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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o Registration statement pursuant to Section 12(b) or (g)
of the Securities Exchange Act of 1934
or
ý Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 20082009
or
o Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
or
o Shell company report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of event requiring this shell company report:
Commission file number: 1-14832
CELESTICA INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada
(Jurisdiction of incorporation or organization)
12 Concorde Place, 5th Floor844 Don Mills Road
Toronto, Ontario, Canada M3C 3R81V7
(Address of principal executive offices)
Paul Carpino
416-448-2211
clsir@celestica.com
844 Don Mills Road
Toronto, Ontario, Canada M3C 1V7
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(b) OF THE ACT:
Subordinate Voting Shares (Title of Class) | The Toronto Stock Exchange New York Stock Exchange (Name of each Exchange on which Registered) |
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(g) OF THE ACT:
N/A
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT:
N/A
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
0 Preference Shares | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yeso No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No ýo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
ý Large accelerated filer o Accelerated filer o Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the statements included in this filing:
IndicateU.S. GAAPo International Financial Reporting Standards as issued by the International Accounting Standards Boardo Otherý
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 ý
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No ý
| | | Page | ||||
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Part I | 1 | ||||||
Item 1. | Identity of Directors, Senior Management and Advisers | 2 | |||||
Item 2. | Offer Statistics and Expected Timetable | 2 | |||||
Item 3. | Key Information | 2 | |||||
A. | Selected Financial Data | 2 | |||||
B. | Capitalization and Indebtedness | ||||||
C. | Reasons for Offer and Use of Proceeds | ||||||
D. | Risk Factors | ||||||
Item 4. | Information on the Company | 17 | |||||
A. | History and Development of the Company | 17 | |||||
B. | Business Overview | ||||||
C. | Organizational Structure | ||||||
D. | Description of Property | 27 | |||||
Item 4A. | Unresolved Staff Comments | ||||||
Item 5. | Operating and Financial Review and Prospects | ||||||
Item 6. | Directors, Senior Management and Employees | ||||||
A. | Directors and Senior Management | ||||||
B. | Compensation | ||||||
C. | Board Practices | ||||||
D. | Employees | ||||||
E. | Share Ownership | ||||||
Item 7. | Major Shareholders and Related Party Transactions | ||||||
A. | Major Shareholders | ||||||
B. | Related Party Transactions | ||||||
C. | Interests of Experts and Counsel | ||||||
Item 8. | Financial Information | ||||||
A. | Consolidated Statements and Other Financial Information | ||||||
B. | Significant Changes | ||||||
Item 9. | The Offer and Listing | ||||||
A. | Offer and Listing Details | ||||||
B. | Plan of Distribution | ||||||
C. | Markets | ||||||
D. | Selling Shareholders | ||||||
E. | Dilution | ||||||
F. | Expense of the Issue | ||||||
Item 10. | Additional Information | ||||||
A. | Share Capital | ||||||
B. | Memorandum and Articles of Incorporation | ||||||
C. | Material Contracts | ||||||
D. | Exchange Controls |
In this Annual Report, "Celestica," the "Company," "we," "us" and "our" refer to Celestica Inc. and its subsidiaries.
In this Annual Report, all dollar amounts are expressed in United States dollars, except where we state otherwise. All references to "U.S.$" or "$" are to U.S. dollars and all references to "C$" are to Canadian dollars. Unless we indicate otherwise, any reference in this Annual Report to a conversion between U.S.$ and C$ is a conversion at the average of the exchange rates in effect for the year ended December 31, 2008.2009. 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 Federal Reserve Bank of New York, the average daily exchange rate was U.S.$1.00 = C$1.066.1.1412.
Unless we indicate otherwise, all information in this Annual Report is stated as of February 23, 2009,22, 2010, the date as of which we prepared information for our annual report to shareholders and management information circular and proxy statement.
Forward-Looking Statements
Item 4, "Information on the Company," "Management'sItem 5, "— Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 5 and other sections of this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the U.S. Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the U.S. Exchange Act, and applicable Canadian securities legislation including, without limitation, statements related to our future growth, trends in our industry, our financial or operational results, including anticipated expenses, benefits or payments, the redemption of our senior subordinated notes and the expected benefits of such redemption, and our conversion from Canadian GAAP to International Financial Reporting Standards, and our financial or operational performance. Such forward-looking statements are predictive in nature, and may be based on current expectations, forecasts or assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially from the forward-looking statements themselves. Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," or similar expressions, or may employ such future or conditional verbs as "may," "will," "should" or "would" or may otherwise be indicated as forward-looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, and in applicable Canadian securities legislation.
Forward-looking statements are not guarantees of future performance. You should understand that the following important factors, in addition to those discussed in Item 3, "Key Information — Risk Factors," and elsewhere in this Annual Report, could affect our future results and could cause those results to differ materially from those expressed in such forward-looking statements: the effects of price competition and other business and competitive factors generally affecting the electronics manufacturing services (EMS) industry, including changes in the trend for outsourcing; our dependence on a limited number of customers and end markets; variability of operating results among periods; the challenges of effectively managing our operations during uncertain economic conditions, including significant changes in demand from our customers as a result of the impact of the globalan uncertain or weak economic crisisenvironment; our inability to retain or expand our business due to execution problems resulting from significant headcount reductions, plant closures and capital markets weakness; the risk of potential non-performance by counterparties, including but not limited to financial institutions, customers and suppliers, during uncertain economic conditions; the effects of price competition and other business and competitive factors generally affecting the electronics manufacturing services (EMS) industry, including the trend for outsourcing; variability of operating results among periods; our dependence on a limited number of customers;product transfer activities; the challenge of responding to lower-than-expectedchanges in customer demand; the delays in the delivery and/or general availability of various components and materials used in our manufacturing process; our dependence on industries affected by rapid technological change; our ability to successfully manage our international operations; our inability to retain or grow our business due to execution problems resulting from significant headcount reductions, plant closures and product transfers associated with restructuring activities; the challenge of managing our financial exposures to foreign currency fluctuations; and the delays in the delivery and/or general availabilityrisk of various components used in our manufacturing process.potential non-performance by counterparties, including but not limited to financial institutions, customers and suppliers. Our forward-looking statements are also based on various assumptions which management believes are reasonable under the current circumstances, but may prove to be inaccurate and many of which may involve factors that are beyond the control of the Company.our control. The material assumptions may include assumptions regarding the following: forecasts from our customers, which range from 30 days to 90 days; timing and investments associated with ramping new business; general economic and market conditions; currency exchange rates; pricing and competition; anticipated customer demand; supplier performance and pricing; commodity, labor, energy and transportation costs; operational and financial matters; technological developments; and the timing and execution of our restructuring plan. These assumptions are based on management's current views with respect to current plans and events, and are and will be subject to the
risks and uncertainties discussed above. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes.
Except as required by applicable law, 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. You should read this Annual Report and the documents, if any, that we incorporate by reference with the understanding that the actual future results may be materially different from what we expect. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
A. Selected Financial Data
You should read the following selected financial data together with Item 5, "Operating and Financial Review and Prospects," the Consolidated Financial Statements in Item 18 and the other information in this Annual Report. The selected financial data is derived from the consolidated financial statements for the years we present.
The Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. These principles conform in all material respects with U.S. GAAP except as described in note 20 to the Consolidated Financial Statements in Item 18. For all the years presented, the selected financial data is prepared in accordance with Canadian GAAP unless otherwise indicated.
| Year ended December 31 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004(1) | 2005(1) | 2006(1) | 2007(1) | 2008(1) | |||||||||||
| (in millions, except per share amounts) | |||||||||||||||
Consolidated Statements of Operations Data (Canadian GAAP): | ||||||||||||||||
Revenue | $ | 8,839.8 | $ | 8,471.0 | $ | 8,811.7 | $ | 8,070.4 | $ | 7,678.2 | ||||||
Cost of sales | 8,431.9 | 7,989.9 | 8,359.9 | 7,648.0 | 7,147.1 | |||||||||||
Gross profit | 407.9 | 481.1 | 451.8 | 422.4 | 531.1 | |||||||||||
Selling, general and administrative expenses(2) | 331.6 | 296.9 | 285.6 | 295.1 | 303.8 | |||||||||||
Amortization of intangible assets | 34.6 | 28.4 | 27.0 | 21.3 | 15.1 | |||||||||||
Integration costs related to acquisitions(3) | 3.1 | 0.6 | 0.9 | 0.1 | — | |||||||||||
Other charges(4) | 603.2 | 130.9 | 211.8 | 47.6 | 885.2 | |||||||||||
Accretion of convertible debt (LYONs) | 17.6 | 7.6 | — | — | — | |||||||||||
Interest expense (income), net(5) | 19.7 | 42.2 | 62.6 | 51.2 | 42.5 | |||||||||||
Earnings (loss) before income taxes | (601.9 | ) | (25.5 | ) | (136.1 | ) | 7.1 | (715.5 | ) | |||||||
Income tax expense(6) | 252.2 | 21.3 | 14.5 | 20.8 | 5.0 | |||||||||||
Net loss | $ | (854.1 | ) | $ | (46.8 | ) | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | |
Other Financial Data: | ||||||||||||||||
Basic loss per share | $ | (3.85 | ) | $ | (0.21 | ) | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | |
Diluted loss per share | $ | (3.85 | ) | $ | (0.21 | ) | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | |
Property, plant and equipment expenditures | $ | 142.2 | $ | 158.5 | $ | 189.1 | $ | 63.7 | $ | 88.8 | ||||||
Consolidated Statements of Operations Data (U.S. GAAP)(7): | ||||||||||||||||
Net loss | $ | (867.5 | ) | $ | (42.8 | ) | $ | (149.3 | ) | $ | (16.1 | ) | $ | (725.8 | ) | |
Shares used in computing per share amounts (in millions): | ||||||||||||||||
Basic | 222.1 | 226.2 | 227.2 | 228.9 | 229.3 | |||||||||||
Diluted | 222.1 | 226.2 | 227.2 | 228.9 | 229.3 |
| Year ended December 31 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005(1) | 2006(1) | 2007(1) | 2008(1) | 2009(1) | |||||||||||
| (in millions, except per share amounts) | |||||||||||||||
Consolidated Statements of Operations Data (Canadian GAAP): | ||||||||||||||||
Revenue | $ | 8,471.0 | $ | 8,811.7 | $ | 8,070.4 | $ | 7,678.2 | $ | 6,092.2 | ||||||
Cost of sales | 7,989.9 | 8,359.9 | 7,648.0 | 7,147.1 | 5,662.4 | |||||||||||
Gross profit | 481.1 | 451.8 | 422.4 | 531.1 | 429.8 | |||||||||||
Selling, general and administrative expenses (SG&A)(2) | 274.4 | 264.7 | 271.7 | 292.0 | 244.5 | |||||||||||
Amortization of intangible assets | 50.9 | 47.9 | 44.7 | 26.9 | 21.9 | |||||||||||
Integration costs related to acquisitions(3) | 0.6 | 0.9 | 0.1 | — | — | |||||||||||
Other charges(4) | 130.9 | 211.8 | 47.6 | 885.2 | 68.0 | |||||||||||
Accretion of convertible debt (LYONs) | 7.6 | — | — | — | — | |||||||||||
Interest expense(5) | 42.2 | 62.6 | 51.2 | 42.5 | 35.0 | |||||||||||
Earnings (loss) before income taxes | (25.5 | ) | (136.1 | ) | 7.1 | (715.5 | ) | 60.4 | ||||||||
Income tax expense | 21.3 | 14.5 | 20.8 | 5.0 | 5.4 | |||||||||||
Net earnings (loss) | $ | (46.8 | ) | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | $ | 55.0 | ||
Other Financial Data: | ||||||||||||||||
Basic earnings (loss) per share | $ | (0.21 | ) | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 | ||
Diluted earnings (loss) per share | $ | (0.21 | ) | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 | ||
Property, plant and equipment expenditures | $ | 158.5 | $ | 189.1 | $ | 63.7 | $ | 88.8 | $ | 77.3 | ||||||
Consolidated Statements of Operations Data (U.S. GAAP)(6): | ||||||||||||||||
Net earnings (loss) | $ | (42.8 | ) | $ | (149.3 | ) | $ | (16.1 | ) | $ | (725.8 | ) | $ | 39.0 | ||
Shares used in computing per share amounts (in millions): | ||||||||||||||||
Basic | 226.2 | 227.2 | 228.9 | 229.3 | 229.5 | |||||||||||
Diluted | 226.2 | 227.2 | 228.9 | 229.3 | 230.9 |
| As at December 31 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004(1) | 2005(1) | 2006(1) | 2007(1) | 2008(1) | |||||||||||
| (in millions) | |||||||||||||||
Consolidated Balance Sheet Data (Canadian GAAP): | ||||||||||||||||
Cash and cash equivalents | $ | 968.8 | $ | 969.0 | $ | 803.7 | $ | 1,116.7 | $ | 1,201.0 | ||||||
Working capital(8) | 1,458.3 | 1,488.1 | 1,394.9 | 1,553.0 | 1,603.4 | |||||||||||
Property, plant and equipment | 555.4 | 531.1 | 553.6 | 466.0 | 467.5 | |||||||||||
Total assets | 4,939.8 | 4,857.8 | 4,686.3 | 4,470.5 | 3,786.2 | |||||||||||
Total long-term debt, including current portion(9) | 627.5 | 751.4 | 750.8 | 758.5 | 733.1 | |||||||||||
Shareholders' equity | 2,488.8 | 2,214.4 | 2,094.6 | 2,118.2 | 1,365.5 | |||||||||||
Consolidated Balance Sheet Data (U.S. GAAP)(7): | ||||||||||||||||
Total assets | $ | 4,988.7 | $ | 4,876.2 | $ | 4,708.1 | $ | 4,485.8 | $ | 3,786.2 | ||||||
Total long-term debt, including current portion | 846.1 | 751.4 | 750.8 | 757.2 | 723.4 | |||||||||||
Shareholders' equity | 2,257.6 | 2,176.9 | 1,960.4 | 1,996.5 | 1,254.8 |
| As at December 31 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005(1) | 2006(1) | 2007(1) | 2008(1) | 2009(1) | |||||||||||
| (in millions) | |||||||||||||||
Consolidated Balance Sheet Data (Canadian GAAP): | ||||||||||||||||
Cash and cash equivalents | $ | 969.0 | $ | 803.7 | $ | 1,116.7 | $ | 1,201.0 | $ | 937.7 | ||||||
Working capital(7) | 1,488.1 | 1,394.9 | 1,553.0 | 1,603.6 | 1,023.0 | |||||||||||
Property, plant and equipment | 458.9 | 484.1 | 418.4 | 433.5 | 393.8 | |||||||||||
Total assets | 4,857.8 | 4,686.3 | 4,470.5 | 3,786.2 | 3,106.1 | |||||||||||
Total long-term debt, including current portion(8) | 751.4 | 750.8 | 758.5 | 733.1 | 222.8 | |||||||||||
Shareholders' equity | 2,214.4 | 2,094.6 | 2,118.2 | 1,365.5 | 1,475.8 | |||||||||||
Consolidated Balance Sheet Data (U.S. GAAP)(6): | ||||||||||||||||
Total assets | $ | 4,876.2 | $ | 4,708.1 | $ | 4,485.8 | $ | 3,786.2 | $ | 3,106.1 | ||||||
Total long-term debt, including current portion | 751.4 | 750.8 | 757.2 | 723.4 | 221.2 | |||||||||||
Shareholders' equity | 2,176.9 | 1,960.4 | 1,996.5 | 1,254.8 | 1,346.8 |
The transitional impact of adopting these standards and recording our derivatives on January 1, 2007 at fair value iswas as follows:
| Increase (decrease) | ||||
---|---|---|---|---|---|
| (in millions) | ||||
Prepaid and other assets | $ | 5.5 | |||
Other long-term assets | (10.3 | ) | |||
Accrued liabilities | 5.8 | ||||
Long-term debt — embedded option and debt obligation | 1.9 | ||||
Long-term debt — unamortized debt issue costs | (11.5 | ) | |||
Other long-term liabilities | 8.1 | ||||
Long-term deferred income tax liability | (2.2 | ) | |||
Opening deficit | 6.4 | ||||
Accumulated other comprehensive loss — cash flow hedges | 0.5 |
| As at December 31 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | ||||||||||
| (in millions) | |||||||||||||
Computer software reclassified to intangible assets | $ | 72.2 | $ | 69.5 | $ | 47.6 | $ | 34.0 |
| Year ended December 31 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2006 | 2007 | 2008 | ||||||||||
| (in millions) | |||||||||||||
Amortization of computer software | $ | 22.5 | $ | 20.9 | $ | 23.4 | $ | 11.8 |
In 2005, Other charges totaled $130.9 million, comprised primarily of: (a) a $160.1 million restructuring charge;charge, offset, in part, by (b)(i) a $13.9 million gain on repurchase of LYONs;LYONs and (c)(ii) a $13.8 million recovery of additional amounts realized relating to a specific customer risk.
In 2006, Other charges totaled $211.8 million, comprised primarily of: (a) a $178.1 million restructuring charge;charge and (b) a $33.2 million non-cash loss resulting from the sale of our plastics business.
In 2007, Other charges totaled $47.6 million, comprised primarily of: (a) a $37.3 million restructuring charge;charge and (b) a non-cash write-down of $15.1 million relating to the annual impairment assessment of long-lived assets, primarily property, plant and equipment.
In 2008, Other charges totaled $885.2 million, comprised primarily of: (a)(i) a non-cash write-down of $850.5 million relating to the annual goodwill impairment assessment; (b)assessment, (ii) a $35.3 million restructuring charge;charge and (c)(iii) a non-cash write-down of $8.8 million relating to the annual impairment assessment of long-lived assets against property, plant and equipment;equipment, offset, in part, by; (d)by (b) a $7.6 million gain on repurchase of long-term debt.
In 2009, Other charges totaled $68.0 million, comprised primarily of: (a)(i) a $83.1 million restructuring charge and (ii) a non-cash write-down of $12.3 million relating to the annual impairment assessment of long-lived assets against property, plant and equipment, offset, in part, by (b)(i) a net $23.7 million recovery of damages from the settlement of a class action lawsuit and (ii) a net $2.8 million gain on repurchase of long-term debt, net of a write-down to the embedded options on the debt.
marked-to-market the embedded prepayment options in our debt instruments and have applied fair value hedge accounting to our interest rate swaps and our hedged debt obligation (7(particularly our 77/8% Senior Subordinated Notes due 2011)2011, which were redeemed in full in the fourth quarter of 2009). The swap agreements were terminated in February 2009, at which point hedge accounting was discontinued. The changes in fair values each period are recorded in interest expense. The marked-to-market adjustment fluctuates each period as it is dependent on market conditions, including future interest rates, implied volatilities and credit spreads.
Refer to note 20 to the Consolidated Financial Statements in Item 18.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for Offer and Use of Proceeds
Not applicable.
D. Risk Factors
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 operating in unprecedented times, as global economies and global capital markets deal with a significant economic crisis.
Businesses in virtually all industries are dealing with an economic environment that may be unprecedented in terms of the rate and pace of change in end-market demand and global economic uncertainty. In this environment, visibility of end-market demand is more uncertain, there could be an increased risk of business failures among competitors, suppliers and customers. If these failures were to occur, this could negatively impact many aspects of our business including revenue and our operating profitability, asset utilization, increased accelerated pricing pressure, additional restructuring activities, market share shifts of existing programs, write-down of inventories and the failure to collect accounts receivables. Additionally, the weaker economic environment could result in significant volatility in currency fluctuation, which could also impact our operating profitability and increase other expenses related to running a global operation. While we have significant cash invested in short-term, high-quality financial instruments including money market funds and certificates of deposits with global banking leaders, we cannot guarantee that these deposits can be protected if the global economy and capital markets continue to experience significant and prolonged weakness.
The global economic conditions and credit crisis may well accelerate or exacerbate the effect of the various risk factors described in this Annual Report as well as result in other unforeseen events that will affect our business and financial condition.
We are in an industry comprised of numerous competitors and aggressive pricing dynamics.
