendments allow entities to assume that the interest rate benchmark on which hedged cash flows and hedged risk are based, and the interest rate benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. The amendments provide temporary relief that allows hedge accounting to continue, and any hedge ineffectiveness to continue to be recorded in the income statement, during the period of uncertainty before the replacement of existing interest rate benchmarks. The amendments apply to all hedging relationships that are directly affected by IBOR reform, and application of the relief is mandatory. A hedging relationship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument.The relief will cease to apply when the uncertainty arising from IBOR reform is no longer present. On January 1, 2020, and in accordance with applicable transition provisions,we adopted the amendments retrospectively to hedging relationships that existed at the start of the reporting period or were designated thereafter, and we continue to apply hedge accounting to the amount in accumulated other comprehensive income (loss) (OCI) with respect to our interest rate swap cash flow hedges. The amendments also contain specific disclosure requirements for hedging relationships to which the relief is applied. See note 20(b) for disclosure of interest rate risks related to IBOR reform. The amendments did not have a significant impact on our disclosures or the amounts reported in our consolidated financial statements for the year ended December 31, 2020.
In August 2020, the IASB issued Interest Rate Benchmark Reform-Phase 2, which amends IFRS 9, IAS 39, IFRS 4, Insurance Contracts, IFRS 7, and IFRS 16, Leases:
Classification of liabilities as current or non-current (Amendments to IAS 1)
In January 2020, the IASB issued Classification of liabilities as current or non-current (Amendments to IAS 1) to clarify how to classify debt and other liabilities as current or non-current.The amendments are effective for reporting periods beginning on or after January 1, 2024. We will adopt this standard as of January 1, 2019. There was no net2024, and are in the process of evaluating the impact of the adoption of this standard on our deficitconsolidated financial statements.
Definition of accounting estimates (Amendments to IAS 8)
In February 2021, the IASB issued Definition of accounting estimates (Amendments to IAS 8) to clarify the distinction between accounting policies and accounting estimates.The amendments are effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2019. When measuring2023. We do not anticipate that the adoption of this standard will have a material impact on our lease obligations, we discounted our lease payments usingconsolidated financial statements.
Deferred tax related to assets and liabilities arising from a weighted-average rate of 4.7%single transaction (Amendments to IAS 12 Income Taxes)
In May 2021, the IASB issued Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes) to clarify how to account for deferred tax on transactions such as leases and decommissioning obligations.The amendments are effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2019 (representing our incremental borrowing rate as of such date). In computing the initial adjustment, we elected to apply the practical expedients available under IFRS 16, and accordingly did2023. We do not recognize ROU assets and related lease obligations for low-value leases, or for leases with terms of 12 months or less. We continue to expense the costs of these low-value and short-term leases in our consolidated statement of operations on a straight-line basis over the lease term. In addition, as IFRS 16 did not require us to reassess whether a contract is, or contains, a lease as of the date of initial application, we maintained the lease determinations used under previous accounting rules. The amortization of the ROU assets is recognized as a depreciation charge, and the interest expense on the related lease obligations is recognized as finance costs in our consolidated statement of operations. Prior toanticipate that the adoption of IFRS 16, we recognized operating lease expensesthis standard will have a material impact on a straight-line basis over the lease term generally in cost of sales or SG&A in our consolidated statementfinancial statements.
F-11
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of operations. There were no changes to our existing finance leases required byU.S. dollars, except percentages and per share amounts)
IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts. IFRS 17 replaces IFRS 4 and sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of IFRS 17. This standard is effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2023. We do not anticipate that the adoption of IFRS 16, which we continue to capitalize at their commencement (included in property, plant and equipmentthis standard will have a material impact on our consolidated balance sheet), and include the corresponding liability, net of finance costs, on our consolidated balance sheet (see note 12).financial statements.
| Operating lease commitments at December 31, 2018 | $ | 107.4 | |
| Discounted using our incremental borrowing rate at January 1, 2019 | (13.2 | ) | |
| Recognition exemption for short-term and low-value leases | (1.9 | ) | |
| Extension options reasonably certain to be exercised | 19.7 | ||
| Lease obligations recognized at January 1, 2019 under IFRS 16 | 112.0 | ||
| Lease obligations previously classified as finance leases under IAS 17 | 10.4 | ||
| Total lease obligations at January 1, 2019 | $ | 122.4 | |
SIGNIFICANT ACCOUNTING POLICIES:
The accounting policies below are in compliance with IFRS as issued by the IASB and have been applied consistently to all periods presented in these consolidated financial statements.
(a) Basis of measurement:
These consolidated financial statements have been prepared primarily on the historical cost basis. Other measurement bases, where used, are described in the applicable notes.
These consolidated financial statements include our direct and indirect subsidiaries, all of which are wholly-owned. Any subsidiaries that are formed or acquired during the year are consolidated from their respective dates of formation or acquisition. Inter-company transactions and balances are eliminated on consolidation.
(c) Business combinations:
We use the acquisition method to account for any business combinations. All identifiable assets and liabilities are recorded at fair value on our consolidated balance sheet as of the acquisition date. Any goodwill that arises from business combinations is tested annually for impairment (see note 2(j)). Potential obligations for contingent consideration and other contingencies are also recorded at fair value on our consolidated balance sheet as of the acquisition date. We record subsequent changes in the fair value of such potential obligations from the date of acquisition to the settlement date in our consolidated statement of operations. We expense integration costs (for the establishment of business processes, infrastructure and information systems for acquired operations) and acquisition-related consulting and transaction costs as incurred in our consolidated statement of operations.
We use judgment to determine the estimates used to value identifiable assets and liabilities, and the fair value of potential obligations, if applicable, at the acquisition date. We may engage third parties to determine the fair value of certain inventory, property, plant and equipment and intangible assets. We use estimates to determine cash flow projections, including the period of expected future benefit, and future growth and discount rates, among other factors, to value intangible assets and contingent consideration. The fair value of acquired tangible assets are measured by applying the market, cost or replacement cost, or the income approach (using discounted cash flows and forecasts by management), as appropriate. The fair value of acquired intangible assets are measured by applying the income approach using a discounted cash flow model and forecasts based on management's estimates and assumptions.
(d) Foreign currency translation:
The majority of our subsidiaries have a U.S. dollar functional currency, which represents the currency of the primary economic environment in which they operate. For these subsidiaries, we translatetranslate: (i) monetary assets and liabilities denominated in foreign currencies into U.S. dollars at the period-end exchange rates. We translaterates; (ii) non-monetary assets and liabilities denominated in foreign currencies into U.S. dollars at historic rates,rates; and we translate(iii) revenue and expenses into U.S. dollars at the average exchange rates prevailing during the month of the transaction. Exchange gains and losses also arise on the settlement of foreign-currency denominated transactions. We recognize foreign currency differences arising on translation in our consolidated statement of operations.
F-12
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
and losses arising from the translation of these operations in the foreign currency translation account included in accumulated other comprehensive income (loss) (OCI).OCI. For these subsidiaries, we translate foreign currency transactions into the relevant non-U.S. dollar functional currency using the exchange rate prevailing during the month of the transaction for revenues and expenses, and the exchange rate as at period end for the translation of these foreign currency denominated monetary assets and liabilities, and such gains and losses arising from these translations are recorded in the statement of operations in their non-U.S. dollar functional currency before translation into U.S. dollar for consolidation purposes.
(e) Cash and cash equivalents:
Cash and cash equivalents include cash on account and short-term investments with original maturities of three months or less. Cash and cash equivalents are classified as financial assets measured at fair value through profit or loss (see paragraph (o) below). These instruments are subject to an insignificant risk of change in fair value over their terms and, as a result, we carry cash and cash equivalents at cost.
(f) Inventories:
We procure inventory and manufacture products based on specific customer orders and forecasts, and value our inventory on a first-in, first-out basis at the lower of cost and net realizable value. The cost of our finished goods and work in progress includes direct materials, labor and overhead. We may require valuation adjustments if actual market conditions or demand for our customers' products or services are less favorable than originally projected. The determination of net realizable value involves significant management judgment. Wejudgment and estimation. When estimating the net realizable value of our inventory, we consider factors such as shrinkage, the aging of and future demand for the inventory, and contractual arrangements with customers. We attempt to utilize excess inventory in other products we manufacture or return such inventory to the relevant suppliers or customers. We use future sales volume forecasts to estimate excess inventory on-hand. A change to these assumptions may impact our inventory valuation and our gross margins. Should circumstances change, we mayWe adjust our previous write-downs in our consolidated statement of operations in the period a change in estimate occurs.
We carry property, plant and equipmentPP&E at cost less accumulated depreciation and accumulated impairment losses. Cost consists of expenditures directly attributable to the acquisition or construction of the asset.asset, and costs directly attributable to bringing the asset to the condition necessary for its intended use. We capitalize the cost of an asset when the economic benefits associated with that asset are probable and when the cost can be measured reliably. We capitalize the costs of major renovations and we write-off the carrying amount of replaced assets. We expense all other maintenance and repair costs in our consolidated statement of operations as incurred. We do not depreciate land. We recognize depreciation expense on a straight-line basis over the estimated useful life of the asset as follows:
| Buildings | Up to 40 years | ||||
| Building/leasehold improvements | Up to 40 years or if shorter, term of lease | ||||
| Machinery and equipment | 3 to 15 years | ||||
We estimate the useful life of property, plant and equipmentPP&E based on the nature of the asset, historical experience, expected changes in technology, and the expected duration of related customer programs. When major components of an asset have a significantly different useful life than their primary asset, the components are accounted for and depreciated separately. We review our estimates of residual values, useful lives and the methods of depreciation annually at year endyear-end and, if required, adjust for thesethem prospectively. We determine gains and losses on the disposal or retirement of property, plant and equipmentPP&E by comparing the proceeds from disposal with the carrying amount of the asset and we recognize these gains and losses in our consolidated statement of operations in the period of disposal.disposal or retirement. Also, see note 2(j)2(j).
(h) Leases:
We are the lessee of property, plant and equipment,PP&E, primarily buildings and machinery. At the inception of a contract, we assess whether an arrangement is, or contains, a lease in accordance with IFRS 16. Where we determine there is a lease under IFRS 16, we recognize an ROUa right-of-use (ROU) asset (representing our right to use such leased asset) and a related lease obligation on the applicable lease commencement date. An ROU asset is first measured based on the initial amount of the related lease obligation, subject to certain adjustments, if any, and then subsequently measured at such cost less accumulated depreciation
F-13
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
and accumulated impairment losses (see note 2(j)2(j)). Depreciation expense on an ROU asset is recorded on a straight-line basis over the lease term in cost of sales or SG&A in our consolidated statement of operations, primarily based on the nature and use of the asset. The lease obligation is initially measured at the present value of the unpaid lease payments on the commencement date, discounted using the interest rate implicit in the lease (if readily determinable) or otherwise on our incremental borrowing rate (taking country-specific risks into consideration) on the lease commencement date. We generally use our incremental borrowing rate as the discount rate. The interest expense on the related lease obligation is recognized as finance costs in our consolidated statement of operations. The lease obligation is remeasured when there are adjustments to future lease payments arising from a change in applicable indices or rates, changes in the estimated amount expected to be payable under a residual value guarantee, or if we change our assessments of whether we will exercise an applicable purchase, extension or termination option. Upon any such remeasurement, a corresponding adjustment is made to the carrying amount of the related ROU asset, or is recorded in our consolidated statement of operations if the carrying amount of such ROU asset has been impaired.
We expense the costs of the low-value and short-term leases in our consolidated statement of operations on a straight-line basis over the lease term. We capitalize finance leases at their commencement, at the lower of the fair value of the leased asset
(i) Goodwill and the present value of the minimum lease payments (included in property, plant and equipment on our consolidated balance sheet), and include the corresponding liability, net of finance costs, on our consolidated balance sheet. Prior to the adoption of IFRS 16, we recognized operating lease expenses on a straight-line basis over the lease term generally in cost of sales or SG&A in our consolidated statement of operations.intangible assets:
Goodwill:
We initially record goodwill related to business acquisitions on our consolidated balance sheet in the amount of the excess of the fair value of the aggregate consideration paid or payable (including the estimated fair value of any contingent consideration) over the
fair value of the identifiable net assets acquired. In subsequent reporting periods, we measure goodwill at cost less accumulated impairment losses, if any. We do not amortize goodwill. For purposes of impairment testing, we allocate goodwill to the CGU, or group of CGUs, that we expect will benefit from the related acquisition. See note 2(j), “Impairment of goodwill, intangible assets, property, plant and equipment, and ROU assets.”.
Intangible assets:
We record acquired intangible assets on our consolidated balance sheet at fair value on the date of acquisition. We capitalize acquired intangible assets when the economic benefits associated with the asset are probable and when the cost can be measured reliably. We estimate the useful life of acquired intangible assets based on the nature of the asset, historical experience and the projected period of expected future economic benefits to be provided by the asset. In subsequent reporting periods, we measure such intangible assets at cost less accumulated amortization and accumulated impairment losses, if any. We amortize these assets on a straight-line basis over their estimated useful lives as follows:
| Intellectual property | 3 to 5 years | ||||
| Other intangible assets | 4 to 15 years | ||||
| Computer software assets | 1 to 10 years | ||||
Intellectual property assets consist primarily of certain acquired non-patented intellectual property and process technology. Other acquired intangible assets consist primarily of customer relationships and contract intangibles. Computer software assets consist primarily of software licenses. We review our estimates of residual values, useful lives and the methods of amortization annually at year end and, if required, adjust for these prospectively. We reflect changes in useful lives on a prospective basis.
F-14
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(j) Impairment of goodwill, intangible assets, PP&E, and ROU assets:
We review the carrying amount of goodwill, intangible assets, property, plantPP&E, and equipment, and commencing in 2019, ROU assets for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets, or the related CGU or CGUs, may not be recoverable. If any such indication exists, we test the carrying amount of such assets or CGUs for impairment. In addition to an assessment of triggering events during the year, we conduct an annual impairment assessment of CGUs with goodwill in the fourth quarter of each year to correspond with our annual planning cycle (Annual Impairment Assessment). Judgment is required in the determination of: (i) our CGUs, which includes an assessment of whether the relevant asset, or group of assets, largely generates independent cash inflows, and an evaluation of how management monitors the business operations pertaining to such asset, or asset group; and (ii) whether events or changes in circumstances during the year are indicators that a review for impairment should be conducted.
We recognize an impairment loss when the carrying amount of an asset, CGU or group of CGUs exceeds its recoverable amount. The recoverable amount of an asset, CGU or group of CGUs is measured as the greater of its expected value-in-use and its estimated fair value less costs of disposal. The process of determiningDetermining the recoverable amount is subjective and requires management to exercise significant judgment in estimating future growth, profitability, discount and terminal growth rates, the fair value of any real property, and in projecting future cash flows, among other factors. Determination of our expected value-in-use is based on a discounted cash flow analysis of the relevant asset, CGU or group of CGUs. The process of determining theDetermining estimated fair value less costs of disposal requires valuations and use of appraisals. Future events and changing market conditions may impact our assumptions as to prices, costs or other factors that may result in changes into our estimates of future cash flows. Where applicable, we engage independent brokers to obtain market prices to estimate our real property and other asset values. We recognize impairment losses in our consolidated statement of operations. If it is determined that an impairment exists, we first allocate the impairment losses to the relevant CGU (or group of CGUs) to reduce the carrying amount of its (or their) goodwill, if any. If the goodwill is reduced to nil and the impairment losses have not been fully allocated, we then to reduce the carrying amount of other assets in such CGU (or group of CGUs), generally on a pro-rata basis.basis, until the impairment losses have been recognized in full. See notes 6, 7, 8 and 9.8.
We do not reverse impairment losses for goodwill in future periods. We reverse impairment losses for property, plant and equipment,PP&E, ROU assets and intangible assets if the events or conditions that resulted in such losses we recognized in prior periods no longer exist or have decreased as a result of changes in circumstances. At each reporting date, we review for indicators that could change the estimates we used
to determine the recoverable amount of the relevant assets. The amount of the reversal will be limited to the carrying amount that would have been determined, net of depreciation or amortization, had we recognized no impairment loss in prior periods.
(k) Provisions:
We recognize a provision for legal or constructive obligations arising from past events when the amount can be reliably estimated and it is probable that an outflow of resources will be required to settle an obligation. The nature and type of provisions vary and management judgment is required to determine the extent of an obligation and whether the outflow of resources is probable. At the end of each reporting period, we evaluate the appropriateness of the remaining balances. We may require adjustmentsbe required to theadjust recorded amounts to reflect actual experience or changes in estimates in future periods.
Restructuring:
We incur restructuring charges relating to workforce reductions, site consolidations, and costs associated with businesses we are downsizing or exiting. Our restructuring charges include employee severance and benefit costs, consultant costs, gains, losses or impairments related to owned sites and equipment we no longer use and which are available for sale, impairment of related intangible assets, and costs or impairments related to leased sites and equipment we no longer use.
The recognition of restructuring charges requires management to make certain judgments and estimates regarding the nature, timing and amounts associated with our restructuring actions. Our assumptions include the timing of employees to be terminated,employee terminations, the measurement of termination costs, any anticipated sublease recoveries from exited sites, and the timing of dispositiondispositions, and the estimated fair values less costs of disposal for assets we no longer use and which are available for sale. We develop detailed plans and record termination costs in the period thethat employees are informed of their termination. For owned sites and equipment that are no longer in use and are available for sale, we recognize an impairment loss based on
F-15
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
their estimated fair value less costs of disposal, with estimated fair value estimated based on market prices for similar assets. We may engage third parties to assist in the determination of the estimated fair values less costs of disposal for these assets. For leased sites that we intend to exit in connection with restructuring activities, we assess the recoverability of our ROU assets, and write down such assets (recorded as restructuring charges) if the carrying value exceeds any estimated sublease recoveries. To estimate future sublease recoveries, we may engage independent brokers to determine the estimated tenant rents we can expect to realize. At the end of each reporting period, we evaluate the appropriateness of our restructuring charges and balances. Adjustments to the recorded amountsWe may be required to adjust recorded amounts to reflect actual experience or changes in estimates for future periods. See note 1615(a).
Legal and other contingencies:
In the normal course of our operations, we may be subject to lawsuits, investigations and other claims, including, but not limited to, environmental, labor, product, customer disputes, and other matters. The filing of a suit or formal assertion of a claim does not automatically trigger a requirement to record a provision. We record a provision for loss contingencies, including legal claims, based on management’s estimate of the probable outcome. Judgment is required when there is a range of possible outcomes. Management considers the degree of probability of the outcome and the ability to make a reasonable estimate of the loss. We may also use third party advisors in making our determination. The ultimate outcome, including the amount and timing of any payments required, may vary significantly from our original estimates. Potential material legal and other material contingent obligations that have not been recognized as provisions, as the outcome is remote or not probable, or the amount cannot be reliably estimated, are disclosed as contingent liabilities. See note 24.24.
Warranty:
We offer product and service warranties to our customers. We record a provision for future warranty costs based on management’s estimate of probable claims under these warranties. In determining the amount of the provision, we consider several factors including the terms of the warranty (which vary by customer, product or service), the current volume of products sold or services rendered during the warranty period, and historical warranty information. We review and adjust these estimates as necessary to reflect our experience and new information. The amount and aging of our provision will vary depending on various factors including the length of the warranty offered, the remaining life of the warranty and the extent and timing of warranty claims. We classify the portion of our warranty provision for which payment is expected in the next 12 months as current, and the remainder as non-current.
(l) Employee benefits:
Pension and non-pension post-employment benefits:
We classify pension and non-pension post-employment benefits as either defined contribution plans or defined benefit plans.
Under defined contribution plans, our obligation is to make a fixed contribution to a separate entity. The related investment risk is borne by the employee. We recognize our obligations to make contributions to defined contribution plans as an employee benefit expense in our consolidated statement of operations in the period the employee services are rendered.
Under defined benefit plans, our obligation is to provide an agreed-upon benefit to specified plan participants. We remain exposed to theboth actuarial and investment risks with respect to defined benefit plans. Our obligation is actuarially determined using the projected unit credit method, based on service and management’s estimates. Actuarial valuations require management to make certain judgments and estimates relating to salary escalation, compensation levels at the time of retirement, retirement ages, the discount rate used in measuring the net interest on the net defined benefit asset or liability, and expected healthcare costs (as applicable). These actuarial assumptions could change from period-to-period and actual results could differ materially from the estimates originally made by management. We evaluate our assumptions on a regular basis, taking into consideration current market conditions and historical data. Market drivenMarket-driven changes may affect the actual rate of return on plan assets compared to our assumptions, as well as our discount rates and other variables which could cause actual results to differ materially from our estimates. Changes in assumptions could impact our defined benefit pension plan valuations and our future defined benefit pension expense and required funding.
F-16
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
Our obligation for each defined benefit plan consists of the present value of the defined benefit obligation less the fair value of plan assets, and is presented on a net basis on our consolidated balance sheet. When the actuarial calculation results in a benefit, the asset we recognize is restricted to the present value of economic benefits available in the form of future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, we also consider any minimum funding requirements that apply to the plan. An economic benefit is available if it is realizable during the life of the plan, or on settlement of the plan liabilities.
We recognize past service costs or credits arising from plan amendments, whether vested or unvested, immediately in our consolidated statement of operations. We determine the net interest expense (income) on the net defined benefit liability (asset) for each year by applying the discount rate used to measure the defined benefit obligation at the beginning of the year to the net defined benefit liability (asset) position, taking into account any changes in the net defined benefit liability (asset) during the year as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in our consolidated statement of operations. The difference between the interest income on plan assets and the actual net return on plan assets is included in the re-measurement of the net defined benefit liability (asset). We recognize actuarial gains and losses on plan assets or obligations, as well as any year over yearyear-over-year change in the impairment of the balance sheet position in OCI and we reclassify the amounts to deficit. Curtailment gains or losses may arise from significant changes to a plan. We record curtailment gains or losses in our consolidated statement of operations when the curtailment occurs.
To mitigate the actuarial and investment risks of our defined benefit pension plans, we from time to time purchase annuities (using existing plan assets) from third party insurance companies for certain, or all, plan participants. The purchase of annuities by the pension plan substantially hedges the financial risks associated with ourthe related pension obligations. Where the annuities are purchased on behalf of, and held by the pension plan, the relevant employer retains the ultimate responsibility for the payment of benefits to plan participants, and we retain the pension assets and liabilities on our consolidated balance sheet. Our annuity purchases have resulted (and future annuity purchases may result) in losses, due to a reduction in the value of the plan assets relative to plan obligations as of the date of the annuity purchase. We record these non-cash losses in OCI on our consolidated balance sheet and simultaneously reclassify such amounts to deficit in the same period. Alternatively, where we purchase annuities from insurance companies on behalf of applicable plan participants with the intention of winding-up the relevant plan in the future (with the expectation of transferring the annuities to the individual plan members), the insurance company assumes responsibility for the payment of benefits to the relevant plan participants once the wind-up is complete. In this case, settlement accounting is applied to the purchase of the annuities and the loss (if any) is recorded in other charges in our consolidated statement of operations. In addition, both the pension assets and liabilities will be removed from our consolidated balance sheet once the wind-up of the plan is complete.
Stock-based compensation (SBC):
We generally grant restricted share units (RSUs) and performance share units (PSUs) and restricted share units (RSUs), and from time to time grant stock options, to employees under our SBC plans. Stock options and RSUs vest in installments over the vesting period. Stock options generally vest 25%one-quarter per year over a four-year period, and RSUs generally vest one-third per year over a three-year period. We treat each installment under a grant of stock options and RSUs as a separate grant in determining the compensation expense. PSUs vest at the end of their respective terms, generally three years from the grant date, to the extent that specified performance conditions have been met.
Stock options:
Stock options are exercisable for SVS. We recognize the grant date fair value of stock options granted to employees as compensation expense in our consolidated statement of operations, with a corresponding charge to contributed surplus on our consolidated balance sheet, over the vesting period. We adjust compensation expense to reflect the estimated number of options we expect to vest at the end of the vesting period. When options are exercised, we credit the proceeds to capital stock on our consolidated balance sheet. We measure the fair value of stock options using the Black-Scholes option pricing model. Measurement inputs include the price of our SVS on the grant date, the exercise price of the stock option, and our estimates of the following: expected price volatility of our SVS (based on weighted average historic volatility), weighted average expected life of the stock option (based on historical experience and general option holderoption-holder behavior), and the risk-free interest rate.
F-17
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
RSUs:
The cost we recordedrecord for RSUs is based on the market value of our SVS at the time of grant. We amortize the cost of RSUs to compensation expense in our consolidated statement of operations, with a corresponding charge to contributed surplus on our consolidated balance sheet, over the vesting period. Unless a grantee has been authorized, and elects, to settle RSUs in cash, we generally intend to settle these awards with SVS purchased in the open market by a broker, or issued from treasury.SVS.
Deferred Share Units (DSUs):
The compensation of our Board of Directors is comprised of annual Board and Board Chair retainer fees, annual Audit and Compensation Committeestanding Board committee Chair retainer fees (for the Chairs of those committees)(where applicable), and travel fees (collectively, Annual Fees)payable in quarterly installments in arrears. In 2017 and 2018, directors were required to elect to have either 75% or 100% of their Annual Fees paid in deferred share units (DSUs)arrears**. Commencing January 1, 2019, directorsDirectors must elect to receive 0%, 25% or 50% of their Annual Fees in cash, with the balance in DSUs, until such director satisfies the requirements of the Company's Director Share Ownership Guidelines. Once a director has satisfied such requirements, the director may then elect to receive 0%, 25% or 50% of their Annual Fees in cash, with the balance either in DSUs or in RSUs (if no election is made, 100% of such director's Annual Fees will be paid in DSUs). The number of DSUs or RSUs we grant is determined by dividing the elected percentage of the dollar value of the Annual Fees earned in the quarter by the closing price of our SVS on the NYSE on the last business day of such quarter.quarter (in the case of DSUs) or the trading day preceding the date of grant (in the case of RSUs). Each DSU represents the right to receive one SVS or an equivalent value in cash after the individual ceases to serve as a director, and is neither an employee of the Company, nor a director or employee of any corporation that does not deal at arm's length with the Company (Retires). DSUs granted prior to January 1, 2007 may be settled with SVS issued from treasury or purchased in the open market, or with cash (at the discretion of the Company). DSUs granted after January 1, 2007 to directors as compensation may only be settled with SVS purchased in the open market, or with cash (at the discretion of the Company). Each quarterly grant of RSUs granted to directors vestsvest ratably over a three-year period. Such RSUsperiod and are governed by the terms of our Long-Term Incentive Plan.Plan (LTIP). Each vested RSU entitles the holder thereof to one SVS; however, if permitted by the Company under the terms of the grant, a director may elect to receive a payment of cash in lieu of SVS. Unvested RSUs will vest immediately on the date the director Retires. We expense the cost of DSUs and RSUs for directorsdirector compensation through SG&A in our consolidated statement of operations in the period the services are rendered.
** Mr. Popatia is an officer of Onex Corporation (Onex) and does not receive compensation as a director of the Company; however, Onex receives compensation for providing his services as a director, payable in DSUs in equal quarterly installments in arrears. See note 17. DSUs granted to Onex prior to January 1, 2007 may be settled with SVS issued from treasury or purchased in the open market, or with cash (at the discretion of the Company). DSUs granted to Onex after January 1, 2007 may only be settled with SVS purchased in the open market, or with cash (at the discretion of the Company).
(m) Deferred financing costs:
Deferred financing costs consist of costs relating to the establishment or amendment of our credit facility.facility (including in connection with subsequent security arrangements). We defer financing costs related to our revolving facility as other assets on our consolidated balance sheet, which weand amortize tothese costs in our consolidated statement of operations on a straight-linestraight-
F-18
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
line basis over the term of the revolving facility.facility (or the remainder of the term for amendments or subsequent security arrangements). We record financing costs relating to the issuance of our term loans as a reduction to the cost of the related debt (see note 12)11), which we amortize toin our consolidated statement of operations using the effective interest rate method over the term of the related debt or when the debt is retired, if earlier.