We are in a highly competitive industry. We compete on a global basis to provide electronics manufacturing services and solutions to original equipment manufacturers (OEMs) in the consumer, communications, enterprise computing, consumer, industrial, aerospace and defense, alternative energyhealthcare and healthcaregreen technology markets. Our competitors include major domestic and foreign companies such as Benchmark Electronics, Inc., Flextronics International Ltd., Hon Hai Precision Industry Co., Ltd., Jabil Circuit, Inc. and Sanmina-SCI Corporation, as well as smaller EMS companies that often have a regional, product, service or industry specific focus. In addition, original design manufacturers (ODMs), companies that provide internally designed products and manufacturing services to OEMs, continue to increase their share of outsourced manufacturing services across several markets and product groups, including personal computer motherboards, notebook and desktop computers, and smartphones and cell phones. While we dohave not generally participatehistorically participated in these segments, and we have not, to date, encountered significant direct competition from ODMs in the end-marketsend markets in which we participate, suchwe anticipate competition maywith ODMs will increase if our business in these markets grows, particularly in smartphones, or if ODMs expand further into or beyond, theseour primary end markets. We also face indirect competition from the manufacturing operations of our current and prospective customers, as these companies could choose to manufacture products internally rather than to outsource to EMS providers.providers, particularly where internal excess capacity exists.
Some of our competitors have greater scale and a greater production presence in lower-cost geographies, as well as greater manufacturing, financial, procurement, research and development and marketing resourcesa broader service offering than we have. While we have increased the amount of capacity we have in lower-cost regions over the past several years, lower-cost regions may not provide the same operational benefits that they have in the past as these regions arehave also being impacted by the global economic crisis.experienced excess capacity. As a result, we may experience increasedour industry is continually responding to aggressive pricing pressure and other competitive pressures as the competitive landscape in lower-cost regions adjusts to the current economic environment.pressures. Additionally, our current or potential competitors may also increase or shift their presence in new lower-cost regions to try to offset current end-market weaknessthe continuous competitive pressure or develop or acquire services comparable or superior to those we develop, combine or merge to form larger competitors, or adapt more quickly than we will to new technologies, evolving industry trends and changing customer requirements. Competition has caused and maywill continue to cause excessive pricing pressures, increased working capital requirements, reduced profit or loss of market share (from both program and customer disengagements), any of which could materially and adversely affect us. The currentweak global economic crisis mayenvironment will also increase the competitive environment in all these areas which could impact our profitability. In addition, the North American and Asian EMS industry hasindustries have excess manufacturing capacity and has seen increased competition from Asian competitors, which may begintrigger EMS providers to expand into new end-markets.and each other's end markets. These factors have exerted and will continue to exert additional pressures on pricing for components and services, thereby increasing the competitive pressures in the EMS industry. We may not be able to compete successfully against our current and future competitors, and the competitive pressures we face may have a material adverse effect on us.
We are dependent on a limited number of customers and end markets, primarily within the consumer, communications and enterprise computing and consumer markets, for a substantial portion of our revenue.
A decline in revenue from these customers or aend markets or the loss of a large customer could have a material adverse affect on our financial condition and resultsoperating results. During 2009, one customer from our consumer end market individually represented more than 10% of operations.our total revenue, and our top 10 customers represented 71% of total revenue. During 2008, we had no individual customer that represented more than 10%
of our total 2008 revenue. Ourrevenue, and our top 10 customers in 2008 represented 63% of our total 2008 revenue. Our two largest customerscustomer, Research in 2007 were Cisco Systems and Sun Microsystems, eachMotion, or RIM, represented 17% of which represented more than 10%total revenue in 2009. Our recent success in the smartphone market, driven primarily by new program wins from RIM, has increased our customer concentration as a percentage of our total 2007 revenue and in aggregate represented 21% of our total 2007 revenue. Our top 10 customers in 2007 represented 61% of our total 2007 revenue.
We expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenue. To reduce this reliance, we have been targeting new customers and new business opportunitiesservices in our traditional segments, as well as newernew markets such as industrial, aerospace and defense, alternative energyhealthcare and healthcaregreen technology markets.
Table of Contents We may also pursue acquisition opportunities to further diversify our revenue or customer base, although there can be no assurance that any acquisition will increase revenue or reduce our customer concentration. Acquisitions are also subject to integration risk and volumes and margins could be lower than we anticipated. As we pursue opportunities in new markets, we may encounter challenges as our knowledge or experience may be limited in these new markets or technologies.
Although we generally enter into master supply agreements with our customers, the level of business to be transacted under those agreements is not guaranteed. Instead, we bid on a project by project basis and typically have supply contracts or purchase orders in place for a specific project. We are dependent on customers to fulfill the terms associated with these orders and/or contracts.
In addition, some of our customers routinely reduce or delay the volume of manufacturing services ordered from us. There is no assurance that present or future large customers will not terminate their manufacturing arrangements with us or significantly change, reduce or delay the volume of manufacturing services they order from us, any of which would adversely affect our operating results. Significant reductions in, or the loss of, revenue from any of our large customers could have a material adverse effect on us. Additionally, the ramping of new program wins from new or existing customers can take from several months to more than a year before production starts. During this start-up period, these programs are subject to significant change or outright cancellation, in contrast to the initial expectations at the time of winning the new business was awarded, due to changes in end-market demand or changes in product viability in the marketplace.
We are dependent on customers operatingwho operate in highly competitive markets and the inability of our customers to succeed in their markets can adversely impact our business, operating results and financial condition.
The end markets we serve can experience major swings in demand which, in turn, can significantly impact our operations. Our financial performance depends on our customers' ability to compete and succeed in their markets, which could be affected directly by the current global economic conditions. The majority of our customers' products are characterized by rapid changes in technologies, increased standardization of technologies and shortening of product lifecycles. In many instances, our customers have experienced severe revenue erosion, pricing and margin pressures, and excess inventories during the past few years.
We have recently increased the amount of our business in the consumer segment, particularly in smartphones, which is characterized by shorter product lifecycles, significant increases andor decreases ofin program volumes based on strength in end-market demand, rapid changes in consumer preferences for these products and devices, and greater ease in shifting these products among EMS competitors. The increased exposure to this segment may make revenue more volatile.volatile and could result in increased risk to our financial results.
We are operating in a weak and uncertain global economic environment.
DuringAlthough the latter partglobal economy has recovered somewhat from the recent economic and financial crisis, the economic environment remains uncertain. This uncertainty has resulted in lower volumes for the products we manufacture and low end market visibility for our customers. This environment can pose significant risk to our business due to weaker demand, customer consolidation or customer financial stress or bankruptcy.
The global economic conditions and credit environment may well accelerate or exacerbate the effect of 2006the various risk factors described in this Annual Report, as well as result in other unforeseen events that will affect our business and financial condition.
We may encounter difficulties expanding and/or restructuring our operations which could adversely affect our operating results.
As we expand our business, enter into new market segments and products, acquire new businesses or capabilities, transfer our business from one region to another or restructure our operations, we may encounter difficulties that result in 2007,higher than expected costs associated with such activities and customer dissatisfaction with our performance. Potential difficulties related to our growth and/or operational restructuring could include:
Any of these factors could prevent us from realizing the anticipated benefits of growth in new markets or the benefits we experienced unexpected reductions in demandexpected to realize from our restructuring actions and could adversely affect our business and operating results.
We may encounter difficulties completing or integrating our acquisitions which could adversely affect our operating results.
We expect to expand our presence in new end markets or expand our capabilities, some of which may occur through acquisitions. These transactions may involve acquisitions of entire companies and/or acquisitions of selected assets from OEMs. Potential difficulties related to our acquisitions include:
Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, including additional revenue, operational synergies and economies of scale. Our failure to realize the anticipated benefits of acquisitions could adversely affect our business and operating results. Previous acquisitions have resulted in the telecommunications segment, driven primarily byrecording of a significant amount of goodwill and intangible assets at the weaker demandtime of acquisition. Our failure to support the carrying value of goodwill and intangible assets in North America, andperiods subsequent to the acquisitions could require write-downs that adversely affect our operating results. All goodwill from recent consolidations in the industry.previous acquisitions has been written off.
Inherent difficulties in managing capacity utilization and unanticipated changes in customer orders place strains on our planning and supply chain execution and may affect our results of operations.operating results.
Our customers are increasingly dependent on EMS providers for new product introductions and rapid response times to meet changes in volume requirements. Most of our customers typically do not commit to firm production schedules for more than 30 to 90 days in advance and we often experience volatility in customers'customer orders.
Additionally, a significant portion of our revenue can occur in the last month of the quarter and could be subject to change or cancellation that will affect our quarter-to-quarter results. Accordingly, we cannot always forecast the level of customer orders with certainty. This can make it difficult to order appropriate levels of materials and to schedule production and maximize utilization of our manufacturing capacity.
In addition, customers may cancel their orders, change production quantities or delay production for a number of reasons. When customers change production volumes or request different products to be manufactured than what they originally forecasted to us, the unavailability of components and materials for such changes could also impact our revenue and working capital performance. Furthermore, in order to guarantee continuity of supply for many of our customers, we are required to manufacture and hold a specified amount of finished goods in our warehouses for our customers.warehouses. The uncertainty of our customers' end-markets,end markets, intense competition in our customers' industries and general order volume volatility have resulted, and may continue to result, in some of our customers delaying or canceling the delivery of some of the products we manufacture for them and placing purchase orders for lower volumes of products than previously anticipated.
Changes or delays in customers'customer orders could also cause a delayresult in the repayment to ushigher than expected inventory levels for inventory expenditures we incurred in preparation for the customer's orders or, inus. In certain circumstances, require uswe may be required to return the inventory to our suppliers, re-sell the inventory or continue to hold the inventory, any of which may result in our taking
additional reserves for the inventory should it become excess or obsolete. Order cancellations and delays could also lower our asset utilization, resulting in higher levels of unproductive assets and lower margins. In some cases, changes in circumstances for a customer could also negatively impact the collectability of receivables or carrying value of our inventory for that customer. On other occasions, customers have required rapid and sudden increases in production, which have placed an excessive burden on our manufacturing capacity. Rapid changes in product ramps and/or the weakening financial condition or deterioration of any single customer's financial condition could prevent us from collecting receivables or realizing the value of inventory on hand. Any of these factors or a combination of these factors could have a material adverse effect on our results of operations.
Competitors with component manufacturing capabilities may have greater opportunities than uswe do to win additional business from some of our customers. This capability may have the potential to provide thata competitor with additional capabilities or cost saving opportunities.
We procure all of our components from third partythird-party suppliers. In addition to traditional EMS services, some of our competitors also manufacture some of the components used in the products they assemble. This can include metal or plastic enclosures, connectors, semiconductors, cabling and other components used in the manufacturing of electronics. Those capabilities may provide additional incentives for some customers to do business with those EMS or ODM companies, as there may be additional opportunity to reduce the total costs of their products by using more components and services from one company. If this wereour customers transfer their business to occur,a competitor, we may experience reduced revenue from certain customers and lower utilization rates.
Our customers and competitors are subject to mergers and acquisitions, and similar transactions which can adversely affect our business relationships or the volume of business we conduct with our customers.
Future mergers and acquisitions could result in a decrease in demand from our customers or a loss of business to our competitors as customers rationalize their business and consolidate their suppliers. Mergers or consolidation among our competitors could increase their competitive advantage over us, which may also result in a loss of business if customers shift their production. In a weaker economic environment, there may be a higher risk of increased consolidation among our customers or competitors.
Mergers among our customers or their customers could increase concentration and/or reduce total demand asWe are subject to the combined entities may rationalize their businesses and consolidate their suppliers.
We may encounter difficulties expanding and/or restructuring our operationsrisk of increased income taxes which could adversely affect our resultsfinancial condition and operating results.
We conduct business operations in a number of operations.countries, including countries where tax incentives have been extended to encourage foreign investment or income tax rates are low.
As we expandWe develop our tax position based upon the anticipated nature and structure of our business enter into new market segments and the tax laws, administrative practices and judicial decisions now 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 and reviews of historical information by local tax authorities which could result in additional tax expense in future periods relating to prior results. Any such increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.
Certain of our subsidiaries provide financing, products orand 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.
Reviews by tax authorities generally focus on, but are not limited to, the validity of our businessinter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and a significant degree of judgment. If any of these tax authorities are successful with their challenges, our income tax expense may be adversely affected and we could also be subject to interest and penalty charges. In connection with ongoing tax audits in Canada, tax authorities have taken the position that income reported by one of our Canadian subsidiaries from one region2001 to another,2003 should have been materially higher as a result of certain inter-company transactions. In connection with a tax audit in Brazil, tax authorities have taken the position that income reported by our Brazilian subsidiary in 2004 should have been materially higher as a result of certain inter-company transactions. We believe that we have substantial defenses to the asserted positions and have adequately accrued for any probable potential adverse tax impact. However, there can be no assurance as to the final resolution of these claims and any resulting proceedings, and if these claims and any ensuing proceedings are determined adversely against us, the amounts we may encounter difficulties thatbe required to pay could be material. The successful pursuit of these assertions by tax authorities could result in higher than expected costs associated withthose subsidiaries owing significant amounts of tax, interest and possibly penalties.
In addition, we have recognized, and will continue to recognize, the future benefit of certain Brazilian tax losses on the basis that these tax losses can and will be fully utilized in the fiscal period ending on the date of dissolution of our growthBrazilian subsidiary. We regularly review Brazilian laws and customer dissatisfaction with performance. Potential difficulties relatedassess the likelihood of the realization of the future benefit of the tax losses. A change to the benefit realizable on these Brazilian losses could result in a substantial increase to our growth and/or operationalnet future tax liabilities.
Our results can be affected by limited availability of components.
A significant portion of our costs is for the purchase of electronic components. During this time of global economic uncertainty, significant restructuring has occurred in the supply base to adjust to the lower volumes. As a result, an improved demand environment could include:
Anyfluctuations in the cost of these factors could prevent us from realizing the anticipated benefits of growth in new markets or the benefits we expected to realize from our restructuring actions and could adversely affect our business and operating results.
We face financial risks due to foreign currency fluctuations.
The principal currency in which we conduct our operations is the U.S. dollar. However, some of our subsidiaries transact business in other currencies, such as the Canadian dollar, Thai baht, Malaysian ringgit, Mexican peso, Czech koruna, Singapore dollar, Japanese yen, Chinese renminbi, Brazilian real, Philippine peso, Romanian lei, Indian rupee and the Euro. The current economic credit crisis has resulted in significant fluctuations of currency rates which has and will continue to affect profitability on a quarter to quarter basis. We often enter into hedging transactions to minimize our exposure to foreign currency risks. Wecomponents, may also enter into forward exchange contracts to hedge our balance sheet exposures. Our current hedging activity is designed to reduce the variability of our foreign currency costs and consists of contracts to purchase or sell foreign currencies at future dates. These contracts generally extend for periods ranging from one to 15 months. Our hedging transactions may not successfully minimize foreign currency risk, which could have a material adverse effect on our business or cause our operating results of operations.
Failure ofto fluctuate from period to period. Changes in forecasted volumes or in the products required by our customers to pay the amounts owed to us in a timely manner may adverselycan affect our financial condition and results of operations.
We generally provide payment terms ranging from 30ability to 60 days. As a result, we generate significant accounts receivable from sales toattain components which could impact our customers, historically representing 22% to 39% of current assets. Accounts receivable from sales to customersresults. Additionally, quality or reliability issues at December 31, 2008 were $1,074.0 million (December 31, 2007 — $941.2 million; and December 31, 2006 — $973.2 million). At December 31, 2008, two customers each represented more than 10% of total accounts receivable (December 31, 2007 — no customer represented more than 10% of total accounts receivable; and December 31, 2006 — no customer represented more than 10% of total accounts receivable). If any of our customers has insufficient liquidity, wecomponent or materials providers, or financial difficulties that affect their production and ability to supply us with components, could encounter significant delayshalt or defaults in payments owed to us by customers, and may extend our payment terms or restructure the debt,delay production of a customer's product which could have a significant adverse impact on our financial condition and results of operations. Any deterioration in the financial condition of our customers will increase the risk of collecting receivables. The current global economic crisis could alsoadversely impact our customers' ability to pay receivables or put customers into bankruptcy or reorganization which could also impact our ability to collect our receivables. We regularly review our accounts receivable valuations and make adjustments when necessary. Our allowance for doubtful accounts at December 31, 2008 was $13.7 million (December 31, 2007 — $21.5 million; and December 31, 2006 — $21.4 million), which represented 1% of the gross accounts receivable balance (December 31, 2007 — 2%; and December 31, 2006 — 2%). In addition, payment terms could change which may adversely affect our financialoperating results.
We face increased financial risk due to the potential non-performance of a counterparty, including but not limited to financial institutions, customers and suppliers, during the current uncertain economic environment.
The potential occurrence of default by a counterparty on its contractual obligations may result in a financial loss to us. To mitigate the risk of financial loss from defaults, we deal with counterparties we believe are creditworthy. We also expect the current global economic conditions and credit crisis to impact the financial condition of some of our customers and suppliers. The current economy could impact certain customers' ability to pay, or it could render them insolvent, which would impact the collectibility of their accounts. Similarly, an interruption in supply from a raw materials 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 product in a timely manner. We continue to closely monitor our customers' ability to pay their receivables and to monitor our suppliers in an effort to ensure consistency of supply.
We may be required to make larger contributions to our defined benefit plans in the future, which may have an adverse impact on our liquidity and our results of operations.
We maintain multiple defined benefit plans as well as supplemental pension plans. Some employees in Canada, Japan, the United Kingdom and the Philippines participate in our defined benefit pension plans. We also have defined contribution plans for our other employees, primarily in Canada and the U.S.
Our pension funding policy is to contribute amounts sufficient to meet minimum local statutory funding requirements that are based on actuarial calculations. Our obligations are based on certain assumptions relating to expected plan performance, including employee turnover and retirement rates, the performance of the financial markets and discount rates. If future trends differ from these assumptions, the amounts we are obligated to contribute to the pension plans may increase. If the financial markets result in returns lower than our assumptions, we may be required to make larger contributions in the future and our pension expense may also increase.
Our customers may be adversely affected by rapid technological changes which may have an adverse impact on their success in their markets and on our business.
Many of our customers compete in markets that are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. These conditions frequently result in short product lifecycles. Our success will depend largely on the success achieved by our customers in developing and marketing their products. If technologies or standards supported by our customers' products become
obsolete, or fail to gain widespread commercial acceptance or are cancelled, our business could be materially adversely affected. In addition, an accelerating decline in end-market demand for customer-specific proprietary systems in favor of open systems with standardized technologies could have a material adverse impact on our business. Additionally,The highly competitive nature of our customers' products could also drive consolidation among OEMs, which could result in product line consolidation that could impact our revenue or customer relationships.
We are seeking to rapidly expand our services capabilities.
We believe OEM customers continue to look to the rampingEMS industry to provide additional supply chain services and capabilities. While we currently provide some of new program winsthese services, such as design and fulfillment, to a few of our customers, we are focused on significantly increasing these capabilities in the near term. We may pursue this growth through internal development or through acquisitions. Our efforts to expand our services capabilities may not be successful. The failure to increase these services and capabilities could impact our existing business and future business wins.
Any failure to successfully manage our international operations would have a material adverse effect on our financial condition and operating results.
We have facilities in numerous countries, including China, the Czech Republic, Ireland, Japan, Malaysia, Mexico, Romania, Singapore, Spain and Thailand. During 2009, approximately two-thirds of our revenue was produced from new or existing customers can takelocations outside of North America. We also purchase material from several monthsinternational suppliers for much of our business, including our North American business. We believe that our future growth depends largely on our ability to more than a year before production starts. During this start-up period, these programsincrease our business and penetration with global OEMs and selective markets, in both higher-cost and lower-cost regions.
International operations are subject to significant change or outright cancellation, in contrast to the initial expectations at the time of winning the new business, due to changes in end-market demand or changes in product viability in the marketplace.
Weinherent risks which may encounter difficulties completing or integrating our acquisitions which could adversely affect our results of operations.
Some of our growth may occur through acquisitions. These transactions may involve acquisitions of entire companies and/or acquisitions of selected assets from OEMs. Potential difficulties related to our acquisitions include:us, including:
AnyEach of these factorsthe regions in which we operate has a history of promoting foreign investment but could prevent us from realizing the anticipated benefits of an acquisition, including operational synergiesexperience economic and economies of scale. Our failure to realize the anticipated benefits of acquisitionspolitical turmoil that could adversely affect our business and operating results. Previous acquisitions have resulted in the recording of a significant amount of goodwill and intangible assets at the time of acquisition. Our failure to support the carrying value of goodwill and intangible assets in periods subsequent to the acquisitions could require write-downs that adversely affect our operating results. All goodwill from previous acquisitions has been written off.us.
We have had significant restructuring charges and losses for several years and may experience restructuring charges and losses in future periods.
We have a history of recording losses resulting primarily from restructuring charges, and the write-down of goodwill and long-lived assets.assets, or the write-down of accounts receivable for customers in bankruptcy. These amounts have varied from period to period. In 2004, we also recorded a write-down of accounts receivable for one specific customer which subsequently went bankrupt. We have undertaken numerous initiatives to restructure and reduce our capacity and cost structures in response to
changes in the EMS industry and end-market demand, with the intention of improving utilization and realizing cost savings in the future. We will continue to evaluate our operations and may propose additional restructuring actions in the future. Any failure to successfully execute these initiatives, including any delay in effecting these initiatives, can have a material adverse impact on our operating results. Furthermore, we may not be profitable in future periods.
Restrictions on our ability to restructure quickly enough can delay the timing and affect the benefits we expect from our restructuring efforts.
We have operations in multiple regions around the world. As a result, we are subject to different regulatory requirements and labor laws governing how quickly we are able to reduce manufacturing capacity and terminate related employees. These requirements are particularly stringent in Europe. Restrictions on our ability to close under-utilized facilities have resulted in higher expenses associated with carrying excess capacity and infrastructure while conducting restructuring activities. While it has typically been easier to restructure our operations in certain lower-cost regions, the current global economic conditions may change how governments in all regions regulate restructuring as the weaker demand environment impacts local economies. The speed of our restructuring can also be impeded by delays from our customers related to the timing of their product transfers, which can prevent us from transferring products to our other facilities in a timely and cost-effective manner. Since the restructuring of our plants requires some of our customers to move their production from one of our facilities to another, customers have, and may in the future, use this opportunity to shift their production to competitors' facilities.
Any failure to successfully manage our international operations would have a material adverse effect on our financial condition and results of operations.
We have facilities in numerous countries, including Brazil, China, the Czech Republic, India, Ireland, Japan, Malaysia, Mexico, the Philippines, Romania, Singapore, Spain and Thailand. During 2008, approximately two-thirds of our revenue was produced from locations outside of North America. We also purchase material from international suppliers for much of our business, including our North American business. We believe that our future growth depends largely on our ability to increase our business and penetration with global OEMs and selective markets, in both higher-cost and lower-cost regions.
Our international expansion has had and will continue to require significant management attention and financial resources. International operations are subject to inherent risks which may adversely affect us, including:
Each of the regions we operate in has a history of promoting foreign investment but could experience economic and political turmoil and fluctuations in the value of its currencies that could adversely affect us.
Our results can be affected by limited availability of components.
A significant portion of our costs is for the purchase of electronic components. All of the products we manufacture or assemble require one or more components that we order from component suppliers. In many cases, there may be only one supplier of a particular component. Supply shortages for a particular component can delay production and thus delay the revenue of all products that use that component or can cause price increases in the products and services we provide. In the past, we have secured sufficient allocations of constrained components so that revenue was not materially impacted. In addition, at various times there have been industry-wide shortages of electronic components. Such shortages, or future fluctuations in the cost of components, may have a material adverse effect on our business or cause our results of operations to fluctuate from period to period. Changes in forecasted volumes by our customers, which require additional components that may not be readily available, could also impact our results. The financial condition of suppliers could affect their ability to supply us with components which could negatively impact our revenue. Additionally, quality or reliability issues at any of our component or materials providers, or financial difficulties that affect their production, could halt or delay production of a customer's product which could adversely impact our results.
The efficiency of our operations could be adversely affected by any delay in delivery from our transportation suppliers, including delays caused by work stoppages and natural disasters.
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. A work stoppage, strike or shutdown of any important supplier's facility or operations, or at any major port or airport, could result in manufacturing and shipping delays or expediting charges, which could have a material adverse effect on our results of operations. Increased political activism and worsening local economic conditions could impact receipt of materials and product shipments. Natural disasters such as tsunamis and earthquakes, and the severe and dramatic change to historical weather patterns in the regions where our facilities or our suppliers' facilities are located, could have an adverse impact on our ability to deliver products to our customers. Such events could disrupt supply to us, and from us to our customers, and adversely affect our operations.
If our products or services are subject to warranty claims, our business reputation may be damaged and we may incur significant costs.
In certain of our sales contracts, we provide warranties against defects or deficiencies in our products, services or designs. A successful claim for damages arising as a result of such defects or deficiencies, for which we are not insured or where the damages exceed our insurance coverage, or any material claim for which insurance coverage is denied or limited and for which indemnification is not available, could have a material adverse effect on our business, results of operations and financial condition. As we pursue new end-markets, warranty requirements will vary and we may be less effective in pricing our products to appropriately capture the warranty costs.
We are subject to the risk of increased income taxes which could adversely affect our financial condition and results of operations.
We conduct business operations in a number of countries, including countries where tax incentives have been extended to encourage foreign investment or income tax rates are low.
We develop our tax position based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions now 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 audits of historical information by local tax authorities which could result in additional tax expense in future periods relating to prior results. Any such increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.
Certain of our subsidiaries provide financing, products and services to, and may from time to time undertake certain significant transactions with other subsidiaries in different jurisdictions. In general, related party transactions and, in particular, related party financing transactions, are subjected to close review by tax authorities. 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.
Taxation authorities could challenge the validity of our related party financing and related party transfer pricing policies. Such a challenge generally involves a subjective area of taxation and generally involves a significant degree of judgment. If any of these taxation authorities is successful in challenging our financing or transfer pricing policies, our income tax expense may be adversely affected and we could also be subjected to interest and penalty charges. In connection with tax audits in the United States, tax authorities had asserted that our United States subsidiaries owed significant amounts of tax, interest and penalties arising from related party transactions. These asserted deficiencies were subsequently resolved in our favor. In connection with ongoing tax audits in Canada, tax authorities have taken the position that income reported by one of our Canadian subsidiaries in 2001 and 2002 should have been materially higher as a result of certain related party transactions. The successful pursuit of that assertion could result in that subsidiary owing significant amounts of tax, interest and possibly penalties. We believe that we have substantial defenses to the asserted position and have adequately accrued for any probable potential adverse tax impact. However, there can be no assurance as to the final resolution of this claim and any resulting proceedings, and if this claim and any ensuing proceedings are determined adversely against us, the amounts we may be required to pay could be material.
Changes in accounting standards enacted by the standard-setting bodies may adversely affect our reported revenue, profitability and financial condition.
Our consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are reconciled to U.S. GAAP. These accounting standards are revised periodically and/or expanded upon by the standard-setting bodies. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations issued from time to time by these authoritative bodies, which include the Canadian Accounting Standards Board, the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission. Most recently, the Canadian Accounting Standards Board has decided to adopt the International Financial Reporting Standards effective 2011. The adoption of these changes could adversely affect our reported revenue, profitability or financial condition. Compliance with these changes could also increase our financial and accounting costs.
The efficiency of our operations could be adversely affected by any disruptions from our third-party IT providers.
We have outsourced certain IT systems support which includes database management, as well as application development support for our production control and inventory management systems. If these third-party providers are unable to fulfill their obligations on a timely and reliable basis, we may experience disruptions to our operations. Any inefficiencies or production down times resulting from these disruptions could have a negative impact on our ability to meet customers' orders, resulting in a delay or decrease to our revenue and our operating margins.
We may be unable to keep pace with manufacturing technology changes.
We continue to evaluate the advantages and feasibility of new manufacturing processes. Our future success will depend, in part, upon our ability to continually develop and market electronics manufacturing services that meet our customers' evolving needs. This could entail investing in new processes or equipment to support new technologies used in our customers' current or future products, and to support their supply chain processes. Additionally, as we enter new end-markets where our experience is limited, we may be less effective in adapting to technological change. Our manufacturing and supply chain processes, test development efforts and design capabilities may not be successful.
In addition, various industry-specific standards, qualifications and certifications are required to produce certain types of products for our customers. Failure to maintain those certifications could adversely affect our ability to maintain existing levels of business or win new levels of business.
We may be unable to 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 have taken, and intend to continue to take, appropriate steps to protect this proprietary information. These steps include signing non-disclosure agreements with customers, suppliers, employees, and other parties, and implementing rigid security measures. Our protection measures may not be sufficient to prevent the misappropriation or unauthorized disclosure of our property or information.
There is also a risk that infringement claims may be brought against us, our customers or our suppliers in the future. If someone does successfully assert an infringement claim, we may be required to spend significant time and money to develop a manufacturing process that does not infringe upon the rights of such other person or to obtain licenses for the technology, process or information from the owner. We may not be successful in such development or any such licenses may not be available on commercially acceptable terms, if at all. In addition, any litigation could be lengthy and costly and could adversely affect us even if we are successful in such litigation. As we pursue new end markets, we may be less effective in anticipating the intellectual property risk related to the new manufacturing and design services.
We may not be able to increase revenue if the trend of outsourcing by OEMs slows.
Future growth in our revenue includes a dependence on new outsourcing opportunities in which we assume additional manufacturing and supply chain management responsibilities from OEMs. Our future growth will be limited to the extent that these opportunities are not available as a result of OEMs deciding to perform these functions internally or delaying their decision to outsource or our inability to win new contracts. The current economic slowdown may also impact the trend of outsourcing as some customers may reverse their outsourcing and shift production back to their own facilities to improve their factory utilization. Political pressures or negative sentiment by our customers' customers or local governments may impede the movement of production from one geography to another. These and other factors could adversely affect the rate of outsourcing generally or, adversely, affect the rate of outsourcing to EMS providers, such as Celestica, who have shifted substantial capacity to these lower-cost geographies.
Implementation of new information systems could adversely impact our results.
We currently use multiple Enterprise Resource Planning systems in support of our manufacturing sites and we may reduce the number and variety of these systems in the future. Our inability to effectively consolidate our information systems could have a material adverse impact on our results.
If we are unable to recruit or retain highly skilled personnel, our business could be adversely affected.
The recruitment of personnel in the EMS industry is highly competitive. We believe that our future success will depend, in part, on our ability to continue to attract and retain highly skilled executive, technical and management personnel. We generally do not have employment or non-competition agreements with our employees. To date, we have been successful in recruiting and retaining executive, managerial and technical personnel; however, the loss of services of certain of these employees could have a material adverse effect on our operations.
Our investment in Lean and Six Sigma initiatives may not produce the anticipated cost benefits or achieve the working capital benefits we expect.
We are continually investing in training, business process and information technology tools to eliminate waste, increase quality and reduce defects in the manufacturing process. This investment is critical in our industry, as our customers require us to continually produce cost savings through the elimination of waste and improved efficiencies. Failure to deliver these cost savings could affect our relationships with our customers in a manner which would adversely affect our volumes and operating results. The deployment of Lean and Six Sigma
initiatives is part of the roadmap we are using to improve our own operating margins. Failure to achieve the anticipated benefits could have a negative impact on our margin improvement.
The complexity of moving our manufacturing base to lower-cost regions could have a material adverse effect on our financial condition and results of operations.operating results.
Due to the highly competitive nature of the electronics industry, our customers have requiredstrive for lower-cost solutions from their EMS providers. Over time, this has resulted in the movement of our production from higher-cost regions such as North America and Western Europe to lower-cost regions such as Asia, Latin America and Eastern Europe. This move has had, and could continue to have, a negative impact on current and future results by increasing the risks associated with, among other things, transferring production to new regions where skills or experience may be more limited than in higher-cost regions, incurring higher operating expenses during the transition, incurring additional restructuring costs associated with the decrease in production levels in higher-cost geographies and the risks of operating in new foreign jurisdictions. In certain situations, product transfers have resulted in, and may in the future result in, our inability to retain our existing business or grow future revenue due to potential execution problems resulting from significant headcount reductions, plant closures and product transfers associatedtransfers.
We face financial risks due to foreign currency fluctuations.
The principal currency in which we conduct our operations is the U.S. dollar. However, some of our subsidiaries transact business in other currencies, such as the Canadian dollar, Thai baht, Malaysian ringgit, Mexican peso, Czech koruna, Singapore dollar, Japanese yen, Chinese renminbi, Romanian lei and the Euro. The global economic uncertainty has resulted in significant fluctuations of currency rates, particularly in 2008, and may continue to affect profitability going forward. We often enter into hedging transactions to minimize our exposure to foreign currency risks. We may also enter into forward exchange contracts to hedge our balance sheet exposures. Our hedging activity is designed to reduce the variability of our foreign currency costs and consists of contracts to purchase or sell foreign currencies at future dates. These contracts generally extend for periods ranging from one to 15 months. Our hedging transactions may not successfully minimize foreign currency risk, which could have a material adverse effect on our operating results.
Failure of our customers to pay the amounts owed to us in a timely manner may adversely affect our financial condition and operating results.
We generally provide payment terms ranging from 30 to 60 days. As a result, we generate significant accounts receivable from sales to our customers, historically representing 22% to 39% of current assets. Accounts receivable from sales to customers at December 31, 2009 were $828.1 million (December 31, 2008 — $1,074.0 million; and December 31, 2007 — $941.2 million). At December 31, 2009, one customer represented more than 10% of total accounts receivable (December 31, 2008 — two customers each represented more than 10% of total accounts receivable; and December 31, 2007 — no customer represented more than 10% of total accounts receivable). If any of our customers have insufficient liquidity, we could encounter significant delays or defaults in payments owed to us by such customers, and we may extend our payment terms or restructure their receivables owed to us, which could have a significant adverse impact on our financial condition and operating results. Any deterioration in the financial condition of our customers will increase the risk of collecting receivables. The ongoing global economic uncertainty could also impact our customers' ability to pay receivables or result in customers going into bankruptcy or reorganization proceedings which could also impact our ability to collect our receivables. We regularly review our accounts receivable valuations and make adjustments when necessary. Our allowance for doubtful accounts at December 31, 2009 was $7.5 million (December 31, 2008 — $13.7 million; and December 31, 2007 — $21.5 million), which represented 1% of the gross accounts receivable balance (December 31, 2008 — 1%; and December 31, 2007 — 2%).
We may be required to make larger contributions to our defined benefit plans in the future, which may have an adverse impact on our liquidity and our operating results.
We maintain multiple defined benefit plans, as well as supplemental pension plans. Some employees in Canada, Japan and the United Kingdom participate in our defined benefit pension plans. We also have defined contribution plans for our other employees, primarily in Canada and the U.S.
Our pension funding policy is to contribute amounts sufficient to meet minimum local statutory funding requirements that are based on actuarial calculations. Our obligations are based on certain assumptions relating to expected plan performance, including employee turnover and retirement rates, the performance of the financial markets and discount rates. If future trends differ from these assumptions, the amounts we are obligated to contribute to the pension plans may increase. If the financial markets result in returns lower than our assumptions, we may be required to make larger contributions in the future and our pension expense may also increase.
The efficiency of our operations could be adversely affected by any delay in delivery from our transportation suppliers, including delays caused by work stoppages and natural disasters.
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. A work stoppage, strike or shutdown of any important supplier's facility or operations, or at any major port or airport, could result in manufacturing and shipping delays or expediting charges, which could have a material adverse effect on our operating results. Increased political activism and local economic conditions could impact receipt of materials and product shipments. Natural disasters such as tsunamis and earthquakes, and the severe and dramatic change to historical weather patterns in the regions where our facilities or our suppliers' facilities are located, could have an adverse impact on our ability to deliver products to our customers. Such events could disrupt supply to us, and from us to our customers, and adversely affect our operating results.
If our products or services are subject to warranty claims, our business reputation may be damaged and we may incur significant costs.
In certain of our sales contracts, we provide warranties against defects or deficiencies in our products, services or designs. A successful claim for damages arising as a result of such defects or deficiencies, for which we are not insured or where the damages exceed our insurance coverage, or any material claim for which insurance coverage is denied or limited and for which indemnification is not available, could have a material adverse effect on our business, operating results and financial condition. As we pursue new end markets,
warranty requirements will vary and we may be less effective in pricing our products to appropriately capture the warranty costs.
We may be unable to keep pace with restructuring activities.manufacturing technology changes.
We continue to evaluate the advantages and feasibility of new manufacturing processes. Our future success will depend, in part, upon our ability to continually develop and market electronics manufacturing services that meet our customers' evolving needs. This could entail investing in new processes or equipment to support new technologies used in our customers' current or future products, and to support their supply chain processes. Additionally, as we pursue business in new end markets where our experience is limited, we may be less effective in adapting to technological change. Our manufacturing and supply chain processes, test development efforts and design capabilities may not be successful.
In addition, various industry-specific standards, qualifications and certifications are required to produce certain types of products for our customers. Failure to maintain those certifications could adversely affect our ability to maintain existing levels of business or win new business.
We may be unable to 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 have taken, and intend to continue to take, appropriate steps to protect this proprietary information. These steps include signing non-disclosure agreements with customers, suppliers, employees and other parties, and implementing rigid security measures. Our complianceprotection measures may not be sufficient to prevent the misappropriation or unauthorized disclosure of our property or information.
There is also a risk that infringement claims may be brought against us, our customers or our suppliers in the future. If an infringement claim is successfully asserted, we may be required to spend significant time and money to develop processes that do not infringe upon the rights of another person or to obtain licenses for the technology, process or information from the owner. We may not be successful in such development, or any such licenses may not be available on commercially acceptable terms, if at all. In addition, any litigation could be lengthy and costly and could adversely affect us even if we are successful in such litigation. As we pursue business in new end markets, we may be less effective in anticipating the intellectual property risks related to new manufacturing, design and other services.
We may not be able to increase revenue if the trend of outsourcing by OEMs slows.
Future growth in our revenue includes a dependence on new outsourcing opportunities in which we assume additional manufacturing and supply chain management responsibilities from OEMs. Our future growth will be limited to the extent that these opportunities are not available as a result of OEMs deciding to perform these functions internally or delaying their decision to outsource or our inability to win new contracts. The global economic slowdown has impacted, and may continue to impact, the trend of outsourcing as some customers have reversed, and other customers may reverse, their outsourcing decisions and shift production back to their own facilities to improve their factory utilization. Political pressures or negative sentiment by our customers' customers or local governments may impede the movement of production from one geography to another. These and other factors could adversely affect the rate of outsourcing generally, or adversely affect the rate of outsourcing to EMS providers, such as Celestica.
If we are unable to recruit or retain highly skilled personnel, our business could be adversely affected.
The recruitment of personnel in the EMS industry is highly competitive. We believe that our future success will depend, in part, on our ability to continue to attract and retain highly skilled executive, technical and management personnel. We generally do not have employment or non-competition agreements with our employees. To date, we have been successful in recruiting and retaining executive, managerial and technical personnel; however, the loss of services of certain of these employees could have a material adverse effect on our operations.
Compliance with environmental laws and obligations could be costly.costly and impact our operations.
We are subject to various federal, state/provincial, local and multi-national environmental laws and regulations. Our environmental approachmanagement systems and practices have been designed to ensure compliance with these laws and regulations in a manner consistent with local practice. Future developmentsMaintaining compliance with and responding to increasingly stringent regulations could require us to incur additional expenditures relating to environmental matters at our facilities. Achievinga significant investment of time and maintaining compliance with present, changingresources and future environmental laws couldmay restrict our ability to modify or expand our facilities or to continue production. This compliance
More complex and stringent environmental legislation continues to be imposed, 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) and product use (such as energy efficiency and waste management/recycling). Noncompliance with these requirements could also require uspotentially result in substantial costs, including fines and penalties, as well as liability to acquire costly equipment or to incur other significant expenses. As well, we are increasingly expected to incur and satisfy contractual obligations with our customers and consumers.
Where compliance responsibility rests primarily with respectOEMs rather than with EMS companies, OEMs may turn to EMS companies for assistance in meeting their obligations. Our customers are becoming increasingly concerned about issues such as waste management (including recycling), climate change (including the reduction of carbon footprints) and product stewardship, and expect their suppliers to be environmental matters andleaders. Although we strive to meet such obligationscustomer expectations, such demands may extend beyond our regulatory obligations.obligations and significant investments of time and resources may be required to attract and retain customers.
We have generally obtained environmental assessment reports, or reviewed recent assessment reports initiatedundertaken by others, for most of theour manufacturing facilities that we own or lease at the time we acquiredof acquisition or leased such facilities.leasing. Such assessments may not reveal all environmental liabilities and current assessments were not available for all facilities. Consequently, thereAs well, some of our operations have involved hazardous substances that could cause contamination. Although we may be material environmental liabilitiesinvestigate, remediate or monitor soil and groundwater contamination at certain of whichour owned sites, we are not aware and ongoing remediation, mitigation and risk assessment measures may not be adequate for purposesaware of future laws.or address all such conditions and we may incur significant costs to do such work in the future. 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 presencedischarge or migration of such substances. For the most part, our current operations are unlikely to cause significant environmental impacts to soil or groundwater. Contamination could have occurred as a result of past operations (our own or prior occupants of a site) and the condition of our properties could be affected by environmental conditions or activities in the vicinity of the properties. From time to time, we investigate, remediate or monitor soil and groundwater contamination at certain of our operating sites and may incur significant costs to do so. In some instances where soil or groundwater contamination existed prior to our ownership or occupation, of a site, landlords or former owners may have retained some contractual responsibility or regulatory liability, but this may not provide sufficient protection for the contaminationus to avoid liability. Third-party claims for damages or personal injury are also possible. Moreover, current remediation, mitigation and its remediation. However, where such residual liabilityrisk assessment measures may not be adequate to comply with future laws.