(n) Income taxes:
Our income tax expense for aeach reporting period is comprised of current and deferred income taxes. Current income taxes and deferred income taxes are recognized in our consolidated statement of operations, except to the extent that they relate to items recognized in OCI or directly in equity, in which case the taxesthey are also recognized in OCI or directly in equity, respectively.
In the ordinary course of business, there are many transactions for which the ultimate tax outcome is uncertain until we resolve it with the relevant tax authority, which may take many years. The final tax outcome of these matters may be different
from the estimates management originally made in determining our tax provision. Management periodically evaluates the positions taken in our tax returns with respect to situations in whichwhere applicable tax rules are subject to interpretation. We establish provisions related to tax uncertainties where appropriate, based on our estimate of the amount that ultimately will be paid to or received from the tax authorities. We recognize accrued interest and penalties relating to tax uncertainties in current income tax expense. The various judgments and estimates used by management in establishing provisions related to tax uncertainties can significantly affect the amounts we recognize in our consolidated financial statements.
We use the liability method of accounting for deferred income taxes. Under this method, we recognize deferred income tax assets and liabilities for future income tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective income tax bases, and on unused tax losses and tax credit carryforwards. We measure deferred income taxes using tax rates and laws that have been enacted or substantively enacted at the reporting date and that we expect will apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. We recognize deferred income tax assets to the extent we believe it is probable, based on management’s estimates, that future taxable profit will be available against which the deductible temporary differences as well as unused tax losses and tax credit carryforwards can be utilized. Estimates of future taxable profit in different tax jurisdictions are an area of estimation uncertainty. We review our deferred income tax assets at each reporting date and reduce them to the extent we determine it is no longer probable that we will realize the related tax benefits; such reductions are reversed when the probability of future taxable profits improves. benefits. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which they can be used. We recognize the effect of a change in income tax rates in the period of enactment or substantive enactment.
We do not recognize deferred income taxes if they arise from the initial recognition of goodwill, or for temporary differences arising from the initial recognition of an asset or a liability in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss. We also do not recognize deferred income taxes on temporary differences relating to investments in subsidiaries to the extent we are able to control the timing of the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future.
During each period, we record current income tax expense or recovery based on taxable income earned or loss incurred in each tax jurisdiction where we operate, and for any adjustments to taxes payable in respect of previous years, using tax laws that are enacted or substantively enacted at the balance sheet date.
(o) Financial assets and financial liabilities:
We recognize financial assets and financial liabilities initially at fair value and subsequently measure these at either fair value or amortized cost based on their classification as described below.
Fair value through profit or loss (FVTPL):
Financial assets and any financial liabilities that we purchase or incur, respectively, with the intention of generating earnings in the near term, and derivatives other than cash flow hedges, are classified as FVTPL. This category includes short-term investments in money market funds (if applicable) that we group with cash equivalents, and derivative assets and
F-19
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
derivative liabilities that do not qualify for hedge accounting. For investments that we classify as FVTPL, we initially recognize such financial assets on our consolidated balance sheet at fair value, and recognize subsequent changes in our consolidated statement of operations.operations (unless they relate to effective hedging relationships for accounting purposes, in which case the subsequent changes are recorded in OCI). See note 2(p). We expense transaction costs related to financial instruments classified as FVTPL as incurred in our consolidated statement of operations. We do not currently hold any liabilities designated as FVTPL.
Amortized cost:
Financial assets that we hold with the intention of collecting the contractual cash flows (in the form of payment of principal and related interest) are measured at amortized cost, and includeconsist of our trade receivables,A/R, term deposits and non-customer receivables. We initially recognize the carrying amount of such assets on our consolidated balance sheet at fair value plus directly attributable transaction costs, and subsequently measure these at amortized cost using the effective interest rate method, less any impairment losses.
(p) Derivatives and hedge accounting:
We enter into forward exchange and swap contracts to hedge the cash flow risk associated with firm purchase commitments and forecasted transactions in foreign currencies that we consider to be highly probable, and to hedge foreign-currency denominated balances. We use estimates to forecast future cash flows and the future financial position of net monetary assets or liabilities denominated in foreign currencies. We enter into interest rate swap agreements to mitigate a portion of the interest rate risk on a portion of our term loan borrowings. We apply hedge accounting to those hedge transactionsrelationships that are considered effective. Management assesses the effectiveness of hedges by comparing actual outcomes against our estimates on a regular basis. Subsequent revisions in estimates of future cash flow forecasts, if significant, may result in the discontinuation of hedge accounting for that hedge. We do not enter into derivative contracts for speculative purposes.
At the inception of a hedging relationship, we formally document the relationship between our hedging instrument and the hedged item, as well as our risk management objectives and strategy for undertaking the various hedge transactions. Our process includes linking all derivatives to specific assets and liabilities on our consolidated balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, both at the hedge’s inception and at the end of each quarter, whether the derivatives used in hedged transactions are highly effective in offsetting changes in the cash flows of the hedged items. We record the gain or loss from these forward exchange and swap contracts in the same line item where the underlying exposures are recognized in our consolidated statement of operations. For our non-designated hedges against our balance sheet exposures denominated in foreign currencies, we record the gain or loss from these forward exchange and swap contracts in SG&A in our consolidated statement of operations.
Forward exchange and swap contracts that are not designated aseffective hedges for accounting purposes are marked to market each period, resulting in a gain or loss in our consolidated statement of operations. We measure allthose derivative contracts at fair value on our consolidated balance sheet. The majority of our derivative assets and liabilities arise from the foreign currency forward and swap contracts and interest rate swaps that we designate as cash flow hedges. In a cash flow hedge, we defer the changes in the fair value of the hedging derivative, to the extent effective, in accumulated OCI until we recognize the asset, liability or forecasted transactions being hedged item in our consolidated statement of operations. Any cash flow hedge ineffectiveness is recognized in our consolidated statement of operations immediately. For hedgeshedging instruments that we discontinue before the end of the original hedge term, we amortize the unrealized hedge gain or loss in accumulated OCI into our consolidated statement of operations over the remaining term of the hedge.hedging relationship or when the hedged item is recognized in net income, if this occurs prior to the end of the original term of the hedging relationship. If the hedged item ceases to exist before the end of the original hedge term, we recognize the unrealized hedge gain or loss in accumulated OCI immediately in our consolidated statement of operations. For our current foreign currency forward and swap cash flow hedges, the majority of the underlying expenses we hedge are for inventory, labour and facility costs, which are included in cost of sales.sales in our consolidated statement of operations. For our interest rate swap agreements, the underlying interest expenses that we hedge are included in finance costs in our consolidated statement of operations.
F-20
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
On December 15, 2022, we entered into a total return swap (TRS) agreement (TRS Agreement) with a third-party bank with respect to a notional amount of 3.0 million of our SVS (Notional Amount), to manage our cash flow requirements and exposure to fluctuations in the share price of the SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. The counterparty under the TRS Agreement is obligated to make a payment to us upon the agreement's termination (in whole or in part) or expiration (Settlement) based on the increase (if any) in the value of the TRS (as defined in the TRS Agreement) over the TRS Agreement’s term, in exchange for periodic payments made by us (TRS Interest) based on the counterparty’s SVS purchase costs (or the trade date value of the Notional Amount if the counterparty elects not to make hedging SVS purchases) and a variable interest rate plus a specified margin. Similarly, if the value of the TRS (as defined in the TRS Agreement) decreases over the term of the TRS Agreement, we are obligated to pay the counterparty the amount of such decrease upon Settlement. If the counterparty purchases SVS, the change in value of the TRS is determined by comparing the average amount realized by the counterparty upon the disposition of purchased SVS to the average amount paid for such SVS. If the counterparty does not purchase SVS, the change in value of the TRS is determined by comparing the trade date value of the Notional Amount to the value of the Notional Amount upon Settlement. The TRS does not qualify for hedge accounting. We measure the TRS Agreement at fair value on our consolidated balance sheet, with changes in fair value recognized in our consolidated statement of operations. TRS Interest is included in finance costs in our consolidated statement of operations.
We value our derivative assets and liabilities based on inputs that are either readily available in public markets or derived from information available in public markets. The inputs we use include discount rates, forward exchange rates, interest rate yield curves and volatility, the share price of our SVS, and credit risk adjustments. Changes in these inputs can cause significant volatility in the fair value of our financial instruments in the short-term.instruments.
(q) Impairment of financial assets:
We review financial assets for impairment at each reporting date. Financial assets are deemed to be impaired when objective evidence resulting from one or more events subsequent to the initial recognition of the asset indicates the estimated future cash flows of the asset have decreased. We use a forward-looking expected credit loss (ECL) model in determining our allowance for doubtful accounts as it relates to trade receivables, contract assets (under IFRS 15)15, Revenue from Contracts with Customers), and other financial assets. Our allowance is based on historical experience, and includes consideration of the aging of the balances, the customer's creditworthiness, current economic conditions, expectation of bankruptcies, and political and economic volatility in the markets/location of our customers, among other factors. We measure an impairment loss as the excess of the carrying amount over the present value of the estimated future cash flows discounted using the financial asset’s original discount rate, and we recognize this loss in our consolidated
statement of operations. A financial asset is written offwritten-off or written downwritten-down to its net realizable value as soon as it is knowndetermined to be impaired. We adjust previous write-downs to reflect changes in estimates or actual experience.
(r) Revenue and deferred investment costs:
We derive the majority of our revenue from the sale of electronic products and services that we manufacture and services we provide to customer specifications. We recognize revenue from the sale of products and services rendered when our performance obligations have been satisfied or when the associated control over the products has passed to the customer and no material uncertainties remain as to the collection of our receivables. Under IFRS 15, whereWhere the products are custom-made to meet a customer's specific requirements, and such customer is obligated to compensate us for the work performed to date, we recognize revenue over time as production progresses to completion, or as services are rendered. We generally estimate revenue for our work in progress based on costs incurred to date plus a reasonable profit margin for eligible products for which we do not have alternative uses. For other contracts that do not qualify for revenue recognition over time, we recognize revenue at the point in time where control is passed to the customer, which is generally upon shipment when no further performance obligation remains except for our standard manufacturing or service warranties. We apply significant estimates, judgment and assumptions in interpreting our customer contracts, determining the timing of revenue recognition and measuring work in progress. As our invoices are typically issued at the time of the delivery of final products to the customers, the earlier recognition of revenue on certain custom-made products has resulted in unbilled contract assets which we include in accounts receivable (A/R)A/R on our consolidated balance sheet.
As most of our contracts have an expected duration of one year or less, we have applied the practical expedient provided by IFRS 15.121 (such that specified disclosures pertaining to remaining performance obligations are not required), as well as the practical expedient provided by IFRS 15.63 (such that transaction price adjustments for the effects of
F-21
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
significant financing are not required). In general, consideration from our contracts with customers is not excluded from the transaction price used to measure revenue.
We record certain investment costs, comprised of contract acquisition or fulfillment costs, to the extent we consider the recoverability of these costs is probable, in other current and non-current assets on our consolidated balance sheet. We subsequently amortize these investment costs over the projected period of expected future economic benefits, or as recoveries are realized, from the new contracts. We monitor these deferred costs for potential impairment on a regular basis.
We receive governmental subsidies, grants and credits (collectively, Subsidies), from time to time related to operating expenditures or equipment purchases. We recognize such Subsidies when there is reasonable assurance that we qualify for, and have complied with the conditions of, the Subsidy, and that the Subsidy will be received. If we receive a Subsidy but cannot reasonably assure that we have complied with its conditions, we will defer recognition of the Subsidy and record a liability on our consolidated balance sheet until the conditions are fulfilled. For Subsidies that relate to operating expenditures, we recognize the Subsidy as a reduction to the expenditure that the Subsidy was intended to offset, in the period the cost is incurred or when the conditions are fulfilled if they were not met when the costs were incurred. For Subsidies that relate to the purchase of equipment, we reduce the cost of the asset in the period the cost is incurred or when the conditions are fulfilled if they were not met when the costs were incurred, and we calculate amortization on the net amount. See note 23.
3. ACQUISITIONS:
| Atrenne | Impakt | |||||
| Current assets*, net of cash acquired ($1.1 for Atrenne and $5.9 for Impakt) | $ | 31.5 | $ | 49.2 | ||
| Property, plant and equipment and other long-term assets | 7.8 | 20.6 | ||||
| Customer intangible assets and computer software assets | 51.0 | 219.3 | ||||
| Goodwill | 62.6 | 112.6 | ||||
| Current liabilities | (8.5 | ) | (25.8 | ) | ||
| Deferred income taxes and other-long-term liabilities | (4.1 | ) | (51.8 | ) | ||
| $ | 140.3 | $ | 324.1 | |||
| Accounts receivable and other current assets | $ | 68.9 | ||||||||||||
| Inventories | 83.6 | |||||||||||||
| PP&E | 22.8 | |||||||||||||
| Customer intangible assets | 176.1 | |||||||||||||
| Other non-current assets | 6.9 | |||||||||||||
| Goodwill | 123.8 | |||||||||||||
| Accounts payable and accrued liabilities | (121.3) | |||||||||||||
| Other current liabilities | (8.1) | |||||||||||||
| Deferred income taxes and other long-term liabilities | (38.0) | |||||||||||||
| $ | 314.7 | |||||||||||||
We engaged third-party consultants to provide valuations of certain inventory, property, plant and equipmentPP&E and intangible assets in connection with our purchasesacquisition of Atrenne and Impakt.PCI. The fair value of the acquired tangible assets was measured based on their value in-use, by applying the market (sales comparison, brokers' quotes), cost or replacement cost, or the income (discounted cash flow) approach, as deemed appropriate. The valuation of the intangible assets by the third-party consultants was primarily based on the income approach using a discounted cash flow model and forecasts based on management's subjective estimates and assumptions. Various Level 2 and 3 data inputs of the fair value measurement hierarchy (described(defined in note 21)20) were used in the valuation of thesethe foregoing assets. Annual amortization of intangible assets increased by approximately $6$18 as a result of the Atrenne acquisitionPCI acquisition.
F-22
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and approximately $15 as a resultper share amounts)
We recorded $0.4 of the Impakt acquisition.
A/R sales program and supplier financing programs (SFPs):
We are party to an A/R sales program agreement with a third-party bank to sell up to $250.0$405.0 (as amended in September 2022 to increase the previous limit of $300.0) in A/R on an uncommitted, revolving basis, (subjectsubject to pre-determined limits by customer)customer. This agreement provides for automatic annual one-year extensions (and was so extended in March 2022 and 2023). This agreement may be terminated at any time by the bank or by us upon 3 months’ prior notice, or by the bank upon specified defaults. We are required to two third-party banks was scheduledcomply with covenants, including those relating to expirethe fulfillment of payment obligations and restrictions on the sale, assignment or creation of liens, with respect to A/R sold under this agreement. At December 31, 2022 and December 31, 2021, we were in November 2019, but was extended to January 15, 2020 pursuant to its terms, at which time it expired. Based on a review ofcompliance with these covenants. Under our requirements at that time, we reduced theA/R sales program, limitwe continue to collect cash from $250.0our customers and remit amounts collected to $200.0 during the extension period. In addition,bank weekly.
As of December 31, 2022, we participate in twothree customer SFPs, (oneone with a CCS segment customer and two with ATS segment customers (including a PCI customer commencing in November 2021). Pursuant to the fourth quarter of 2019 (Q4 2019), one with an ATS segment customer), pursuant to whichSFPs, we sell A/R from the relevant customer to third-party banks on an uncommitted basis. At December 31, 2019, we sold $90.6 of A/R under our A/R sales program (December 31, 2018 — $130.0)The SFPs have indefinite terms and $50.4 of A/R undermay be terminated at any time by the SFPs (December 31, 2018 — $50.0).customer or by us upon specified prior notice. We utilize the SFPs to substantially offset the effect of extended payment terms required by these customers on our working capital for the period. Under our previous A/R sales program (and the current one described below), we collect cash from our customers, and remit the cash to the banks once collected. Under our SFPs, the third-party banks collect the relevant receivables directly from the customers.
At December 31, 2022, we sold $245.6 of A/R (December 31, 2021 — $45.8) under our previous A/R sales program and based on a recent review$105.6 of our requirements, we entered into an agreement in March 2020 with a new third-party bank to sell up to $235.0 in A/R (based on currently approved obligors) on an uncommitted basis, subject to pre-determined limits by customer. This agreement provides for a one-year term, with automatic annual one-year extensions, and may be terminated at any time by the bank or by us upon 3 month’s prior notice, or by the bank upon specified defaults.(December 31, 2021 — $98.0) under our SFPs.
The A/R sold under the foregoingeach of these programs are de-recognized from our A/R balance, and 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 A/R to the banks. We payA/R are sold net of discount charges, which we recordare recorded as finance costs in our consolidated statement of operations.
Contract assets:
At December 31, 2019,2022, our A/R balance included $226.7$292.9 (December 31, 2021 — $253.5) of contract assets recognized as revenue under IFRS 15, Revenue from Contractsin accordance with Customers (December 31, 2018 — $267.8).our revenue recognition accounting policy.
5. INVENTORIES:
Inventories are comprised of the following:
| December 31 | |||||||||||
| 2021 | 2022 | ||||||||||
| Raw materials | $ | 1,585.8 | $ | 2,130.6 | |||||||
| Work in progress | 71.2 | 84.1 | |||||||||
| Finished goods | 40.0 | 135.6 | |||||||||
| $ | 1,697.0 | $ | 2,350.3 | ||||||||
| December 31 | |||||||
| 2018 | 2019 | ||||||
| Raw materials | $ | 948.8 | $ | 868.3 | |||
| Work in progress | 101.5 | 77.1 | |||||
| Finished goods | 39.6 | 46.8 | |||||
| $ | 1,089.9 | $ | 992.2 | ||||
We record inventory provisions, net of valuation recoveries, in cost of sales. Inventory provisions reflect write-downs in the value of our inventory to net realizable value, and valuation recoveries primarily reflect realized gains on the disposition of previously written-down inventory. During 2019,2022, we recorded net inventory provisionswrite-downs of $4.1 (2018 — $13.5; 2017 — $3.3), comprised of new provisions (approximately$30.5, approximately two-thirds of which related to specified aged inventory in our ATS segment), which were partiallysegment. During 2021, we recorded net inventory write-downs of $4.9, consisting of $7.2 in inventory write-downs pertaining to our ATS segment, offset in part by $5.8$2.3 of valuation recoveries (relatively equalin our CCS segment. During 2020, we recorded net inventory write-downs of $17.0, split approximately evenly between our two segments) recorded in Q4 2019. Our net inventory provisions for 2018 were primarily due to increases in our overall aged inventory levels as compared to 2017, more than half of which related to customers in our ATS segment, comprised of new provisions which were partially offset by $4.6 of valuation recoveries recorded in the fourth quarter of 2018. We regularly review our estimates and assumptions used to value our inventory through analysis of historical performance.
F-23
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
We receive cash deposits from certain of our customers primarily to help mitigate the impact of higher inventory levels carried due to the current constrained materials environment, and to reduce risks related to excess and/or obsolete inventory. Such deposits as of December 31, 2022 totaled $825.6 (December 31, 2021 — $434.0), and were recorded in accrued and other current liabilities on our consolidated balance sheet.
6. PROPERTY, PLANT AND EQUIPMENT:
PP&E are comprised of the following:
| 2021 | |||||||||||||||||
| Cost | Accumulated Depreciation and Impairment | Net Book Value | |||||||||||||||
| Land | $ | 35.2 | $ | 12.0 | $ | 23.2 | |||||||||||
| Buildings including improvements | 383.5 | 228.0 | 155.5 | ||||||||||||||
| Machinery and equipment | 739.7 | 579.7 | 160.0 | ||||||||||||||
| $ | 1,158.4 | $ | 819.7 | $ | 338.7 | ||||||||||||
| 2022 | |||||||||||||||||
| Cost | Accumulated Depreciation and Impairment | Net Book Value | |||||||||||||||
| Land | $ | 34.2 | $ | 12.0 | $ | 22.2 | |||||||||||
| Buildings including improvements | 374.6 | 235.5 | 139.1 | ||||||||||||||
| Machinery and equipment | 808.2 | 598.0 | 210.2 | ||||||||||||||
| $ | 1,217.0 | $ | 845.5 | $ | 371.5 | ||||||||||||
| 2018 | |||||||||||
| Cost | Accumulated Depreciation and Impairment | Net Book Value | |||||||||
| Land | $ | 26.8 | $ | 12.0 | $ | 14.8 | |||||
| Buildings including improvements | 375.5 | 218.0 | 157.5 | ||||||||
| Machinery and equipment | 781.2 | 588.2 | 193.0 | ||||||||
| $ | 1,183.5 | $ | 818.2 | $ | 365.3 | ||||||
| 2019 | |||||||||||
| Cost | Accumulated Depreciation and Impairment | Net Book Value | |||||||||
| Land | $ | 35.6 | $ | 12.0 | $ | 23.6 | |||||
| Buildings including improvements | 351.7 | 197.1 | 154.6 | ||||||||
| Machinery and equipment | 720.8 | 544.0 | 176.8 | ||||||||
| $ | 1,108.1 | $ | 753.1 | $ | 355.0 | ||||||
The following table details the changes to the net book value of property, plant and equipmentPP&E for the years indicated:
| Note | Land | Buildings including Improvements | Machinery and Equipment | Total | ||||||||||||||||||||||
| Balance — January 1, 2021 | $ | 24.2 | $ | 150.4 | $ | 157.9 | $ | 332.5 | ||||||||||||||||||
| Additions | — | 11.0 | 47.2 | 58.2 | ||||||||||||||||||||||
| Acquisitions through business combinations | 3 | — | 17.8 | 5.0 | 22.8 | |||||||||||||||||||||
| Depreciation | — | (22.0) | (46.8) | (68.8) | ||||||||||||||||||||||
Write-down of assets and other disposals(i) | — | (0.8) | (3.1) | (3.9) | ||||||||||||||||||||||
| Foreign exchange and other | (1.0) | (0.9) | (0.2) | (2.1) | ||||||||||||||||||||||
| Balance — December 31, 2021 | 23.2 | 155.5 | 160.0 | 338.7 | ||||||||||||||||||||||
| Additions | — | 16.5 | 99.7 | 116.2 | ||||||||||||||||||||||
| Depreciation | — | (22.1) | (47.1) | (69.2) | ||||||||||||||||||||||
Write-down of assets and other disposals (i)(ii) | — | (10.1) | (2.0) | (12.1) | ||||||||||||||||||||||
| Foreign exchange and other | (1.0) | (0.7) | (0.4) | (2.1) | ||||||||||||||||||||||
| Balance — December 31, 2022 | $ | 22.2 | $ | 139.1 | $ | 210.2 | $ | 371.5 | ||||||||||||||||||
(i) Includes write-downs of equipment related to disengaged programs in 2021 and 2022 (recorded in each case as restructuring charges), as described in note 15(a).
| Note | Land | Buildings including Improvements | Machinery and Equipment | Total | ||||||||||||
| Balance — January 1, 2018 | $ | 11.1 | $ | 141.6 | $ | 171.2 | $ | 323.9 | ||||||||
| Additions | — | 25.4 | 62.3 | 87.7 | ||||||||||||
| Acquisitions through business combinations | 3 | 3.6 | 10.8 | 13.9 | 28.3 | |||||||||||
| Depreciation | — | (20.4 | ) | (53.3 | ) | (73.7 | ) | |||||||||
| Write down of assets and other disposals | — | — | (0.9 | ) | (0.9 | ) | ||||||||||
| Foreign exchange and other | 0.1 | 0.1 | (0.2 | ) | — | |||||||||||
Balance — December 31, 2018 (i) | 14.8 | 157.5 | 193.0 | 365.3 | ||||||||||||
| Transferred from assets held for sale | 6 | 11.2 | 1.7 | — | 12.9 | |||||||||||
| Additions | — | 21.7 | 55.1 | 76.8 | ||||||||||||
Adjustment through business combinations (ii) | 3 | — | — | (0.3 | ) | (0.3 | ) | |||||||||
| Depreciation | — | (20.1 | ) | (53.2 | ) | (73.3 | ) | |||||||||
Write down of assets and other disposals (iii) (iv) | (2.5 | ) | (6.1 | ) | (17.6 | ) | (26.2 | ) | ||||||||
| Foreign exchange and other | 0.1 | (0.1 | ) | (0.2 | ) | (0.2 | ) | |||||||||
Balance — December 31, 2019 (i) | $ | 23.6 | $ | 154.6 | $ | 176.8 | $ | 355.0 | ||||||||
We review the carrying amount of property, plant and equipmentPP&E for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets (or the related CGU or CGUs) may not be recoverable. If any such indication exists, we test the carrying amount of such assets or CGUs for impairment. We did not identify any triggering event during the course of 2017 to 2019 indicating that the carrying amount of such assets or CGUs may not be recoverable. However, we recorded non-cash restructuring charges: (i) in 2017, to write down our then-remaining solar panel manufacturing equipment; (ii) in 2018, to reflect losses on the sale of surplus equipment; and (iii) in 2019, to write-down certain equipment primarily related to our capital equipment business and disengaged programs, in each case in connection with our restructuring activities. See note 16(a).
| Land | Buildings | Other | Total | ||||||||||||
| Balance — January 1, 2019 | $ | 7.3 | $ | 103.5 | $ | 0.7 | $ | 111.5 | |||||||
| Additions | — | 27.5 | 2.1 | 29.6 | |||||||||||
| Depreciation | (0.6 | ) | (31.6 | ) | (0.3 | ) | (32.5 | ) | |||||||
Write down of assets and lease terminations(i) | — | (4.7 | ) | — | (4.7 | ) | |||||||||
| Foreign exchange and other | 0.3 | — | (0.1 | ) | 0.2 | ||||||||||
| Balance — December 31, 2019 | $ | 7.0 | $ | 94.7 | $ | 2.4 | $ | 104.1 | |||||||
F-24
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
event during the course of 2020 through 2022 indicating that the carrying amount of such assets or related CGUs may not be recoverable. The accounting treatment of a building and equipment destroyed in a fire event in June 2022 is described in notes 15 and 26.
7. RIGHT-OF-USE ASSETS:
The following table details the changes to the net book value of ROU assets during the periods shown:
| Land | Buildings | Other | Total | ||||||||||||||||||||
| Balance — January 1, 2021 | $ | 7.1 | $ | 91.7 | $ | 2.2 | $ | 101.0 | |||||||||||||||
Additions (i) | 0.1 | 42.1 | 0.4 | 42.6 | |||||||||||||||||||
| Additions through business combination (note 3) | 4.3 | 0.8 | — | 5.1 | |||||||||||||||||||
| Depreciation | (0.5) | (31.0) | (0.5) | (32.0) | |||||||||||||||||||
Write-down of assets and lease terminations(ii) | — | (0.3) | — | (0.3) | |||||||||||||||||||
| Foreign exchange and other | (0.3) | (2.3) | — | (2.6) | |||||||||||||||||||
| Balance — December 31, 2021 | 10.7 | 101.0 | 2.1 | 113.8 | |||||||||||||||||||
Additions (i) | — | 63.0 | 0.4 | 63.4 | |||||||||||||||||||
| Depreciation | (0.6) | (34.3) | (0.5) | (35.4) | |||||||||||||||||||
Write-down of assets and lease terminations(ii) | — | (0.7) | — | (0.7) | |||||||||||||||||||
| Foreign exchange and other | — | (2.2) | (0.1) | (2.3) | |||||||||||||||||||
| Balance — December 31, 2022 | $ | 10.1 | $ | 126.8 | $ | 1.9 | $ | 138.8 | |||||||||||||||
(i) Represents new leases and lease renewals as result of extension of lease terms. Additions for 2021 were reduced by $0.4 in tenant improvement allowances that we received in connection with a building lease for one of our Atrenne sites.
(ii) Represents the write-down (in each case as restructuring charges) of certain ROU assets in connection with restructuring actions. See note 15(a).