The efficiency of landlords or former owners does not exist or where such landlords or former owners failour operations could be adversely affected by any disruptions from our third-party IT providers.
We have outsourced certain IT systems support, which includes database management, as well as application development and support for our production control and inventory management systems. If these third-party providers are unable to fulfill their obligations on a timely and reliable basis, we may be required to remediate such contamination.
More stringent environmental legislation continues to be imposed, including laws which place increased responsibility and requirements on the "producers" of electronic equipment (i.e., the OEMs) and, in turn, their EMS providers and suppliers. A significant investment of time and resources must be made to ensure compliance with ever-changing environmental legislation and any non-compliance could impact production. These laws include the European Union's Restriction of Hazardous Substances (RoHS), which restricts the use of lead and certain other specified substances in electronic products in the European Union and China's Administration on the Control of Pollution caused by Electronic Information Products (often referred to as
China's RoHS legislation). Where appropriate, we have transitioned our manufacturing processes and interfaced with suppliers and customers to conform to RoHS requirements. Noncompliance with the RoHS requirements could potentially result in substantial costs, including fines and penalties, as well as liabilityexperience disruptions to our customers. The electronics industry is also subject to the European Union's requirements with respect to the collection, recycling and management of waste for electronic products and components. Under the European Union's Waste Electrical and Electronic Equipment (WEEE) directive, compliance responsibility rests primarily with OEMs rather than with EMS companies. However, OEMs may turn to EMS companies for assistance in meeting their WEEE obligations. Failure by our customers to meet the RoHSoperations. Any inefficiencies or WEEE requirements or obligationsproduction down times resulting from such disruptions could have a negative impact on their businesses and revenue which would adversely impact our financial results. Similar restrictions are being proposed or enacted in other jurisdictions. Finally, the European Union regulation concerning the Registration Evaluation Authorisation and Restriction of Chemicals (REACH) requires manufacturers or importers of substances manufactured or imported into the EU in quantities of one tonne per year or more to register with a central European Chemicals Agency. We have assessed our obligations under REACH and are interfacing with suppliers and customers in order to conform. Noncompliance with the REACH requirements could potentially result in substantial fines and penalties as well as an inability to manufacture or supply substances, preparations or articles legally. We continue to monitor other emerging environmental legislation which may impact the industry going forward. We cannot currently assess the impact of such legislation on our operations.
Our customers are becoming increasingly concerned about environmental issues, such as waste management (including recycling), climate change (including the reduction of carbon footprints), and product stewardship, and expect their suppliers to be environmental leaders. Although we striveability to meet such customer expectations, such demands may become more onerous and significant investments of time and resources may be requiredcustomers' orders, resulting in ordera delay or decrease to attract and maintain customers.
We may be unable to renew our revolving credit facility during the current uncertain economic times.
Our revolving credit facility for $300.0 million will expire in April 2009. With the current global economic conditions and credit crisis and the weakening of capital markets, we may not be able to renew our facility, or the financing may not be available on terms acceptable to us. Given our strong cash position at December 31, 2008, we are assessing whether we will renew all or a portion of this facility. We cannot assure that werevenue and our lenders will agree on mutually acceptable terms if we seek a renewal. Whether or not we renew the credit facility, we believe we have sufficient resources to satisfy our financial obligations. There were no direct borrowings outstanding under this facility at December 31, 2008.operating margins.
Our credit agreement and certain indentures containcontains restrictive covenants that may impair our ability to conduct our business.
Our outstanding credit agreement the indenture related to our 77/8% Senior Subordinated Notes due 2011 (2011 Notes) and the indenture related to our 75/8% Senior Subordinated Notes due 2013 (2013 Notes) containcontains financial and operating covenants that limit our management's discretion with respect to certain business matters. Among other things, these covenants restrict 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 restricted payments such as dividends, repurchase our stock, and merge or consolidate with other entities. At February 23, 2009,22, 2010, we were in compliance with these covenants. AtBased on the required financial ratios at December 31, 2008,2009, we had full access to the $300our $200 million of credit available under our credit facility based on the required financial ratios.facility.
We are exposed to interest rate fluctuations.
In June 2004, we issued our 2011 Notes with an aggregate principal amount of $500.0 million bearing a fixed interest rate of 7.875%. We also entered into agreements which hedge the fair value of our 2011 Notes by swapping the fixed rate of interest for a variable rate based on LIBOR plus a margin, thereby subjecting us to interest ratecould face increased financial risk due to fluctuationsthe potential non-performance by counterparties, including but not limited to financial institutions, customers and suppliers.
The potential occurrence of default by a counterparty on its contractual obligations may result in a financial loss to us. For our financial markets activity, we mitigate the LIBOR rate.risk of financial loss from defaults by dealing with counterparties we believe are creditworthy. The average interest rateglobal economic uncertainty has impacted, and we expect will continue to impact, the financial condition of some of our customers and suppliers. An interruption in supply from a raw materials supplier, especially for single-sourced components, could have a significant impact on our 2011 Notes for 2008 was 6.5% (2007 — 8.3%;operations and 2006 — 8.2%) after reflecting the interest rate swap. A one percentage point increaseon our customers, if we are unable to deliver finished products in the LIBOR rate would increasea timely manner. We will continue to closely monitor our interest expense by approximately $5 million annually. Wecustomers' and suppliers' financial condition and creditworthiness.
terminated these interest rate swaps in February 2009. See note 22 to the Consolidated Financial Statements in Item 18.
The interest of our controlling shareholder may conflict with the interest of the remaining holders of our subordinate voting shares.
Onex Corporation, or Onex, owns, directly or indirectly, all of the outstanding multiple voting shares and less than 1% of the outstanding subordinate voting shares. The number of shares owned by Onex, together with those shares Onex has the right to vote, represents 79%69% of the voting interest in Celestica and less than 1% of the voting interest in our outstanding subordinate voting shares. Accordingly, Onex exercises a controlling influence over our business and affairs and has the power to determine all matters submitted to a vote of our shareholders where our shares vote together as a single class. Onex has the power to elect our directors and its approval is required for significant corporate transactions such as certain amendments to our articles of incorporation, the sale of all or substantially all of our assets and plans of arrangement. Onex's voting power could have the effect of deterring or preventing a change in control of our company that might otherwise be beneficial to our other shareholders. Under our revolving credit facility,agreement, it is an event of default entitling our lenders to demand repayment if Onex ceases to control Celestica unless the shares of Celestica become widely held ("widely held" meaning that no one person owns more than 20% of the votes). Gerald W. Schwartz, the Chairman President and Chief Executive Officer of Onex and one of our directors, owns multiple voting shares of Onex, carrying the right to elect a majority of the Onex board of directors. Mr. Schwartz, therefore, effectively controls our affairs. The interests of Onex and Mr. Schwartz may differ from the interests of the remaining holders of subordinate voting shares. For additional information about our principal shareholders, see Item 7(A), "Major Shareholders." Onex has, from time to time, issued debentures exchangeable and redeemable under certain circumstances for our subordinate voting shares, entered into forward equity agreements with respect to subordinate voting shares, sold shares (after exchanging multiple voting shares for subordinate voting shares), or redeemed these debentures through the delivery of subordinate voting shares and could do so in the future. These sales could impact our share price, have consequences on our outstanding debt and change our ownership structure.
We face securities class action and shareholder derivative lawsuits which could result in substantial costs, diversion of management's attention and resources and negative publicity.
Celestica has been named as a defendant in a purported class action lawsuit in the United States which asserts claims for violations of federal securities laws on behalf of persons who acquired our securities between January 27, 2005 and January 30, 2007. Celestica has been named as a defendant in a similar purported class action brought in Canada under Canadian law. Our former Chief Executive and Chief Financial Officers were also named as defendants in these lawsuits. In a consolidated amended U.S. complaint, the plaintiffs have added one of our directors and Onex Corporation as defendants. These lawsuits seek unspecified damages. All defendants have filed motions with the U.S. court to dismiss the amended Complaint.complaint. Those motions are pending. Although we believe the allegations in these claims are without merit and we intend to defend these claims vigorously, these lawsuits could result in substantial costs to us, divert management's attention and resources from our operations and negatively affect our public image and reputation.
Potential unenforceability of civil liabilities and judgments.
We are incorporated under the laws of the Province of Ontario, Canada. A significant number of our directors, controlling persons and officers are residents of Canada. Also, a substantial portion of our assets and the assets of these persons are located outside of the United States. As a result, it may be difficult to effect
service within the United States upon those directors, controlling persons and officers who are not residents of the United States or to realize in the United States upon a judgment of courts of the United States predicated upon the civil liability provisions of the U.S. federal securities laws.
Changes in accounting standards enacted by the standard-setting bodies may adversely affect our reported revenue, profitability and financial condition.
Our consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are reconciled to U.S. GAAP. The accounting standards are revised periodically and/or expanded upon by the standard-setting bodies. Accordingly, 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, which include the Canadian Accounting Standards Board, the Financial Accounting Standards Board and the U.S. Securities and Exchange Commission. The Canadian Accounting Standards Board announced that it will adopt the International Financial Reporting Standards for publicly accountable enterprises in Canada, effective 2011. The adoption of these changes could adversely affect our reported revenue, profitability or financial condition. Compliance with these changes could also increase our financial and accounting costs.
Shares eligible for public sale could adversely affect our share price.
Future sales of our subordinate voting shares in the public market, or the issuance of subordinate voting shares upon the exercise of stock options or otherwise, could adversely affect the market price of the subordinate voting shares.
At February 23, 2009,22, 2010, we had 199,580,858210,992,933 subordinate voting shares and 29,637,31618,946,368 multiple voting shares outstanding. All of the subordinate voting shares are freely transferable without restriction or further registration under the U.S. Securities Act, except for shares held by our affiliates (as defined in the U.S. Securities Act). Shares held by our affiliates include all of the multiple voting shares and 1,996,2311,451,320 subordinate voting shares held by Onex Corporation (Onex).Onex. An affiliate may not sell shares in the United States unless the sale is registered under the U.S. Securities Act or an exemption from registration is available. Rule 144 adopted underof the U.S. Securities Act permits our affiliates to sell our shares in the United States subject to volume limitations and requirements relating to manner of sale, notice of sale and availability of current public information with respect to us.
In addition, as of February 23, 200922, 2010, there were approximately 27,000,00026,000,000 subordinate voting shares reserved for issuance under our employee share purchase and option plans and for director compensation, including outstanding options to purchase approximately 11,100,00010,700,000 subordinate voting shares. Moreover, we may, pursuant to our articles of incorporation, we may issue an unlimited number of additional subordinate voting shares without further shareholder approval (subject to any required stock exchange approvals). As a result, a substantial number of our subordinate voting shares will be eligible for sale in the public market at various times in the future. The issuances and/or sale of such shares would dilute the holdings of our shareholders and could adversely affect the market price of the subordinate voting shares.
Acts of terrorism and other political and economic developments could adversely affect our business.
Increased international political instability, evidenced by the threat or occurrence of terrorist attacks, enhanced national security measures, conflicts in the Middle East and Asia, security issues at the U.S./Mexico border related to illegal immigration or criminal activities associated with illegal drugs activities, strained international relations arising from these conflicts and the related decline in consumer confidence may hinder our ability to do business. Any escalation in these events or similar future events may disrupt our operations or those of our customers and suppliers and could affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. These events have had and may continue to have an adverse impact on the U.S. and world economy in general and customer confidence and spending in particular, which in turn could adversely affect our revenue and results of operations.operating results. The impact of these events on the volatility of the U.S. and world financial markets could
increase the volatility of the market price of our securities and may limit the capital resources available to us and our customers and suppliers.
Item 4. Information on the Company
A. History and Development of the Company
We were incorporated in Ontario, Canada under the name Celestica International Holdings Inc. on September 27, 1996. Since that date, we have amended our articles of incorporation on various occasions, principally to modify our corporate name and our share capital. Our legal name and commercial name is Celestica Inc. We are a corporation domiciled in the Province of Ontario, Canada and operate under the Ontario Business Corporations Act.Act (Ontario). Our principal executive offices are located at 12 Concorde Place, 5th Floor,844 Don Mills Road, Toronto, Ontario, Canada M3C 3R81V7 and our telephone number is (416) 448-5800. Our website ishttp://www.celestica.com. Information on our website is not incorporated by reference in this Annual Report.
Prior to our incorporation, we were an IBM manufacturing unit and wethat provided manufacturing services to IBM for more than 75 years. In 1993, we began providing EMSelectronics manufacturing services to non-IBM customers. In October 1996, we were purchased from IBM by an investor group, led by Onex, which included our then management.
Celestica providesoffers a range of electronics manufacturing services and solutions to OEMs across many industries. We operate a global manufacturing and supply chain network.
Recent Acquisitions
Certain information concerning our acquisition activities, including property, plant and equipment expenditures, including acquisitions and financing activities, is set forth in notes 3, 4, 7, 8, 15, 17 and 1722 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."
Certain information concerning our divestiture activities, including our restructurings, is set forth in note 10 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."
B. Business Overview
We provide end-to-end product lifecycledeliver innovative supply chain solutions to OEMs in the consumer, communications, consumer, enterprise computing, industrial, aerospace and defense, alternative energyhealthcare and healthcaregreen technology sectors. We believe our services and solutions will help our customers reduce their time to market and eliminate waste from their supply chains, resulting in lower product lifecycle costs, and better financial returns and positioning them more competitivelyimproved competitive advantage in their respective business environments.
Our global operating network spans the Americas, Asia and Europe. In an effort to drive speed and flexibility for our customers, we conduct the majority of our business through eight full-service mega-sites,centers of excellence, strategically located around the world. Through our Ring Strategy, we strive to align a network of suppliers around each of our mega-sitescenters of excellence in order to increase flexibility in our supply chain, deliver shorter overall product lead times and reduce inventory. We operate additionalother sites around the globe with certainspecialized supply chain management and high-mix/low-volume manufacturing capabilities to meet the specific production and product lifecycle requirements of customers in markets such as the industrial, aerospace and defense, alternative energy and healthcare sectors.our customers.
Through our mega-sitescenters of excellence and the deployment of our Total Cost of OwnershipOwnership™ (TCOO) Strategy, we strive to provide our customers with the lowest total cost throughout the product lifecycle. This approach enables us to focus our capabilities on broad solutions that address the total cost of design, sourcing, production, delivery and after-market supportservices for our customers' products, which can help drive greater levels of efficiency and improved service levels throughout our customers' supply chain.
The majorOur targeted end markets we serve include consumer, communications, consumer, enterprise computing, industrial, aerospace and defense. Serving these end markets has enabled us to diversify some of the market risk associated with concentration in a limited number of sectors. Wedefense, healthcare and green technology. Although we supply products and services to over 100 OEMs.OEMs, we depend on a relatively small number of customers for a significant portion of our revenue. In the aggregate, our
top 10 customers represented 63%71% of revenue in 2008.2009 and our largest customer represented 17% of revenue. In 2008,2009, we segmented our end-marketsend markets as follows: enterprise communications (25%consumer (29% of revenue); consumer (26% of revenue); servers (16%enterprise communications (21% of revenue); telecommunications (15% of revenue); servers (13% of revenue); storage (10%(12% of revenue); and industrial, aerospace and defense, (8%and healthcare (10% of revenue). The products we manufacture can be found in a wide arrayvariety of end products, including smartphones; networking, wireless and telecommunications and computing equipment; handheld communications devices primarily smartphones; peripherals; storage devices; servers; healthcare products; audio visual equipment, including flat-panel televisions; printers and related supplies; gaming products; aerospace and defense electronics, such as in-flight entertainment and guidance systems; healthcare products; audiovisual equipment, including set-top boxes and flat-panel televisions; printers and related supplies; peripherals; gaming products; and a range of industrial and alternative energygreen technology electronic equipment.
We believe we are well-positioned to compete effectively in the EMS industry, given our financial strength and our position as one of the major EMS providers worldwide. Our focus is to (i) improve our operating margins and increase operating efficiency by driving costs lower and delivering market-specific supply chain solutions that provide value for us and our customers, (ii) leverage our supply chain practices to lower material costs and improve asset utilization, (iii) develop and enhance profitable and key relationships with leading OEMs across our strategic target market segments, and (iv) broaden the range of the services we provide to OEMs in areas that can reduce their overall product lifecycle costs. We believe that success in these areas will allow us to maintain acceptable financial performance and enhance shareholder value.
Our principal strengths include our advanced capabilities in the areas of technology and quality, our flexible service offerings, our financial strength and our market-specific supply chain management capabilities. We provideoffer a wide range of advanced manufacturing technologies, test capabilities and processes to support our customers' needs. OurWe believe our size, geographic reach and expertise in supply chain management allow us to purchase materials effectively and to deliver products to customers faster, thereby reducing overall product costs and reducing the time-to-market.
We believe that our highly skilled workforce differentiates us from our competitors. We have an entrepreneurial, participative and team-based culture, with a focus on continuous improvement, flexibility and customer service excellence.
Table We believe we are well positioned to compete effectively in the EMS industry, given our financial strength and our position as one of Contentsthe major EMS providers worldwide. Our priorities include to (i) grow revenue through organic program wins and acquisitions; (ii) improve financial results, including operating margins, return on invested capital and cash flow performance; (iii) develop and enhance profitable and key relationships with leading OEMs across our strategic target market segments; (iv) broaden the range of the services we offer to OEMs; and (v) expand capabilities in services and technologies that diversify and expand our revenue base beyond our traditional areas of EMS manufacturing expertise. We believe that success in these areas will result in improved financial performance which will enhance shareholder value.
Electronics Manufacturing Services Industry
Overview
The EMS industry is comprised of companies that provideoffer a broad range of electronics manufacturing services to OEMs. Since the 1990's,1990s, OEMs have become increasingly reliant uponincreased their reliance on these services to become more efficient and to enhance their competitive positions. Today, the leading EMS companies have global operating networks delivering worldwide supply chain management solutions. They offer end-to-end services for the entire product lifecycle, including design and engineering, manufacturing and systems integration, fulfillment and after-market services. By outsourcing theirthe manufacturing and related services, OEMs are able to overcome their most pressing business challenges related to cost, asset utilization, quality, time-to-market and rapidly changing technologies.
We believe the adoption of outsourcing by OEMs will continue across a number of industries, because it allows OEMs to:
Reduce Operating Costs and Invested Capital. OEMs are under significant pressure to reduce total product lifecycle costs, and property, plant and equipment expenditures. The manufacturing process of electronics products has become increasingly automated, which requires greater levels of investment in property, plant and equipment. EMS companies enable OEMs to gain access to a global network of manufacturing facilities with supply chain management expertise, advanced engineering capabilities, flexible capacity and economies of scale. By working with EMS companies, OEMs can reduce their overall product lifecycle and operating costs, working capital and property, plant and equipment investment requirements.
Focus Resources on Core Competencies. The electronicsEMS industry operates in a highly-competitivehighly competitive environment characterized by rapid technological change and shortening product lifecycles. In this environment, many OEMs are prioritizing their resources on their core competencies of product development, sales, marketing and customer service, and to outsourceoutsourcing design, manufacturing, supply chain and other product support requirements to their EMS partners.
Improve Time-to-Market. Electronic products experience shorter product lifecycles, requiring OEMs to continually reduce the time required to bringand cost of bringing products to market. OEMs can significantly improve product development cycles and enhance time-to-market by benefiting from the expertise and infrastructure of EMS providers. This includesproviders, including capabilities relating to design 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. Successful manufacturing of electronic products requires significant resources to deal with the complexities in planning, procurement and inventory management, frequent design changes, shorter product lifecycles and product demand fluctuations. OEMs can address these complexities by outsourcing to 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. Electronic products and the electronics manufacturing technology needed to support them have become complex. As a result, OEMs increasingly rely on EMS companies to provide design, engineering support, manufacturing and technological expertise. Through their design and engineering services, and through the knowledge gained from repairing products, EMS companies can assist OEMs in the development of new product concepts, or the re-design of existing products, as well as assist with improvements in the performance, cost and time required to bring products to market. In addition, OEMs gain access to high-quality manufacturing expertise and capabilities in the areas of advanced process, interconnect and test technologies.