We review the carrying amount of ROU assets for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets (or the related CGU or CGUs) may not be recoverable. If any such indication exists, we test the carrying amount of such assets or CGUs for impairment. We did not identify any triggering event during the course of 20192020, 2021 or 2022 indicating that the carrying amount of our ROU assets or related CGUs may not be recoverable. recoverable.However, we recorded non-cash restructuring charges in 2019such years to write-down certain ROU assets related to vacated properties, resulting in part (in 2020) from certain sublet recoveries that were lower than the carrying value of the related leases (Sublet Losses), in connection with actions pertaining to our cost efficiency initiative. Seerestructuring activities, as described in footnote (ii) above and in note 16(a)15(a).
8. GOODWILL AND INTANGIBLE ASSETS: |
Goodwill and intangible assets are comprised of the following:
| 2018 | 2021 | |||||||||||||||||||||||||||
| Cost | Accumulated Amortization and Impairment | Net Book Value | Cost | Accumulated Amortization and Impairment | Net Book Value | |||||||||||||||||||||||
| Goodwill | $ | 253.8 | $ | 55.4 | $ | 198.4 | Goodwill | $ | 379.6 | $ | 55.4 | $ | 324.2 | |||||||||||||||
| Intellectual property | $ | 111.3 | $ | 111.3 | $ | — | Intellectual property | $ | 111.3 | $ | 111.3 | $ | — | |||||||||||||||
| Other intangible assets | 508.0 | 238.2 | 269.8 | Other intangible assets | 676.6 | 305.1 | 371.5 | |||||||||||||||||||||
| Computer software assets | 290.1 | 276.3 | 13.8 | Computer software assets | 298.8 | 288.3 | 10.5 | |||||||||||||||||||||
| $ | 909.4 | $ | 625.8 | $ | 283.6 | $ | 1,086.7 | $ | 704.7 | $ | 382.0 | |||||||||||||||||
| 2019 | |||||||||||
| Cost | Accumulated Amortization and Impairment | Net Book Value | |||||||||
| Goodwill | $ | 253.7 | $ | 55.4 | $ | 198.3 | |||||
| Intellectual property | $ | 111.3 | $ | 111.3 | $ | — | |||||
| Other intangible assets | 503.2 | 260.9 | 242.3 | ||||||||
| Computer software assets | 291.1 | 282.1 | 9.0 | ||||||||
| $ | 905.6 | $ | 654.3 | $ | 251.3 | ||||||
| Note | Goodwill | Other Intangible Assets | Computer Software Assets | Total | ||||||||||||
| Balance — January 1, 2018 | $ | 23.2 | $ | 10.4 | $ | 11.2 | $ | 44.8 | ||||||||
| Additions | — | — | 3.3 | 3.3 | ||||||||||||
| Acquisitions through business combinations | 3 | 175.2 | 271.0 | 3.0 | 449.2 | |||||||||||
| Amortization | — | (11.6 | ) | (3.8 | ) | (15.4 | ) | |||||||||
| Foreign exchange and other | — | — | 0.1 | 0.1 | ||||||||||||
| Balance — December 31, 2018 | 198.4 | 269.8 | 13.8 | 482.0 | ||||||||||||
| Additions | — | — | 1.8 | 1.8 | ||||||||||||
Adjustment through business combinations(i) | 3 | — | (3.0 | ) | (0.7 | ) | (3.7 | ) | ||||||||
| Amortization | — | (24.6 | ) | (5.0 | ) | (29.6 | ) | |||||||||
| Write down of assets | — | — | (0.8 | ) | (0.8 | ) | ||||||||||
| Foreign exchange and other | (0.1 | ) | 0.1 | (0.1 | ) | (0.1 | ) | |||||||||
| Balance — December 31, 2019 | $ | 198.3 | $ | 242.3 | $ | 9.0 | $ | 449.6 | ||||||||
F-25
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| 2022 | |||||||||||||||||
| Cost | Accumulated Amortization and Impairment | Net Book Value | |||||||||||||||
| Goodwill | $ | 377.2 | $ | 55.4 | $ | 321.8 | |||||||||||
| Intellectual property | $ | 111.3 | $ | 111.3 | $ | — | |||||||||||
| Other intangible assets | 679.3 | 342.1 | 337.2 | ||||||||||||||
| Computer software assets | 300.7 | 291.4 | 9.3 | ||||||||||||||
| $ | 1,091.3 | $ | 744.8 | $ | 346.5 | ||||||||||||
The following table details the changes to the net book value of goodwill and intangible assets for the years indicated:
| Note | Goodwill | Other Intangible Assets | Computer Software Assets | Total | ||||||||||||||||||||||
| Balance — January 1, 2021 | $ | 198.6 | $ | 220.6 | $ | 8.8 | $ | 428.0 | ||||||||||||||||||
| Additions | — | — | 5.0 | 5.0 | ||||||||||||||||||||||
| Acquisitions through business combinations | 3 | 126.0 | 173.4 | — | 299.4 | |||||||||||||||||||||
| Amortization | — | (22.5) | (3.0) | (25.5) | ||||||||||||||||||||||
| Foreign exchange and other | (0.4) | — | (0.3) | (0.7) | ||||||||||||||||||||||
| Balance — December 31, 2021 | 324.2 | 371.5 | 10.5 | 706.2 | ||||||||||||||||||||||
| Additions | — | — | 1.9 | 1.9 | ||||||||||||||||||||||
Adjustment to acquisitions through business combination (i) | 3 | (2.2) | 2.7 | — | 0.5 | |||||||||||||||||||||
| Amortization | — | (37.0) | (3.1) | (40.1) | ||||||||||||||||||||||
| Foreign exchange and other | (0.2) | — | — | (0.2) | ||||||||||||||||||||||
| Balance — December 31, 2022 | $ | 321.8 | $ | 337.2 | $ | 9.3 | $ | 668.3 | ||||||||||||||||||
(i) In Q1 2022, we finalized the PCI purchase price allocation. In connection therewith, we adjusted our preliminary purchase price allocation by, among other things, increasing the carrying value of customer intangible assets by $2.7, and decreasing goodwill by $2.2. See note 3.
We review the carrying amountamounts of goodwill and intangible assets for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets (or the related CGU or CGUs) may not be recoverable. If any such indication exists, we test the carrying amount of such assets or CGUs for impairment. No triggering events occurred during 2020, 2021 or 2022. However, see note 15(a) below for a description of write-downs of specified equipment and ROU and other assets during such three-year period in connection with our restructuring activities. In addition to an assessment of triggering events during the year, we conduct an Annual Impairment Assessment of CGUs with goodwill in the fourth quarter of each year. We recorded no impairment charges against goodwill or intangible assets during 2017 to 2019, or as a result of our 2017, 20182020, 2021 or 20192022 Annual Impairment Assessments. However, see note 16(a) for a discussion of non-cash restructuring charges recorded in 2017 to 2019 to write-down certain equipment and ROU assets in connection with our restructuring activities.
For our Annual Impairment Assessments,we useduse cash flow projections based primarily on our plan for the following year, and, to a lesser extent, on our three-year strategic plan, and other financial projections. Our plans, which are primarily based on financial projections submitted by our subsidiaries along with input from our customer teams, are reviewed by various levels of management as part of our annual planning cycle. TheOur three-year strategic plan and other financial projections were presented to our Board of Directors in July 2022. Our plan for 2020 (used for our 2019 Annual Impairment Assessment)2023 was approved by management and presented to our Board of Directors in December 2019.2022.
Determining the recoverable amount of a CGU is subjective and requires management to exercise significant judgment in estimating, among other things, future growth,revenue, profitability, and discount and terminal growth rates, among other factors.rates. The assumptions used in our 20192022 Annual Impairment Assessment were determined based on past experiences adjusted for expected changes in future conditions. Where applicable, we also engaged independent brokers to obtain market prices to
F-26
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
estimate our real property and other asset values. For our 20192022 Annual Impairment Assessment, we used cash flow projections over a 5-year period, and applied a perpetuity growth rate of 2% thereafter (consistent with long-term inflation guidance).
Our goodwill balance at December 31, 20192022 was $198.3$321.8 (December 31, 20182021 — $198.4;$324.2; December 31, 20172020 — $23.2)$198.6). Our capital equipmentAt December 31, 2022, our Capital Equipment CGU consistsconsisted of $112.5$112.2 of goodwill attributable to our November 2018 acquisition of Impakt in November 2018 and $19.5 attributable to prior acquisitions. Ouracquisitions; our A&D CGU consistsconsisted of goodwill of $3.7 attributable to our November 2016 acquisition of Lorenz, Inc. and Suntek Manufacturing Technologies, SA de CV collectively known as Karel Manufacturing. Our Atrenne CGU consists of goodwill of(Karel Manufacturing), and $62.6 attributable to our April 2018 acquisition of Atrenne acquisition. See note 3Integrated Solutions, Inc. (commencing in 2022, our Atrenne CGU merged into our A&D CGU); and our PCI CGU consisted of goodwill of $123.8 attributable to our November 2021 acquisition of PCI.
During 2022, we merged our Atrenne CGU into our A&D CGU due to a change in the pattern of cash inflows resulting from the following factors: (i) a reallocation of manufacturing equipment and implementation of program transfers among these businesses to better address customer requirements; (ii) the integration of certain business processes; and (iii) the consolidation of their management reporting structures. Given the common customers and site usage of these businesses, we have centralized relevant resource allocation between them into a combined A&D CGU, such that core manufacturing assets are shared to generate revenues on an integrated basis and fulfill orders for further details.common customers. As a result, the individual manufacturing sites no longer generate independent cash inflows.
We used the following assumptions for purposes of our Annual Impairment Assessments of goodwill for the periods shown:
| Assumption | Capital Equipment CGU | A&D CGU(iii) | Atrenne CGU(iii) | PCI CGU | |||||||||||||||||
Annual revenue growth rate | 2021 — 10% over 5 year period; 2020 — 13% over 5 year | 2022 — | 2022 — N/A(iii); 2021 — 19% over 5 year period; 2020 — 9% over | 2022 — 2021 — | 2020 — N/A | ||||||||||||||||
| Average annual CGU margins over the 5-year period | 2022 — above total company margin(i); 2021 — above total company 2020 — above total company | 2022 —slightly above total company margin(i); 2021 — slightly above total company | 2020 — slightly above total company | 2022 — | 2021 — above total company 2020 — above total company | 2022 — above total company margin(i); 2021 — above total company margin(i); 2020 — N/A | |||||||||||||||
Discount rate (ii) | 2021 — 11%; 2020 — 12% | 2022 — 12%; 2021 — 11%; 2020 — 11% | 2022 — N/A (iii); 2021 — 10%; 2020 — 10% | 2022 — 15%; 2021 — 15%; 2020 — N/A | |||||||||||||
(ii) For 2022, the pre-tax discount rate by CGU is as follows: Capital Equipment CGU 18%; A&D CGU 15%; and PCI CGU 18%.
(iii) Commencing in 2022, our capital equipmentAtrenne CGU generatedmerged into our A&D CGU, and is no longer a net operating loss in 2019,separate CGU. As a result, our assumptions for this CGU for our 20192022 Annual Impairment Assessment reflectfor our expectation of market recovery in the capital equipmentA&D CGU includes our Atrenne business.
Future growth in revenue and margins arefor these CGUsis supported by new business awarded recently, near-term customer forecasts, improvedassumptions for additional future program wins based on our current revenue pipeline, margin improvements based on restructuring actions implemented and external industry outlooks. Assumptions for our 2022 Annual Impairment Assessment for all of our CGUs reflect market interest rate increases in 2022. In addition, assumptions for our 2022 Annual Impairment Assessment for: (i) our Capital Equipment CGU include an expected market demand decrease in the near term and risks related to increased global trade regulations, but strong business growth over the long term; (ii) our A&D CGU reflect industry expectations for a recovery of demand as we continue to recover from the negative impact of COVID-19; and (iii) our PCI CGU include expected synergies as we continue to integrate PCI into our other businesses.
F-27
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
Future events and changing market conditions may impact our assumptions as to prices, costs or other factors that may result in changes to our estimates of future cash flows. Failure to realize the assumed revenues at an appropriate profit margin of a CGU could result in impairment losses in such CGU in future periods especially with respect to our capital equipment CGU.
9. OTHER NON-CURRENT ASSETS:
| December 31 | ||||||||||||||
| Note | 2021 | 2022 | ||||||||||||
| Net pension assets | 18 | $ | 5.1 | $ | 7.1 | |||||||||
| Land rights | 8.9 | 7.3 | ||||||||||||
| Deferred investment costs | 2.4 | 1.7 | ||||||||||||
| Deferred financing costs | 2.3 | 1.5 | ||||||||||||
| Interest rate swap derivative | 20 | 0.5 | 18.7 | |||||||||||
| Other | 6.0 | 17.2 | ||||||||||||
| $ | 25.2 | $ | 53.5 | |||||||||||
| December 31 | ||||||||
| Note | 2018 | 2019 | ||||||
| Net pension assets | 19 | $ | 4.5 | $ | 5.1 | |||
| Land rights | 10.1 | 9.7 | ||||||
| Deferred investment costs | 2.9 | 1.9 | ||||||
| Deferred financing costs | 2.1 | 2.2 | ||||||
| Other | 10.6 | 7.5 | ||||||
| $ | 30.2 | $ | 26.4 | |||||
Our provisions include restructuring, warranty, legal and other provisions. We have included a description of our restructuring, warranty and legal provisions (described in note 2(k)). We include details of our restructuring provision in note 1615(a). The following chart details the changes in our provisions for the year indicated:
| Restructuring | Warranty | Legal (i) | Other(ii) | Total | |||||||||||||||||||||||||
| Balance — December 31, 2021 | $ | 6.1 | $ | 29.0 | $ | 0.8 | $ | 9.2 | $ | 45.1 | |||||||||||||||||||
| Provisions | 8.4 | 11.8 | — | 0.2 | 20.4 | ||||||||||||||||||||||||
Reversal of prior year provisions(iii) | — | (4.2) | — | — | (4.2) | ||||||||||||||||||||||||
| Payments/usage | (8.9) | (4.5) | — | (0.4) | (13.8) | ||||||||||||||||||||||||
| Accretion, foreign exchange and other | 0.2 | (0.3) | — | (0.4) | (0.5) | ||||||||||||||||||||||||
| Balance — December 31, 2022 | $ | 5.8 | $ | 31.8 | $ | 0.8 | $ | 8.6 | $ | 47.0 | |||||||||||||||||||
| Current | $ | 5.8 | $ | 11.3 | $ | 0.8 | $ | — | $ | 17.9 | |||||||||||||||||||
Non-current(iv) | — | 20.5 | — | 8.6 | 29.1 | ||||||||||||||||||||||||
| December 31, 2022 | $ | 5.8 | $ | 31.8 | $ | 0.8 | $ | 8.6 | $ | 47.0 | |||||||||||||||||||
| Restructuring | Warranty | Legal (i) | Other(ii) | Total | |||||||||||||||
| Balance — December 31, 2018 | $ | 10.3 | $ | 18.7 | $ | 1.1 | $ | 7.5 | $ | 37.6 | |||||||||
| Provisions | 28.9 | 11.2 | — | 0.6 | 40.7 | ||||||||||||||
Reversal of prior year provisions(iii) | (0.8 | ) | (3.0 | ) | — | (0.3 | ) | (4.1 | ) | ||||||||||
| Payments/usage | (26.5 | ) | (5.0 | ) | — | (0.4 | ) | (31.9 | ) | ||||||||||
| Accretion, foreign exchange and other | (0.7 | ) | 0.2 | (0.1 | ) | 0.2 | (0.4 | ) | |||||||||||
| Balance — December 31, 2019 | $ | 11.2 | $ | 22.1 | $ | 1.0 | $ | 7.6 | $ | 41.9 | |||||||||
| Current | $ | 11.2 | $ | 13.5 | $ | 1.0 | $ | 0.4 | $ | 26.1 | |||||||||
Non-current(iv) | — | 8.6 | — | 7.2 | 15.8 | ||||||||||||||
| December 31, 2019 | $ | 11.2 | $ | 22.1 | $ | 1.0 | $ | 7.6 | $ | 41.9 | |||||||||
(ii) Other represents our asset retirement obligations relating to properties that we currently lease.
(iii) During 2022, we reversed prior year warranty provisions primarily as a result of expired warranties and changes in estimated costs based on historical experience.
(iv) Non-current balances are included in provisions and other non-current liabilities on our consolidated balance sheet.
At the end of each reporting period, we evaluate the appropriateness of our provisions, and make adjustments may be madeas required to reflect actual experience or changes in our estimates.
11. CREDIT FACILITIES AND LEASE OBLIGATIONS:
We are party to a credit agreement (Credit Facility) with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which as of a December 6, 2021 amendment thereto, includes a term loan in the original principal amount of $350.0 (Initial Term Loan), a term loan in the original principal amount of $365.0 (Incremental Term Loan), and a $600.0 revolving credit facility (Revolver). Prior to such amendment, the Credit Facility included the Initial Term Loan, a term loan in the original principal amount of $250.0 (Terminated Term Loan), the outstanding borrowings under which were fully repaid on December 6, 2021 with a portion of the proceeds of the Incremental Term Loan, and commitments of $450.0 under the Revolver. The Initial Term Loan and the Incremental Term Loan are collectively referred to as the Term Loans.
F-28
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
The Initial Term Loan requires quarterly principal repayments of $0.875, commencing September 30, 2018,was unchanged by the December 2021 amendment to the Credit Facility, and continues to mature in June 2025. The Incremental Term Loan and the Revolver each mature on March 28, 2025, unless either (i) the Initial Term Loan has been prepaid or refinanced or (ii) commitments under the Revolver are available and have been reserved to repay the Initial Term Loan in full, in which case such obligations mature on December 6, 2026.
The Incremental Term Loan requires quarterly principal repayments of $0.625, commencing March 31, 2019,$4.5625, and in each caseof the Term Loans requires a lump sum repayment of the remainder outstanding at maturity. Commencing in 2020, weThe Initial Term Loan required quarterly principal repayments of $0.875, all of which were paid by the end of the first half of 2020. We are also required to make an annual prepayment ($107.0 in 2020)prepayments of outstanding obligations under the Credit Facility (applied first to the Term Loans, then to the Revolver, in the manner set forth in the Credit Facility) ranging from 0% — 50% (based on a defined leverage ratio) of specified excess cash flow (as defined in the Credit Facility)(ECF) for the prior fiscal year. The Toronto Proceeds (note 7)A mandatory prepayment of $107.0 (ECF Amount) was required and paid during the first half of 2020 based on this provision. No prepayments based on ECF were includedrequired in the determination of excess cash flow for 2019.2021 or 2022, or will be required in 2023. In addition, prepayments of outstanding obligations under the Credit Facility (applied as described above) may also be required in the amount of specified net cash proceeds received above a specified annual threshold (including proceeds from the disposal of certain assets, but excludingassets). No Credit Facility prepayments based on net cash proceeds were required in 2020, 2021 or 2022, or will be required in 2023. Any outstanding amounts under the Toronto Proceeds).Revolver are due at maturity. Except under specified circumstances, and subject to the payment of breakage costs (if any), we are generally permitted to make voluntary prepayments of outstanding amounts under the Revolver and the Term Loans without any other premium or penalty. Repaid amounts on the term loansTerm Loans may not be re-borrowed.
At December 31, 2022, the aggregate remaining mandatory principal repayments under the Credit Facility are as follows (assuming no further mandatory principal repayments are required based on ECF or net cash proceeds):
| Total | 2023 | 2024 | 2025 | 2026 | |||||||||||||||||||||||||
| Initial Term Loan | $ | 280.4 | $ | — | $ | — | $ | 280.4 | $ | — | |||||||||||||||||||
Incremental Term Loan (i) | $ | 346.8 | $ | 18.25 | $ | 18.25 | $ | 18.25 | $ | 292.0 | |||||||||||||||||||
(i) This assumes that the conditions required for a December 2026 maturity date are satisfied. If such conditions are not satisfied, the Incremental Term Loan matures (and all amounts outstanding thereunder are payable) on March 28, 2025.
The Credit Facility has an accordion feature that allows us to increase the term loansTerm Loans and/or revolving loan commitments thereunderunder the Revolver by approximately $110,$150.0, plus an unlimited amount to the extent that a specified leverage ratio on a pro forma basis does not exceed specified limits, in each case on an uncommitted basis and subject to the satisfaction of certain terms and conditions. The Revolver also includes a $50.0 sub-limit for swing line loans, providing for short-term borrowings up to a maximum of ten business days, as well as a $150.0 sub-limit for letters of credit, in each case subject to the overall Revolver credit limit. The Revolver permits us and certain designated subsidiaries to borrow funds (subject to specified conditions) for general corporate purposes, including for capital expenditures, certain acquisitions, and working capital needs.
Borrowings under the Revolver bear interest, depending on the currency of the borrowing and our election for such currency, at LIBOR, Base Rate, Canadian Prime, an Alternative Currency Daily Rate, or Basean Alternative Currency Term Rate (each as defined in the Credit Facility) plus a specified margin, or in the case of any bankers' acceptance, at the B/A Discount Rate (as defined in the Credit Facility).margin. The margin for borrowings under the Revolver and the Incremental Term Loan ranges from 0.75%1.50% to 2.5%,2.25% for LIBOR borrowings and commitment fees range between 0.35%Alternative Currency borrowings, and from 0.50%, to 1.25% for Base Rate and Canadian Prime borrowings, in each case depending on the rate we select and our consolidated leverage ratio (as defined in the Credit Facility). Commitment fees range from 0.30% to 0.45% depending on our consolidated leverage ratio. The Initial Term Loan currently bears interest at LIBOR plus 2.125%. The Incremental Term Loan currently bears interest at LIBOR plus 2.5%2.0%. The Credit Facility provides that whenSee note 20 for a description of the Administrative Agent, the majority of lenders or the Company determines that LIBOR is unavailable or being replaced, the Administrative Agent and the Company may amend the underlying credit agreement to reflect a successor rate. Once LIBOR becomes unavailable, if no successor rate has been established, loansprovisions under the Credit Facility. Prior to the December 2021 amendment of the Credit Facility, will convertthe margin for borrowings under the Revolver ranged from 0.75% to Base Rate loans.2.5%, commitment fees ranged from 0.35% to 0.50%, in each case depending on the rate we selected and our consolidated leverage ratio, the Initial Term Loan bore interest at LIBOR plus 2.125%, and the Terminated Term Loan bore interest at LIBOR plus 2.5%. We have entered into interest rate swap agreements to hedge against our exposures to the interest rate variability on a portion of our Term Loans. See note 20 for further detail.
We are required to comply with certain restrictive covenants under the Credit Facility, including those relating to the incurrence of certain indebtedness, the existence of certain liens, the sale of certain assets, (excluding real property then held for sale), specified investments and payments, sale and leaseback transactions, and certain financial covenants relating to a defined interest coverage ratio and leverage ratio that are tested on a quarterly basis. Our Credit Facility also prohibits share repurchases for cancellation if our
F-29
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
leverage ratio (as defined in such facility) exceeds a specified amount (Repurchase Restriction). At December 31, 2019,2022 and December 31, 2021, we were in compliance with all restrictive and financial covenants under the Credit Facility. As previously disclosed in the notes to our unaudited interim condensed consolidated financial statements for the third quarter of 2019, we had been in non-compliance with certain restrictive covenants related toFacility, and the Repurchase Restriction with respect to approximately $17was not in excess share repurchases made in May 2019 under our normal course issuer bid (NCIB). These defaults, as well as related cross defaults, were waived in October 2019 (Waivers). Upon receipt of the Waivers, the Terms Loans were no longer subject to potential acceleration, and our interest rate swap agreements were no longer subject to potential termination, and therefore reverted to their prior long-term classification (they had previously been reclassified to current as of September 30, 2019).effect.
The obligations under the Credit Facility are guaranteed by us and certain specified subsidiaries. Subject to specified exemptions and limitations, all assets of the guarantors are pledged as security for the obligations under the Credit Facility. The Credit Facility contains customary events of default. If an event of default occurs and is continuing (and is not waived), the administrative agentAdministrative Agent may declare all amounts outstanding under the Credit Facility to be immediately due and payable, and may cancel the lenders’ commitments to make further advances thereunder. In the event of a payment or other specified defaults, outstanding obligations accrue interest at a specified default rate. No such defaults occurred during 2021 or 2022.
During first quarter of 2021, we repaid an aggregate of $30.0 under the Terminated Term Loan. On October 27, 2021, we borrowed $220.0 under the Revolver to fund a portion of the PCI acquisition price in November 2021. On December 6, 2021, upon receipt of the net proceeds from the $365.0 Incremental Term Loan, we repaid all remaining amounts outstanding under the Terminated Term Loan ($145.0) and $215.0 of the $220.0 borrowed under the Revolver. On December 29, 2021, we repaid the remaining $5.0 outstanding under the Revolver.
During the first quarter of 2020, we made the scheduled quarterly principal repayment of $0.875 under the Initial Term Loan, and also prepaid an aggregate of $60.0 under the Terminated Term Loan. On April 27, 2020, we prepaid $47.0 under the Initial Term Loan. These two prepayments were first applied to all remaining scheduled quarterly principal repayments of the Initial Term Loan and Terminated Term Loan prior to maturity, as applicable, and thereafter to remaining applicable principal amounts outstanding thereunder. These prepayments also represented payment in full of the ECF Amount. In June 2020, we prepaid an additional $1.5 under the Initial Term Loan and $12.5 under the Terminated Term Loan.
In addition, we also made intra-quarter borrowings under the Revolver during certain quarters of 2020, 2021 and 2022, in each case drawn and repaid during the quarter of the borrowing, with no impact to the amounts outstanding at either the relevant quarter-end or year-end.