Improve Access to Global Markets. OEMs provide products and support services for a global customer base. EMS companies with global infrastructure and support capabilities provide OEMs with efficient global manufacturing solutions and distribution capabilities.
Access to Broadening Service Offerings. In response to OEMs' continued desire to outsource activities that were traditionally handled internally, EMS providers are continually expanding their offerings to include
services such as design, fulfillment and after-market support, including repair and recycling services. This enables OEMs to benefit from outsourcing more of their cost of goods sold.
Celestica's Focus
We are dedicated to building solid partnerships and providing flexible product lifecycledelivering innovative supply chain solutions in electronics manufacturing services.to our customers. To achieve this, goal, we work closely with our OEM customers to proactively identify and fulfill their requirements.current requirements and anticipate future needs. We strive to exceed our customers' expectations by providingoffering a broad range of services to lower cost,costs, increase flexibility and predictability, improve quality and improve quality.provide better service to their customers. We also look at ways to invest in theirour customers' future by continuing to deepen our knowledge of their businesses and to develop solutions to meet their needs. We constantly look to advance our technical capabilities to help our customers haveachieve a competitive advantage. By succeeding in the following areas, we believe we will maximize customer satisfaction, achieve superiorand improve financial performance andwhich will enhance shareholder value:
Steadily Improve Financial Results, Including Operating Efficiency to Increase Operating Margins.Margins, Return on Invested Capital and Cash Flow Performance. We continue to focus on:on (i) improving utilization in regions or sites where volumes are below appropriate levels, (ii) completing our restructuring programs to ensure we have the appropriate global manufacturing network and cost structures in place to serve our customers, (iii) leveraging our best supply chain practices globally to lower material costs, minimize lead times and improve our planning cycle to better meet changes in customers' demand and improve asset utilization, (iv) compensating our employees based, in part, on the achievement of profitability and return on invested capital targets, and (v) leveraging our IT tools in order to reduce waste and redundancy and improve quality. We will continue our intensive focus on maximizing asset utilization, which we believe will, when combined with the margin enhancement measures described above,will increase our return on invested capital.capital and (v) maximizing cash flow performance.
Leverage Expertise in Technology, Quality and Supply Chain Management. We are committed to meeting our customers' needs in the areas of technology, quality and supply chain management. OurWe believe our expertise in these areas enableenables us to meet the rigorous demands of our OEM customers, and allowallows us to produce a variety
of electronic products ranging from high-volume consumer electronics to highly complex technology infrastructure products. OurWe believe our commitment to quality allows us to deliver consistently reliable products to our customers. The systems and collaborative processes associated with our expertise in supply chain management have generally enabled us to rapidly adjust our operations to meet the lead time requirements of our customers, flexibly shift capacity in response to product demand fluctuations and quickly and effectively deliver products directly to end customers. We often work closelycollaborate with suppliers to influence component design for the benefit of our customers. Based on the successes that we have had in these areas, we have been recognized with numerous customer and industry achievement awards.
Develop and Enhance Profitable and Key Relationships with Leading OEMs. We seek to build and sustain profitable, strategic and collaborative relationships with targeted industry leaders in sectors that can benefit from the delivery of our services and solutions. We conduct ourselves as an extension of our customers' organizations and thiswhich enables us to respond to their needs with speed, flexibility and predictability in delivering results. We have established and maintain strong manufacturing relationships with a diverse mix of leading OEMs across several market segments. Going forward, weWe believe that our customer base will be a strong source of growth for us as we seek to strengthen these relationships through the delivery of additional services.
Expand Range of Service Offerings. We continually look to expand the breadth and depth of the services we provide to OEMs in areas that can reduce their overall product lifecycle costs. In recent years, we have significantly expanded our service offerings to facilitate the manufacture of a broader spectrum of products and to support the full product lines of leading OEMs in a variety of industry segments. During this period, we have also expanded or acquired additional capabilities in prototyping, design, engineering solutions, systems assembly, logistics, fulfillment and after-market services.
Continue to Penetrate Strategic Target End-Markets.End Markets. As a result of new or continued demand for outsourced electronics manufacturing services, we have establishedstrive to establish a diverse customer base with OEM customers in several industries. OurWe believe our legacy of expertise in technology, quality and supply chain management, in addition to our broad service offerings, have positioned us as an attractive partner to companies across these market segments. Our
diversification goal is to diversify across manytargeted markets, has reducedsuch as commercial aerospace and defense, healthcare, industrial and green technology, to reduce the risk associated with reliance on only a few sectors. Our revenue diversification is as follows:
| 2006 | 2007 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Consumer | 18% | 22% | 26% | |||||||
Enterprise communications | 28% | 28% | 25% | |||||||
Servers | 17% | 19% | 16% | |||||||
Telecommunications | 18% | 14% | 15% | |||||||
Storage | 10% | 10% | 10% | |||||||
Industrial, aerospace and defense | 9% | 7% | 8% |
| 2007 | 2008 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Consumer | 19% | 23% | 29% | |||||||
Enterprise Communications | 28% | 25% | 21% | |||||||
Telecommunications | 14% | 15% | 15% | |||||||
Servers | 19% | 16% | 13% | |||||||
Storage | 10% | 10% | 12% | |||||||
Industrial, Aerospace and Defense and Healthcare | 10% | 11% | 10% |
Selectively Pursue Strategic Acquisitions. We have completed numerous acquisitions and will continue to selectively seek acquisition opportunities in order to (i) grow our revenue, (ii) further develop strategic relationships with OEMs in our target markets (ii) expand our capacity and capabilities, and (iii) broaden and deepen the scope of our capabilities and service offerings.
Celestica's Business
OEM Supply Chain Services and Solutions
We are a global provider of end-to-endinnovative supply chain solutions offeringsolutions. We offer a full spectrumrange of productservices including design, manufacturing, engineering, order fulfillment, delivery (including reverse logistics),logistics and after-market repair and product reclamation services. We capitalize on our global operating network, information technology and supply chain expertise using a collaborative process and a team of highly skilled, customer-focused employees. We believe that our ability to deliver a wide spectrumbroad range of flexiblesupply chain solutions to our customers across several industries provides our customerthem with a competitive time to markettime-to-market and cost advantage. We also believe our full range of integrated product lifecycle service capabilities provides us with an advantage in the EMS industry.
Supply Chain Management. We use enterprise resource planning and supply chain management systems to optimize materials management from suppliers through to our customers' customers. The effective management
of the supply chain is critical to the OEMs' success, as it directly impacts the time required to deliver products to market and the capital requirements associated with carrying inventory. We feelbelieve that we have a differentiated supply chain offering compared to our competitors through our Total Cost of Ownership™ (TCOO)TCOO Strategy and Ring Strategy.
Through the development of our TCOO Strategy, we strive to provide our customers with the true cost of producing, delivering and supporting their products so that we can exceed their expectations for time-to-market and quality and provide them with the lowest TCOO. Through our Ring Strategy, we strive to align a network of suppliers around each of our mega-sites. This strategy strives to align the material supply in close proximity to our mega-sitescenters of excellence so we can increase the agility, flexibility and flexibilitycollaborative approach of our supply chain andto deliver the shortest overall lead times for any given product.
Design. Our global design services and solutions architects are focused on opportunities that span the entire product lifecycle. Supported by a disciplined approach to program management, we strive to provide flexible design solutions and expertise to help customers optimize the supply chain to reduce their overall product costs, improve time-to-market and introduce competitively differentiated products. A leader in design analysis, we leverage our proprietary CoreSim Technology™ to minimize design spins, speed time to market and provide improved manufacturing yields for our customers. Through our collective experience with common technologies across multiple industries and product groups, we believe we can provide quality and cost-focused solutions for our customers' design needs.
Our teams workcollaborate with OEM product designers in the early stages of product development. Our design team uses advanced tools to enable new product ideas to progress from electrical and application-specific integrated circuit design, to simulation, physical layout and design for manufacturing. Collaborative links and databases between the customer and our design and manufacturing groups help to ensure that new designs are released rapidly, smoothly and cohesively into production.
We strive to enhance our design services capabilities through strategic relationships with global engineering and research and development organizations, as well as other IT services and business process outsourcing firms. We believe that by combining our companies' strengths, we can create solutions to help our customers overcome design relateddesign-related challenges. The skills and scalability that we can access enable us to better manage projects throughout the life of the product, including software development and systems validation, as well as complete product sustainability.
Other key initiatives aimed at enhancing our design services offering include developing and marketing solutions accelerator platforms for server blades,products such as blade servers, storage advanced telecommunications computing architecturedevices, wireless networking equipment and worldwide interoperability for microwave access (WiMAX). Thesesmart grid technologies. We believe these customizable solution accelerators will help OEMs reach their markets faster by reducing design cycles without compromising their intellectual property.
Green Services™. Since 2004, weWe have been developingdeveloped a suite of services to help our customers comply with environmental legislation, including the European Union's (EU) RoHS and WEEE laws and China's RoHS directives. The EU's RoHS mandatedsuch as those relating to the removal of a number of hazardous substances including the lead commonly found in electronic products. Through WEEE, the EU requires that producers or distributors register with the government authorities in each member state and consider recycling costs in the pricing for any products placed in the EU markets after August 2005. We continue to develop and offer a comprehensive suite ofwaste management/recycling. Our services to help our customers design, prototype, introduce, manufacture, test, ship, takeback, repair, refurbish, reuse, recycle and properly dispose of end-of-life (EOL) products in compliance with the existing legislation and the evolving legislation in countries in which we operate.
Prototyping. Prototyping is a critical early-stage process in the development of new products. In prototyping, ourOur engineers collaborate with OEM engineers to build early-stage products at our new product introduction centers. These centers are strategically located to enable us to provide a quick response in the early stages of the product development lifecycle. Upon completion of these prototypes, our new product introduction centers provide a seamless entry into our larger manufacturing facilities.
Systems Assembly and Test. We use sophisticated technologies in the assembly and testing of our products. We have continually made significantcontinue to make investments in the development of new assembly and test process techniques to enhance product quality, reduce cost and improve delivery time to customers. We work independently and also collaborate with customers and suppliers to develop leading 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 subassemblies and components before shipping to their final destination. Increasingly, OEMs 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 exploit this trend.respond to our customers' needs.
Product Assurance. We provide product assurance to our OEM customers. Our product assurance teams perform product life testing and full circuit characterization to ensure that designs meet or exceed required specifications. We are accredited as a National Testing Laboratory capable of testing to international standards (e.g., Canadian Standards Association and Underwriters Laboratories). We believe that this service allows our customers to attain product certification significantly faster than is customary in the EMS industry.
Failure Analysis. 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 robustness. Products are subjected to various environmental extremes, including temperature, humidity, vibration, voltage and rate of use. Field conditions are simulated in failure analysis laboratories which employ advanced electron microscopes, spectrometers and other advanced equipment. We are also able to discover failures before products are shipped, as our highly qualified engineers are proactive in working in partnership with suppliers and customers to develop and implement resolutions.
Fulfillment.Order Fulfillment and Logistics. We leverage our global scale in manufacturing, supply chain management and fulfillment to provide fully integrated logistics solutions to our customers. Our logistics offering includesofferings include warehouse and
distribution, freight management, logistics consulting services, product and materials visibility and reverse logistics. We ship worldwide to our customers or, in many cases, directly to our OEMs' customers.
After-MarketAfter Market Services. We help our customers extend the value of their product through our after-market repair, returns and recycling services, individualized to meet each customer's requirements. These services include field failure analysis, product upgrades, repair and engineering change management. The knowledge gained from these services may also be used in future design activity to improve quality and reliability in next-generation products.
Quality Management
OneWe 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. All of our principal facilities are ISO certified to ISO 9001 or ISO 9002 standards. Most of our principal facilities are also certified toand ISO 14001 (environmental) standards, as well as to other industry-specific certifications.
In addition to these standards, we continue to deploy Lean and Six Sigma initiatives throughout our manufacturing network. Implementing Lean throughout the manufacturing process improves the efficiency, shortens cycle times and reduces waste in areas such as inventory on hand, set up times, floor space and the number of people required for production. Six Sigma ensures continuous improvement by reducing process variation. We also apply the knowledge we gain in our after market services to improve the quality and reliability of next-generation products. Success in these areas helps our customers lower their costs, positioning them more competitively in their respective business environments.
We believe that quality management is one of the key services directly linked to meeting and exceeding our customers' expectations, and we have a series of key performance indicators deployed across our operating network that allow our teams to focus on driving continuous improvement and meeting the customers' expectations aroundwith respect to quality.
Geographies
Since 2005, approximatelyApproximately one-half of our revenue wasis produced in Asia and one-third of our revenue has beenis produced in North America. A listing of our principal manufacturing and non-manufacturing locations is included in Item 4, "Information on the Company — Description of Property." We believe we have a competitive and strategic global manufacturing network with approximately 80% of our employees located in lower-cost regions. We have deployed many of our significant technical capabilities to a broad number of our global sites in both high-cost and low-cost regions which we believe differentiates us from our competitors.
Certain geographic information is set forth in note 17 to the Consolidated Financial Statements in Item 18.
Sales and Marketing
We have adopted a marketing approach focused on creating profitable, strategic relationships with leading OEMs in targeted end-markets.end markets. We have structured our business development teams by market segment, with a focus on providing complete manufacturing and supply chain solutions. Our coordination of efforts with key global customers has been enhanced by the creation of customer-focused teams, each headed by a group general manager who oversees the global relationship with suchthese customers. These teams work with our solutions architects to develop specific approaches that meet the unique needs of each customer's product or supply chain requirements. Our global network is comprised of customer-focused teams, including direct sales representatives, operational and project managers, account executives, supply chain management teams, as well as senior executives. Our global sales organization also leverages an integrated set of processes designed to provide consistency to customers worldwide.
Customers
We supply products and services to approximately 100 OEM customers and target industry leading customers in strategic market segments focused on key technologies. Our customers include Alcatel Lucent, Cisco Systems, EMC, Hewlett-Packard, Hitachi, Honeywell, IBM, Juniper, Microsoft, NEC, Polycom, Raytheon, Research in Motion and Sun Microsystems. We are focused on strengthening our relationships with these strategic customers
through the delivery of new and expanding end-to-end solutions, such as design, and engineering, systems integration,order fulfillment, logistics and after-market services, including managing end-of-life products forservices.
During 2009, our customers.
largest customer, Research in Motion, represented more than 10% of total revenue. During 2008, we had no customers that represented over 10% of total revenue. During 2007, our two largest customers, Cisco Systems and Sun Microsystems, each represented more than 10% of total revenue and in aggregate represented 21% of total revenue. Our top 10 customers represented 63%71% and 61%63%, respectively, of total revenue for 20082009 and 2007.2008.
We generally enter into contractual agreements with our key customers that provide the framework for our overall relationship. The majority of our customer arrangements also require the customer to purchase from us any unused inventory that we have purchased to fulfill that customer's forecasted manufacturing demand.
Technology and Research and Development
We use advanced technology in the design, assembly and testing of the products we manufacture. We believe that our processes and skills are among the most sophisticated in the industry. We believe that this provides us with advantages over many of our smaller competitors and our competitors building less complex products.
Our customer-focused factories are highly flexible and are reconfigured as needed to meet customer specificcustomer-specific product requirements and fluctuations in volumes. We have extensive capabilities across a broad range of specialized assembly processes. We work with a variety of substrate types based on the wide range of products we build for our customers, from thin, flexible printed circuit boards to highly complex, dense multi-layer boards as well as with a broad array of advanced component and attach technologies employed in our customers' products. Increasing demand for full-system assembly solutions continues to drive technical advancement in complex mechanical assembly and configuration.
Our assembly capabilities are complemented by advanced test capabilities. The technologies we use include high-speed functional testing, optical, burn-in, vibration, radio frequency, in-circuit and in-situ dynamic thermal cycling stress testing. We believe that our inspection technology, which includes X-ray laminography, advanced automated optical inspection, three-dimensional laser paste volumetric inspection and scanning electron microscopy, is among the most sophisticated in the EMS industry. We work directly with the leaders in the equipment industry to optimize their products and solutions or to jointly design a solution to better meet our needs and the needs of our customers. Furthermore, we employ internally developed automated robotic technology to perform in-process repair.
Our ongoing research and development activities include the development of processes and test technologies, as well as some focused product development. We are proactive in developing manufacturing techniques that take advantage of the latest component, product and packaging designs. We work directly with
our customers to understand their product roadmaps and to develop the technology solutions required to optimally solution their future needs. We often work with, and take a leadership role in, industry groups that strive to advance the state of technology in the industry.
Supply Chain Management
We have strong relationships with suppliers of everyour commodity we use.suppliers. We employ electronicshare data interchangeelectronically with our key suppliers and ensure speed of supply through strong relationships with our logistics partners and full-service distribution capabilities. During 2008,2009, we procured and managed over $6$4.5 billion in materials and related services. We view the size and scale of our procurement activities as an important competitive advantage, as it enhances our ability to obtain better pricing, influence component packaging and design and obtain a supply of components in constrained markets.
We believe we have a differentiated supply chain offering compared to our competitors through our Total Cost of Ownership™ Strategy and Ring Strategy. Through our TCOO Strategy, we strive to provide our customers with the true cost of producing, delivering and supporting their products so that we can exceed their expectations for time-to-market and quality and provide them with the lowest TCOO. Through our Ring Strategy, we strive to align a network of suppliers around our mega-sites. This strategy places an emphasis on
dealing with suppliersexcellence to increase flexibility in close proximity to our mega-sites so we can increase the agility and flexibility of our supply chain and deliver the shortestshorter overall product lead times for any given product.times.
We utilize two enterprise systems which provide comprehensive information on our logistics, financial and engineering support functions. These systems provide management with the data required to manage the logistical complexities of the 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. 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. In providing electronics manufacturing services to our customers, we are largely protected from the risk of fluctuations in inventory costs, as these costs are generally passed through to customers.
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.
Many of these suppliers are also involved with our Ring Strategy, whereby the supplier locates its operations in close proximity to our major facilitiescenters of excellence in order to reduce lead times and provide greater levels of flexibility to our customers.
Intellectual Property
We hold licenses to various technologies which we acquired in connection with acquisitions. In addition, we believe that we have secured access to all required technology that is material to 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 and suppliers and 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, there can be no assurance that misappropriation will not occur.
We currently have a limited number of patents and patent applications pending. However, we believe that the rapid pace of technological change makes patent protection less significant than such factors as the knowledge and experience of management and personnel and our ability to develop, enhance and market electronics manufacturing services.
We license some technology from third parties which 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 a material breach by us of the terms of such agreements.
Competition
We compete on a global basis to provide electronics manufacturing services and solutions to OEMs across various end-markets.end markets. Our competitors include a large number of domestic and foreign companies, such as Benchmark Electronics, Flextronics International, Hon Hai Precision Industry, Jabil Circuit and Sanmina-SCI, as well as smaller EMS companies that often have a regional, product, service or industry specific focus. ODMs, companies that provide internally designed products and manufacturing services to OEMs, continue to increase their share of outsourced manufacturing services provided to OEMs inacross several markets such asand product groups, including personal computer motherboards, notebook and desktop computers, cell phones and cell phones.smartphones. While we have not, to date,
encountered significant direct competition from ODMs in our primary markets, such competition may increase if our business in these markets grows, or if ODMs expand further into or beyond, theseour primary end markets.
We may also face competition from current and prospective customers who evaluate our capabilities against the merits of manufacturing products internally. We compete with different companies depending on the type of service or geographic area. Some of our competitors may have greater manufacturing, financial, procurement, research and development, and sales and marketing resources than we do. We believe our competitive advantage in our targeted markets is our track record in manufacturing technology, quality, responsiveness and providing 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 on time and compete favorably on price. To enhance our competitiveness, we expect to expand our service offerings or capabilities beyond our traditional areas of EMS manufacturing expertise.
Human Resources
As of December 31, 2008,2009, we employed over 38,000approximately 33,000 permanent and temporary (contract) employees worldwide. Some of our employees in the Czech Republic, Japan, Mexico, Singapore and Spain are represented by unions. Given the variable nature of our project flow and the quick response time required by our customers, it is critical that we are able to quickly ramp our production up or down to maximize efficiency. To achieve this, our approach has been to employ a skilled temporary labor force, as required.
We believe that our employees are our greatest asset. Culturally, we are collaborative, team-oriented, values-driven and results-oriented, with a focus on customer service and quality at all levels. This culture is an important element of our strategy, as we need to be able to fully utilize the intellectual capital of our employees to be successful. Some of our employees in Brazil, China, Japan, Mexico, Singapore and Spain are represented by unions.
Environmental Matters
We are subject to various federal, state/provincial, local and multi-national environmental, health and safety laws and regulations, including environmental measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of contaminants, hazardous substances and waste, as well asand health and safety measures related to practices and procedures applicable to the construction and operation of our plants. We believe that we are currently in compliance in all material respects with applicable environmental laws.laws and have management systems in place to maintain compliance.
SomeOur past operations and historical operations of our operating sitesothers may have a history of industrial use. As is typical for such businesses,resulted in soil and groundwater contamination could have occurred.on our sites. From time to time we investigate, remediate and monitor soil and groundwater contamination at certain of our operating sites.
Except for the facilities that we acquired in the Omni Industries Limited and MSL transactions, Generally, Phase I or similar environmental assessments (which involve general inspections without soil sampling or groundwater analysis) were obtained for most of theour manufacturing facilities we lease or own in connection with ourat the time of acquisition or lease of such facilities.leasing. Where contamination is suspected at sites being acquired, Phase II intrusive environmental assessments (including soil and/or groundwater testing) are usually performed. We expect to conduct suchPhase I or similar environmental assessments in respect toof future property acquisitions and will do Phase II assessments where consistent with local practice.appropriate. These environmental assessments have not revealed any environmental liability that we believe based on current information, will have a material adverse effect on our operating results, of operations, business, prospects or financial condition, nor are we aware that we have any such material environmental liability, in part because of the contractual retention of liability for some contamination and its remediation by landlords and former owners at somecertain sites. It is possible that our assessments do not reveal all environmental liabilities, or that there are material environmental liabilities of which we are not presently aware, or that future changes in law or enforcement standards will cause us to incur significant costs or liabilities in the future.
Environmental legislation also operates at the product level. Since 2004, we have developed our Green Services™, offering a suite of services that helpshelp our customers comply with environmental legislation, such as the EU's RoHSEuropean Union's Restriction of Hazardous Substances (RoHS) and WEEEWaste Electrical and Electronic Equipment directive (WEEE) laws and China's RoHS legislation.
Backlog
Although we obtain firm purchase orders from our customers, OEM customers typically do not make firm orders for delivery of products more than 30 to 90 days in advance. We do not believe that the backlog of
expected product sales covered by firm purchase orders is a meaningful measure of future sales, since orders may be rescheduled or cancelled.
Seasonality
Seasonality is reflected in the mix and complexity of the products we manufacture. With a significant exposure to consumer, computing and communications infrastructure products, there will be a level of seasonality in our quarterly revenue patterns for many customers. The consumer electronics business has revenue peaks that are different than those of our communications and enterprise computing market segments. The pace of technological change, the frequency of OEMs transferring business among EMS competitors and the constantly changing dynamics of the global economy will also continue to impact us. As a result of this mix,these factors, our efforts to diversify our revenue base, and limited visibility in technology end-markets,end markets, it is difficult for us to predict the extent and impact of seasonality on our business. With the current global economic crisis, it is difficult to assess how seasonality will impact us going forward.
C. Organizational Structure
We conduct our business through subsidiaries operating on a worldwide basis. The following companies are considered significant subsidiaries and each of them is wholly-owned:wholly owned:
Celestica Cayman Holdings 1 Limited, a Cayman Islands corporation.corporation;
Celestica Cayman Holdings 9 Limited, a Cayman Islands corporation.corporation;
Celestica Corporation, a Delaware corporation.corporation;
Celestica (Gibraltar) Limited, a Gibraltar corporation.corporation;
Celestica Holdings Pte Ltd., a Singapore corporation.corporation;
Celestica Hong Kong Limited, a Hong Kong corporation.corporation;
Celestica International Inc., an Ontario corporation.corporation;
Celestica Liquidity Management Hungary Limited Liability Company, a Hungary corporation.corporation;
Celestica (Luxembourg) S.ÀR.L., a Luxembourg corporation.corporation;
Celestica (Thailand) Limited, a Thailand corporation.corporation;
Celestica (US Holdings) Inc., a Delaware corporation.corporation;
IMS International Manufacturing Services Limited, a Cayman Islands corporation.corporation;
1282087 Ontario Inc., an Ontario corporation.corporation;
1681714 Ontario Inc., an Ontario corporation; and
1755630 Ontario Inc., an Ontario corporation.
D. Description of Property
The following table summarizes our principal facilities as of February 23, 2009.22, 2010. Our facilities are used to provide electronics manufacturing services and solutions, such as the manufacture of printed circuit boards,
assembly and configuration of final systems, and other related manufacturing and customer support activities, including warehousing, distribution and fulfillment.
Major | Square Footage | Owned/Leased | |||
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| (in thousands) | | |||
| |||||
| Owned/Leased | ||||
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| Leased | ||||
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| Leased | ||||
| Leased | ||||
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| |||||
| |||||
| Leased | ||||
| |||||
| 133 | Leased | |||
| 418 | Owned | |||
| |||||
| 185 | Owned/Leased | |||
| 200 | Owned | |||
| 58 | Leased | |||
China(1) | |||||
| |||||
| Owned/Leased | ||||
| |||||
| Owned/Leased | ||||
| |||||
| 1,085 | Owned/Leased | |||
Singapore(1) | Leased | ||||
| |||||
| |||||
| |||||
| Owned/Leased |
Our principal executive office is located at 12 Concorde Place, 5th Floor,844 Don Mills Road, Toronto, Ontario, Canada M3C 3R8. All of our1V7. Our principal facilities are ISO certified to ISO 9001 or ISO 9002 standards. Most of our principal facilities are also certified to theand ISO 14001 (environmental) standards.
Our land and facility leases expire between 20092010 and 2060. We currently expect to be able to extend the terms of expiring leases or to find replacement facilities on reasonable terms.
As part of our restructuring plans, we have been focused on increasing production in lower-cost geographies. We will continue to evaluate our operating network to ensure that it meets our customers' requirements. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — Operating Results" for additional information concerning our restructurings.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements, which we prepared in accordance with Canadian GAAP. A reconciliation to United StatesU.S. GAAP is disclosed in note 20 to the Consolidated Financial Statements. All dollar amounts are expressed in U.S. dollars. The information in this discussion is provided as of February 20, 2009.19, 2010.
Certain statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) constitute forward-lookingforward looking statements within the meaning of section 27A of the U.S. Securities Act, and section 21E of the U.S. Exchange Act, and applicable Canadian securities legislation, including, without limitation, statements related to our future growth,growth; trends in our industry,industry; our financial or operational results including anticipated expenses, benefits or payments; the redemption of our Senior Subordinated Notes and the expected benefits of such redemption; our financial or operational performance.performance; and our conversion from Canadian GAAP to International Financial Reporting Standards. Such forward-lookingforward looking statements are predictive in nature, and may be based on current expectations, forecasts or assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially from the forward-lookingforward looking statements themselves. Such forward-lookingforward looking statements may, without limitation, be preceded by, followed by, or include words such as "believes," "expects," "anticipates," "estimates," "intends," "plans," or similar expressions, or may employ such future or conditional verbs as "may", "will", "should" or "would" or may otherwise be indicated as forward-lookingforward looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-lookingforward looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, and in any applicable Canadian securities legislation. Forward-lookingForward looking statements are not guarantees of future performance. You should understand that the following important factors could affect our future results and could cause those results to differ materially from those expressed in such forward-lookingforward looking statements: the effects of price competition and other business and competitive factors generally affecting the electronics manufacturing services (EMS) industry, including changes in the trend for outsourcing; our dependence on a limited number of customers and end markets; variability of operating results among periods; the challenges of effectively managing our operations during uncertain economic conditions, including significant changes in demand from our customers as a result of the impact of the globalan uncertain or weak economic crisisenvironment; our inability to retain or expand our business due to execution problems resulting from significant headcount reductions, plant closures and capital markets weakness; the risk of potential non-performance by counterparties, including but not limited to financial institutions, customers and suppliers, during uncertain economic conditions; the effects of price competition and other business and competitive factors generally affecting the electronics manufacturing services (EMS) industry, including the trend for outsourcing; variability of operating results among periods; our dependence on a limited number of customers;product transfer activities; the challenge of responding to lower-than-expectedchanges in customer demand; the delays in the delivery and/or general availability of various components and materials used in our manufacturing process; our dependence on industries affected by rapid technological change; our ability to successfully manage our international operations; our inability to retain or grow our business due to execution problems resulting from significant headcount reductions, plant closures and product transfers associated with restructuring activities; the challenge of managing our financial exposures to foreign currency fluctuations; and the delays in the delivery and/or general availabilityrisk of various components used in our manufacturing process.potential non-performance by counterparties, including but not limited to financial institutions, customers and suppliers. These and other risks and uncertainties, as well as other information related to the company, are discussed in our various public filings at www.sedar.com and www.sec.gov, including our Annual Report on Form 20-F and subsequent reports on Form 6-K filed with the U.S. Securities and Exchange Commission and our Annual Information Form filed with the Canadian Securities Commissions.
Except as required by applicable law, we disclaim any intention or obligation to update or revise any forward-lookingforward looking statements, whether as a result of new information, future events or otherwise. You should read this document with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-lookingforward looking statements, even if our situation changes in the future. All forward-lookingforward looking statements attributable to us are expressly qualified by these cautionary statements.
Overview
What Celestica does:
We provide end-to-end product lifecycledeliver innovative supply chain solutions to original equipment manufacturers (OEMs) in the communications, consumer, enterprise computing, communications, industrial, aerospace and defense, alternative energyhealthcare and healthcaregreen technology markets.
To support our customers' products throughout their entire lifecycle, we provide end-to-end solutions including design, supply chain management, manufacturing and systems integration, fulfillment and after-market
services. We believe theseour services and solutions will help our customers reduce their time to market and eliminate waste from their supply chains, resulting in lower product lifecycle costs, better financial returns and greater returns.improved competitive advantage in their respective business environments.
Our global operating network spans the Americas, Asia and Europe. In an effort to drive speed and flexibility for our customers, we conduct the majority of our business through eight full-service mega-sites,centers of excellence, strategically located around the world. Through our Ring Strategy, we strive to align a network of suppliers around eachin proximity to our centers of our mega-sitesexcellence in order to increase flexibility in our supply chain, deliver shorter overall product lead times and reduce inventory. We operate additionalother sites around the globe with certainspecialized supply chain management and high-mix/low-volume manufacturing capabilities to meet the specific production and product lifecycle requirements of customers in markets such as the industrial, aerospace and defense sectors.our customers.
Through our mega-sitescenters of excellence and the deployment of our Total Cost of Ownership (TCOO™)Ownership™ (TCOO) Strategy, we strive to provide our customers with the lowest total cost throughout the product lifecycle. This approach enables us to focus our capabilities on broad solutions that address the total cost of design, sourcing, production, delivery and after-market supportafter market services for our customers' products, which can help drive greater levels of efficiency and improved service levels throughout our customers' supply chain.chains.
Our targeted end markets include consumer, enterprise computing, communications, industrial, aerospace and defense, healthcare and green technology. We offer a full range of services to our customers including design, manufacturing, engineering, order fulfillment, logistics and after-market services. We are focused on expanding these service offerings across our major markets with existing and new customers. In particular, we intend to invest in assets and resources to expand our design, engineering and after-market service capabilities to support future growth opportunities. Our recent acquisition of Scotland-based Invec Solutions Limited will enhance our after market services offering.
Although we supply products and services to over 100 OEMs, we depend upon a relatively small number of customers for a significant portion of our revenue. In the aggregate, our top 10 customers represented 71% of revenue in 2009 and our largest customer represented 17% of revenue. The majorityproducts we manufacture can be found in a wide variety of end products, including smartphones; networking, wireless and telecommunications equipment; storage devices; servers; aerospace and defense electronics, such as in-flight entertainment and guidance systems; healthcare products; audiovisual equipment, including set-top boxes and flat-panel televisions; printers and related supplies; peripherals; gaming products; and a range of industrial and green technology electronic equipment.
We believe that our principal strengths include our advanced capabilities in the areas of technology and quality, our flexible service offerings, our financial strength and our market-specific supply chain management capabilities. We offer a wide range of advanced manufacturing technologies, test capabilities and processes to support our customers' needs. We believe our size, geographic reach and expertise in supply chain management allow us to purchase materials effectively and to deliver products to customers faster, thereby reducing overall product costs and reducing the time-to-market.
We believe we are well positioned to compete effectively in the EMS industry, given our financial strength and our position as one of the major EMS providers worldwide. Our priorities include to (i) grow revenue through organic program wins and acquisitions; (ii) improve financial results, including operating margins, return on invested capital and cash flow performance; (iii) develop and enhance profitable and key relationships with leading OEMs across our strategic target market segments; (iv) broaden the range of the services we offer to OEMs; and (v) expand capabilities in services and technologies that diversify and expand our revenue is derived from customersbase beyond our traditional areas of EMS manufacturing expertise. We believe that success in the consumer, communications and enterprise computing markets.these areas will result in improved financial performance which will enhance shareholder value.
Overview of business environment:
Since the 1990s, OEMs have shifted more of their manufacturing and supply chain activities to EMS providers in an effort to drive greater manufacturing flexibility and to improve their financial returns. In response to this shift by OEMs, the EMS industry has grown rapidly and its capabilities and services have evolved.
The EMS industry is highly competitive with multiple global EMS providers competing for the same customers and programs. Although the industry is characterized by significantlarge revenue opportunities, operating margins are comparatively low. Assetlow and aggressive pricing pressure is a common business dynamic in the industry. Capacity utilization is an important factor affecting operating margins. The amount of available manufacturing capacity and the location of that capacity are vital considerations for EMS providers. Volatility in energy prices, which may affect raw materials and transportation costs, and rising labor costs could also impact operating margins for the EMS industry. The EMS industry is also working capital intensive. As a result, we believe that return on invested capital, which encompassesis primarily affected by operating margins inventory management, accounts receivable and accounts payable,investments in working capital and equipment, is one of the mostan important metricsmetric for measuring an EMS provider's financial success.performance.
EMS companies are exposed to a variety of customers and end markets. Demand visibility is limited which makes revenue in each of our end markets difficult to predict. This is due primarily to the shorter product lifecycles inherent in technology markets, rapid shifts in technology for our customers' products and the general economic environment. In the early 2000s, a global economic downturn led to a decline in demand for many technology products. This negatively impacted the operations of many EMS providers, including us.
Historically, significant economic uncertainty has had a negative impact on our customers' demand.conditions. Recent global economic conditions and uncertainty, including the current global economic crisisdownturn and volatile capital markets, have negatively impacted the operations of most EMS providers, including Celestica.
Impact of current economic environment:
In 2009, as a result of the global economic downturn, revenue declined year-over-year in all end markets that we serve, other than the consumer market, which was relatively flat. Although the global economy has recovered somewhat from the recent economic and financial crisis, the economic outlook remains uncertain with continued low end market visibility for our customers. This environment can pose significant risk to our business due to continuing weak demand or customer financial stress or bankruptcy. While we have operated relatively well during this period, we expect that this uncertainty will continue to impact our revenue, operating profitability and cash flow. As customers adjust their strategies during this time, we continue to experience increased pricing pressure and other competitive pressures. Despite the difficult end-market environment, recent demand increases have resulted in some component and material shortages, as well as extended lead times. If this trend accelerates, similar shortages could impact our financial resultsresults. The trend towards outsourcing continues to change as some customers have brought their production back in-house to fill capacity, while other customers have chosen to increase their outsourcing to reduce costs. Other customers have shifted their production between EMS providers based on pricing concessions or their preference for consolidating their supply chain. This environment has resulted in additional restructuring actions and site closures as we respond to our customers' actions. The uncertain environment has also impacted foreign currency rates, the fair value of our financial instruments and the returns we earn on our pension assets, among other items. The global economic uncertainty has impacted, and we expect will likely continue to impact, the financial condition of some of our customers and suppliers. We will continue to closely monitor our suppliers' and customers' financial condition and creditworthiness in an effort to ensure continuity of supply and to limit the impact from companies that have or may become financially distressed. Although we have processes in place to limit our exposure to financially weaker customers and suppliers, our efforts may not eliminate all risks. The interruption of supply from a raw materials supplier, especially for single sourced components, could have a negativesignificant impact over the next several quarterson our operations, and beyond.
Table of Contentson our customers, if we are unable to deliver finished products in a timely manner.
Summary of 20082009
The following table sets forth, for the periods indicated, certain key operating results and other financial information (in millions, except per share amounts):
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Revenue | $ | 8,811.7 | $ | 8,070.4 | $ | 7,678.2 | ||||
Gross profit | 451.8 | 422.4 | 531.1 | |||||||
Selling, general and administrative expenses (SG&A) | 285.6 | 295.1 | 303.8 | |||||||
Net loss | (150.6 | ) | (13.7 | ) | (720.5 | ) | ||||
Basic loss per share | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | |
Diluted loss per share | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Revenue | $ | 8,070.4 | $ | 7,678.2 | $ | 6,092.2 | ||||
Gross profit | 422.4 | 531.1 | 429.8 | |||||||
Selling, general and administrative expenses (SG&A)(1) | 271.7 | 292.0 | 244.5 | |||||||
Net earnings (loss) | (13.7 | ) | (720.5 | ) | 55.0 | |||||
Basic earnings (loss) per share | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 | ||
Diluted earnings (loss) per share | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 |
| As at December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Cash and cash equivalents | $ | 803.7 | $ | 1,116.7 | $ | 1,201.0 | ||||
Total assets | 4,686.3 | 4,470.5 | 3,786.2 | |||||||
Total long-term financial liabilities | 750.8 | 758.5 | 733.1 |
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2008 | 2009 | |||||
Cash and cash equivalents | $ | 1,201.0 | $ | 937.7 | |||
Total assets | 3,786.2 | 3,106.1 | |||||
Total long-term financial liabilities | 733.1 | 222.8 |
Revenue for 20082009 of $6.1 billion decreased 21% from $7.7 billion in 2008. Revenue decreased 5%in all end markets, other than the consumer market, which was relatively flat compared to the prior year. The slower economic environment has continued to impact end-market demand, resulting in lower production volumes. Our production volumes also vary each period because of the impacts associated with program wins or losses with new, existing or disengaging customers, changes in demand for the products we manufacture, and seasonality, among other factors. The consumer end market was our largest segment, representing 29% of revenue for 2009.
Gross profit for 2009 decreased 19% from $8.1 billion in 2007.2008. The decrease in revenuegross profit was primarily due to lower volumes, primarily from our servers, enterprise communications and storage end markets which more thanpartially offset the increase in revenue primarily from customers in our consumer, telecommunications and industrial end markets. The amount of revenue reduction in 2008 as a result of customer disengagements, primarily in the enterprise communications end market, was approximately 5%.
Gross profit for 2008 increased approximately 25% from 2007 primarily due to operational improvements in Mexico and Europe. We also continued to benefitby benefits from cost reductions, restructuring actions the impact of renegotiating or exiting unprofitable accounts and the streamlining and simplifying of processes throughout the company.increased productivity. Gross margin as a percentage of revenue wasincreased to 7.1% in 2009 compared to 6.9% in 2008 compared to 5.2% for 2007.2008.
SG&A expenses for 2009 decreased 16% from 2008 as a percentage of revenue were 4.0% comparedprimarily due to 3.7% of revenue for 2007. The increase in percentage primarily reflects the impact oflower foreign exchange losses, benefits from cost reductions and higher variable compensation costs, partially offset byrestructuring actions, and lower IT and consulting costs.
Gross profit and support costsSG&A for 2009 were negatively impacted by $5.2 million and capital tax recoveries,$5.7 million, respectively, relating to a mark-to-market adjustment for certain restricted share unit awards vesting in the first quarter of 2010, which we plan to settle with cash. Cash-settled awards are accounted for as wellliabilities and are remeasured at market value at each reporting date until the settlement date. Management's current intention is to settle future restricted share unit awards in the form of shares purchased in the open market and, as lower revenue levels in 2008.a result, will continue to account for these awards as equity awards.
In January 2008, we announced that we would incur additional restructuring charges of between $50 million and $75 million to complete our planned restructuring actions. As we finalized our 2009 plan in the fourth quarter of 2008, we estimated that our restructuring costs would reach the high end of our previously announced range of $50 million to $75 million. In 2008,July 2009, we recordedannounced further restructuring charges of $35.3between $75 million and $100 million. Combined, we expect to incur total restructuring charges of between $150 million and $175 million associated with this program. During 2008 and 2009, we recorded total restructuring charges of $118.4 million. We expect to complete the remainder of thethese restructuring actions by the end of 2009.2010.