Activity under our Credit Facility*,Facility for the periods indicated is set forth below:
Revolver (i) | Term loans | ||||||||||
| Outstanding balances as of December 31, 2019 | $ | — | $ | 592.3 | |||||||
| Amount repaid in Q1 2020 | — | $ | (60.9) | ||||||||
| Amount repaid in Q2 2020 | — | $ | (61.0) | ||||||||
| Outstanding balances as of December 31, 2020 | $ | — | $ | 470.4 | |||||||
| Amount repaid in Q1 2021 | — | (30.0) | |||||||||
| Amount borrowed in Q4 2021 | 220.0 | 365.0 | |||||||||
| Amount repaid in Q4 2021 | (220.0) | (145.0) | |||||||||
| Outstanding balances as of December 31, 2021 | $ | — | $ | 660.4 | |||||||
| Amount repaid in Q1 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q2 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q3 2022 | — | (4.5625) | |||||||||
| Amount repaid in Q4 2022 | — | (19.5625) | |||||||||
| Outstanding balances as of December 31, 2022 | $ | — | $ | 627.2 | |||||||
(i) In addition to borrowings for the acquisition of PCI, we drew on the Revolver for short term borrowings during certain quarters of 2020, 2021 and our lease obligations, as2022, and repaid such borrowings in full within the quarter borrowed. Such intra-quarter borrowings and repayments, other than those related to the acquisition of December 31, 2019PCI, are offset against each other, and 2018:are excluded from this table.
| Note | December 31 2018 | December 31 2019 | |||||
Borrowings under the Revolver (1) | $ | 159.0 | $ | — | |||
Borrowings under the Term Loans (2) | 598.3 | 592.3 | |||||
| Total borrowings under Credit Facility | 757.3 | 592.3 | |||||
Less: unamortized debt issuance costs related to our Term Loans (2) | (9.8 | ) | (9.7 | ) | |||
Lease obligations, comprised of lease obligations under IFRS 16 and lease obligations financed through third parties (3) | 2 | 10.4 | 116.1 | ||||
| $ | 757.9 | $ | 698.7 | ||||
| Comprised of: | |||||||
| Current portion of borrowings under Credit Facility and lease obligations | $ | 107.7 | $ | 139.6 | |||
| Long-term portion of borrowings under Credit Facility and lease obligations | 650.2 | 559.1 | |||||
| $ | 757.9 | $ | 698.7 | ||||
F-30
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
The Term Loans require aggregate quarterly principal repaymentsfollowing table sets forth, at the dates shown: outstanding borrowings under the Credit Facility, excluding ordinary course letters of $1.5, and a lump sum repayment of the remainder outstanding at maturity, as well as mandatory prepaymentscredit (L/Cs); notional amounts under specified conditions (as described above). At December 31, 2019, the aggregate remaining mandatory principal repayments of the Term Loans were as follows, including a mandatory Term Loan prepayment of $107.0 due in 2020 based on specified excess cash flow for 2019 (we are currently unable to determine whether further mandatory principal repayments of the Term Loans based on specified excess cash flow or cash proceeds will be required subsequent to 2020):
| Years ending December 31 | Amount | ||
| 2020 | $ | 113.0 | |
| 2021 | 6.0 | ||
| 2022 | 6.0 | ||
| 2023 | 6.0 | ||
| 2024 | 6.0 | ||
| 2025 (to maturity in June 2025) | 455.3 | ||
| $ | 592.3 | ||
| Outstanding borrowings | Notional amounts under interest rate swaps (note 20) | ||||||||||||||||
| December 31 2021 | December 31 2022 | December 31 2021 | December 31 2022 | ||||||||||||||
Borrowings under the Revolver (i) | $ | — | $ | — | $ | — | $ | — | |||||||||
Borrowings under the Term Loans (i) | |||||||||||||||||
| Initial Term Loan | $ | 295.4 | $ | 280.4 | $ | 100.0 | $ | 100.0 | |||||||||
| Incremental Term Loan | 365.0 | 346.8 | 100.0 | 230.0 | |||||||||||||
| Total | $ | 660.4 | $ | 627.2 | $ | 200.0 | $ | 330.0 | |||||||||
| Total borrowings under Credit Facility | $ | 660.4 | $ | 627.2 | |||||||||||||
Unamortized debt issuance costs related to Term Loans (i) | (4.6) | (3.5) | |||||||||||||||
Lease obligations (ii) | 138.6 | 162.4 | |||||||||||||||
| $ | 794.4 | $ | 786.1 | ||||||||||||||
| Total Credit Facility and lease obligations: | |||||||||||||||||
| Current portion | $ | 51.5 | $ | 52.2 | |||||||||||||
| Long-term portion | 742.9 | 733.9 | |||||||||||||||
| $ | 794.4 | $ | 786.1 | ||||||||||||||
| L/Cs, surety bonds and overdraft facilities: | |||||||||||||||||
| Outstanding L/Cs under the Revolver | $ | 21.0 | 18.0 | ||||||||||||||
| Outstanding L/Cs and surety bonds outside the Revolver | 27.1 | 23.8 | |||||||||||||||
| Total | $ | 48.1 | $ | 41.8 | |||||||||||||
| Available uncommitted bank overdraft facilities | $ | 198.5 | $ | 198.5 | |||||||||||||
| Amounts outstanding under available uncommitted bank overdraft facilities | $ | — | $ | — | |||||||||||||
(i) We incur debt issuance costs upon execution of, third-party banks in Augustsubsequent security arrangements under, and December 2018 to partially hedge against our exposuresamendments to, the interest rate variabilityCredit Facility. Debt issuance costs incurred in 2022 totaling $0.3 ($2.2 in 2021; $0.3 in 2020) in connection with the Revolver were deferred as other assets on our Term Loans. The derivative instruments swapconsolidated balance sheets and are amortized on a straight line basis over the variable rate of interest for a fixed rate of interest on $175.0 of the amounts outstanding under each of our Initial Term Loan and our Incremental Term Loan, for an aggregate hedged amount of $350.0. See note 21.
(ii) These lease obligations represent the present value of unpaid lease payment obligations which have been discounted using our incremental borrowing rate on the lease commencement dates. In addition to these lease obligations, we have commitments under additional real property leases not recognized as liabilities as of December 31, 2019, we2022, because certain leases had $13.3 (December 31, 2018 — $14.4)not yet commenced as of such lettersdate. A description of creditthese leases and surety bonds outstanding. Atminimum lease payments thereunder are disclosed in note24. As of December 31, 2019, we also had a total2022, the current portion of$142.5 (December 31, 2018 — $132.8) in uncommitted bank overdraft facilities available for intraday and overnight operating requirements. There were no amounts outstanding under these overdraft facilities at December 31, 2019 or December 31, 2018.
| Years ending December 31 | Leases financed through third-parties | Other leases | Total | ||||||
| 2020 | $ | 1.6 | $ | 32.5 | $ | 34.1 | |||
| 2021 | 1.6 | 25.8 | 27.4 | ||||||
| 2022 | 1.4 | 20.7 | 22.1 | ||||||
| 2023 | 0.9 | 16.2 | 17.1 | ||||||
| 2024 | — | 11.2 | 11.2 | ||||||
| Thereafter | — | 23.0 | 23.0 | ||||||
| $ | 5.5 | $ | 129.4 | $ | 134.9 | ||||
| Year ended December 31 | 2019 | ||
| Interest expense on lease obligations | $ | 6.6 | |
| Variable lease payments not included in the measurement of lease obligations | $ | 0.7 | |
| Expenses relating to short-term leases or low-value leases | $ | 4.6 | |
F-31
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Years ending December 31 | Total | ||||||||||
| 2023 | $ | 42.7 | |||||||||
| 2024 | $ | 30.9 | |||||||||
| 2025 | $ | 25.5 | |||||||||
| 2026 | $ | 21.2 | |||||||||
| 2027 | $ | 15.9 | |||||||||
| Thereafter | $ | 56.9 | |||||||||
| $ | 193.1 | ||||||||||
Other lease-related expenses that were recognized in the consolidated statement of operations are as follows:
| Year ended December 31 | 2020 | 2021 | 2022 | ||||||||
| Interest expense on lease obligations | $ | 6.1 | $ | 6.6 | $ | 8.1 | |||||
| Variable lease payments not included in the measurement of lease obligations | $ | 0.8 | $ | 0.9 | $ | 1.2 | |||||
| Expenses relating to short-term leases or low-value leases | $ | 3.7 | $ | 1.5 | $ | 1.8 | |||||
See note 16 for a discussion of finance costs.
12. CAPITAL STOCK:
We are authorized to issue an unlimited number of SVS, which entitle the holder to one vote per share, and an unlimited number of multiple voting shares (MVS), which entitle the holder to 25 votes per share. The SVS and MVS vote together as a single class on all matters submitted to a vote of shareholders, including the election of directors, except as otherwise required by law. The holders of the SVS and MVS are entitled to share ratably, as a single class, in any dividends declared subject to any preferential rights of any outstanding preferred shares in respect of the payment of dividends. Each MVS is convertible at any time at the option of the holder thereof and automatically, under certain circumstances, into one SVS. We are also authorized to issue an unlimited number of preferred shares, issuable in series. No preferred shares have been issued to date.
(a) Capital transactions:
| Number of shares (in millions) | SVS | MVS | |||||||||
| Issued and outstanding at December 31, 2019 | 110.2 | 18.6 | |||||||||
Issued from treasury(i) | 0.3 | — | |||||||||
| Cancelled under normal course issuer bid (NCIB) | (0.0062) | — | |||||||||
| Issued and outstanding at December 31, 2020 | 110.5 | 18.6 | |||||||||
Issued from treasury(i) | 0.03 | — | |||||||||
| Cancelled under NCIB | (4.37) | — | |||||||||
| Issued and outstanding at December 31, 2021 | 106.1 | 18.6 | |||||||||
Issued from treasury(i) | 0.07 | — | |||||||||
| Cancelled under NCIB | (3.14) | — | |||||||||
| Issued and outstanding at December 31, 2022 | 103.0 | 18.6 | |||||||||
| Number of shares (in millions) | SVS | MVS | ||||
| Issued and outstanding at December 31, 2016 | 121.9 | 18.9 | ||||
Issued from treasury(i) | 2.8 | — | ||||
| Cancelled under NCIB | (1.9 | ) | — | |||
Other(ii) | 0.35 | (0.35 | ) | |||
| Issued and outstanding at December 31, 2017 | 123.2 | 18.6 | ||||
Issued from treasury(i) | 1.3 | — | ||||
| Cancelled under NCIB | (6.8 | ) | — | |||
| Issued and outstanding at December 31, 2018 | 117.7 | 18.6 | ||||
Issued from treasury(i) | 0.8 | — | — | |||
| Cancelled under NCIB | (8.3 | ) | — | — | ||
| Issued and outstanding at December 31, 2019 | 110.2 | 18.6 | ||||
We have repurchasedsettled other RSUs and PSUs with SVS purchased in the open market and otherwise for cancellation in recent years pursuant to NCIBs, which allow us to repurchase a limited number of SVS during a specified period. However, our Credit Facility prohibits share repurchases for cancellation if our leverage ratio (as defined in such facility) exceeds a specified amount. This prohibition (Repurchase Restriction) was in effect at December 31, 2019. The maximum number of SVS we are permitted to repurchase for cancellation under each NCIB (when permitted) is reduced by the number of SVS purchased by a broker in the open market during the term of such NCIB to satisfy obligations under our SBC plans. The Repurchase Restriction is not applicable to open market purchases for this purpose.(described below).
F-32
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
We have repurchased SVS in the open market, or as otherwise permitted, for cancellation through NCIBs, which allow us to repurchase a limited number of SVS during a specified period. The maximum number of SVS we are permitted to repurchase for cancellation under each NCIB is reduced by the number of SVS we arrange to be purchased by any non-independent broker in the open market during the term of such NCIB to satisfy delivery obligations under our SBC plans. We from time-to-time enter into automatic share purchase plans (ASPPs) with a broker, instructing the broker to purchase our SVS in the open market on our behalf, either for cancellation under an NCIB (NCIB ASPPs) or for delivery obligations under our SBC plans (SBC ASPPs), including during any applicable trading blackout periods, up to specified maximums (and subject to certain pricing and other conditions) through the term of each ASPP.
On November 19, 2020, the TSX accepted our notice to launch an NCIB (2020 NCIB), which allowed us to repurchase, at our discretion, from November 24, 2020 until the earlier of November 23, 2021 or the completion of purchases thereunder, up to approximately 9.0 million SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. We entered into NCIB ASPPs in each of December 2020, March 2021, and June 2021, all of which have since expired. At December 31, 2020, we recorded an accrual of $15.0 (2020 NCIB Accrual), representing the estimated contractual maximum number of permitted SVS repurchases (Contractual Maximum Quantity) for cancellation under the December 2020 NCIB ASPP (2.0 million SVS), which was reversed in 2021.
On December 2, 2021, the TSX accepted our notice to launch another NCIB (2021 NCIB), which allowed us to repurchase, at our discretion, from December 6, 2021 until the earlier of December 5, 2022 or the completion of purchases thereunder, up to approximately 9.0 million of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. We entered into NCIB ASPPs in each December 2021, June 2022, September 2022, all of which have since expired. At December 31, 2021, we recorded an accrual of $7.5 (2021 NCIB Accrual), representing the estimated Contractual Maximum Quantity (0.7 million SVS) for cancellation under the December 2021 NCIB ASPP, which was reversed in 2022. In each of December 2021 and May 2022, we entered into an SBC ASPP, each of which has since expired. We recorded an accrual as of December 31, 2021 of $33.8 (2021 SBC Accrual), representing the estimated Contractual Maximum Quantity (3.0 million SVS) under the December 2021 SBC ASPP, which was reversed in 2022.
On December 8, 2022, the TSX accepted our notice to launch a new NCIB (2022 NCIB), which allows us to repurchase, at our discretion, from December 13, 2022 until the earlier of December 12, 2023 or the completion of purchases thereunder, up to approximately 8.8 million of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. As of December 31, 2022, approximately 8.5 million SVS remain available for repurchase under the 2022 NCIB either for cancellation or SBC delivery purposes. In December 2022, we entered into an NCIB ASPP that expired prior to December 31, 2022 (with no accrual recorded).
Information regarding share repurchase activities, including SVS purchases for cancellation under our NCIBsNCIB ASPPs and for SBC plan delivery obligations under SBC ASPPs, for the years indicated is set forth below:
| Year ended December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
Aggregate cost (1) of SVS repurchased for cancellation (2) | $ | 0.1 | $ | 35.9 | $ | 34.6 | |||||
Number of SVS repurchased for cancellation (in millions) (3) | 0.0062 | 4.4 | 3.4 | ||||||||
| Weighted average price per share for repurchases | $ | 7.45 | $ | 8.21 | $ | 10.45 | |||||
Aggregate cost (1) of SVS repurchased for delivery under SBC plans(4) | $ | 19.1 | $ | 20.6 | $ | 44.9 | |||||
Number of SVS repurchased for delivery under SBC plans (in millions)(5) | 2.9 | 1.9 | 3.9 | ||||||||
| Year ended December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
Aggregate cost (1) of SVS repurchased for cancellation | $ | 19.9 | $ | 75.5 | $ | 67.3 | |||
| Number of SVS repurchased for cancellation (in millions) | 1.9 | 6.8 | 8.3 | ||||||
| Weighted average price per share for repurchases | $ | 10.58 | $ | 11.10 | $ | 8.15 | |||
Aggregate cost (1) of SVS repurchased for delivery under SBC plans | $ | 16.7 | $ | 22.4 | $ | 9.2 | |||
| Number of SVS repurchased for delivery under SBC plans (in millions) | 1.4 | 2.1 | 1.2 | ||||||
| December 31 | |||
| 2017 | 2018 | 2019 | |
Number of SVS held by trustee for delivery under SBC plans (1) (in millions) | 0.8 | 1.9 | 1.7 | ||||||
Value of SVS held by trustee for delivery under SBC plans (1) | $ | 8.7 | $ | 20.2 | $ | 14.8 | |||
(3) Includes 2.5 million, 2.8 million and nil repurchases of SVS for cancellation under NCIB ASPPs in 2022, 2021 and 2020, respectively.
(4) For 2021, excludes the $33.8 2021 SBC Accrual.
(5)Includes 3.9 million, 0.7 million and nil repurchases of SVS for SBC delivery obligations under SBC ASPPs in 2022, 2021 and 2020, respectively.
F-33
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
Number of SVS held by trustee for delivery under SBC plans (1)(2) (in millions) | 2.4 | 1.4 | 1.5 | ||||||||
Value of SVS held by trustee for delivery under SBC plans (2) | $ | 15.7 | $ | 15.1 | $ | 16.7 | |||||
(1) For accounting purposes, we classify these shares as treasury stock until they are delivered pursuant to the plans.
(2)The number and value of SVS held in 2021 exclude the 2021 SBC Accrual.
(b) Employee SBC:
Under the LTIP, we may grant stock options, stock appreciation rights, RSUs and PSUs (Awards) to eligible employees consultants and directors.consultants. Eligible directors may be granted Awards other than stock options. We may, at the time of grant, authorize the grantees to settle these awards either in cash or in SVS. Absent such permitted election, suchvested grants under the LTIP will be settled in SVS (on a one-for-one basis), which we may purchaseeither with SVS purchased in the open market or issueissued from treasury (up to a maximum aggregate of 29.0 million SVS). As of December 31, 2019, 10.32022, 9.9 million SVS remain reserved for issuance from treasury under the LTIP, covering potential issuances of SVS for outstanding awards and for potential future grants of SBC under the LTIP.award grants.
Celestica Share Unit Plan (CSUP):
Under the CSUP, we may grant RSUs and PSUs to directors and eligible employees. We have the option to settle vested RSUs and PSUs issued thereunder in SVS (on a one-for-one basis) purchased in the open market, or in cash.
Employee SBC Expense:
Employee SBC expense may fluctuate from period-to-period to account for, among other things, new grants, forfeitures resulting from employee terminations or resignations, and the recognition of accelerated SBC expense for employees eligible for retirement. The portion of employee SBC expense that relates to performance-based compensation is subject to adjustment in any period to reflect changes in the estimated level of achievement of pre-determined performance goals and financial targets. Based on reviews of the status of the non-market performance vesting condition and modifier, we recorded an $8.4 expense reversal in 2020 and a $12.3 expense in 2022 to reflect changes in the estimated number of PSUs expected to vest at the end of January 2021 and at the beginning of February 2023, respectively. No significant adjustments were recorded in 2021 with respect to PSUs expected to vest at the beginning of February 2022.
On December 15, 2022, we entered into the TRS Agreement to manage our cash flow requirements and exposure to fluctuations in the share price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. See notes 2(p) and 20 for further detail.
Information regarding employee SBC expense for the years indicated is set forth below:
| Year ended December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
| Employee SBC expense in cost of sales | $ | 11.1 | $ | 13.0 | $ | 20.3 | |||||
| Employee SBC expense in SG&A | 14.7 | 20.4 | 30.7 | ||||||||
| 25.8 | 33.4 | 51.0 | |||||||||
For RSUs and DSUs issued to eligible directors under our Directors’ Share Compensation Plan (DSC Plan), see paragraph (c) below.
| Year ended December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
| Employee SBC expense in cost of sales | $ | 14.6 | $ | 14.7 | $ | 14.6 | |||
| Employee SBC expense in SG&A | 15.5 | 18.7 | 19.5 | ||||||
| Total | $ | 30.1 | $ | 33.4 | $ | 34.1 | |||
F-34
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(i) Stock options:
We are permitted to grant stock options under our LTIP, although no stock options have been granted in 2017, 2018 or 2019. When granted, stockLTIP. Stock options are granted at prices equal to the closing market price on the day prior to the grant date and are exercisable during a period not to exceed 10 years from the grant date.
Stock option transactionsgrants and exercises were as follows for the years indicated:
| Number of Options | Weighted Average Exercise Price | |||||
| (in millions) | ||||||
| Outstanding at January 1, 2017 | 2.1 | $ | 8.46 | |||
| Exercised | (1.7 | ) | $ | 7.87 | ||
| Outstanding at December 31, 2017 | 0.4 | $ | 12.14 | |||
| Exercised | (0.1 | ) | $ | 6.20 | ||
| Outstanding at December 31, 2018 | 0.3 | $ | 11.93 | |||
| Exercised | — | $ | — | |||
| Outstanding at December 31, 2019 | 0.3 | $ | 12.50 | |||
| Number of Options | Weighted Average Exercise Price* | ||||||||||
| (in millions) | |||||||||||
| Outstanding at January 1, 2020 | 0.3 | $ | 12.50 | ||||||||
| Exercised | — | $ | — | ||||||||
| Outstanding at December 31, 2020 | 0.3 | $ | 12.78 | ||||||||
| Granted | 0.09 | $ | 10.58 | ||||||||
| Exercised | (0.02) | $ | 6.54 | ||||||||
| Outstanding at December 31, 2021 | 0.4 | $ | 12.70 | ||||||||
| Exercised | (0.02) | $ | 6.36 | ||||||||
| Outstanding at December 31, 2022 | 0.4 | $ | 12.38 | ||||||||
The following stock options* were outstanding as at December 31, 2019:2022:
| Range of Exercise Prices | Outstanding Options | Weighted Average Exercise Price | Weighted Average Remaining Life of Outstanding Options | Exercisable Options | Weighted Average Exercise Price | Range of Exercise Prices | Outstanding Options | Weighted Average Exercise Price | Weighted Average Remaining Life of Outstanding Options | Exercisable Options | Weighted Average Exercise Price | |||||||||||||||||||||||||||||||
| (in millions) | (years) | (in millions) | (in millions) | (years) | (in millions) | |||||||||||||||||||||||||||||||||||||
| $6.35 - $13.46 | 0.3 | $12.50 | 5.2 | 0.3 | $12.50 | |||||||||||||||||||||||||||||||||||||
| $10.58 to $12.93 | $10.58 to $12.93 | 0.4 | 12.38 | 4.1 | 0.3 | $12.76 | ||||||||||||||||||||||||||||||||||||
* The exercise prices used in the above tables were determined by converting the grant date fair value into U.S. dollars at the year-end exchange rate.
We amortize the estimated grant date fair value of stock options to expense over the vesting period (generally four4 years). The grant date fair value of outstanding stock options granted in 2021 was determined using the Black-Scholes option pricing model and the following assumptions in the year of the grant:assumptions: risk-free interest rate (based on U.S. government bond yields) of 1.09%, expected volatility of the market price of our shares (based on historical volatility of our share price) of 43%, and the expected option life (in years)of 7 years (based on historical option holder behavior). No stock options were granted in 2020 or 2022.
(ii) RSUs and PSUs:
We grant RSUs and PSUs to employees pursuant to our LTIP and CSUP. Each vested unit generally entitles the holder to receive one SVS. Under the CSUP, we have the option to satisfy the delivery of shares upon vesting of the awards by purchasing SVS in the open market or by settling such awards in cash. Under the LTIP, we may (at the time of grant) authorize the grantees to settle awards in either cash or SVS (absent such permitted election, grants will be settled in SVSs, which we may purchaseSVS purchased in the open market or issueissued from treasury, subject to certain limits). We have generally settled these awards with SVS purchased in the open market by a broker, or issued from treasury. Unless a grantee has been authorized, and elects, to settle these awards in cash, Celestica intends to settle all outstanding RSUs and PSUs with shares purchased in the open market.SVS. As a result, we have accountedaccount for these share unit awards as equity-settled awards. We amortize the grant date fair value of RSUs and PSUs to expense over the vesting period.
The grant date fair value of RSUs is based on the market value of our SVS at the time of grant.
With respect to PSUs, employees are granted a target number of PSUs (set forth for the years indicated in the table below). The number of PSUs that will actually vest will vary from 0% to 200% of the target amount granted based on the level of achievement of the relevant performance conditions. PSUs (representing in each case 100% of target) wereare primarily granted in the first quarter of each of 2017, 2018 and 2019. Theyear. PSUs granted in 20182020, 2021 and 20192022 vested or will vest based on the level of achievement of a pre-determined non-market performance measurement in the final year of the three-year performance period, subject to
modification by each of a separate pre-determined non-market financial target and our relative TSR performance over the three-year vesting period. See note 2(l). The grant date fair value of the TSR modifier is based on a Monte Carlo simulation model and a premium of 116% for 2022 (2021 — 109%; 2020 — 112%). The grant date fair value of the non-TSR-based performance measurement and modifier is based on the market value of our SVS at the time of grant and
F-35
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
The assumptions used in the measurement of the grant date fair values of PSUs were as follows:
| Year ended December 31 | ||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||
| Expected volatility | 30 | % | 49 | % | 52 | % | ||||||||
| Expected life | 3 years | 3 years | 3 years | |||||||||||
| Risk-free interest rate (based on 3-year Treasury bonds) | 1.4 | % | 0.2 | % | 1.4 | % | ||||||||
Information regarding aggregate RSU, PSU and PSUstock option grants to employees, and directors (see below), as applicable, for the years indicated is set forth below:
| Year ended December 31 | Year ended December 31 | |||||||||||||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
| RSUs Granted: | RSUs Granted: | RSUs Granted: | ||||||||||||||||||
| Number of awards (in millions) | 1.9 | 2.6 | 3.0 | Number of awards (in millions) | 2.4 | 3.0 | 2.0 | |||||||||||||
| Weighted average grant date fair value per unit | $ | 13.05 | $ | 10.48 | $ | 7.88 | Weighted average grant date fair value per unit | $ | 8.60 | $ | 8.36 | $ | 12.17 | |||||||
| PSUs Granted: | PSUs Granted: | PSUs Granted: | ||||||||||||||||||
| Number of awards (in millions, representing 100% of target) | 0.9 | 1.6 | 2.1 | Number of awards (in millions, representing 100% of target) | 1.7 | 2.9 | 1.3 | |||||||||||||
| Weighted average grant date fair value per unit | $ | 17.18 | $ | 11.11 | $ | 8.14 | Weighted average grant date fair value per unit | $ | 9.88 | $ | 9.49 | $ | 14.27 | |||||||
| December 31 | ||||||||||||||||||||
| 2017 | 2018 | 2019 | ||||||||||||||||||
| Stock Options Granted: | Stock Options Granted: | |||||||||||||||||||
| Number of awards (in millions) | Number of awards (in millions) | — | 0.09 | — | ||||||||||||||||
| Weighted average grant date fair value per option | Weighted average grant date fair value per option | $ | — | $ | 4.22 | $ | — | |||||||||||||
| December 31 | ||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||
| Number of outstanding RSUs (in millions) | 3.2 | 3.8 | 4.6 | Number of outstanding RSUs (in millions) | 4.5 | 4.6 | 3.8 | |||||||||||||
| Number of outstanding PSUs (in millions, representing 100% of target granted) | 2.5 | 3.2 | 3.8 | Number of outstanding PSUs (in millions, representing 100% of target granted) | 4.6 | 6.1 | 5.1 | |||||||||||||
(c) Director SBC:
We grant DSUs to certain members of our Board of Directors and Onex under our DSC Plan. Commencing in 2019, weWe also grant RSUs (under specified circumstances) to certain directors as compensation under the DSC Plan. DSUs granted prior to January 1, 2007 may be settled with SVS issued from treasury or purchased in the open market, or with cash (at the discretion of the Company). DSUs granted after January 1, 2007 to directors as compensation may only be settled with SVS purchased in the open market, or with cash (at the discretion of the Company). RSUs granted to directors vest ratably over a three-year period. Such RSUsperiod and are governed by the terms of our LTIP. Each vested RSU entitles the holder thereof to one SVS; however, if permitted by the Company under the terms of the grant, a director may elect to receive a payment of cash in lieu of SVS. Unvested RSUs will vest immediately on the date the director Retires. See note 2(l) for details. During 2017, two of our directors resigned from the Board and in connection therewith, we settled their outstanding DSUs in 2017 in accordance with the provisions of the DSC Plan. Specifically, we paid $1.7 in cash to Joseph M. Natale to settle his outstanding DSUs, and we settled the outstanding DSUs of Thomas S. Gross with 14,098 SVS that we purchased in the open market.additional detail. As Celestica is permitted to, and currently intends to, settle all other DSUs with shares purchased in the open market, we have accountedaccount for these awards as equity-settled awards.
On January 29, 2020, William A. Etherington our former Chair of the Board, retired from Celestica’s Board of Directors and Michael M. Wilson (a director since 2011) was immediately appointed as Chair of the Board.Directors. In accordance with the DSC Plan, the DSUs held by Mr. Etherington will be redeemed and payable on or prior to the 90th day following the date on which he is no longer a director or employee of any corporation that does not deal at arm’s length with the Company. As of January 29, 2020,December 31, 2022, Mr. Etherington held 0.470.475 million DSUs.DSUs as he remained as a director of Onex. Eamon Ryan retired from Celestica's Board of Directors in April 2022. The 0.03 million RSUs then-held by Mr. Ryan were vested and settled upon his retirement. In accordance with the DSC Plan, the 0.26 million DSUs then-held by Mr. Ryan were settled in July 2022.
F-36
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
Information regarding director SBC expense for the years indicated is set forth below:
| Year ended December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
Director SBC expense in SG&A (1) | $ | 2.0 | $ | 2.1 | $ | 2.2 | |||||
| DSUs Granted: | |||||||||||
| Number of awards (in millions) | 0.2 | 0.12 | 0.12 | ||||||||
| Weighted average grant date fair value per unit | $ | 5.64 | $ | 8.98 | $ | 10.18 | |||||
| RSUs Granted: | |||||||||||
| Number of awards (in millions) | 0.022 | 0.054 | 0.042 | ||||||||
| Weighted average grant date fair value per unit | $ | 5.71 | $ | 8.92 | $ | 10.44 | |||||
| December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
| Number of DSUs outstanding (in millions) | 2.0 | 2.2 | 2.1 | ||||||||
| Number of RSUs issued to directors outstanding (in millions) | 0.03 | 0.07 | 0.07 | ||||||||
| Year ended December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
| Director SBC expense in SG&A | $ | 2.2 | $ | 2.0 | $ | 2.4 | |||
| December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
| Number of DSUs outstanding (in millions) | 1.5 | 1.6 | 1.8 | ||||||
| Number of RSUs issued to directors outstanding (in millions) | — | — | 0.02 | ||||||
| Year ended December 31 | ||||||||||||||||||||
| Note | 2020 | 2021 | 2022 | |||||||||||||||||
| Opening balance of foreign currency translation account | $ | (14.6) | $ | (10.3) | $ | (18.0) | ||||||||||||||
| Foreign currency translation adjustments | 4.3 | (7.7) | (6.7) | |||||||||||||||||
| Closing balance | (10.3) | (18.0) | (24.7) | |||||||||||||||||
| Opening balance of unrealized net gain (loss) on currency forward cash flow hedges | $ | 3.1 | $ | 11.6 | $ | (1.9) | ||||||||||||||
Net gain (loss) on currency forward cash flow hedges(i) | 9.0 | (5.3) | (5.9) | |||||||||||||||||
Reclassification of net loss (gain) on currency forward cash flow hedges to operations(ii) | (0.5) | (8.2) | 13.1 | |||||||||||||||||
Closing balance(iii) | 11.6 | (1.9) | 5.3 | |||||||||||||||||
| Opening balance of unrealized net loss on interest rate swap cash flow hedges | $ | (12.1) | $ | (16.5) | $ | (6.9) | ||||||||||||||
Net gain (loss) on interest rate swap cash flow hedges(iv) | (12.8) | 2.4 | 18.1 | |||||||||||||||||
| Reclassification of net loss on interest rate swap cash flow hedges to operations | 8.4 | 7.2 | 2.5 | |||||||||||||||||
Closing balance(v) | (16.5) | (6.9) | 13.7 | |||||||||||||||||
| Actuarial gains (losses) on pension and non-pension post-employment benefit plans | 18 | $ | (9.1) | $ | 9.3 | $ | 33.5 | |||||||||||||
| Reclassification of actuarial losses (gains) to deficit | 9.1 | (9.3) | (33.5) | |||||||||||||||||
| Loss on purchase of pension annuities | 18 | (0.2) | — | — | ||||||||||||||||
| Reclassification of loss on purchase of pension annuities to deficit | 18 | 0.2 | — | — | ||||||||||||||||
| Closing balance | — | — | — | |||||||||||||||||
| Accumulated other comprehensive loss | $ | (15.2) | $ | (26.8) | $ | (5.7) | ||||||||||||||
(i) Net of an income tax recovery of $1.6 for 2022 (2021 — net of a $0.5 income tax recovery; 2020 — net of a $0.8 income tax expense).
(ii) Net of a $2.2 release in income tax recovery associated with the reclassification of net hedge (gain) loss to the consolidated statements of operations for 2022 (2021 — net release of $0.6 in income tax expense; 2020 — net of nil income tax expense).
(iii) Net of an income tax expense of $0.5 as of December 31, 2022 (December 31, 2021 — net of a $0.1 income tax recovery; December 31, 2020 — net of $1.0 in income tax expense).
| Year ended December 31 | ||||||||||||
| Note | 2017 | 2018 | 2019 | |||||||||
| Opening balance of foreign currency translation account | $ | (15.2 | ) | $ | (14.5 | ) | $ | (14.4 | ) | |||
| Foreign currency translation adjustments | 0.7 | 0.1 | (0.2 | ) | ||||||||
| Closing balance | (14.5 | ) | (14.4 | ) | (14.6 | ) | ||||||
| Opening balance of unrealized net gain (loss) on currency forward cash flow hedges | $ | (9.5 | ) | $ | 7.8 | $ | (7.7 | ) | ||||
Net gain (loss) on currency forward cash flow hedges(i) | 27.9 | (14.7 | ) | 6.7 | ||||||||
Reclassification of net loss (gain) on currency forward cash flow hedges to operations(ii) | (10.6 | ) | (0.8 | ) | 4.1 | |||||||
Closing balance(iii) | 7.8 | (7.7 | ) | 3.1 | ||||||||
| Opening balance of unrealized net gain (loss) on interest rate swap cash flow hedges | $ | — | $ | — | $ | (4.4 | ) | |||||
| Net loss on interest rate swap cash flow hedges | — | (4.8 | ) | (10.2 | ) | |||||||
| Reclassification of net loss on interest rate swap cash flow hedges to operations | — | 0.4 | 2.5 | |||||||||
Closing balance(iv) | — | (4.4 | ) | (12.1 | ) | |||||||
| Actuarial gains (losses) on pension and non-pension post-employment benefit plans | 19 | $ | (1.2 | ) | $ | 8.4 | $ | (8.7 | ) | |||
| Reclassification of actuarial losses (gains) to deficit | 1.2 | (8.4 | ) | 8.7 | ||||||||
| Loss on purchase of pension annuities | 19 | (17.0 | ) | (63.3 | ) | — | ||||||
Reclassification of loss on purchase of pension annuities to deficit | 19 | 17.0 | 63.3 | — | ||||||||
| Closing balance | — | — | — | |||||||||
| Accumulated other comprehensive loss | $ | (6.7 | ) | $ | (26.5 | ) | $ | (23.6 | ) | |||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(iv) Net of an income tax expense of $5.0 for 2022 (2021 and 2020 — net of nil income tax expense).
14. EXPENSES BY NATURE:
We have presented our consolidated statement of operations by function.
Items included in our cost of sales and SG&A for the years indicated are set forth below:
| Year ended December 31 | |||||||||||
| 2020 | 2021 | 2022 | |||||||||
| Employee-related costs | $ | 810.7 | $ | 819.4 | $ | 955.8 | |||||
| SBC expense included in above employee-related costs | 25.8 | 33.4 | 51.0 | ||||||||
| Freight and transportation costs | 107.9 | 142.5 | 186.1 | ||||||||
Depreciation expense (i) | 99.1 | 100.8 | 104.6 | ||||||||
Rental expense (i) | 4.5 | 2.4 | 3.0 | ||||||||
(i) The amortization of ROU assets is included in depreciation expense. See note 7. We expense the costs of low-value and short-term leases in our consolidated statement of operations on a straight-line basis as rental expense. See note 11 for disclosure of these lease expenses.
15. OTHER CHARGES, NET OF RECOVERIES:
| Year ended December 31 | |||||||||
| 2017 | 2018 | 2019 | |||||||
| Employee-related costs | $ | 726.4 | $ | 804.7 | $ | 815.2 | |||
| SBC expense included in above employee-related costs | 30.1 | 33.4 | 34.1 | ||||||
| Freight and transportation costs | 79.3 | 97.0 | 90.3 | ||||||
Depreciation expense (including depreciation on ROU assets in 2019) (i) | 67.6 | 73.7 | 105.8 | ||||||
Rental expense (i) | 28.5 | 35.4 | 5.3 | ||||||
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Restructuring charges, net of recoveries (a) | $ | 25.8 | $ | 10.5 | $ | 8.4 | |||||||||||
| Transition Costs (Recoveries) (b) | — | 1.2 | (2.1) | ||||||||||||||
| Credit Facility-related charges (c) | — | 3.0 | — | ||||||||||||||
| Acquisition Costs (Recoveries) and Other (d) | (2.3) | (4.4) | 0.4 | ||||||||||||||
| $ | 23.5 | $ | 10.3 | $ | 6.7 | ||||||||||||
In addition to the items set forth above, other charges, net of recoveries for 2022 included approximately $95 in aggregate charges representing write-downs to inventories, a building and equipment resulting from the fire event described in note 26, as well as equivalent amounts in recoveries, as we expect to fully recover the written-down amounts pursuant to the terms and conditions of our insurance policies. As a result, such event had no net impact on other charges, net of recoveries during 2022. See note 26 for further detail.
| Year ended December 31 | ||||||||||||
| Note | 2017 | 2018 | 2019 | |||||||||
| Restructuring charges (a) | $ | 28.9 | $ | 35.4 | $ | 37.9 | ||||||
| Losses on pension and non-pension post-employment benefit plans (b) | 19 | 1.9 | — | 4.1 | ||||||||
| Transition Costs (Recoveries) (c) | 7 | 1.6 | 13.2 | (95.8 | ) | |||||||
| Credit Facility-related charges (d) | — | 1.2 | 2.0 | |||||||||
| Acquisition Costs and other (e) | 4.6 | 11.2 | 1.9 | |||||||||
| $ | 37.0 | $ | 61.0 | $ | (49.9 | ) | ||||||
Our restructuring activities in 2022 consisted primarily of actions to adjust our cost base to address reduced levels of demand in certain of our businesses and geographies.
We recorded restructuring charges of $8.4 in 2022, consisting of cash charges of $7.5, primarily for the years indicated were comprisedemployee termination costs, and non-cash charges of $0.9, consisting of the following:
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Cash charges | $ | 25.1 | $ | 35.2 | $ | 28.1 | |||||
| Non-cash charges | 3.8 | 0.2 | 9.8 | ||||||||
| $ | 28.9 | $ | 35.4 | $ | 37.9 | ||||||
We recorded an aggregate of $81.3 in restructuring charges fromof $10.5 in 2021, consisting of cash charges of $9.8, primarily for employee termination costs, and net non-cash charges of $0.7 (consisting of non-cash restructuring charges of $1.5 and non-cash restructuring recoveries of $0.8). The non-cash charges consisted primarily of the commencementwrite-down of our cost efficiency initiative (CEI) in the fourth quarter of 2017 through its completion at the end of 2019. The CEI included actionsequipment related to our previously-disclosed CCS segment portfolio review (CCS Review) and our capital equipment business, and resulted in reductions to our workforce, as well as consolidationdisengaged programs. The non-cash restructuring recoveries primarily reflect gains on the sale of certain sites to better align capacity and infrastructure with current and anticipated customer
surplus equipment.
F-38
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
We recorded restructuring charges of $37.9$25.8 in 2019, all in connection with our CEI,2020, consisting of cash charges of $28.1,$23.3, primarily for employee termination costs, and non-cash charges of $9.8.$2.5. The non-cash restructuring charges recordedrepresented the write-down of ROU assets ($1.1) in 2019 representedconnection with vacated properties (resulting in part from Sublet Losses), and the write-down of certain equipment primarily related to our capital equipment business and disengaged programs, and the write down of ROU assets ($1.0) pertaining to vacated properties, resultingoffset in part from certain sublet recoveries that were lower than the carrying value of the related leases. Our restructuring provision at December 31, 2019 was $11.2 (December 31, 2018 — $10.3), which we recordedby $0.3 in the current portion of provisions on our consolidated balance sheet. See note 11.
See notes 2(k) and 1110 for further details regarding our restructuring provisions.
(b) Losses on pension and non-pension post-employment benefit plans:
Transition Costs are comprisedconsist of transition-related relocation and duplicate costs pertaining to: (i) the relocation of our Toronto manufacturing operations and our corporate headquartersrecorded in connection with the sale of our Toronto real property (Toronto Transition Costs); and (ii)with: (i) the transfer of certain capital equipment manufacturing lines from closed sites to other sites within our global networknetwork; and (ii) the sale of real properties unrelated to restructuring actions (Property Dispositions). Transition Costs in response toprior years also included costs in connection with the current capital equipment demand environment (Internal Relocation Costs).relocation of our Toronto manufacturing operations and corporate headquarters in connection with the 2019 sale of our former Toronto real property. Transition Costs consist of direct relocation and duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition periods, as well as cease-use and other costs incurred in connection with idle or vacated portions of the relevant premises.premises that we would not have incurred but for these relocations, transfers and dispositions. Transition Recoveries consist of the $102.0 Property Gain weany gains recorded in Q1 2019. See note 7 for a discussionconnection with Property Dispositions. We recorded $1.5 of Toronto Transition Costs andin 2022, related primarily to the disposal of assets reclassified as held for sale of our Toronto real property.in Q1 2022. We recorded $2.4$3.6 of Internal RelocationTransition Recoveries in 2022, reflecting the gain on the subsequent disposal of such assets held for sale. We incurred Transition Costs of $1.2 in 2019 (no such costs were recorded prior2021 (2020 — de minimis), pertaining to the third quartertransfer of 2019).manufacturing lines from closed sites to other sites within our global network, and no Transition Recoveries in 2021 or 2020.
(d) Acquisition Costs (Recoveries) and Other:
We incur consulting, transaction and integration costs relating to potential and completed acquisitions. We also incur charges or releases related to the extinguishmentsubsequent re-measurement of indemnification assets or the Prior Facility. See note 12. During Q4 2019, we incurred $2.0 in feesrelease of indemnification or other liabilities recorded in connection with obtaining the Waivers in October 2019 (Waiver Fees)acquisitions, when applicable. Collectively, these costs, charges and releases are referred to as Acquisition Costs (Recoveries).
Other consists of legal recoveries of $10.5 in 2021 and $2.5 in 2020, for prior component parts, in connection with the settlement of class action lawsuits in which we were a plaintiff. The 2017No such legal recoveries of $1.1 were partially offset by costs we recorded for unrelated legal matters.in 2022.
16. FINANCE COSTS:
Finance costs consist of interest expense and fees related to our Credit Facility (including debt issuance and related amortization costs), our interest rate swap agreements, the TRS Agreement, our A/R sales program and SFPs, and commencing in Q1 2019, interest expense on our lease obligations, under IFRS 16, net of interest income earned.See notes 4 and 11. We paid finance costs of $44.5$50.0 in 2019 (20182022 (2021 — $36.0; 2017$26.0; 2020 — $10.2). See notes 4 and 12. We$29.5), including $0.8 in debt issuance costs paid $2.0 in Waiver Fees in 2019, which we recorded in Other Charges (see note 16(d))2022 (2021 — $3.6; 2020 — $0.6).
17. RELATED PARTY TRANSACTIONS:
Onex Corporation (Onex) beneficially owns, controls, or directs, directly or indirectly, all of our outstanding MVS. Accordingly, Onex has the ability to exercise significant influence over our business and affairs and generally has the power to determine all matters submitted to a vote of our shareholders where the SVS and MVS vote together as a single class. Mr. Gerald Schwartz,
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CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
the Chairman of the Board President and Chief Executive Officer of Onex, indirectly owns shares representing the majority of the voting rights of the shares of Onex.
We are party to a Services Agreementservices agreement with Onex for the services of Mr. Tawfiq Popatia, an officer of Onex, as a director of Celestica, pursuant to which Onex receives compensation for such services. This agreement automatically renews for successive one-year terms unless either party provides a notice of intent not to renew. Under such agreement, the annual fee payable to Onex is $0.235, payable in DSUs in equal quarterly installments, in arrears. The Services Agreementservices agreement terminates automatically and the rights of Onex to receive compensation (other than accrued and unpaid compensation) will terminate (a) 30 days after the first day on which Onex ceases to hold at least one MVS of Celestica or any successor company or (b) the date Mr. Popatia ceases to be a director of Celestica for any reason.
Compensation of key management personnel:
Our key management team consists of directors and senior executive officers. The aggregate compensation expenses we recognized under IFRS for our directors and senior executive officers for the periods shown were as follows:
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Short-term employee benefits and costs | $ | 8.7 | $ | 7.3 | $ | 9.7 | |||||||||||
| Post-employment and other long-term benefits | 0.2 | 0.6 | 0.5 | ||||||||||||||
| SBC (including DSUs and RSUs to eligible directors) | 12.5 | 17.3 | 25.5 | ||||||||||||||
| $ | 21.4 | $ | 25.2 | $ | 35.7 | ||||||||||||
18. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS:
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Short-term employee benefits and costs | $ | 7.5 | $ | 6.2 | $ | 4.4 | |||||
| Post-employment and other long-term benefits | 0.6 | 0.3 | 0.3 | ||||||||
| SBC (including DSUs and RSUs to eligible directors) | 12.4 | 14.8 | 15.6 | ||||||||
| $ | 20.5 | $ | 21.3 | $ | 20.3 | ||||||
(a) Plan summaries:
We provide pension and non-pension post-employment benefit plans for our employees. At December 31, 2019,2022, such plans included a defined benefitour pension plan for our employees in the United Kingdom (U.K.) (U.K. main pension plan), thatwhich generally provides participants with stated benefits on retirement based on their pensionable service, either in annuities and/or lump sum payments. The U.K. main pension plan is closed to new members, and approximately 1% of such plan members remain active employees of the Company. Our previous supplementary pension plan for U.K. employees (described below) was wound-up in 2019. Defined contribution pension plans are offered to certain employees, mainly in Canada and the U.S. We provide non-pension post-employment benefits (under other benefit plans) to retired and terminated employees in Canada, the U.S., Mexico, Thailand, South Korea, Indonesia and Thailand.the Philippines. These benefits may include one-time retirement and specified termination benefits, medical, surgical, hospitalization coverage, supplemental health, dental and/or group life insurance.
To mitigate the actuarial and investment risks of our defined benefit pension plans, we purchase annuities from time to time (using existing plan assets) from third party insurance companies for certain, or all, plan participants. The purchase of annuities by the pension plan substantially hedges the financial risks associated with the related pension obligations.
In March 2017,August 2020, the trustees of our U.K. main pension plan entered into an agreement with a third party insurance companypurchased annuities to purchase an annuity for participants in such plan who have retired. The cost ofhedge the annuity was £123.7 million (approximately $154.3 at the exchange rate at the time of recording) and was funded with existing plan assets. The annuity is held as an asset of the main pension plan. Although we retain ultimate responsibility for the payment of benefits payable to plan participants, the annuity substantially hedges the financial risk component of the associated pension obligations for such retired participants. The purchase of the annuity resulted in a non-cash loss of $17.0 which we recorded in OCI and simultaneously re-classified to deficit during the first quarter of 2017. We also reduced the value of our pension assets by $17.0 during the first quarter of 2017, which was recorded in other non-current assets on our consolidated balance sheet.
The overall governance of our pension plans is conducted by our Human Resources and Compensation Committee which, through annual reviews, approves material plan changes, reviews funding levels, investment performance, compliance matters and plan assumptions, and ensures that the plans are administered in accordance with local statutory requirements. We have established a Canadian and a U.S. Pension Committee to govern our Canadian and U.S. pension plans.plans respectively. The U.K. pension plan is governed by a Board of Trustees, composed of employee and company representation. Both the Canadian and U.S. Pension CommitteeCommittees, and the U.K. Board of Trustees review funding levels, investment performance and
F-40
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
compliance matters for their respective plans. Our pension funding policy is to contribute amounts sufficient, at minimum, to meet local statutory funding requirements. For our defined benefit pension plans (primarily our U.K.) pension plan), local regulatory bodies either define the minimum funding requirement or approve the funding plans submitted by us. We may make additional discretionary contributions taking into account actuarial assessments and other factors. The contributions that we make to support ongoing plan obligations are recorded in the respective asset or liability accounts on our consolidated balance sheet.
Our U.K. pension plan requires an actuarial valuation to be completed every three years. The most recent actuarial valuation was completedused a measurement date of April 2019. An updated actuarial valuation using a measurement date of April 2019; the next valuation will have a2022 is required to be received within 15 months of this measurement date of April 2022.date.
We currently fund our non-pension post-employment benefit plans as we incur benefit payment obligations thereunder. Excluding our mandatory plans, the most recent actuarial valuationsmeasurements for our largest non-pension post-employment benefit plans were completed using measurementvaluation dates of May 20192022 (Canada) and December 2019January 2022 (U.S.). The next actuarial valuationsmeasurements for these plans will have measurementvaluation dates of May 20222025 and December 2020,January 2024, respectively. We accrue the expected costs of providing non-pension post-employment benefits during the periods in which the employees render service. We used a measurement date of December 31, 20192022 for the accounting valuation for pension and non-pension post-employment benefits.
Our pension plans are exposed to market risks such as changes in interest rates, inflation, and fluctuations in investment values, as well as financial risks including counterparty risks of financial institutions from which annuities have been purchased for specified plans. See note 21(c)20(d). Our plans are also exposed to non-financial risks, including the membership’s mortality and demographic changes, as well as regulatory changes.
We manage the funding level risk of defined benefit pension plans through our asset allocation strategy for each plan. In the U.K., the majority of the obligations under our remaining U.K. defined benefit pension plan have been hedged with the purchase of annuities with insurance companies as described above.above, but do not qualify for designation as hedges for application of hedge accounting purposes.
Pension fund assets are invested primarily in fixed income and equity securities. Asset allocation between fixed income and equity securities is adjusted based on the expected life of the plan and the expected retirement dates of the plan participants. Our pension funds do not invest directly in our shares, but may invest indirectly as a result of the inclusion of our shares in certain investment funds. All of our plan assets are measured at their fair value using inputs described in the fair value hierarchy inputs described in note 21.20. At December 31, 2019, $28.7 (December2022, $32.1 (December 31, 20182021 — $26.5)$33.2) of our plan assets were measured using Level 1 inputs of the fair value hierarchy and $299.8$182.0 (December 31, 20182021 — $266.5)$328.7) of our plan assets (comprised of insurance annuities) were measured using Level 3 inputs of the fair value hierarchy. At December 31, 2019, none (December 31, 2018 — none)None of our plan assets were measured using Level 2 inputs of the fair value hierarchy.inputs. Approximately 97%92% of our plan assets consist of annuities purchased with insurance companies, and assets held with financial institutions with a Standard and Poor’s long-term rating of A-A or above at December 31, 2019.2022. The annuities purchased for theour U.K. Main pension plansplan are held with financial institutions that are governed by local regulatory bodies. The remaining assets are held with financial institutions where ratings are not available or are below A-.available. For these institutions, Celestica monitorswe monitor counterparty risk based on the diversification of plan assets. These plan assets are maintained in segregated accounts by a custodian that is independent from the fund managers. We believe that the counterparty risk is low.
Plan assets are measured at their fair values; however, the amounts we are permitted to record for defined benefit plan assets may be restricted under IFRS. SeeIFRS, as described in note 2(l) for a description of this restriction. . Based on a plan-by-plan review of the terms, conditions, and statutory minimum funding requirements of our defined benefit plans in 2022, we have determined that the present value of future pension refunds or reductions in future contributions to our pension plans exceeds the total of the fair value of plan assets net of the present value of related obligations. This determination was made on a plan-by-plan basis.obligations for all of our defined benefit plans, except for our defined benefit plan in Japan. As a result of this review, we reduced the recorded amount of our assessment, there were no reductions to the amounts we recorded for Japan defined benefit plan assets by $0.9 as at December 31, 2019 or 2018. 2022 (December 31, 2021 — $1.6), which was reflected in OCI.
| Fair Market Value at December 31 | Actual Asset Allocation (%) at December 31 | ||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||
| Quoted market prices: | |||||||||||||
| Debt investment funds | $ | 10.2 | $ | 10.3 | 4 | % | 3 | % | |||||
| Equity investment funds | 6.6 | 7.4 | 2 | % | 2 | % | |||||||
| Non-quoted market prices: | |||||||||||||
| Insurance annuities | 266.5 | 299.8 | 91 | % | 91 | % | |||||||
| Other | 9.7 | 11.0 | 3 | % | 4 | % | |||||||
| Total | $ | 293.0 | $ | 328.5 | 100 | % | 100 | % | |||||
F-41
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(b) Plan financials:
The table below presents the fair market value of defined pension and other benefit plan assets:
| Fair Market Value at December 31 | Actual Asset Allocation (%) at December 31 | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Quoted market prices: | |||||||||||||||||||||||
| Debt investment funds | $ | 10.6 | $ | 9.0 | 3 | % | 4 | % | |||||||||||||||
| Equity investment funds | 7.6 | 6.4 | 2 | % | 3 | % | |||||||||||||||||
| Non-quoted market prices: | |||||||||||||||||||||||
| Insurance annuities | 328.7 | 182.0 | 91 | % | 85 | % | |||||||||||||||||
| Other | 15.0 | 16.7 | 4 | % | 8 | % | |||||||||||||||||
| Total | $ | 361.9 | $ | 214.1 | 100 | % | 100 | % | |||||||||||||||
The following tables provide a summary of the financial position of our defined pension and other benefit plans:
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Plan assets, beginning of year | $ | 378.1 | $ | 359.9 | $ | 2.0 | $ | 2.0 | |||||||||||||||
| Interest income | 5.2 | 5.8 | — | — | |||||||||||||||||||
Actuarial gains (losses) in other comprehensive income (i) | (5.2) | (112.0) | — | — | |||||||||||||||||||
| Administrative expenses paid from plan assets | (0.8) | (0.6) | — | — | |||||||||||||||||||
| Employer contributions | 4.7 | 4.0 | 0.8 | 0.8 | |||||||||||||||||||
| Employer direct benefit payments | 1.4 | 0.1 | 1.7 | 2.4 | |||||||||||||||||||
| Employer direct settlement payments | — | — | 1.1 | — | |||||||||||||||||||
| Settlement payments from employer | — | — | (1.1) | — | |||||||||||||||||||
| Settlement payments from plan | — | — | (0.2) | — | |||||||||||||||||||
| Benefit payments from plan | (16.8) | (10.4) | (0.5) | (0.4) | |||||||||||||||||||
| Benefit payments from employer | (1.4) | (0.1) | (1.7) | (2.4) | |||||||||||||||||||
| Foreign currency exchange rate changes and other | (5.3) | (34.9) | (0.1) | (0.1) | |||||||||||||||||||
| Plan assets, end of year | $ | 359.9 | $ | 211.8 | $ | 2.0 | $ | 2.3 | |||||||||||||||
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Plan assets, beginning of year | $ | 395.5 | $ | 293.0 | $ | — | $ | — | |||||||
| Interest income | 9.4 | 8.0 | — | — | |||||||||||
Actuarial gains (losses) in other comprehensive income (i) | (82.2 | ) | 27.8 | — | — | ||||||||||
| Administrative expenses paid from plan assets | (1.4 | ) | (1.2 | ) | — | — | |||||||||
| Employer contributions | 2.7 | 2.9 | — | 0.9 | |||||||||||
| Employer direct benefit payments | 1.0 | 0.8 | 2.3 | 3.0 | |||||||||||
| Employer direct settlement payments | — | — | 2.5 | 5.2 | |||||||||||
| Settlement payments from employer | — | — | (2.5 | ) | (5.2 | ) | |||||||||
| Settlement payments from plan | 0.1 | — | — | (0.2 | ) | ||||||||||
| Benefit payments from plan | (12.7 | ) | (12.0 | ) | — | (0.2 | ) | ||||||||
| Benefit payments from employer | (1.0 | ) | (0.8 | ) | (2.3 | ) | (3.0 | ) | |||||||
| Foreign currency exchange rate changes and other | (18.4 | ) | 10.0 | — | 1.3 | ||||||||||
| Plan assets, end of year | $ | 293.0 | $ | 328.5 | $ | — | $ | 1.8 | |||||||
(i) Actuarial gains or losses are determined based on actual return on plan assets less interest income as set forth in the table above. |
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Accrued benefit obligations, beginning of year | $ | 355.8 | $ | 309.6 | $ | 75.5 | $ | 68.1 | |||||||
| Current service cost | 1.8 | 1.9 | 2.2 | 2.6 | |||||||||||
Past service cost and settlement/curtailment losses (i) | 0.1 | — | 1.2 | 8.0 | |||||||||||
| Interest cost | 8.6 | 8.6 | 2.6 | 2.6 | |||||||||||
| Actuarial losses (gains) in other comprehensive income from: | |||||||||||||||
| — Changes in demographic assumptions | (3.7 | ) | (0.4 | ) | — | (1.7 | ) | ||||||||
| — Changes in financial assumptions | (19.9 | ) | 31.1 | (3.5 | ) | 11.4 | |||||||||
| — Experience adjustments | 0.2 | (2.9 | ) | (0.5 | ) | (0.7 | ) | ||||||||
| Settlement payments from employer | — | — | (2.5 | ) | (5.2 | ) | |||||||||
| Settlement payments from plan | 0.1 | — | — | (0.2 | ) | ||||||||||
| Benefit payments from plan | (12.7 | ) | (12.0 | ) | — | (0.2 | ) | ||||||||
| Benefit payments from employer | (1.0 | ) | (0.8 | ) | (2.3 | ) | (3.0 | ) | |||||||
| Foreign currency exchange rate changes and other | (19.7 | ) | 10.9 | (4.6 | ) | 5.7 | |||||||||
| Accrued benefit obligations, end of year | $ | 309.6 | $ | 346.0 | $ | 68.1 | $ | 87.4 | |||||||
| Weighted average duration of benefit obligations (in years) | 18 | 18 | 13 | 13 | |||||||||||
F-42
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Accrued benefit obligations, beginning of year | $ | 396.9 | $ | 373.9 | $ | 95.6 | $ | 89.1 | |||||||||||||||
| Current service cost | 2.5 | 0.3 | 3.4 | 3.1 | |||||||||||||||||||
Past service cost (credit) and settlement/curtailment losses (i) | — | — | 0.3 | — | |||||||||||||||||||
| Interest cost | 5.6 | 6.2 | 2.4 | 2.7 | |||||||||||||||||||
| Actuarial losses (gains) in other comprehensive income from: | |||||||||||||||||||||||
| — Changes in demographic assumptions | (1.1) | (0.5) | — | (4.6) | |||||||||||||||||||
| — Changes in financial assumptions | (7.6) | (124.7) | (7.5) | (15.7) | |||||||||||||||||||
| — Experience adjustments | — | 7.5 | 0.1 | (1.8) | |||||||||||||||||||
| Settlement payments from employer | — | — | (1.1) | — | |||||||||||||||||||
| Settlement payments from plan | — | — | (0.2) | — | |||||||||||||||||||
| Benefit payments from plan | (16.8) | (10.4) | (0.5) | (0.4) | |||||||||||||||||||
| Benefit payments from employer | (1.4) | (0.1) | (1.7) | (2.4) | |||||||||||||||||||
| Foreign currency exchange rate changes and other | (4.2) | (35.3) | (1.7) | (3.7) | |||||||||||||||||||
| Accrued benefit obligations, end of year | $ | 373.9 | $ | 216.9 | $ | 89.1 | $ | 66.3 | |||||||||||||||
| Weighted average duration of benefit obligations (in years) | 18 | 13 | 12 | 10 | |||||||||||||||||||
(i) The settlement losses relate to employee terminations in connection with 2021 restructuring actions.