During 2009, we paid $495.8 million in cash, excluding accrued interest, to repurchase our Senior Subordinated Notes due 2011 (2011 Notes) and recorded a gain of $19.5 million in other charges. We expect the redemption will result in an estimated benefit to our net interest expense of approximately $14 million in 2010.
Our net loss for 2008 wasof $720.5 million compared to $13.7 million for 2007. Although operating earnings improved year-over-year, our net loss for 2008 was impacted primarily byincluded a write-off of goodwill of $850.5 million.
In January 2010, we announced our intention to redeem our outstanding Senior Subordinated Notes due 2013 (2013 Notes) at a price of 103.813% of the principal amount of $223.1 million. We expect to complete the redemption in the first quarter of 2010 using existing cash resources. Based on the carrying value at December 31, 2009 and the redemption price, we expect to incur a loss of approximately $9 million which we will record in other charges. We expect the redemption will reduce our net interest expense by approximately $4 million per quarter after redemption.
Other performance indicators:
In addition to the key financial, revenue and earnings-relatedearnings related metrics described above, management regularly reviews the following working capital metrics:
Cash Cycle Days:
| 1Q07 | 2Q07 | 3Q07 | 4Q07 | 1Q08 | 2Q08 | 3Q08 | 4Q08 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Days in accounts receivable | 45 | 42 | 42 | 39 | 44 | 42 | 43 | 50 | |||||||||||||||||
Days in inventory | 59 | 50 | 44 | 38 | 42 | 42 | 40 | 41 | |||||||||||||||||
Days in accounts payable | (80 | ) | (66 | ) | (66 | ) | (64 | ) | (73 | ) | (71 | ) | (72 | ) | (79 | ) | |||||||||
Cash cycle days | 24 | 26 | 20 | 13 | 13 | 13 | 11 | 12 |
| 1Q08 | 2Q08 | 3Q08 | 4Q08 | 1Q09 | 2Q09 | 3Q09 | 4Q09 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Days in accounts receivable | 44 | 42 | 43 | 50 | 56 | 50 | 49 | 46 | |||||||||||||||||
Days in inventory | 42 | 42 | 40 | 41 | 50 | 47 | 42 | 40 | |||||||||||||||||
Days in accounts payable | (53 | ) | (52 | ) | (53 | ) | (57 | ) | (63 | ) | (55 | ) | (57 | ) | (56 | ) | |||||||||
Cash cycle days | 33 | 32 | 30 | 34 | 43 | 42 | 34 | 30 | |||||||||||||||||
Days in accounts receivable (A/R) is calculated as the average A/R for the quarter divided by the average daily revenue. Days in inventory is calculated as the average inventory for the quarter divided by the average daily cost of sales. Days in accounts payable (A/P) is calculated as the average A/P (including accruals) for the quarter divided by average daily cost of sales. Cash cycle days is calculated as the sum of days in A/R and inventory, less the days in A/P. Beginning with the fourth quarter of 2009, we excluded accrued liabilities from the average A/P balance when calculating A/P days. We made this change to better align our definition of cash cycle days with that used by some of our major competitors. We have recalculated our days in A/P and our cash cycle days for prior periods to reflect this change.
Cash cycle days for the fourth quarter of 2009 decreased from the same period in 2008 by four days. A/R and inventory days improved by four days and one day, compared torespectively, from the fourth quarter of 2007. Although2008. The year-over-year improvement in A/R days and inventory days have increased year-over year, we also increased our A/P days. A/R days worsened 11 days year-over-year, and seven days sequentially, primarily due to management's decision to reducereflects the amount of A/R sold under the A/R sales program from $225 million at the end of 2007 to zero at the end of 2008, and the timing of revenue during the period. Inventorycontinued strong collection efforts driven in part by changes in customer payment terms. Cash cycle days for 2008 reflect our improved inventory management. The increase in inventory days in the fourth quarter of 20082009 improved four days compared to the third quarter of 20082009, primarily reflecting improved inventory turns and to the fourth quarter of 2007 reflects the higher inventory levels required to support certain customer demandcontinued strong collections.
Management also reviews adjusted net earnings, adjusted operating margin (EBIAT), return on invested capital (ROIC) and the ramping of new programs. A/P days increased due to timing of payments, as well as extended payment terms offered by suppliers.
Impact of current economic environment:
The global economic crisis and capital market weakness is affecting virtually all companies and industries. Visibility to end-market demand has become even more uncertain. This economic environment could have a significant negative impact on our revenue and operating profitability, ourfree cash flow and our liquidity. We may experience increased pricing pressure and other competitive pressures as customers adjustmetrics, which are referred to the current environment. The trend towards outsourcing could also change as some customers may want to bring their production back in-house to fill capacity. Other customers may want to shift their production between EMS providers based on pricing concessions or their preference for consolidating their supply chain. This may result in additional restructuring actions and site closures as we respond to our customers' actions. We have experienced significant foreign currency fluctuations, especially in the second half of 2008, which will likely continue to impact us going forward. The uncertain environment has also impacted the fair value of our financial instruments, and the returns we earnnon-GAAP measures on our pension assets, among other items. We also expect that the global economic environment will impact the financial condition of some of our customers and suppliers. We will continue to closely monitor our customers' ability to pay their receivables and monitor our suppliers, in an effort to ensure consistency of supply. The interruption of supply from a raw materials 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 product in a timely manner.
During the fourth quarter of 2008, we experienced a significant decline in expected future demand for all of the end markets we serve. We conducted our goodwill impairment assessment in the fourth quarter of 2008. The deteriorating macro environment and economic uncertainty, along with the sustained decline in our own market capitalization, resulted in an $850.5 million goodwill write-down in the fourth quarter of 2008. Other major competitors in our industry have also taken similar write-downs. See note 10(b) to the Consolidated Financial Statements.
Table of Contentspage 51.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with Canadian GAAP with a reconciliation to United StatesU.S. GAAP, as disclosed in note 20 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant accounting policies and methods used in the preparation of the financial statements are described in note 2 to the Consolidated Financial Statements. We evaluate our estimates and assumptions on a regular basis, based on historical experience and other relevant factors. Actual results could differ materially from these estimates and assumptions, especially in light of the current economic environment and uncertainties. The following critical
Significant accounting policies are impacted by judgments, assumptions and estimatesmethods used in the preparation of the financial statements are described in note 2 to the Consolidated Financial Statements.
Revenue recognition:
We derive most of our revenue from Effective January 1, 2009, we adopted the sale of electronic equipment that we have builtrevised accounting standards for goodwill and intangible assets, which are summarized in note 2 to customer specifications. We recognize revenue from product sales when all of the following criteria have been met: shipment has occurred; title has passed; persuasive evidence of an arrangement exists; performance has occurred; receivables are reasonably assured of collection; and customer specified test criteria have been met.Consolidated Financial Statements. We have contractual arrangements with the majorityretroactively reclassified $34.0 million of our customers that require the customer to purchase unused inventory that we have purchased to fulfill that customer's forecasted manufacturing demand. We account for raw material returns as reductions in inventory and do not recognize revenue on these transactions.
We provide warehousing services in connection with manufacturing services to certain customers. We assess these contracts to determine whether the manufacturing and warehousing services can be accounted for as separate units of accounting. If the services do not constitute separate units of accounting, or the manufacturing services do not meet all of the revenue recognition requirements, we defer recognizing revenue until the products have been shipped to the customer.
Allowance for doubtful accounts:
We record an allowance for doubtful accounts related to accounts receivable that management believes are impaired. The allowance is basedcomputer software assets on our knowledgeconsolidated balance sheet at December 31, 2008 from property, plant and equipment to intangible assets. We have also reclassified $11.8 million of the financial condition of our customers, the aging of the receivables, the current business environment, customer and industry concentrations, and historical experience. If any of our customers have insufficient liquidity or their financial condition deteriorates, we may encounter significant delays or defaults in payments owed to us by our customers. This may result in our restructuring the debt or extending payment terms which may have a significant adverse effectcomputer software amortization on our financial condition and resultsconsolidated statement of operations. The current global economic crisis could impact our customers' abilityoperations from depreciation expense, included in SG&A, to pay, or it could render them insolvent, which would impact the collectibilityamortization of their accounts. A change to these factors could impact the estimated allowance and the provisionintangible assets for bad debts recorded in SG&A. If actual defaults are higher than expected, additional provisions may be required.2008 ($23.4 million for 2007).
Inventory valuation:
We value our inventory on a first-in, first-out basis at the lower of cost and net realizable value. We regularly adjust our inventory valuation based on shrinkage and management's estimates of net realizable value, taking into consideration factors such as inventory aging and future demand for the inventory, and the nature of the contractual agreements with customers and suppliers, including the ability to return inventory to them.inventory. A change to these
assumptions could impact the valuation of inventory and have a resulting impact on gross margins. We procure inventory based on specific customer orders and forecasts. If actual market conditions or our customers' product demands are less favourable than those projected, additional valuation adjustments may be required.
Warranty costs:
We have recorded a liability for warranty costs. As part of the normal sale of a product or service, we provide our customers with product or service warranties that extend for periods generally ranging from one to three years from the date of sale. The liabilityrequired for the expected cost of warranty-related claims is established whenrelated customer. We attempt to utilize excess inventory in other products are sold and services are rendered. In estimatingwe manufacture or to return the warranty liability, historical material replacement costs and the associated labor to correct the defect are considered. Revisions to these estimates are made when actual experience differs materially from historical experience. Known product or service defects are specifically accrued as we become aware of such defects. Changesinventory to the estimates could impactsupplier or customer. Our success in these recovery efforts may result in the liability and have a resulting impact on gross margins.reversal of previously recorded inventory valuations.
Income taxes:
We have recorded an income tax expense or recovery based on the income earned or loss incurred in each tax jurisdiction and the substantively enacted tax rate applicable to that income or loss. In the ordinary course of business, there are many transactions for which the ultimate tax outcome is uncertain.uncertain and estimations are required for exposures related to examinations by taxation authorities. We review these transactions and exposures and record tax liabilities for open years based on our assessment of many factors, including past experience and interpretations of tax law applied to the facts of each matter. The determination of tax liabilities is subjective and generally involves a significant amount of judgment. The final tax outcome of these matters may be different from the estimates originally made by management in determining our income tax provisions. We recognize a tax benefit related to tax uncertainties when it is probable based on our best estimate of the amount that will ultimately be realized. A change to these estimates could impact the income tax provision.
We record a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management considers factors such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies, changes in tax laws and other factors. A change to these factors could impact the estimated valuation allowance and income tax expense.
Goodwill:
WeTo the extent we have goodwill, we perform our annual goodwill impairment test in the fourth quarter of each year (to correspond with our planning cycle), and more frequently if events or changes in circumstances indicate that an impairment loss may have been incurred. To the extentIf our market capitalization is less than our book value for a sustained period of time, it could be an indicator that an impairment loss has occurred. We test impairment, using the two-step method, at the reporting unit level by comparing the reporting unit's carrying amount to its fair value. We estimate the fair value of the reporting units using a combination of a market capitalization approach, a multiples approach and discounted cash flows. The process of determining fair values is subjective and requires management to exercise judgment in making assumptions about future results, including revenue and expense projections, and discount rates and market multiples at the reporting unit level. A significant change to these assumptions could impact the fair value of the reporting units resulting in a change to the impairment charge. During the fourth quarter of 2008, we conducted our annual goodwill assessment, and determined thatwrote off the entire remaininggoodwill balance. At December 31, 2009, our goodwill balance was impaired.zero. See further details on page 39 and in note 5(d)10(b) to the Consolidated Financial Statements.
Long-lived assets:
We estimate the useful lives of property, plant and equipment and intangible assets based on the nature of the asset, historical experience and the terms of any related supply contracts. We perform ouran annual impairment teststest on long-lived assets in the fourth quarter of each year (to correspond with our planning cycle), and more frequently if events or changes in circumstances indicate that an impairment loss has incurred.occurred. We estimatetest impairment, using the useful livestwo-step method, by comparing the carrying amount of property, plantan asset, or group of assets, to the undiscounted cash flows from the use and equipment and intangible assets based on the natureeventual disposal of the asset historical experience andor group of assets. If the termscarrying amount exceeds the undiscounted cash flows, we perform step two by comparing the fair value of any related supply contracts. The valuationthe asset or group of long-lived assets is based onto its carrying amount to determine the amount of future netimpairment. We estimate fair value using discounted cash flows that theseor estimates of market values for certain assets, are estimated to generate, as well as appraisals for real property.where available. Revenue and expense projections are based on management's estimates,discounted using risk-adjusted rates. We work with independent brokers to obtain the market prices to support our real property values. The process of determining fair values is subjective and requires management to exercise judgment in making assumptions about future results, including estimates of currentrevenue and future industry conditions.expense
projections, discount rates and market values. A significant change to these assumptions and estimates could impact the estimated useful lives or valuation of long-lived assets resulting in a change to depreciation or amortization expense and the impairment charge. We recorded a long-lived asset impairment loss in 2008.2009. See note 10(c) to the Consolidated Financial Statements. Future impairment tests may result in further impairment charges.
Restructuring charges:
We have recorded restructuring charges relating to workforce reductions, facility consolidations and costs associated with exiting businesses. The restructuring charges include employee severance and benefit costs, costs related to leased facilities that have been abandoned or subleased,vacated, owned facilities which are no longer used and are available-for-sale, costs of leased equipment that have been abandoned,are no longer used, impairment of owned equipment available-for-sale, and impairment of related intangible assets. The recognition of these charges requires management to make certain judgments and estimates regarding the nature, timing and amounts associated with these plans. For owned facilities and equipment, the impairment loss recognized is based on the fair value less costs to sell, with fair value estimated based on existing market prices for similar assets. For leased facilities that have been abandoned or subleased,vacated, the liability for lease obligations is calculated on a discounted basis based on future lease payments subsequent to abandonment less estimated sublease income. To estimate future sublease income, we work with independent brokers to determine the estimated tenant rents we could expect to realize. The estimated liability could change subsequent to its initial recognition, requiring adjustments to the restructuring expense and liability recorded. At the end of each reporting period, we evaluate the appropriateness of the remaining accrued balances.
Financial instruments:
We use a variety of methods and assumptions that are based on market conditions and risks existing on each reporting date to determine the fair value of our financial instruments. We use broker quotes and standard market conventions and techniques, such as discounted cash flow analysis and option pricing models, to determine the fair value of our financial instruments, including derivatives and hedged debt obligations. We also consider the credit quality of the financial instrument, including our own credit risk and the credit risk of the counterparty. All methods of fair value measurement result in a general approximation of value and such value may never be realized. A change in the fair value related to fair value hedges could impact our interest expense on long-term debt and a change in the fair value related to cash flow hedges could impact our other comprehensive income and our operating expenses.
Our derivative instruments are required to be recorded at fair value on our consolidated balance sheet. Hedge accounting is applied to certain designated hedge relationships when all the qualifying conditions are met. Hedge ineffectiveness, if significant, is recognized immediately in operations. There is no assurance that all hedge relationships will remain effective throughout their terms until maturity. Hedge accounting will be discontinued once we assess that a hedge relationship is no longer effective on a retroactive or prospective basis. Subsequent changes in the fair value of the derivatives, which were previously used as the hedging instruments, will flow through operations directly. There is no assurance that our hedging strategy will be successful in mitigating the volatility to operations when economic conditions become unstable.
Pension and non-pension post-employment benefits:
We have pension and non-pension post-employment benefit costs and liabilities, which are determined from actuarial valuations. Actuarial valuations require management to make certain judgments and estimates relating to expected plan investment performance, salary escalation and compensation levels at the time of retirement, retirement ages, the discount rate used in measuring the liability and expected healthcare costs. Actual future experience will differ from these assumptions, and the differences may be material. There is no assurance that our future benefit plans will be able to earn the assumed rate of return. Market driven changes may result in changes to our discount rates and other variables which could lead us to future contributions that differ significantly from our estimates.
The fair values of our pension assets were based on a measurement date of December 31, 2008.2009. We evaluate these assumptions on a regular basis, taking into consideration current market conditions and historical data. A change in these factors could impact future pension expense and funding requirements. See notes 2(k) and 13 to the Consolidated Financial Statements.
Operating Results
We are required to disclose certain information in our financial statements regarding operating segments, products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segment is comprised of our electronics manufacturing services business.
Our annual and quarterly operating results vary from period to period as a result of the level and timing of customer orders, fluctuations in materials and other costs, and the relative mix of value-add products and services. The level and timing of customer orders will vary due to variation in demand for their products, general economic conditions, their attempts to balance their inventory, availability of materials and changes in their supply chain strategies or suppliers, variation in demand for their products and general economic conditions.suppliers. Our annual and quarterly operating results are affected by: the mix, volumes and seasonality of business in each of our end markets; price competition; mix of manufacturing value-add; capacity utilization; manufacturing effectiveness and efficiency; the degree of automation used in the assembly process; capacity utilization; manufacturing effectiveness and efficiency; shortagesavailability of components or labor; costs associated with ramping new programs; customer product delivery requirements; costs and inefficiencies of transferring programs between facilities; the loss of programs and customer disengagements; the impact of foreign exchange fluctuations; the performance of third-party providers for certain IT systems and production support;providers; the ability to manage inventory, and property, plantproduction location and equipment effectively; the ability to manage changing labor, component, energy and transportation costs effectively; the timing of expenditures in anticipation of forecasted sales levels; the timing of acquisitions and related integration costs; and other factors.
In the EMS industry, customers can often award new programs or shift programs to other EMS providers for a variety of reasons including changes in demand for the customers' products, pricing benefits offered by
other EMS providers, execution or quality issues, preference for consolidation or a change in their supplier base, consolidation amongstamong OEMs, as well as a decisiondecisions to outsource additional business.adjust the volume of business being outsourced. Our operating results for each quarterperiod include the impacts associated with customer disengagements or program losses, as well as new customer or program wins from competitors.or losses with new, existing or disengaging customers. Customer or program transfers between EMS competitors are part of the competitive nature of our industry. Significant quarterlyperiod to period variations can result from the timing of when new programs reachreaching full production, and when existing programs arebeing fully transferred to a competitor.competitor and programs reaching end-of-life.
The table below sets forth certain operating data expressed as a percentage of revenue for the periods indicated:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 94.9 | 94.8 | 93.1 | |||||||
Gross profit | 5.1 | 5.2 | 6.9 | |||||||
SG&A | 3.2 | 3.7 | 4.0 | |||||||
Amortization of intangible assets | 0.3 | 0.3 | 0.2 | |||||||
Other charges | 2.4 | 0.6 | 11.5 | |||||||
Interest expense, net of interest income | 0.7 | 0.6 | 0.5 | |||||||
Loss before income taxes | (1.5 | ) | — | (9.3 | ) | |||||
Income taxes expense | (0.2 | ) | (0.2 | ) | (0.1 | ) | ||||
Net loss | (1.7 | )% | (0.2 | )% | (9.4 | )% | ||||
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales | 94.8 | 93.1 | 92.9 | |||||||
Gross profit | 5.2 | 6.9 | 7.1 | |||||||
SG&A(1) | 3.4 | 3.8 | 4.0 | |||||||
Amortization of intangible assets(1) | 0.6 | 0.4 | 0.4 | |||||||
Other charges | 0.6 | 11.5 | 1.1 | |||||||
Interest expense, net of interest income | 0.6 | 0.5 | 0.6 | |||||||
Earnings (loss) before income taxes | — | (9.3 | ) | 1.0 | ||||||
Income taxes expense | (0.2 | ) | (0.1 | ) | (0.1 | ) | ||||
Net earnings (loss) | (0.2 | )% | (9.4 | )% | 0.9 | % | ||||
Revenue:
Revenue for 2009 of $6.1 billion decreased 21% from $7.7 billion for 2008. Revenue decreased in all end markets, other than the consumer market, which was relatively flat compared with 2008. The slower economic environment has continued to impact end-market demand, resulting in lower production volumes. Revenue from our telecommunications and enterprise communications markets also reflected program disengagements or program transfers back to customers or to competitors.
Revenue for 2008 of $7.7 billion decreased 5% from $8.1 billion for 2007. The decrease in revenue was due to lower volumes associated with weaker end-market demand, primarily in the servers, enterprise communications and storage end markets, which more than offset the increase in revenue primarily from customers in our consumer, telecommunications and industrial end markets. The amount of revenue reduction
for 2008 from customer disengagements, primarily in the enterprise communications end market, was approximately 5%.