The present value of the defined benefit obligations, the fair value of plan assets and the surplus or deficit in our defined benefit pension and other benefit plans are summarized as follows:
| Pension Plans December 31 | Other Benefit Plans December 31 | ||||||||||||||||||||||
| 2021 | 2022 | 2021 | 2022 | ||||||||||||||||||||
| Accrued benefit obligations, end of year | $ | (373.9) | $ | (216.9) | $ | (89.1) | $ | (66.3) | |||||||||||||||
| Plan assets, end of year | 359.9 | 211.8 | 2.0 | 2.3 | |||||||||||||||||||
Reduction of plan assets due to IFRS restrictions described in note 2(l) | $ | (1.6) | $ | (0.9) | — | — | |||||||||||||||||
| Deficiency of plan assets over accrued benefit obligations | $ | (15.6) | $ | (6.0) | $ | (87.1) | $ | (64.0) | |||||||||||||||
| Pension Plans December 31 | Other Benefit Plans December 31 | ||||||||||||||
| 2018 | 2019 | 2018 | 2019 | ||||||||||||
| Accrued benefit obligations, end of year | $ | (309.6 | ) | $ | (346.0 | ) | $ | (68.1 | ) | $ | (87.4 | ) | |||
| Plan assets, end of year | 293.0 | 328.5 | — | 1.8 | |||||||||||
| Deficiency of plan assets over accrued benefit obligations | $ | (16.6 | ) | $ | (17.5 | ) | $ | (68.1 | ) | $ | (85.6 | ) | |||
The following table outlines the plan balances as reported on our consolidated balance sheet:sheets:
| December 31, 2021 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Pension Plans | Other Benefit Plans | Total | Pension Plans | Other Benefit Plans | Total | ||||||||||||||||||||||||||||||
| Pension and non-pension post-employment benefit obligations | $ | (20.7) | $ | (86.8) | $ | (107.5) | $ | (13.1) | $ | (63.9) | $ | (77.0) | |||||||||||||||||||||||
| Current other post-employment benefit obligations | — | (0.3) | (0.3) | — | (0.1) | (0.1) | |||||||||||||||||||||||||||||
| Non-current net pension assets (note 9) | 5.1 | — | 5.1 | 7.1 | — | 7.1 | |||||||||||||||||||||||||||||
| $ | (15.6) | $ | (87.1) | $ | (102.7) | $ | (6.0) | $ | (64.0) | $ | (70.0) | ||||||||||||||||||||||||
| December 31 | December 31 | ||||||||||||||||||||||
| 2018 | 2019 | ||||||||||||||||||||||
| Pension Plans | Other Benefit Plans | Total | Pension Plans | Other Benefit Plans | Total | ||||||||||||||||||
| Pension and non-pension post-employment benefit obligations | $ | (21.1 | ) | $ | (67.7 | ) | $ | (88.8 | ) | $ | (22.6 | ) | $ | (84.5 | ) | $ | (107.1 | ) | |||||
| Current other post-employment benefit obligations | — | (0.4 | ) | (0.4 | ) | — | (1.1 | ) | (1.1 | ) | |||||||||||||
| Non-current net pension assets (note 10) | 4.5 | — | 4.5 | 5.1 | — | 5.1 | |||||||||||||||||
| $ | (16.6 | ) | $ | (68.1 | ) | $ | (84.7 | ) | $ | (17.5 | ) | $ | (85.6 | ) | $ | (103.1 | ) | ||||||
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 | 2018 | 2019 | ||||||||||||||||||
| Current service cost | $ | 2.1 | $ | 1.8 | $ | 1.9 | $ | 2.0 | $ | 2.2 | $ | 2.6 | |||||||||||
| Net interest cost (income) | (1.3 | ) | (0.8 | ) | 0.6 | 2.6 | 2.6 | 2.6 | |||||||||||||||
| Past service cost and settlement/curtailment losses | 1.9 | 0.1 | — | 0.6 | 1.2 | 8.0 | |||||||||||||||||
| Plan administrative expenses and other | 1.3 | 1.3 | 1.5 | — | — | — | |||||||||||||||||
| 4.0 | 2.4 | 4.0 | 5.2 | 6.0 | 13.2 | ||||||||||||||||||
| Defined contribution pension plan expense (note 19(c)) | 9.4 | 9.6 | 10.1 | — | — | — | |||||||||||||||||
| Total expense for the year | $ | 13.4 | $ | 12.0 | $ | 14.1 | $ | 5.2 | $ | 6.0 | $ | 13.2 | |||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Cumulative losses (gains), beginning of year | $ | (4.1 | ) | $ | 14.1 | $ | 69.0 | ||||
| Loss on pension annuity purchases (note 19(a)) | 17.0 | 63.3 | — | ||||||||
Actuarial losses (gains) recognized during the year (i) | 1.2 | (8.4 | ) | 8.7 | |||||||
Cumulative losses (gains), end of year (ii) | $ | 14.1 | $ | 69.0 | $ | 77.7 | |||||
F-43
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
The following table outlines the net expense recognized in our consolidated statement of operations for pension and non-pension post-employment benefit plans:
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||
| Current service cost | $ | 1.9 | $ | 2.5 | $ | 0.3 | $ | 3.2 | $ | 3.4 | $ | 3.1 | |||||||||||||||||||||||
| Net interest cost | 0.5 | 0.4 | 0.4 | 2.4 | 2.4 | 2.7 | |||||||||||||||||||||||||||||
| Past service cost (credit) and settlement/curtailment losses | (0.8) | — | — | 2.3 | 0.3 | — | |||||||||||||||||||||||||||||
| Plan administrative expenses and other | 1.1 | 1.3 | 0.6 | — | — | — | |||||||||||||||||||||||||||||
| 2.7 | 4.2 | 1.3 | 7.9 | 6.1 | 5.8 | ||||||||||||||||||||||||||||||
| Defined contribution pension plan expense (note 18(c)) | 10.6 | 11.6 | 12.3 | — | — | — | |||||||||||||||||||||||||||||
| Total expense for the year | $ | 13.3 | $ | 15.8 | $ | 13.6 | $ | 7.9 | $ | 6.1 | $ | 5.8 | |||||||||||||||||||||||
We generally record the expenses for pension plans and non-pension post-employment benefits in cost of sales, SG&A expenses, or other charges, depending on the nature of the expenses.
The following table outlines the gains and losses, net of tax, recognized in OCI and reclassified directly to deficit for the years shown:
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Cumulative losses, beginning of year | $ | 77.7 | $ | 87.0 | $ | 77.7 | |||||||||||
| Loss on pension annuity purchases (see note 18(a)) | 0.2 | — | — | ||||||||||||||
Actuarial losses (gains) recognized during the year (i) | 9.1 | (9.3) | (33.5) | ||||||||||||||
Cumulative losses, end of year (ii) | $ | 87.0 | $ | 77.7 | $ | 44.2 | |||||||||||
(i) Including a $5.0 income tax recovery for 2022 (2021 — nil ; 2020 — net of a $0.4 income tax recovery).
(ii) Net of income tax recovery of $6.5 as at December 31, 2022 (December 31, 2021 and December 31, 2020 — net of a $1.5 income tax recovery).
The following percentages and assumptions were used in measuring the plans for the years indicated:
| Pension Plans | Other Benefit Plans | ||||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||
Weighted average discount rate at December 31 (i) for: | |||||||||||||||||||||||||||||||||||
| Benefit obligations | 1.4 | 1.8 | 4.9 | 2.5 | 3.2 | 4.9 | |||||||||||||||||||||||||||||
| Net pension cost | 2.1 | 1.4 | 1.8 | 2.9 | 2.5 | 3.2 | |||||||||||||||||||||||||||||
| Weighted average rate of compensation increase for: | |||||||||||||||||||||||||||||||||||
| Benefit obligations | 1.1 | 1.1 | 1.1 | 4.6 | 4.6 | 4.6 | |||||||||||||||||||||||||||||
| Net pension cost | 3.8 | 1.1 | 1.1 | 4.6 | 4.6 | 4.6 | |||||||||||||||||||||||||||||
| Healthcare cost trend rates: | |||||||||||||||||||||||||||||||||||
| Immediate trend | — | — | — | 5.3 | 5.2 | 5.1 | |||||||||||||||||||||||||||||
| Ultimate trend | — | — | — | 4.0 | 4.0 | 4.0 | |||||||||||||||||||||||||||||
| Year the ultimate trend rate is expected to be achieved | — | — | — | 2040 | 2040 | 2040 | |||||||||||||||||||||||||||||
(i) The weighted average discount rate is determined using publicly available rates for highly-rated bonds by currency in countries where we have a pension or non-pension benefit plan. A higher discount rate would decrease the present value of the benefit obligation, and a lower discount rate would increase the present value of the benefit obligation.
F-44
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Pension Plans | Other Benefit Plans | |||||||||||||
| 2017 | 2018 | 2019 | 2017 | 2018 | 2019 | |||||||||
Weighted average discount rate at December 31 (i) for: | ||||||||||||||
| Benefit obligations | 2.5 | 2.9 | 2.1 | 3.6 | 3.8 | 2.9 | ||||||||
| Net pension cost | 2.6 | 2.5 | 2.9 | 3.9 | 3.6 | 3.8 | ||||||||
| Weighted average rate of compensation increase for: | ||||||||||||||
| Benefit obligations | 4.0 | 4.1 | 3.8 | 4.6 | 4.2 | 4.6 | ||||||||
| Net pension cost | 3.9 | 4.0 | 4.1 | 4.6 | 4.6 | 4.2 | ||||||||
| Healthcare cost trend rates: | ||||||||||||||
| Immediate trend | — | — | — | 5.8 | 5.7 | 5.3 | ||||||||
| Ultimate trend | — | — | — | 4.5 | 4.0 | 4.0 | ||||||||
| Year the ultimate trend rate is expected to be achieved | — | — | — | 2030 | 2040 | 2040 | ||||||||
A one percentage-point increase or decrease in one of the following actuarial assumptions, holding other assumptions constant in each case, would increase (decrease) our benefit obligations as follows:
| Pension Plans | Other Benefit Plans | ||||||||||||||||||||||
| Year ended December 31, 2022 | Year ended December 31, 2022 | ||||||||||||||||||||||
| 1% Increase | 1% Decrease | 1% Increase | 1% Decrease | ||||||||||||||||||||
| Discount rate | $ | (23.4) | $ | 28.7 | $ | (6.2) | $ | 7.3 | |||||||||||||||
| Healthcare cost trend rate | $ | — | $ | — | $ | 3.2 | $ | (2.7) | |||||||||||||||
| Pension Plans | Other Benefit Plans | ||||||||||||||
| Year ended December 31, 2019 | Year ended December 31, 2019 | ||||||||||||||
| 1% Increase | 1% Decrease | 1% Increase | 1% Decrease | ||||||||||||
| Discount rate | $ | (54.5 | ) | $ | 70.6 | $ | (10.5 | ) | $ | 12.9 | |||||
| Healthcare cost trend rate | $ | — | $ | — | $ | 7.2 | $ | (5.9 | ) | ||||||
The sensitivity figures shown above were calculated by determining the change in our benefit obligations as at December 31, 20192022 due to a 100 basis point increase or decrease to each of our significant actuarial assumptions used, primarilyspecifically the discount rate and healthcare cost trend rate, in isolation, leaving all other assumptions unchanged from the original calculation.
(c) Plan contributions:
We made the following plan contributions for the years indicated below and estimate our contribution for 20202023 to be as follows:
| Year ended December 31 | Estimated Contribution* | ||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | ||||||||||||||||||||
| Defined contribution plan | $ | 10.6 | $ | 11.6 | $ | 12.3 | $ | 12.3 | |||||||||||||||
| Defined benefit plan | 5.1 | 6.1 | 4.1 | 3.2 | |||||||||||||||||||
| Total | $ | 15.7 | $ | 17.7 | $ | 16.4 | $ | 15.5 | |||||||||||||||
Non-pension post-employment benefit plans (i) | $ | 7.8 | $ | 3.6 | $ | 3.2 | $ | 4.3 | |||||||||||||||
* Our actual contributions could differ materially from these estimates.
(i) Contributions for 2020 include higher settlement payments than in 2021 and 2022 as a result of higher employee terminations in connection with our restructuring actions during the year. See note 15(a).
19. INCOME TAXES
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Current income tax expense: | |||||||||||||||||
Current year (i) | $ | 38.9 | $ | 44.3 | $ | 99.1 | |||||||||||
Adjustments for prior years, including changes to net provisions related to tax uncertainties (ii) | (6.0) | (3.4) | (10.4) | ||||||||||||||
| 32.9 | 40.9 | 88.7 | |||||||||||||||
| Deferred income tax expense (recovery): | |||||||||||||||||
Origination and reversal of temporary differences (i) (iii) | 10.1 | 1.3 | (22.3) | ||||||||||||||
| Changes in previously unrecognized tax losses and deductible temporary differences, including adjustments for prior years | (13.4) | (10.1) | (8.3) | ||||||||||||||
| (3.3) | (8.8) | (30.6) | |||||||||||||||
| Income tax expense | $ | 29.6 | $ | 32.1 | $ | 58.1 | |||||||||||
F-45
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Year ended December 31 | Estimated Contribution* | ||||||||||||||
| 2017 | 2018 | 2019 | 2020 | ||||||||||||
| Defined contribution plan | $ | 9.4 | $ | 9.6 | $ | 10.1 | $ | 10.1 | |||||||
| Defined benefit plan | 2.5 | 3.7 | 3.7 | 3.0 | |||||||||||
| Total | $ | 11.9 | $ | 13.3 | $ | 13.8 | $ | 13.1 | |||||||
Non-pension post-employment benefit plans (i) | $ | 4.5 | $ | 4.8 | $ | 9.1 | $ | 4.4 | |||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Current income tax expense: | |||||||||||
Current year (i) | $ | 39.3 | $ | 44.4 | $ | 35.1 | |||||
Adjustments for prior years, including changes to net provisions related to tax uncertainties (ii) | (0.2 | ) | (4.7 | ) | (12.3 | ) | |||||
| 39.1 | 39.7 | 22.8 | |||||||||
| Deferred income tax expense (recovery): | |||||||||||
Origination and reversal of temporary differences (i) (iii) | (5.6 | ) | 6.2 | 15.4 | |||||||
Changes in previously unrecognized tax losses and deductible temporary differences, including adjustments for prior years (iii) (iv) | (5.9 | ) | (62.9 | ) | (8.7 | ) | |||||
| (11.5 | ) | (56.7 | ) | 6.7 | |||||||
| Income tax expense (recovery) | $ | 27.6 | $ | (17.0 | ) | $ | 29.5 | ||||
A reconciliation of income taxes calculated at the statutory income tax rate to the income tax expense at the effective tax rate is as follows:
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Earnings before income taxes | $ | 90.2 | $ | 136.0 | $ | 203.6 | |||||||||||
| Income tax expense at Celestica’s statutory income tax rate of 26.5% (2020 to 2022) | $ | 23.9 | $ | 36.1 | $ | 54.0 | |||||||||||
| Impact on income taxes from: | |||||||||||||||||
| Foreign income taxed at different rates | (16.3) | (16.9) | (34.1) | ||||||||||||||
| Foreign exchange | (8.6) | 1.2 | 5.7 | ||||||||||||||
Other, including non-taxable/non-deductible items and changes to net provisions related to tax uncertainties (i) (ii) | 25.0 | 8.2 | 2.9 | ||||||||||||||
Change in tax rates (iii) | — | (7.6) | 0.1 | ||||||||||||||
| Change in unrecognized tax losses and deductible temporary differences | 5.6 | 11.1 | 29.5 | ||||||||||||||
| Income tax expense | $ | 29.6 | $ | 32.1 | $ | 58.1 | |||||||||||
| Year ended December 31 | |||||||||||
| 2017 | 2018 | 2019 | |||||||||
| Earnings before income taxes | $ | 133.1 | $ | 81.9 | $ | 99.8 | |||||
| Income tax expense at Celestica’s statutory income tax rate of 26.5% (2018 and 2017 — 26.5%) | $ | 35.3 | $ | 21.7 | $ | 26.4 | |||||
| Impact on income taxes from: | |||||||||||
| Manufacturing and processing deduction | (0.1 | ) | (0.1 | ) | — | ||||||
| Foreign income taxed at different rates | (7.6 | ) | (9.1 | ) | (6.7 | ) | |||||
| Foreign exchange | (6.8 | ) | 3.8 | 5.0 | |||||||
Other, including non-taxable/non-deductible items and changes to net provisions related to tax uncertainties (i) (ii) (iii) | 3.4 | 11.3 | (5.8 | ) | |||||||
| Change in tax rates | — | — | (0.8 | ) | |||||||
Change in unrecognized tax losses and deductible temporary differences (iii) (iv) | 3.4 | (44.6 | ) | 11.4 | |||||||
| Income tax expense (recovery) | $ | 27.6 | $ | (17.0 | ) | $ | 29.5 | ||||
(ii) These line items for 2020, 2021 and 2022 in the two tables above include tax benefits related to return-to-provision adjustments for changes in estimates related to prior years based on changes in facts or circumstances (RTP Adjustments), and net adjustments for tax liabilities and uncertainties (discussed below).
(iii) This line item for 2021 in the two tables above relates to a deferred tax recovery recorded in connection with the revaluation of certain temporary differences using the future effective tax rate of our Thailand subsidiary in connection with the then-forthcoming transition from a 100% income tax exemption to a 50% exemption in 2022 under an applicable tax incentive (Revaluation Impact). See the discussion of tax incentives below.
Our effective income tax rate can vary significantly period-to-period for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the Americas, Europe and Asia, in jurisdictions with tax holidays and tax incentives, and in jurisdictions for which no net deferred income tax assets have been recognized because management believedbelieves it wasis not probable that future taxable profit wouldwill be available against which tax losses and deductible temporary differences could be utilized. Our effective income tax rate can also vary due to the impact of restructuring charges, foreign exchange fluctuations, operating losses, cash repatriations, and changes in our provisions related to tax uncertainties.
During 2019,2022, we recorded net income tax expense of $58.1, which was favorably impacted by $4.9 in reversals of tax uncertainties in one of our Asian subsidiaries, which was more than offset by an adverse $3.5 taxable foreign exchange impact arising primarily from the weakening of the Chinese renminbi relative to the U.S. dollar, our functional currency (Currency Impact) and a $3.3 Repatriation Expense (defined in footnote (i) above) related to certain of our Chinese subsidiaries. The withholding tax of $10.3 associated with the repatriation of undistributed earnings from certain of our Chinese subsidiaries in 2022 (realized as current tax) was fully offset by the reversal of previously accrued deferred taxes from the then-anticipated repatriation of such undistributed earnings.
During2021, we recorded net income tax expense of $32.1, which included a $7.6 Revaluation Impact (defined in footnote (iii) above), largely offset by a $6.0 Repatriation Expense related to certain of our Chinese subsidiaries. Currency Impacts were not significant in 2021.
During 2020, we recorded a net income tax expense of $29.5,$29.6, which was favorably impacted by $6.4 inincluded $18.3 of tax benefits arising from return-to-provision adjustments for changes in estimates relatedexpenses relating to prior years, based on changes in facts or circumstances,current and an aggregate of $4.5 in reversals of certain previously-recorded tax liabilities and uncertainties, offset in part by $6.0 of deferred tax expense arising from taxable temporary differencesfuture withholding taxes associated with the anticipated repatriationrepatriations of undistributed earnings from certain of our Chinese and Thai subsidiaries. While our net income tax expense included taxable foreign exchange impacts (Currency Impacts) from fluctuationssubsidiaries that occurred in foreign currencies relative2020 or were then-anticipated to occur in the U.S. dollar during each quarter of 2019, overall net Currency Impacts for 2019 were not significant. In connection with the sale of our Toronto real property, there was no net tax impact (see note 16(c)), as the deferred tax expenses of $5.7 was offset by the recognition of previously unrecognized tax losses.
F-46
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
following favorable impacts: (i) $4.1 in RTP Adjustments (defined in footnote (ii) above), (ii) the recognition of $2.6 of previously unrecognized deferred tax assets of our Japanese subsidiary, (iii) $5.1 in favorable Currency Impacts arising primarily from the strengthening of the Chinese renminbi relative to the U.S. dollar, and (iv) a $5.7 reversal of tax uncertainties in certain of our Asian subsidiaries in the first quarter of 2020.
Changes in deferred tax assets and liabilities for the periods indicated are as follows:
| Unrealized foreign exchange gains | Accounting provisions not currently deductible | Pensions and non-pension post-retirement benefits | Tax losses carried forward | Property, plant and equipment and intangibles | Other | Reclassification between deferred tax assets and deferred tax liabilities(i) | Total | Unrealized foreign exchange gains | Accounting provisions not currently deductible | Pensions and non-pension post-retirement benefits | Tax losses carried forward | Property, plant and equipment and intangibles | Other | Reclassification between deferred tax assets and deferred tax liabilities(i) | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax assets: | Deferred tax assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — January 1, 2018 | $ | — | $ | 8.8 | $ | — | $ | 34.6 | $ | 6.3 | $ | — | $ | (12.1 | ) | $ | 37.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — January 1, 2021 | Balance — January 1, 2021 | $ | — | $ | 10.5 | $ | 0.7 | $ | 72.2 | $ | — | $ | — | $ | (43.5) | $ | 39.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) to net earnings | — | 2.1 | — | 36.8 | — | 17.1 | — | 56.0 | Credited (charged) to net earnings | — | 7.2 | 2.1 | (3.2) | — | 2.7 | — | 8.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) directly to equity | — | — | — | (9.8 | ) | — | 1.7 | — | (8.1 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of foreign exchange | — | (0.1 | ) | — | (2.1 | ) | — | 0.1 | — | (2.1 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (6.3 | ) | (4.1 | ) | (36.3 | ) | (46.7 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2018 | — | 10.8 | — | 59.5 | — | 14.8 | (48.4 | ) | 36.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) to net earnings | — | (1.0 | ) | 0.6 | 2.1 | — | (3.1 | ) | — | (1.4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) directly to equity | — | — | — | 0.3 | — | (0.6 | ) | — | (0.3 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited directly to equity | Credited directly to equity | — | — | — | — | — | 1.1 | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additions from business combinations | — | (0.1 | ) | — | — | — | — | — | (0.1 | ) | Additions from business combinations | — | 0.1 | — | — | — | 1.0 | — | 1.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of foreign exchange | — | (0.1 | ) | — | 1.0 | — | 0.3 | — | 1.2 | Effects of foreign exchange | — | (0.1) | — | 0.2 | — | (0.5) | — | (0.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | (0.8 | ) | — | — | — | (1.7 | ) | (2.5 | ) | Other | — | — | — | — | — | (3.1) | 0.3 | (2.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2019 | $ | — | $ | 9.6 | $ | (0.2 | ) | $ | 62.9 | $ | — | $ | 11.4 | $ | (50.1 | ) | $ | 33.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2021 | Balance — December 31, 2021 | — | 17.7 | 2.8 | 69.2 | — | 1.2 | (43.2) | 47.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) to net earnings | Credited (charged) to net earnings | — | 13.7 | 2.8 | (10.7) | — | 17.4 | — | 23.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credited (charged) directly to equity | Credited (charged) directly to equity | — | — | 4.4 | 0.4 | — | (5.1) | — | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of foreign exchange | Effects of foreign exchange | — | (0.5) | — | (1.9) | — | (0.2) | — | (2.6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | Other | — | — | — | — | — | — | 0.9 | 0.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2022 | Balance — December 31, 2022 | $ | — | $ | 30.9 | $ | 10.0 | $ | 57.0 | $ | — | $ | 13.3 | $ | (42.3) | $ | 68.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deferred tax liabilities: | Deferred tax liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — January 1, 2018 | $ | 25.2 | $ | — | $ | 10.6 | $ | — | $ | — | $ | 4.1 | $ | (12.1 | ) | $ | 27.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — January 1, 2021 | Balance — January 1, 2021 | $ | 27.2 | $ | — | $ | — | $ | — | $ | 45.5 | $ | 3.1 | $ | (43.5) | $ | 32.3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charged (credited) to net earnings | 1.5 | — | — | — | (2.3 | ) | — | — | (0.8 | ) | Charged (credited) to net earnings | (0.2) | — | — | — | 0.2 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charged (credited) directly to equity | — | — | (9.9 | ) | — | — | — | — | (9.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additions from business combinations | — | — | — | — | 56.6 | — | — | 56.6 | Additions from business combinations | — | — | — | — | 30.7 | — | — | 30.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of foreign exchange | (2.1 | ) | — | 0.1 | — | 0.5 | — | — | (1.5 | ) | Effects of foreign exchange | 0.2 | — | — | — | (0.2) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | (6.3 | ) | (4.1 | ) | (36.3 | ) | (46.7 | ) | Other | — | — | — | — | — | (3.1) | 0.3 | (2.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2018 | 24.6 | — | 0.8 | — | 48.5 | — | (48.4 | ) | 25.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2021 | Balance — December 31, 2021 | 27.2 | — | — | — | 76.2 | — | (43.2) | 60.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Charged (credited) to net earnings | 0.8 | — | — | — | 4.5 | — | — | 5.3 | Charged (credited) to net earnings | (5.0) | — | — | — | (2.4) | — | — | (7.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Additions from business combinations | — | — | — | — | (0.9 | ) | — | — | (0.9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Effects of foreign exchange | 1.0 | — | — | — | — | — | — | 1.0 | Effects of foreign exchange | (1.7) | — | — | — | (0.7) | — | — | (2.4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | (0.8 | ) | — | — | — | (1.7 | ) | (2.5 | ) | Other | — | — | — | — | 0.4 | — | 0.9 | 1.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2019 | $ | 26.4 | $ | — | $ | — | $ | — | $ | 52.1 | $ | — | $ | (50.1 | ) | $ | 28.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance — December 31, 2022 | Balance — December 31, 2022 | $ | 20.5 | $ | — | $ | — | $ | — | $ | 73.5 | $ | — | $ | (42.3) | $ | 51.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(i) This reclassification reflects the offsetting of deferred tax assets and deferred tax liabilities to the extent they relate to the same taxing authorities and there is a legally enforceable right to such offset.
The amount of deductible temporary differences and unused tax losses for which no deferred tax assets have been recognized at December 31, 2019 is 2022 was $1,783.2 (December1,688.9 (December 31, 20182021 — $1,780.4)$1,764.1). We have not recognized deferred tax assets in respect of these items because, based on management’s estimates, it is not probable that future taxable profit will be available against which we can utilize the benefits. A portion of theseour unused tax losses expires between 20202023 and 20392042 and a portion can be carried forward indefinitely to offset taxable profits. The deductibleindefinitely. Deductible temporary differences do not expire under current applicable tax legislation.
recognize deferred tax assets based on our estimate of the future taxable profit we expect these subsidiaries to achieve based on our review of financial projections. We did not record any deferred tax assets related to losses incurred
F-47
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in 2017 for anymillions of our subsidiaries.U.S. dollars, except percentages and per share amounts)
Certain countries in which we do business grant tax incentives to attract or retain our business. Our tax expense could increase significantly if certain tax incentives from which we benefit are retracted. A retraction could occur if we fail to satisfy the conditions on which these tax incentives are based, or if they are not renewed or replaced upon expiration. Our tax expense could also increase if tax rates applicable to us in such jurisdictions are otherwise increased, or due to changes in legislation or administrative practices. Changes in our outlook in any particular country could impact our ability to meet the required conditions.
Our tax incentives currently consist of tax holidaysexemptions for the profits of our Thailand and Laos subsidiaries, as well as tax incentives for dividend withholding taxes for these subsidiaries. These tax incentivesexemptions are subject to certain conditions with which we intend to comply, and expire between 2020as described below.
We have three income tax incentives (including an incentive that commenced in 2022) in Thailand. One of these incentives allows for a 50% income tax exemption until its expiration in 2027. The second incentive allows for a 100% income tax and 2027.distribution tax exemption for eight years, and expires in 2028. The third incentive allows for a 100% income tax exemption for six years, and expires in 2028. Our tax incentive in Laos allows for a 100% income tax exemption until 2025, and a reduced income tax rate of 8% thereafter. Upon full expiry of each of the incentives, taxable profits associated with such incentives become fully taxable. The aggregate tax benefit arising from all of our tax incentives was approximately $1.5 or $0.01 per diluted share$21 for 2019, $4.7 or $0.03 per diluted share for 2018, and $7.6 or $0.05 per diluted share for 20172022 (2021 — $15; 2020 — $10).
We have threereceived an approval from the Malaysian authorities in 2020 for an income tax incentives in Thailand (one previous incentive expired in October 2019, and we had withdrawn another in 2017 in connection withfor one of our exit from the solar panel manufacturing business). Two of these incentives initially allow for a 100% income tax exemption (including distribution taxes),Malaysian subsidiaries, which after eight years transition toprovided a 50% income tax exemption for the nexta period of five years (excluding distribution taxes). The third(a significant portion of which applied to previous periods) for certain product sets manufactured by such subsidiary. In 2022, the Malaysian authorities determined that this incentive obtainedwould cover 2016 - 2021, but the applicable benefit was not significant in 2019, allows for a 100% income tax exemption for eight years. Upon full expiry of each of the incentives, taxable profits associated withany such expired tax incentives become fully taxable. One of our remaining Thailand tax incentives expires in 2020, another will transition to the 50% exemption in 2022 and expire in 2027, and the third will expire in 2027.year.
See note 24 for contingencies regarding a Brazilian salesRomanian income and value-added tax contingency.matter.
20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT: |
Our financial assets are comprised primarily of cash and cash equivalents, A/R, and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of A/P, certain accrued and other liabilities, and provisions, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives. Wederivatives used for hedging purposes. Subsequent to initial recognition, we record the majority of our financial assets and liabilities at amortized cost except for derivative assets and liabilities, which we measure at fair value. We classify our short-term investments in money market funds (if applicable) as FVTPL, and initially recognize such assets on our consolidated balance sheet at fair value with subsequent changes recorded in our consolidated statement of operations. The carrying value of the Term Loans approximates their fair value as they bear interest at a variable market rate. We classify the financial assets and liabilities that we measure at fair value based on the inputs used to determine fair value at the measurement date.
Cash and cash equivalents are comprised of the following:
| December 31 | December 31 | |||||||||||||||||
| 2018 | 2019 | 2021 | 2022 | |||||||||||||||
| Cash | $ | 409.1 | $ | 446.3 | Cash | $ | 384.4 | $ | 364.0 | |||||||||
| Cash equivalents | 12.9 | 33.2 | Cash equivalents | 9.6 | 10.5 | |||||||||||||
| $ | 422.0 | $ | 479.5 | $ | 394.0 | $ | 374.5 | |||||||||||
Our current portfolio of cash and cash equivalents consists of bank deposits. The majority of our cash and cash equivalents are held with financial institutions each of which had at December 31, 20192022 a Standard and Poor’s short-term rating of A-1.
A-1 or above.
Financial risk management objectives:
We have exposures to a variety of financial risks through our operations. We regularly monitor these risks and have established policies and business practices that are intended to mitigate the adverse effects of these potential exposures. We have usedexposures, including the use of derivative financial instruments, such as foreign currency forward and swap contracts, as well asthe TRS Agreement and interest rate swaps, to reduce the effects of some of these risks.swap agreements. We do not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
F-48
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(a) Currency risk:
Due to the global nature of our operations, we are exposed to exchange rate fluctuations on our financial instruments denominated in various currencies. The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. As part of our risk management program, we attempt to mitigate currency risk through a hedging program using forecasts of our anticipated future cash flows and balance sheet exposuresmonetary assets and monetary liabilities denominated in foreign currencies. We enter into foreign exchangecurrency forward contracts and swaps, generally for periods of up to 12 months, to lock in the exchange rates for future foreign currency transactions, which isare intended to reduce the variability offoreign currency risk related to our operating costs and future cash flows denominated in local currencies. While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates on our operating costs and cash flows, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates. Although our functional currency is the U.S. dollar, currency risk on our income tax expense arises as we are generally required to file our tax returns in the local currency for each particular country in which we have operations. While our hedging program is designed to mitigate currency risk vis-à-vis the U.S. dollar, we remain subject to taxable foreign exchange impacts in our translated local currency financial results relevant for tax reporting purposes.
We cannot predict changes in currency exchange rates, the impact of exchange rate changes on our operating results, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Such changes could have a material effect on our business, financial performance and financial condition.
Our major currency exposures at December 31, 20192022 are summarized in U.S. dollar equivalents in the following table. The local currency amounts have been converted to U.S. dollar equivalents using spot rates at December 31, 2019.2022.
| Canadian dollar | Romanian Leu | Euro | Thai baht | Chinese renminbi | Canadian dollar | Euro | Thai baht | Chinese renminbi | Mexican Peso | Malaysian ringgit | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 2.0 | $ | 0.6 | $ | 19.5 | $ | 2.7 | $ | 37.1 | Cash and cash equivalents | $ | 1.1 | $ | 11.0 | $ | 3.6 | $ | 9.9 | $ | 1.3 | $ | 2.0 | |||||||||||||||||||||||||||||||
| A/R | 3.1 | 0.5 | 46.4 | 1.0 | 12.1 | A/R | 7.4 | 56.4 | — | 19.8 | — | 7.5 | ||||||||||||||||||||||||||||||||||||||||||
| Income taxes and value-added taxes receivable | — | 0.5 | 1.1 | 1.2 | 2.4 | Income taxes and value-added taxes receivable | 19.7 | 1.2 | 0.9 | 5.6 | 41.0 | 5.8 | ||||||||||||||||||||||||||||||||||||||||||
| Other financial assets | — | 0.7 | 1.7 | 0.6 | 0.3 | Other financial assets | 0.4 | 7.7 | 0.2 | 0.4 | 0.9 | 4.9 | ||||||||||||||||||||||||||||||||||||||||||
| Pension and non-pension post-employment liabilities | (69.8 | ) | (0.1 | ) | (0.6 | ) | (13.3 | ) | (0.7 | ) | Pension and non-pension post-employment liabilities | (73.4) | (0.7) | (19.6) | (0.5) | (4.4) | — | |||||||||||||||||||||||||||||||||||||
| Income taxes and value-added taxes payable | (1.4 | ) | — | (0.6 | ) | (2.1 | ) | (6.7 | ) | Income taxes and value-added taxes payable | (19.0) | (2.2) | (4.8) | (7.1) | (12.8) | (1.4) | ||||||||||||||||||||||||||||||||||||||
| A/P and certain accrued and other liabilities and provisions | (54.4 | ) | (10.5 | ) | (39.2 | ) | (31.9 | ) | (28.3 | ) | A/P and certain accrued and other liabilities and provisions | (63.7) | (41.5) | (45.4) | (46.3) | (15.9) | (31.8) | |||||||||||||||||||||||||||||||||||||
| Net financial assets (liabilities) | $ | (120.5 | ) | $ | (8.3 | ) | $ | 28.3 | $ | (41.8 | ) | $ | 16.2 | Net financial assets (liabilities) | $ | (127.5) | $ | 31.9 | $ | (65.1) | $ | (18.2) | $ | 10.1 | $ | (13.0) | ||||||||||||||||||||||||||||
Foreign currency risk sensitivity analysis:
The financial impact of a one-percentage point strengthening or weakening of the following currencies against the U.S. dollar for our financial instruments denominated in such non-functional currencies is summarized in the following table as at December 31, 2019.2022. The financial instruments impacted by a change in exchange rates include our exposures to the above financial assets or liabilities denominated in non-functional currencies and our foreign exchange forward contracts and swaps.
| Canadian dollar | Euro | Thai baht | Chinese renminbi | Mexican Peso | Malaysian ringgit | ||||||||||||||||||||||||||||||||||||
| Increase (decrease) | |||||||||||||||||||||||||||||||||||||||||
| 1% Strengthening | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | (0.5) | $ | — | $ | (0.4) | $ | — | $ | (0.1) | $ | (0.2) | |||||||||||||||||||||||||||||
| OCI | $ | 1.1 | (0.2) | 1.2 | 0.2 | 0.4 | 1.2 | ||||||||||||||||||||||||||||||||||
| 1% Weakening | |||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 0.5 | — | 0.4 | — | 0.1 | 0.2 | ||||||||||||||||||||||||||||||||||
| OCI | $ | (1.1) | 0.2 | (1.1) | (0.2) | (0.4) | (1.2) | ||||||||||||||||||||||||||||||||||
F-49
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Canadian dollar | Romanian Leu | Euro | Thai baht | Chinese renminbi | |||||||||||||||
| Increase (decrease) | |||||||||||||||||||
| 1% Strengthening | |||||||||||||||||||
| Net earnings | $ | (0.2 | ) | $ | (0.1 | ) | $ | 0.1 | $ | (0.1 | ) | $ | — | ||||||
| Other comprehensive income | 1.0 | 0.3 | — | 0.7 | 0.3 | ||||||||||||||
| 1% Weakening | |||||||||||||||||||
| Net earnings | 0.2 | 0.1 | (0.1 | ) | 0.1 | — | |||||||||||||
| Other comprehensive income | (1.0 | ) | (0.3 | ) | — | (0.7 | ) | (0.3 | ) | ||||||||||
(b) Interest rate risk:
Borrowings under the Credit Facility bear interest at specified rates, plus specified margins. See note 12.11. Our borrowings under this facility at December 31, 20192022 totaled $592.3$627.2 (December 31, 20182021 — $757.3)$660.4), comprised in each year of an aggregate of $592.3outstanding borrowings under the Term Loans, (December 31, 2018 — $598.3), and other than ordinary course letters of credit (described below), no amountsnil amount outstanding under the Revolver (December 31, 2018 — $159.0 outstanding under the Revolver).Revolver. Such borrowings expose us to interest rate risk due to the potential variability of market interest rates. Without accounting for the interest rate swaps described below, a one-percentage point increase in these rates would increase interest expense, based on outstanding borrowings of $592.3$627.2 as at December 31, 2019,2022, by $5.9$6.3 annually.
As part of our risk management program, we attempt to mitigate interest rate risk through interest rate swaps. ToIn order to partially hedge against our exposure to interest rate variability on theour Term Loans, we have entered into 5-yearvarious agreements with a syndicate of third-party banks in August and December 2018 to swap the variable interest ratesrate (based on LIBOR plus a margin) with a fixed ratesrate of interest on $350.0for a portion of the totalborrowings under our Term Loans. At December 31, 2022, we had: (i) interest rate swaps hedging the interest rate risk associated with $100.0 of our Initial Term Loan borrowings that expire in August 2023 (Initial Swaps); (ii) interest rate swaps hedging the interest rate risk associated with $100.0 of our Initial Term Loan borrowings, for which the cash flows commence upon the expiration of the Initial Swaps and continue through June 2024 (First Extended Initial Swaps) (iii) interest rate swaps (entered into in February 2022) hedging the interest rate risk associated with $100.0 of our Initial Term Loan borrowings (and any subsequent term loans replacing the Initial Term Loan), for which the cash flows commence upon the expiration of the First Extended Initial Swaps and continue through December 2025 (Second Extended Initial Swaps); (iv) interest rate swaps hedging the interest rate risk associated with $100.0 of outstanding borrowings under the Incremental Term Loans.Loan that expire in December 2023 (Incremental Swaps); (v) interest rate swaps (entered into in February 2022) hedging the interest rate risk associated with $100.0 of our Incremental Term Loan borrowings, for which the cash flows commence upon the expiration of the Incremental Swaps and continue through December 2025 (First Extended Incremental Swaps); and (vi) interest rate swaps (entered into in February 2022) hedging the interest rate risk associated with an additional $130.0 of our Incremental Term Loan borrowings that expire in December 2025 (Additional Incremental Swaps). We have an option to cancel up to $50.0 of the notional amount of the Additional Incremental Swaps from January 2024 through October 2025. The terms of the interest rate swap agreements onwith respect to the floating market rate and the interest payment dates match that of the underlying debt, such that any hedge ineffectiveness is not expected to be significant. The swap agreements include options that allow us
At December 31, 2022, the interest rate risk related to cancel up to $150.0$297.2 of borrowings under the notional amountCredit Facility was unhedged, consisting of unhedged amounts outstanding under the original swap agreementsTerm Loans ($75.0180.4 under the Initial Term Loan and $116.8 under the Incremental Term Loan), and no amounts outstanding (other than ordinary course letters of credit) under the Revolver (December 31, 2021 — $460.4 unhedged, consisting of $195.4 under the Initial Term Loan and $265.0 under the Incremental Term Loan, starting in December 2020, and $75.0 under the Initial Term Loan starting in August 2021). These options to cancel are aligned with our risk management strategy for the Term Loans as they allow us to make voluntary prepaymentsno amounts outstanding (other than ordinary course letters of outstanding amounts without premium or penalty, subject to certain conditions. Our unhedged borrowings under the Credit Facility at December 31, 2019 were $242.3 (comprised of an aggregate of $242.3 under the Term Loans and $0.0credit) under the Revolver). A one-percentage point increase in relevantapplicable interest rates would increase interest expense, based on the outstanding unhedged borrowings of $242.3 asunder the Credit Facility at December 31, 2019,2022, and including the impact of our interest rate swap agreements, by $2.4$3.0 annually.
We obtain third-party valuations of the swaps under the interest rate swap agreements. The valuations of the swaps are primarily measured through various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and volatility, and credit risk adjustments. The valuations of the interest rate swaps are measured primarily based on Level 2 data inputs of the fair value measurement hierarchy. The unrealized portion of the hedge gain or losschange in fair value of the swaps is recorded in accumulated OCI. The realized portion of the hedge gain or losschange in fair value of the swaps is released from accumulated OCI and recognized under finance costs in our consolidated statement of operations in the respective interest payment periods. At December 31, 2019,2022, the fair value of our interest rate swap agreements was aan unrealized gain of $18.7, which we recorded in other non-current assets on our consolidated balance sheet (December 31, 2021 — net unrealized loss of $12.1 $6.9, consisting of aggregate unrealized gains of $0.5 for certain of our swaps, which we recorded in other non-current assets, and aggregate unrealized losses of $7.4 on the remainder, which we recorded in other non-current liabilities on our consolidated balance sheet.sheet). As we have swapped $350.0$330.0 of our borrowings under the Term Loans from floating to fixed rates as at December 31, 2022, the financial impact of a 25 basis point increase in the floating market interest rate would decreaseincrease the net unrealized lossgain by $2.1 and a 25 basis point decrease in the floating interest rate would increasedecrease our unrealized lossgain on the interest rate swaps by $2.0.$2.1.
Global reform of major interest rate benchmarks is currently underway, including the anticipated replacement of some IBORs (including LIBOR) with alternative nearly risk-free rates. See note 2, "Recently issued accounting standards
F-50
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
and amendments." We have obligations under our Credit Facility and certain derivative instruments, that are indexed to LIBOR (LIBOR Agreements). The interest rates under these agreements are subject to change when relevant LIBOR benchmark rates cease to exist. Remaining LIBOR settings are expected to expire after June 2023. However, there remains uncertainty over the methods of transition to such alternate rates.
Our Credit Facility provides that, with respect to the Initial Term Loan and any non-U.S. dollar-denominated borrowings under the Revolver, when the Administrative Agent, the majority of lenders or we determine that LIBOR (or the corresponding rate for any Alternative Currency, as defined in the Credit Facility), is unavailable or being replaced, then we and the Administrative Agent may amend the underlying credit agreement to reflect a successor rate as specified therein. The Credit Facility has not yet been so amended. Once LIBOR becomes unavailable: (i) if no successor rate has been established, LIBOR borrowings under the Initial Term Loan will convert to Base Rate loans, and any non-U.S. dollar-denominated borrowings under the Revolver will be repaid, replaced or converted pursuant to the Credit Facility, and (ii) LIBOR borrowings under the Incremental Term Loan and U.S. dollar-denominated borrowings under the Revolver will convert to secured overnight financing rate (SOFR) loans recommended or selected by the relevant governmental body, adjusted as set forth in the Credit Facility. It remains uncertain when the benchmark transitions will be complete or what replacement rates will be used.
Our variable rate Term Loans are partially hedged with interest rate swap agreements (as of December 31, 2022, 53% hedged with an aggregate notional amount of $330.0, and December 31, 2021 — 30% hedged with an aggregate notional amount of $200.0). Hedge ineffectiveness could result due to the cessation of LIBOR, if such agreements transition using a different benchmark or spread adjustment as compared to the underlying hedged debt. The Second Extended Initial Swaps, the First Extended Incremental Swaps and the Additional Incremental Swaps mirror the LIBOR successor provisions under the Credit Facility, but have not yet transitioned to a successor rate. We have also amended the swap agreement with one of the two counterparty banks under the Incremental Swaps (with a notional amount of $50.0) to mirror the LIBOR successor provisions under the Credit Facility, but such swaps have not yet transitioned to the successor rate. Our remaining interest rate swap agreements do not yet have LIBOR successor provisions and will require future amendment. As a result, we cannot assure that benchmark transitions under these interest rate swap agreements will be successful, or if so, what replacement rates will be used.
Our A/R sales program and three customers SFPs have transitioned to alternative benchmark rates with predetermined spreads. Our lease arrangements with progress payments that were indexed to LIBOR have transitioned to SOFR-based benchmark rates. These transitions did not have a significant impact on our consolidated financial statements. TRS Interest is based on SOFR.
While we expect that reasonable alternatives to LIBOR benchmarks will be implemented in advance of their cessation date, we cannot assure that this will be the case. If relevant LIBOR benchmarks are no longer available and the alternative reference rate is higher, interest rates under the affected LIBOR Agreements would increase, which would adversely impact our interest expense, our financial performance and cash flows. We will continue to monitor developments with respect to the cessation of LIBOR, and will evaluate potential impacts on our LIBOR Agreements, processes, systems, risk management methodology and valuations, financial reporting, taxes, and financial results. However, we are currently unable to predict what the future replacement rates or consequences on our operations or financial results will be.
(c) Equity price risk:
On December 15, 2022, we entered into the TRS Agreement with a third-party bank with respect to a Notional Amount of 3.0 million of our SVS to manage our cash flow requirements and exposure to fluctuations in the price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. If the value of the TRS (as defined in the TRS Agreement) decreases over the term of the TRS Agreement, we are obligated to pay the counterparty the amount of such decrease upon Settlement (see note 2(p) and 12). As of December 31, 2022, the counterparty had acquired 400,205 SVS at a weighted average price of $10.97. The TRS Agreement matures in February 2023, provides for automatic annual one-year extensions (subject to specified conditions), and may be terminated by either party at any time. The TRS did not have a material impact on our consolidated financial statements for 2022.
(d) Credit risk:
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe theour credit risk of counterparty non-performance iscontinues to be relatively low, however,low. We are in regular contact with our customers, suppliers and logistics providers, and have not experienced significant counterparty credit-related non-
F-51
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
performance in 2021 or 2022. However, if a key supplier (or any company within such supplier's supply chain) or customer experiences financial difficulties or fails to comply with their contractual obligations, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign currency exchange contracts or swaps, interest rate swaps, or annuities for our pension plans, or which is counterparty to our TRS, defaults on their contractual obligations. With respect to our financial market activities, we have adopted a policy of dealing only with credit-worthy counterparties we deem to be creditworthy to help mitigate the risk of financial loss from defaults. We monitor the credit risk of the counterparties with whom we conduct business, through a combined process of credit rating reviews and portfolio reviews. To
attempt to mitigate the risk of financial loss from defaults under our foreign currency forward contracts and swaps, and our interest rate swaps and our TRS Agreement, our contracts are held by counterparty financial institutions, each of which had a Standard and Poor’s rating of A-2 or above at December 31, 2019.2022. In addition, we maintain cash and short-term investments in highly-rated investments or on deposit with major financial institutions. Each financial institution with which we had our A/R sales program and our SFPs during 2019 had a Standard and Poor’s short-term rating of A-2 or above and a long-term rating of BBB+A- or above at December 31, 2019.2022. The financial institution with which we have our March 2020 A/R sales program had a Standard and Poor's short term rating of A-1 and a long term rating of A+ at the time of execution of the agreement. Each financial institution from which annuities have been purchased for the defined benefit component of our Canadian pension plan had a Standard and Poor’s long-term rating of A+ or above at December 31, 2019. In addition, the financial institutions from which annuities have been purchased for the defined benefit component of our U.K. Main pension plansplan are governed by local regulatory bodies. If an institution from which we purchased annuities for our pension plans defaults on their contractual obligations, this would result in a financial loss to us, as we retain ultimate responsibility for the payment of benefits to plan participants unless and until such pension plans are wound-up.
We also provide unsecured credit to our customers in the normal course of business. Customer exposures that potentially subject us to credit risk include our A/R, inventory on hand, and non-cancellable purchase orders in support of customer demand. From time to time, we extend the payment terms applicable to certain customers, and/or provide longer payment terms when deemed commercially reasonable. Longer payment terms which have become more prevalent, could adversely impact our working capital requirements, and increase our financial exposure and credit risk. We attempt to mitigate customer credit risk by monitoring our customers’ financial condition and performing ongoing credit evaluations as appropriate. In certain instances, we obtain letters of credit or other forms of security from our customers. We may also purchase credit insurance from a financial institution to reduce our credit exposure to certain customers. We consider credit risk in determining our allowance for doubtful accounts, and we believe that such allowance, as adjusted from time to time, is adequate. The carrying amount of financial assets recorded in our consolidated financial statements, net of our allowance for doubtful accounts, represents our estimate of maximum exposure to credit risk. No significant adjustments were made to our allowance for doubtful accounts during 2022 in connection with our ongoing assessments and monitoring initiatives. At December 31, 2019, less than 2%2022, approximately 1% of our gross A/R arewas over 90 days past due (2018(December 31, 2021 — approximately 1%less than 2%). A/R are net of an allowance for doubtful accounts of $4.2$7.9 at December 31, 20192022 (December 31, 20182021 — $5.3)$5.7).
(e) Liquidity risk:
Liquidity risk is the risk that we may not have cash available to satisfy our financial obligations as they come due. The majority of our financial liabilities recorded in accounts payable, accrued and other current liabilities and provisions are due within 90 days. We manage liquidity risk by maintaining a portfoliothrough maintenance of liquid fundscash on hand and investments and having access to a revolving credit facility, intradaythe various financing arrangements described in notes 4 and overnight bank overdraft facilities, an A/R sales program and our SFPs. Since our A/R sales program and the SFPs are each on an uncommitted basis, there can be no assurance that any participant bank will purchase all the A/R that we wish to sell thereunder. However, we11. We believe that cash flow from operating activities, together with cash on hand, cash from the saleaccepted sales of A/R, and borrowings available under the Revolver and potentially available under uncommitted intraday and overnight bank overdraft facilities, are sufficient to fund our currently anticipated financial obligations.obligations, and will remain available in the current environment. As our A/R sales program and SFPs are each uncommitted, there can be no assurance that any participant bank will purchase any of the A/R that we wish to sell.
Fair values:
We estimate the fair value of each class of financial instruments.instrument. The carrying values of cash and cash equivalents, our A/R, A/P, accrued liabilities and provisions, and our borrowings under the Revolver approximate thetheir fair values of these financial instruments due to thetheir short-term nature of these instruments.nature. The carrying value of the Term Loans approximateapproximates their fair value as they bear interest at a variable market rate. The fair values of foreign currency contracts are estimated using generally accepted valuation models based on a discounted cash flow analysis with inputs of observable market data, including currency rates and discount factors. Discount factors are adjusted by our own credit risk or the credit risk of the counterparty, depending on whether the fair values are in liability or asset positions, respectively. We obtained third-party valuations of the swaps under our interest rate swap agreements.agreements and the TRS Agreement. The valuations of the swapsour interest rate swap agreements are primarily measured through various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and volatility, and credit risk adjustments,adjustments. The valuation of the TRS is primarily measured by reference to observable market data, including movements in the price of our SVS over the valuation period and the volume weighted average price of counterparty SVS purchases, adjusted for required interest payments based on SOFR, the rate applicable to the TRS Agreement. The valuations of both interest rate swaps and the TRS Agreement are based on Level 2 data inputs of the fair value measurement hierarchy (described below).
F-52
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
the fair value measurement hierarchy (described below). The TRS had a de minimis impact on our consolidated financial statements for 2022, and is therefore excluded from the table below.
See note 18 for the input levels used to measure the fair value of our pension assets. Foreign currency forward and swap contracts are valued using an income approach, by comparing the current quoted market forward rates to our contract rates and discounting the values with appropriate market observable credit risk adjusted rates.
Fair value measurements:
In the table below, we have segregated our financial assets and liabilities that are measured at fair value, based on the inputs used to determine fair value at the measurement date. The three levels within the fair value hierarchy, based on the reliability of inputs, are as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly (i.e. prices) or indirectly (i.e. derived from prices); and
• Level 3 inputs are inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).
| December 31, 2018 | December 31, 2019 | ||||||||||||||||
| Level 1 | Level 2 | Level 1 | Level 2 | ||||||||||||||
| Assets: | |||||||||||||||||
| Foreign currency forwards and swaps | $ | — | $ | 2.1 | $ | — | $ | 7.4 | |||||||||
| Liabilities: | |||||||||||||||||
| Interest rate swaps | $ | — | $ | (4.4 | ) | $ | — | $ | (12.1 | ) | |||||||
| Foreign currency forwards and swaps | — | (16.3 | ) | — | (2.9 | ) | |||||||||||
| $ | — | $ | (20.7 | ) | $ | — | $ | (15.0 | ) | ||||||||
| December 31, 2021 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Note | Level 1 | Level 2 | Level 1 | Level 2 | |||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | 9 | $ | — | $ | 0.5 | $ | — | $ | 18.7 | ||||||||||||||||||||||||||
| Foreign currency forwards and swaps | — | 7.4 | — | 18.9 | |||||||||||||||||||||||||||||||
| $ | — | $ | 7.9 | $ | — | $ | 37.6 | ||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | (7.4) | $ | — | $ | — | |||||||||||||||||||||||||||
| Foreign currency forwards and swaps | — | (6.2) | — | (13.7) | |||||||||||||||||||||||||||||||
| $ | — | $ | (13.6) | $ | — | $ | (13.7) | ||||||||||||||||||||||||||||
We have not valued any of the financial instruments described in the table above using Level 3 (unobservable) inputs. There were no transfers of fair value measurements between Level 1 and Level 2 of the fair value hierarchy in 20192022 or 2018.2021.
Currency derivatives and hedging activities:
We enter into foreign exchangecurrency forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge our balance sheet exposures.foreign currency risk related to anticipated future cash flows, monetary assets and monetary liabilities denominated in foreign currencies. At December 31, 20192022 and 2018,2021, we had foreign exchangecurrency forwards and swaps to trade U.S. dollars in exchange for the following currencies:
As at December 31, 2019 Currency | Contract amount of U.S. dollars | Weighted average exchange rate in U.S. dollars | Maximum period in months | Fair value gain/(loss) | ||||||
| Canadian dollar | $ | 195.6 | $ | 0.76 | 12 | $ | 2.1 | |||
| Thai baht | 98.8 | 0.03 | 12 | 2.1 | ||||||
| Malaysian ringgit | 54.1 | 0.24 | 12 | 0.4 | ||||||
| Mexican peso | 22.4 | 0.05 | 12 | 0.9 | ||||||
| British pound | 2.2 | 1.29 | 4 | 0.1 | ||||||
| Chinese renminbi | 48.8 | 0.14 | 12 | (0.7 | ) | |||||
| Euro | 26.1 | 1.12 | 12 | (0.5 | ) | |||||
| Romanian leu | 33.5 | 0.23 | 12 | 0.1 | ||||||
| Singapore dollar | 23.9 | 0.74 | 12 | 0.2 | ||||||
| Other | 18.5 | — | 4 | (0.2 | ) | |||||
| Total | $ | 523.9 | $ | 4.5 | ||||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
As at December 31, 2022 Currency | Contract amount in U.S. dollars | Weighted average exchange rate in U.S. dollars (i) | Maximum period in months | Fair value gain/(loss) | ||||||||||
| Canadian dollar | $ | 194.2 | 0.75 | 12 | $ | (1.9) | ||||||||
| Thai baht | 138.0 | 0.03 | 12 | 6.8 | ||||||||||
| Malaysian ringgit | 127.8 | 0.22 | 12 | 1.3 | ||||||||||
| Mexican peso | 56.6 | 0.05 | 12 | 0.9 | ||||||||||
| British pound | 2.6 | 1.18 | 4 | (0.2) | ||||||||||
| Chinese renminbi | 45.7 | 0.15 | 12 | 0.4 | ||||||||||
| Euro | 46.2 | 1.04 | 8 | (3.4) | ||||||||||
| Romanian leu | 37.3 | 0.20 | 12 | 1.5 | ||||||||||
| Singapore dollar | 24.7 | 0.72 | 12 | 1.1 | ||||||||||
| Japanese yen | 6.8 | 0.0072 | 4 | (0.6) | ||||||||||
| Korean won | 4.8 | 0.0008 | 4 | (0.7) | ||||||||||
Total (ii) | $ | 684.7 | $ | 5.2 | ||||||||||
As at December 31, 2021 Currency | Contract amount in U.S. dollars | Weighted average exchange rate in U.S. dollars (i) | Maximum period in months | Fair value gain/(loss) | ||||||||||
| Canadian dollar | $ | 195.5 | 0.79 | 12 | $ | 0.6 | ||||||||
| Thai baht | 109.9 | 0.03 | 12 | (1.0) | ||||||||||
| Malaysian ringgit | 48.8 | 0.24 | 12 | 0.2 | ||||||||||
| Mexican peso | 23.5 | 0.05 | 12 | 0.2 | ||||||||||
| Chinese renminbi | 55.2 | 0.15 | 12 | 1.2 | ||||||||||
| Euro | 20.6 | 1.14 | 4 | 0.6 | ||||||||||
| Romanian leu | 40.6 | 0.23 | 12 | (1.1) | ||||||||||
| Singapore dollar | 27.8 | 0.74 | 12 | — | ||||||||||
| Japanese yen | 11.6 | 0.0088 | 4 | 0.5 | ||||||||||
| Korean won | 6.0 | 0.0008 | 4 | — | ||||||||||
Total (ii) | $ | 539.5 | $ | 1.2 | ||||||||||
As at December 31, 2018 Currency | Contract amount of U.S. dollars | Weighted average exchange rate in U.S. dollars | Maximum period in months | Fair value gain/(loss) | ||||||
| Canadian dollar | $ | 210.2 | $ | 0.76 | 12 | $ | (10.3 | ) | ||
| Thai baht | 81.1 | 0.03 | 12 | (0.7 | ) | |||||
| Malaysian ringgit | 53.4 | 0.24 | 12 | (0.8 | ) | |||||
| Mexican peso | 25.6 | 0.05 | 12 | 0.2 | ||||||
| British pound | 5.3 | 1.27 | 4 | — | ||||||
| Chinese renminbi | 66.8 | 0.15 | 12 | (1.6 | ) | |||||
| Euro | 35.8 | 1.17 | 12 | 0.3 | ||||||
| Romanian leu | 40.4 | 0.25 | 12 | (0.9 | ) | |||||
| Singapore dollar | 22.1 | 0.74 | 12 | (0.3 | ) | |||||
| Other | 3.5 | — | 1 | (0.1 | ) | |||||
| Total | $ | 544.2 | $ | (14.2 | ) | |||||
(ii) As of December 31, 2022, the fair value of outstanding foreign currency forward and swap contracts related to effective cash flow hedges where we applied hedge accounting was a gain of $6.6 (December 31, 2021 — loss of $2.2), and the fair value of outstanding foreign currency forward and swap contracts related to economic hedges where we recorded the changes in the fair values of such contracts through our consolidated statement of operations was a loss of $1.4 (December 31, 2021 — gain of $3.4).
At December 31, 2022, the fair value of our outstanding currency forward and swap contracts was a net unrealized gain of $4.5 (December$5.2 (December 31, 20182021 — net unrealized lossgain of $14.2)$1.2), resulting from fluctuations in foreign exchange rates between the contract execution and the period-end date. Changes in the fair value of hedging derivatives to which we apply cash flow hedge accounting, to the extent effective, are deferred in accumulated OCI until the expenses or items being hedged are recognized in our consolidated statement of operations. Any hedge ineffectiveness, which at December 31, 20192022 was not significant, is recognized immediately in our consolidated statement of operations. At December 31, 2019,2022, we recorded $18.9 of derivative assets in other current assets and $13.7 of derivative liabilities in accrued and other current liabilities (December 31, 2021 — $7.4 of derivative assets in other current assets and $2.9 of derivative liabilities in accrued and other current liabilities (December 31, 2018 — $2.1 of derivative assets in other current assets and $16.3$6.2 of derivative liabilities in accrued and other current liabilities).
Certain foreign currency forward and swap contracts to trade U.S. dollars do not qualify as hedges, most significantly certain Canadian dollar contracts, and we have markedhedges. We mark these contracts to market each period in our consolidated statement of operations. See note 2(p)2(p).
F-54
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
21. CAPITAL DISCLOSURES:
Our main objectives in managing our capital resources are to ensure liquidity and to have funds available for working capital or other investments we determine aredeem required to grow our business. Our capital resources consist of cash provided by operating activities, access to the Revolver, uncommitted intraday and overnight bank overdraft facilities, an uncommitted A/R sales program theand SFPs, (while available) and our ability to issue debt or equity securities.
We regularly review our borrowing capacity and make adjustments, as permitted, for changes in economic conditions and changes in our requirements. In June 2018, we entered into our $800.0 Credit Facility, which provides for the $350.0 Initial Term Loan that matures in June 2025, and the $450.0 Revolver that matures in June 2023. In November 2018, we utilized the accordion feature under our Credit Facility to add the incremental $250.0 Incremental Term Loan, maturing in June 2025. The Credit Facility has an accordion feature that allows us to increase the term loans and/or revolving loan commitments thereunder by approximately $110, plus an unlimited amount to the extent that a specified leverage ratio on a pro forma basis does not exceed specified limits, in each case on an uncommitted basis and subject to the satisfaction of certain terms and conditions. The Revolver also includes a $50.0 sub-limit for swing line loans, providing for short-term borrowings up to a maximum of ten business days, as well as a $150.0 sub-limit for letters of credit, in each case subject to the overall revolving credit limit. See note 1211 for amounts outstanding undera discussion of the terms of the Credit Facility, and amounts outstanding thereunder at December 31, 2019.2022. We had $428.8$582.0 available as of December 31, 20192022 under the Revolver for future borrowings. As of December 31, 2019,2022, we also had access (in each case on an uncommitted basis) to $142.5$198.5 in intraday and overnight bank overdraft facilities, our then-existing $200.0 uncommitted$405.0 A/R sales program and the uncommitted SFPs to provide short-term liquidity. At December 31, 2019,2022, we sold $90.6$245.6 of A/R under our then-effective A/R sales program and $50.4 $105.6 under the SFPs. We replaced our previous A/R sales program with a new uncommitted $235.0 A/R sales program that we executed in
We have commenced NCIBs in the past few years, pursuant to which we have repurchased and canceled SVS. See note 13 for details.SVS under NCIBs in recent years. In addition, we have purchasedpurchase SVS from time-to-time in the open market through a broker forto satisfy delivery obligations under our SBC plans. See note 12 for details. We have not distributed, nor do we have any current plan to distribute, any dividends to our shareholders.
Our strategy on capital risk management has not changed significantly since the end of 2018.2021. Other than the restrictive and financial covenants associated with theour Credit Facility described in note 12,11, we are not subject to any contractual or regulatory capital requirements. While some of our international operations are subject to government restrictions on the flow of capital into and out of their jurisdictions, these restrictions have not had a material impact on our operations or cash flows.
| 2017 | 2018 | 2019 | ||||||
| Weighted average number of shares (basic) | 143.1 | 139.4 | 131.0 | |||||
| Dilutive effect of outstanding awards under SBC plans | 2.1 | 1.2 | 0.8 | |||||
| Weighted average number of shares (diluted) | 145.2 | 140.6 | 131.8 | |||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Weighted average number of shares (basic) | 129.1 | 126.7 | 123.5 | ||||||||||||||
| Dilutive effect of outstanding awards under SBC plans | — | — | 0.1 | ||||||||||||||
| Weighted average number of shares (diluted) | 129.1 | 126.7 | 123.6 | ||||||||||||||
For the year ended December 31, 2019,2022, we excluded 0.30.4 million stock options (year ended December 31, 2018 — 0.3 million; year ended December 31, 2017 — 0.2 million) from the diluted weighted average per sharenumber of shares calculation (each of years ended December 31, 2021 and December 31, 2020 — 0.3 million stock options) as they were out-of-the-money. References to shares in this note 2322 are to our SVS and MVS taken collectively.
We qualified for COVID-19-related Subsidies (COVID Subsidies) during 2021 and 2020 from various government authorities, the most significant of which were provided under the Canadian Emergency Wage Subsidy (CEWS) first announced by the Government of Canada in April 2020. However, we have not applied for COVID Subsidies since June 2021, and recorded no COVID Subsidies in 2022. In 2021 and 2020, we qualified for an aggregate of approximately $11 and $34 of COVID Subsidies, respectively, from various government authorities, which we recognized as a reduction of approximately $8 and $27 to the related expenses in cost of goods sold, respectively, and approximately $3 and $7 to the related expenses in SG&A, respectively, on our consolidated statement of operations.
F-55
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
24. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At December 31, 2019,2022, we havehad commitments (not recognized as liabilities as of such date) under IT support agreements that require future minimum payments as follows:
| 2023 | $ | 25.3 | ||||||
| 2024 | 20.6 | |||||||
| 2025 | 15.6 | |||||||
| 2026 | 12.2 | |||||||
| 2027 | 11.4 | |||||||
| Thereafter | 18.0 | |||||||
| Total future minimum payments | $ | 103.1 | ||||||
| 2020 | $ | 24.4 | ||
| 2021 | 18.6 | |||
| 2022 | 14.9 | |||
| 2023 | 14.5 | |||
| 2024 | 12.6 | |||
| Thereafter | 49.8 | |||
| Total future minimum payments | $ | 134.8 | ||
As at December 31, 2019,2022, management had approved $23.1 for$52.5 for capital expenditures, primarily for machinery and equipment to support new customer programs, and issued $6.0$9.7 of such amount in purchase orders to third-party vendors. We also have a contractual commitment with a supplier to purchase $8 of component parts in 2023.
We have contingent liabilities in the form of letters of credit,L/Cs, letters of guarantee and surety bonds (collectively, Guarantees) which we have provided to various third parties. The Guarantees cover various payments, including customs and excise taxes, utility commitments and certain bank guarantees. At December 31, 2019,2022, we had $34.5$41.8 of Guarantees (December 31, 20182021 — $35.7)$48.1), including $21.2$18.0 (December 31, 2018 —$21.3)2021 — $21.0) of letters of creditL/Cs outstanding under our Revolver.
We are required to make contributions to our pension and non-pension post-employment benefit plans,scheduled quarterly mandatory principal repaymentsamortization payments under the Incremental Term Loans,Loan, certain annual mandatory prepayments under the Credit Facility under specified circumstances, payments of outstanding amounts under the Credit Facility at maturity and(see note 11), contractual payments under our lease obligations (described in note 11 and below), and contributions to our pension and non-pension post-employment benefit plans (see notes 12 and 19)note 18). We are also required to makepay interest, payments on amounts outstanding under the Credit Facility, and to pay fees and charges related tounder our Credit Facility, our A/R sales program and SFPs, and under our interest rate swap agreements the(the amounts under the swap to bethereunder are determined based on market rates at the time the interest payments are duedue) and the TRS Agreement, and may be required to make other payments under the TRS Agreement (see notes 122(p), 4, 11 and 21)20). See note 2120 for our obligations under the foreign exchange contracts we held at December 31, 2019.2022.
Additional real property lease commitments:
In March 2019, as part of our Toronto real property sale, we entered into a 10-year lease with the purchaser of such property for our then-anticipated corporate headquarters, to be built by such purchaser on the site of our former location (Purchaser Lease). We have been informed that construction issues will delay the anticipated commencement date of the Purchaser Lease beyond the prior target of May 2023. In connection with the foregoing, we have extended the lease on our current corporate headquarters, and have recognized the related ROU assets and lease liabilities in our consolidated financial statements as of December 31, 2022. Upon commencement of the Purchaser Lease, our estimated annual basic rent payments will be approximately $2.1 million Canadian dollars for each of the first five years, and approximately $2.2 million Canadian dollars for each of the remaining five years. The rental payments that will be due under the Purchaser Lease were not recognized as liabilities as of December 31, 2022, because the lease had not yet commenced.
We are committed to lease certain space located in Richardson, Texas (Texas Lease) from April 2027 to March 2032. The rental amounts for Texas Lease ($0.9 in 2027 and $5.6 thereafter) were not recognized as liabilities as of December 31, 2022 because the lease had not yet commenced.
Indemnifications:
We provide routine indemnifications, the terms of which range in duration and scope, and often are not explicitly defined, including for third-party intellectual property infringement, certain negligence claims, and for our directors and officers. We have also provided indemnifications in connection with the sale of certain assets. The maximum potential liability from these indemnifications cannot be reasonably estimated. In some cases, we have recourse against other parties or
F-56
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
Litigation:
In the normal course of our operations, we may be subject to lawsuits, investigations and other claims, including environmental, labor, product, customer disputes, and other matters. Management believes that adequate provisions have been recorded where required. Although it is not always possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of all such pending matters will not have a material adverse impact on our financial performance, financial position or liquidity.
Income taxes:taxes and other matters:
We are subject to tax audits in various jurisdictions. Reviews by tax authorities generally focus on, but are not limited to, the validity of our inter-company transactions, including financing and transfer pricing policies which may involve subjective areas of taxation and significant judgment.
The successful pursuit of assertions made by any taxinggovernment authority, including tax authorities, could result in our owing significant amounts of tax or other reimbursements, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse tax ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and in excess of amounts accrued, and/or have a significant adverse impact on our earnings and cash flows.
In 2017, the Brazilian Ministry of Science, Technology, Innovation and Communications (MCTIC) issued assessments seeking to disqualify certain research and development (R&D) expenses for the years 2006 to 2009, which entitled2009. As of the end of the Q1 2022, this matter was completely resolved with no adjustment to our Brazilian subsidiary (which ceased operationsoriginal filing positions for any relevant year.
In the third quarter of 2021 (Q3 2021), the Romanian tax authorities issued a final assessment in 2009)the aggregate amount of approximately 31 million Romanian leu (approximately $7 at period-end exchange rates), for additional income and value-added taxes for one of our Romanian subsidiaries for the 2014 to charge reduced sales2018 tax leviesyears. In order to its customers. The assessments againstadvance our Brazilian subsidiary, which (includingcase to the appeals phase and reduce or eliminate potential interest and penalties) total approximately 39 million Brazilian real (approximately $10 at year-end exchange rates) forpenalties, we paid the Romanian tax authorities the full amount assessed in Q3 2021 (without agreement to all or any portion of such years, remain under appeal. Although we cannot predict the outcome of this matter, weassessment). We believe that our R&D activities for the periodoriginally-filed tax return positions are supportable,in compliance with applicable Romanian tax laws and it is probable thatregulations, and intend to vigorously defend our position will be sustained upon full examination by the appropriate Brazilian authorities and, ifthrough all necessary upon consideration by the Brazilianappeals or other judicial courts. Our position is supported by our Brazilian legal advisers. There were no changes in the status of this matter during either 2018 or 2019.processes.
25. SEGMENT AND GEOGRAPHIC INFORMATION:
Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenue and incur expenses; for which discrete financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance. No operating segments have been aggregated to determine our reportable segments.
Factors considered in determining the two reportable segments include the nature of applicable business activities, management structure, market strategy and margin profiles. Products and services in thisour ATS segment are extensive and are often more regulated than in our CCS segment, and can include the following: government-certified and highly-specialized manufacturing, electronic and enclosure-related services for aerospaceA&D customers; high-precision semiconductor and defense-related customers; high-precisiondisplay equipment and integrated subsystems used in the manufacture of semiconductors and displays;subsystems; a wide range of industrial automation, controls, test and measurement devices; advanced solutions for surgical instruments, diagnostic imaging and patient monitoring; and efficiency products to help manage and monitor the energy and power industries. Our ATS segment businesses typically have a higher margin profile,profiles and margin volatility, higher working capital requirements, and longer product life cycles than the businesses in our CCS segment. Our CCS segment consists of our Communications and Enterprise end markets. Our Enterprise end market is comprised of our servers and storage businesses. Products and services in thisour CCS segment consist predominantly of enterprise-level data communications and
F-57
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
information processing infrastructure products, and can include routers, switches, data center interconnects, servers and storage-related products used by a wide range of businesses and cloud-based and other service providers to manage digital connectivity, commerce and social media applications. Our CCS segment businesses typically have a lower margin profile,profiles, lower working capital requirements, and higher volumes than the businesses in our ATS segment. Within our CCS segment, however, our Hardware Platform Solutions (HPS) business (which includes firmware/software enablement across all primary IT infrastructure data center technologies and have been impactedaftermarket services), typically has a higher margin profile than our traditional CCS businesses, but also requires specific investments (including R&D) and higher working capital. Our CCS segment generally experiences a high degree of volatility in recent periods (and continueterms of revenue and product/service mix and as a result, our CCS segment margin can fluctuate from period to be impacted) by aggressive pricing, rapid shifts in technology, model obsolescence and the commoditization of certain products.period.
Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). Revenue is attributed to the segment in which the product is manufactured or the service is performed. Segment income is defined as a segment’s net revenue less its cost of sales and its allocable portion of selling, general and administrative expenses and research and development expenses (collectively, Segment Costs). Identifiable Segment Costs are allocated directly to the applicable segment while other Segment Costs, including indirect costs and certain corporate charges, are allocated to our segments based on an analysis of the relative usage or benefit derived by each segment from such costs. SegmentFor 2020 — 2022, segment income excludes finance costs (defined in note 17)16), employee SBC expense, amortization of intangible assets (excluding computer software), Other Chargesand other charges (recoveries) (defined below), other solar charges (consisting(the components of non-cash charges we recordedwhich are described in 2017 to write-down the carrying value of our then-remaining solar panel inventory and A/R balances), and fair value adjustments for acquired inventory (see note 3)15), as these costs and charges/recoveries are managed and reviewed by our CEO at the company level. Other Charges (recoveries) consist of, in applicable periods, restructuring charges (recoveries), impairment charges (recoveries), Acquisition Costs (defined in note 3), legal settlements (recoveries), Transition Costs (Recoveries) (defined in note 16(c)), Credit Facility-related charges (described in note 16(d)), and losses incurred on specified benefit plans (described in note 16(b)). Our segments do not record inter-segment revenue. Although segment income and segment margin are used to evaluate the performance of our segments, we may incur operating costs in one segment that may also benefit the other segment. Our accounting policies for segment reporting are the same as those applied to the companyCompany as a whole.
Information regarding each reportable segment for the periods indicated is set forth below:
| Revenue by segment: | Year ended December 31 | |||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||
| % of Total | % of Total | % of Total | ||||||||||||||||||||||||
| ATS | 2,086.3 | 36% | 2,315.1 | 41% | 2,979.0 | 41% | ||||||||||||||||||||
| CCS | 3,661.8 | 64% | 3,319.6 | 59% | 4,271.0 | 59% | ||||||||||||||||||||
| Communications revenue as a % of total revenue | 42 | % | 40 | % | 40 | % | ||||||||||||||||||||
| Enterprise revenue as a % of total revenue | 22 | % | 19 | % | 19 | % | ||||||||||||||||||||
| Total | 5,748.1 | 5,634.7 | 7,250.0 | |||||||||||||||||||||||
| Revenue by segment: | Year ended December 31 | ||||||||||||||||
| 2017 | 2018 | 2019 | |||||||||||||||
| % of total | % of total | % of total | |||||||||||||||
| ATS | $ | 1,958.6 | 32 | % | $ | 2,209.7 | 33 | % | $ | 2,285.6 | 39 | % | |||||
| CCS | 4,184.1 | 68 | % | 4,423.5 | 67 | % | 3,602.7 | 61 | % | ||||||||
| Total | $ | 6,142.7 | $ | 6,633.2 | $ | 5,888.3 | |||||||||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Year ended December 31 | |||||||||||||||||||||||||
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | ||||||||||||||||||||||||
| ATS segment income and margin | $ | 69.7 | 3.3 | % | $ | 105.0 | 4.5 | % | $ | 140.9 | 4.7 | % | ||||||||||||||
| CCS segment income and margin | 129.3 | 3.5 | % | 128.9 | 3.9 | % | 217.1 | 5.1 | % | |||||||||||||||||
| Total segment income | 199.0 | 233.9 | 358.0 | |||||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||||
| Finance costs | 37.7 | 31.7 | 59.7 | |||||||||||||||||||||||
| Employee SBC expense | 25.8 | 33.4 | 51.0 | |||||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 21.8 | 22.5 | 37.0 | |||||||||||||||||||||||
| Other charges, net of recoveries (note 15) | 23.5 | 10.3 | 6.7 | |||||||||||||||||||||||
| IFRS earnings before income taxes | $ | 90.2 | $ | 136.0 | $ | 203.6 | ||||||||||||||||||||
F-58
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Year ended December 31 | ||||||||||||||||
| 2017 | 2018 | 2019 | |||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | |||||||||||||||
| ATS segment income and margin | $ | 96.8 | 4.9 | % | $ | 102.5 | 4.6 | % | $ | 64.2 | 2.8 | % | |||||
| CCS segment income and margin | 120.4 | 2.9 | % | 111.4 | 2.5 | % | 93.9 | 2.6 | % | ||||||||
| Total segment income | 217.2 | 213.9 | 158.1 | ||||||||||||||
| Reconciling items: | |||||||||||||||||
| Finance costs | 10.1 | 24.4 | 49.5 | ||||||||||||||
| Employee SBC expense | 30.1 | 33.4 | 34.1 | ||||||||||||||
| Amortization of intangible assets (excluding computer software) | 5.5 | 11.6 | 24.6 | ||||||||||||||
| Other Charges (Recoveries) (note 16) | 37.0 | 61.0 | (49.9 | ) | |||||||||||||
| Inventory fair value adjustment (note 3) | — | 1.6 | — | ||||||||||||||
| Other solar charges (inventory and A/R write-down) | 1.4 | — | — | ||||||||||||||
| IFRS earnings before income taxes | $ | 133.1 | $ | 81.9 | $ | 99.8 | |||||||||||
The following table details our external revenue allocated by manufacturing location among countries that generated 10% or more of total revenue for the years indicated:
| Year ended December 31 | |||||||||||||||||
| 2020 | 2021 | 2022 | |||||||||||||||
| Thailand | 35 | % | 36 | % | 44 | % | |||||||||||
| China | 20 | % | 16 | % | 11 | % | |||||||||||
| Malaysia | * | 13 | % | 12 | % | ||||||||||||
| Canada | * | * | * | ||||||||||||||
| Year ended December 31 | ||||||||
| 2017 | 2018 | 2019 | ||||||
| Thailand | 34 | % | 32 | % | 34 | % | ||
| China | 21 | % | 20 | % | 18 | % | ||
| Malaysia | 12 | % | 12 | % | 12 | % | ||
The following table details our allocation of property, plantPP&E and equipment and, commencing in 2019, ROU assets among countries that represented 10% or more of total property, plant and equipmentPP&E and ROU assets for the years indicated:
| December 31 | |||||||||||
| 2021 | 2022 | ||||||||||
| China | 11 | % | * | ||||||||
| Thailand | 16 | % | 18 | % | |||||||
| United States | 22 | % | 25 | % | |||||||
| Canada | * | * | |||||||||
| December 31 | |||||
| 2018 | 2019 | ||||
| China | 19 | % | 14 | % | |
| Thailand | 16 | % | 16 | % | |
| Malaysia | 13 | % | * | ||
| Romania | 15 | % | 11 | % | |
| United States | 15 | % | 16 | % | |
| Canada | * | * | |||
The following table details our allocation of intangible assets and goodwill*goodwill among countries that represented 10% or more of total intangible assets and goodwill for the years indicated:
| December 31 | |||||||||||
| 2021 | 2022 | ||||||||||
| United States | 49 | % | 48 | % | |||||||
| Singapore | 42 | % | 42 | % | |||||||
| Canada | * | * | |||||||||
| December 31 | |||||
| 2018 | 2019 | ||||
| United States | 96 | % | 86 | % | |
| South Korea | * | 10 | % | ||
* For purposes of this table, intangible assets and goodwill acquired as part of our Impakt acquisition were originally allocated in full to the United States in 2018. In 2019, however, upon finalizing the purchase price allocation, we allocated Impakt's intangible assets and goodwill between the United States and South Korea.
Less than 10%.
Customers:
| Segment | Year ended December 31 | ||||||||
| 2017 | 2018 | 2019 | |||||||
| Cisco Systems, Inc. | CCS | 18 | % | 14 | % | 12 | % | ||
| Dell Technologies | CCS | * | 10 | % | * | ||||
| Juniper Networks, Inc. | CCS | 13 | % | * | * | ||||
| Total | 31 | % | 24 | % | 12 | % | |||
At December 31, 2019,2022, we had two customersone customer that individually represented 10% or more of total A/R (one from each of our segments) (December 31, 2018 — two customers (in our CCS segment); (December 31, 2021— two customers (each in our CCS segment)).
26. FIRE EVENT:
On June 7, 2022, a fire occurred at our Batam, Indonesia facility. The fire destroyed inventories and damaged a building and equipment located at the site. Our manufacturing operations at the site were briefly paused, but resumed in June 2022. We wrote down inventories destroyed (approximately $94) and a building and equipment damaged (aggregate of $1) by the fire. We expect to fully recover our tangible losses pursuant to the terms and conditions of our insurance policies. In Q4 2022, we recovered $31 of our inventory losses through insurance proceeds. As of December 31, 2017 — two customers (one from2022, we recorded an estimated receivable of approximately $64 related to remaining anticipated insurance proceeds in other current assets on our consolidated balance sheet. The write-downs and the offsetting insurance receivable (in equivalent amounts) were each ofrecorded in other charges (recoveries), resulting in no net impact to net earnings in 2022. See note 15. We determined that this event did not constitute an impairment review triggering event for the applicable CGU, and no impairments to our segments)).intangibles or goodwill were recorded in connection therewith in 2022.
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