Revenue for 2007 of $8.1 billion decreased 8% from $8.8 billion in 2006. Approximately 75% of our decline year-to-year was the result of program and customer disengagements, primarily in the industrial and communications markets. Further reductions, due to lower volumes primarily in the communications market, were partially offset by higher revenue from our consumer and server markets, which accounted for a 3% increase in total revenue from 2006. Revenue from our consumer and server markets increased primarily due to ramping volumes from previous program wins, new customers and stronger end market demand.
The following table shows the end markets we serve as a percentage of revenue for the periods indicated:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Consumer | 18% | 22% | 26% | |||||||
Enterprise communications | 28% | 28% | 25% | |||||||
Servers | 17% | 19% | 16% | |||||||
Telecommunications | 18% | 14% | 15% | |||||||
Storage | 10% | 10% | 10% | |||||||
Industrial, aerospace and defense | 9% | 7% | 8% |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Consumer | 19% | 23% | 29% | |||||||
Enterprise Communications | 28% | 25% | 21% | |||||||
Telecommunications | 14% | 15% | 15% | |||||||
Servers | 19% | 16% | 13% | |||||||
Storage | 10% | 10% | 12% | |||||||
Industrial, Aerospace and Defense, and Healthcare | 10% | 11% | 10% |
RevenueBeginning January 1, 2009, we included certain customer programs, such as office products, automotive and healthcare, in our industrial, aerospace and defense, and healthcare category. Previously, we included these customer programs in our consumer category. We have recalculated our prior period percentages to conform to the current period's presentation. For each of 2007 and 2008, we reclassified 3% of revenue from our consumer market increased from 2007 primarily as a resultend-market category to industrial, aerospace and defense, and healthcare. We may change the classification or grouping of new business wins from existing customers. Revenue from our enterprise communications and serversend markets declined from 2007 duein the future to lower volumes associated with weaker end-market demand. The decline in our enterprise communications revenue also reflects the impact of customer disengagements beginning in 2007. In 2007, our telecommunications market was negatively impacted by end market weakness and our industrial segment reflected the impact of customer disengagements, initiated in 2006. Revenue has increased in both ofreflect changes to how we manage these markets in 2008, reflecting primarily new customer and program wins.the dynamics of those businesses.
Our revenue and operating results vary from period to period depending on the level of businessdemand and seasonality in each of our end markets, as well as the mix and complexity of the products being manufactured, and the impact associated with program wins or losses with new, existing or disengaging customers, among other factors.
Although we have diversified our end markets over the past several years, we are dependent on a limited number of customers in the consumer, communications (comprised of enterprise communications and telecommunications) and enterprise computing (comprised of servers and storage) end markets for a substantial portion of our revenue.
The consumer market was our largest end market in 2009, representing 29% of total revenue, with over half of our consumer business generated by smartphones. Our largest customer is categorized in the consumer segment and represented 17% of total revenue in 2009. Revenue from our consumer market in 2009 was relatively flat compared to the prior year and reflected new program wins, primarily in the smartphone markets, which offset the declines from customers impacted by the slower general economic environment. Revenue from our enterprise communications market in 2009 declined from 2008 due to a combination of weaker customer end markets and our 2008 decision to disengage from programs generating unacceptable returns. All of our other end markets continued to be negatively impacted by the slower economy, although we have seen some modest improvements during the second half of 2009.
For 2009, one customer in our consumer end market individually represented more than 10% of total revenue. Research in Motion accounted for 17% of total revenue for 2009. For 2008, no customer represented more than 10% of total revenue. For 2007, two customers, Cisco Systems and Sun Microsystems, each represented more than 10% of total revenue. For 2006, two customers, Cisco Systems and IBM, each represented more than 10% of total revenue.This change also increased our customer concentration percentages below.
Whether any of our customers account for more than 10% of revenue in any period depends on various factors affecting our business with that customer or with other customers, including overall changes in demand for a customer's product, seasonality of business, new program wins program consolidations or losses, the phasing in or out of programs, changes in end-market demand, price competition and changes in our customers' supplier base or supply chain strategies.
The following table shows our customer concentration as a percentage of total revenue for the periods indicated:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Top 10 customers | 61% | 61% | 63% |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Top 10 customers | 61% | 63% | 71% |
Our recent success in the smartphone market, driven primarily by new program wins, has increased our customer concentration as a percentage of total revenue. In general, business in the consumer segment, and in particular smartphones, is characterized by shorter product lifecycles, significant increases or decreases in program volumes based on strength in end-market demand, rapid changes in consumer preferences for these products and devices, and greater ease in shifting these products among EMS competitors. The increased exposure to this segment may make revenue more volatile and could result in increased risk to our financial results.
We are dependent upon continued revenue from our largest customers. There can be no assurance that revenue from these or any other customers will not decrease in absolute terms or as a percentage of total revenue. Any material decrease in revenue from these or other customers could have a material adverse effect
on our results of operations. RecentThe global economic conditions and uncertainty couldcontinues to adversely affect our customers and has negatively impacted our financial results. Recent demand increases in some end markets have resulted in
component and material shortages, as well as extended lead times. If this trend accelerates, similar shortages could impact our financial results.
We believe ourthat delivering sustainable revenue growth depends on increasing sales to existing customers for their current and future product generations.generations and expanding the range of services we provide to these customers. We also actively pursue new customers to expand our end-market penetration and diversify our end-market mix. To achieve this, we are focused on offering end-to-end product lifecycleinnovative supply chain solutions towhich include design, supply chain management, manufacturing, engineering, order fulfillment, logistics and systems integration, fulfillment and after-marketafter market services. We may also seek acquisition opportunities in order to diversify our customer base, enhance our capabilities, or add new technologies or capabilities to our offerings. In our industry, customers may cancel contracts and volume levels can be changed or delayed. Customers may also shift business to a competitor or bring programs in-house to improve their own utilization. We cannot assure the timely replacement of delayed, cancelled or reduced orders with new business. In addition, we cannot assure that any of our current customers will continue to utilize our services, whichservices. If they do not, this could have a material adverse impact on our results of operations.
Gross profit:
The following table is a breakdown of gross profit and gross margin as a percentage of revenue for the periods indicated:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Gross profit (in millions) | $ | 451.8 | $ | 422.4 | $ | 531.1 | ||||
Gross margin | 5.1 | % | 5.2 | % | 6.9 | % |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Gross profit (in millions) | $ | 422.4 | $ | 531.1 | $ | 429.8 | ||||
Gross margin | 5.2 | % | 6.9 | % | 7.1 | % |
Gross profit for 2009 decreased 19% from 2008. The decrease in gross profit was due primarily to lower volumes, partially offset by continued operational improvements and increased productivity. Gross margin as a percentage of revenue improved for 2009 compared to 2008, reflecting primarily continued operational improvements.
Gross profit for 2008 increased approximately 25%26% from 2007 primarily due to operational improvements in Mexico and Europe. In addition, we continued to benefit from cost reductions, restructuring actions, the impact of renegotiating or exiting unprofitable accounts and the streamlining and simplifying of processes throughout the company.
Gross profit for 2007 decreased 7% compared to 2006 and reflects the impact of lower volumes, underutilization of facilities in Europe and higher costs of disengaging from customers, primarily in Mexico. These factors more than offset the benefits from our restructuring actions, the exiting of non-profitable business and operational efficiencies. During the second half of 2006, we recorded net charges, primarily for increased inventory provisions at two of our facilities, which negatively impacted gross margin by 0.4% for 2006.
Multiple factors cause gross marginsmargin to fluctuate including: product volume and mix; production efficiencies; utilization of manufacturing capacity; material and labor costs;costs, including variable labor costs associated with direct manufacturing employees; manufacturing and transportation costs; start-up and ramp-up activities; new product introductions; cost structures at individual sites; and other factors, including pricing pressures from competitors andcompetitors; foreign exchange volatility. We continue to experience pricing pressure from our customers and are frequently asked to re-bid on business previously won, which could lead to margin pressure in the future. In addition,volatility; the availability of components is subject to lead timecomponents; and other constraints that could affect our revenue and margins.factors.
Selling, general and administrative expenses:
SG&A increased 3%for 2009 decreased 16% to $303.8$244.5 million (4.0% of revenue) compared to $292.0 million (3.8% of revenue) in 2008. The decrease in SG&A for 2009 was primarily a result of lower foreign exchange losses, overall cost reductions including lower IT and consulting costs, and benefits from restructuring actions. In 2009, our foreign exchange losses were $1.1 million compared to $16.4 million in 2008. These losses were significantly lower in 2009 as a result of our successful balance sheet hedging program, as well as a more stable currency environment. The increase in SG&A as a percentage of revenue for 2009 compared to 2008 primarily reflects the fixed nature of some of our SG&A expenses, as well as the lower revenue levels in 2009.
SG&A increased 7% to $292.0 million (3.8% of revenue) in 2008 compared to $295.1$271.7 million (3.7%(3.4% of revenue) in 2007. The increase in SG&A for 2008 was due primarily to foreign exchange losses, mainly in the second half of 2008 for certain foreign currencies, and higher variable compensation costs, partially offset by lower IT consulting and support costs and capital tax recoveries. The increase in SG&A as a percentage of revenue reflects higher costs, as well as the lower revenue levels in 2008. The increase in SG&A for 2008 is due primarily to foreign exchange losses, mainly in the second half of 2008, and higher variable compensation costs, partially offset by lower IT consulting and support costs and capital tax recoveries.
Each quarter, we incur unrealized foreign exchange gains or losses on the translation of foreign currency denominated asset and liability balances to U.S. dollars and these amounts are included in SG&A. The amount of these gains or losses fluctuates from quarter to quarter and is dependent on currency markets and the value of our foreign currency denominated asset or liability positions in each period. We also incur realized transactional foreign exchange gains or losses in the normal course of business.
The foreign exchange losses were $16.4 million for 2008 compared to foreign exchange gains in 2007 of $2.9 million and foreign exchange gains in 2006 of $9.1 million. During the first half of 2008, we recorded approximately $8 million in foreign exchange gains in Canada and Europe as a result of changes to the Euro, Czech koruna and Canadian dollar compared to the U.S. dollar. However, during the second half of 2008, we incurred foreign exchange losses of approximately $24 million primarily as a result of the significant weakening of the Brazilian real and the British pound sterling (GBP) compared to the U.S. dollar. Although we enter into forward exchange contracts to hedge against our cash flow exposures associated with forecasted transactions in foreign currencies, we have not historically hedged against the translation gains or losses from the foreign currency denominated assets or liabilities on our balance sheet. The majority of these foreign exchange losses resulted from the translation of foreign currency denominated assets and liabilities to U.S. dollars. Approximately one-half of these losses resulted from the precipitous devaluation of the Brazilian real compared to the U.S. dollar from September through November 2008 and a higher net asset position in the Brazilian real. The GBP weakened considerably against the U.S. dollar during the fourth quarter of 2008. Although we no longer have manufacturing operations in the United Kingdom, we maintain a pension plan for former employees. We have recorded a pension asset on our consolidated balance sheet which is denominated in GBP and translated into U.S. dollars each period. The significant weakening of the GBP resulted in foreign exchange losses in the fourth quarter of 2008.
At the end of the fourth quarter of 2008, we entered into forward exchange contracts to hedge our balance sheet exposures in certain currencies to To mitigate the foreign exchange translation volatility that impacted us in the second half of 2008. These2008, we started to enter into forward exchange contracts to partially hedge our significant balance sheet exposures in certain currencies. Since the balance sheet hedges are based on our forecasts of the future position of net assets or liabilities denominated in foreign currencies, and, therefore,they may not mitigate the full impact of any translation impacts in the future. There is no assurance that our hedging transactions will be successful.
Stock-based compensation:
We recorded the following stock-based compensation costs, included in cost of sales and SG&A, increased 3%for the periods indicated (in millions):
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Stock option awards | $ | 7.0 | $ | 6.6 | $ | 5.9 | ||||
Restricted share unit awards(a) | 6.2 | 16.8 | 33.0 | |||||||
$ | 13.2 | $ | 23.4 | $ | 38.9 | |||||
Other charges:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Restructuring | $ | 178.1 | $ | 37.3 | $ | 35.3 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Restructuring charges | $ | 37.3 | $ | 35.3 | $ | 83.1 |
Between 2001 and 2004, we announced global restructuring plans as a result of end market weakness and the shifting of manufacturing capacity from higher-cost regions in North America and Europe to lower-cost regions in Asia. During 2005 and 2006, we announced further plans to improve capacity utilization and accelerate margin improvements, primarily in our North America and Europe regions as end-market demand and profitability had not recovered to sustainable levels. In January 2008, we estimated that an additionalannounced restructuring chargecharges of between $50 million toand $75 million would be recorded throughout 2008 and 2009. AsIn light of the continued uncertain economic environment, we finalizeddetermined that further restructuring actions were required to improve our overall utilization and reduce overhead costs. In July 2009, plan in the fourth quarter of 2008, we estimated that our restructuring costs would reach the high end of our previously announced range of $50 million to $75 million. We will continue to evaluate our operations and may propose additional restructuring actions as a result. Duringcharges of between $75 million and $100 million. Combined, we expect to incur total restructuring charges of between $150 million and $175 million associated with this program. We recorded $118.4 million of restructuring charges during 2008 weand 2009. Of that amount, $83.1 million was recorded $35.3 million in restructuring charges.2009. We expect to complete the remainder of ourthese restructuring actions by the end of 2009.2010. As we complete these restructuring actions, we expect our overall utilization and operating efficiency to improve. As we finalize the detailed plans of these restructuring actions, we will recognize the related charges. The recognition of these charges requires management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to our recorded expense and the liability amounts recorded.amounts.
Our restructuring actions includedinclude consolidating facilities and reducing our workforce.workforce, primarily in the Americas, Europe and the Philippines. The majority of the employees terminated were manufacturing and plant employees. Approximately 32,900 employees have been terminated since 2001. Approximately 70% of these employee terminations were in the Americas, 25% in Europe and 5% in Asia. For leased facilities that werewe no longer used,use, the lease costs included in the restructuring costs represent future lease payments less estimated sublease recoveries. Adjustments arewere made to lease and other contractual obligations to reflect incremental cancellation fees paid for terminating certain facility leases and to reflect higherchanges in the accruals for other leases due to delays in the timing of sublease recoveries, and changes in estimated sublease rates, or changes in use, relating principally to facilities in the Americas. We expect our long-term lease and other contractual obligations to be paid out over the remaining lease terms through 2015. Our restructuring liability is recorded in accrued liabilities.
As a result of our restructuring actions to date, we have closed or downsized over 50 facilities, primarily in the Americas and Europe. All cash outlays have been, and currently foreseeable outlays are expected to be, funded from cash on hand.
We will continue to evaluate our operations from time to time and may propose future restructuring actions or divestitures as a result of changes in the marketplacemarket place and/or our exit from less profitable operations or services no longer demanded by our customers.non-strategic operations.
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Goodwill impairment | $ | — | $ | — | $ | 850.5 | ||||
Long-lived asset impairment | 1.4 | 15.1 | 8.8 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Goodwill impairment | $ | — | $ | 850.5 | $ | — | ||||
Long-lived asset impairment | 15.1 | 8.8 | 12.3 |
Goodwill impairment:
We perform our goodwill impairment test in the fourth quarter of each year. We test impairment using the two-step method, at the reporting unit level, by comparing the reporting unit's carrying amount to its fair value (step one). To the extent a reporting unit's carrying amount exceeds its fair value, we may have an impairment of goodwill. We measure impairment by comparing the implied fair value of goodwill, determined in a manner similar to a purchase price allocation, to its carrying amount (step two).
During the fourth quarter of 2008, we performed our annual goodwill impairment test. All of our goodwill iswas allocated to our Asia reporting unit. Our goodwill balance prior to the impairment charge was $850.5 million and was established primarily as a result of an acquisition in 2001.
We completed our step one analysis using a combination of valuation approaches including a market capitalization approach and a multiples approach andwhich was then validated with a discounted cash flow. The market capitalization approach usesused our publicly traded stock price to determine fair value.value which we allocated to the Asia reporting unit on a pro rata basis based on earnings. The multiples approach usesused comparable market multiples, which were based on an average of our major competitors trading multiples, to arrivedetermine fair value. Both of the fair values determined by the market approaches were adjusted upward for a control premium, an estimated amount a buyer would pay over the trading price of the company's shares to gain control of the company. We applied a 20% control premium to the fair values, which we believe is a reasonable estimate based on past transactions in the EMS industry at a fair value and theDecember 31, 2008. The discounted cash flow method usesused our three-year revenue and expense projections to determine fair value. These projections were based on site submissions and risk-adjustedinput from our customer teams during our plan cycle in the fourth quarter of 2008. Our projections were negatively impacted by customers who decreased their demand forecasts as the global economy deteriorated in the fourth quarter of 2008. Subsequent to our internal plan submissions, we decreased our future internal projections in response to the economic downturn and the overall uncertainties and lack of visibility at that time. We discounted our three-year projections using a 27% discount rates. The process of determining fair value is subjective and requires management to exercise a significant amount of judgment in determining future growth rates, discount and tax rates and other factors. The currentrate. At that time, the economic environment hasnegatively impacted our ability to forecast future demand and has in turn resulted in our use of a higher discount rates,rate, reflecting the risk and uncertainty in currentthe markets. We averaged the fair values derived from the above approaches to determine the estimated fair value of the Asia reporting unit.
The results of our step one analysis indicated potential impairment in our Asia reporting unit, which was corroborated by a combination of factors including a significant and sustained decline in our market capitalization, which iswas significantly below our book value, and the deteriorating macro environment, which has resulted in a decline in expected future demand. The process of determining fair value was subjective and
required management to exercise a significant amount of judgment in determining future growth rates, discount rates and tax rates, among other factors. We therefore performed the second step of the goodwill impairment assessment to quantify the amount of impairment. We engaged an independent third-party consultant to assist with our step two analysis. This involved calculating the implied fair value of goodwill, determined in a manner similar to a purchase price allocation, and comparing the residual amount to the carrying amount of goodwill. Based on our analysis incorporating the declining market capitalization in 2008, as well as the significant end marketend-market deterioration and economic uncertainties impacting expected future demand at that time, we concluded that the entire goodwill balance as of December 31, 2008 of $850.5 million was impaired. The goodwill impairment charge iswas non-cash in nature and doesdid not affect our liquidity, cash flows from operating activities or our compliance with debt covenants. The goodwill impairment charge is not deductible for income tax purposes and, therefore, we have not recorded a corresponding tax benefit in 2008.
During the fourth quartersquarter of 2006 and 2007, we performed our annual goodwill assessment and determined there was no impairment. At December 31, 2009, our goodwill balance was zero.
Long-lived asset impairment:
During the fourth quarter of each year, we conduct our annual recoverability review of long-lived assets. Impairment wasis measured as the excess of the carrying amount over the fair value of the assets determined on ausing discounted cash flow basis.flows and estimated market values, where available. We recorded an impairment charge of $8.8$12.3 million in 2008 (20072009 (2008 — $8.8 million; 2007 — $15.1 million; 2006 — $1.4 million).
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Gain on repurchase of Senior Subordinated Notes | $ | — | $ | (7.6 | ) | $ | (19.5 | ) | |||
Write-down of embedded prepayment option | — | — | 16.7 | ||||||||
$ | — | $ | (7.6 | ) | $ | (2.8 | ) | ||||
In March 2009, we paid $149.7 million, excluding accrued interest, to repurchase 2011 Notes with a principal amount of $150.0 million and recognized a gain of $9.1 million. In November 2009, we paid $346.1 million, excluding accrued interest, to repurchase 2011 Notes with a principal amount of $339.4 million and recognized a gain of $10.4 million. The gains on the repurchases were measured based on the carrying value of the repurchased portion of the 2011 Notes on the dates of repurchase. We also terminated our interest rate swap agreements related to the 2011 Notes in February 2009 and received $14.7 million in cash, excluding accrued interest, as settlement of these agreements. In connection with the termination of the swap agreements, we discontinued fair value hedge accounting on the 2011 Notes in the first quarter of 2009 and recorded a write-down in the carrying value of the embedded prepayment option on the 2011 Notes.
In January 2010, we announced our intention to redeem our outstanding 2013 Notes at a price of 103.813% of the principal amount of $223.1 million. We expect to complete the redemption in the first quarter of 2010. Based on the carrying value at December 31, 2009 of $222.8 million and the redemption price, we expect to incur a loss of approximately $9 million which we will record in other charges.
Interest expense on long-term debt and other interest income/expense:
The following table is a breakdown of interest expense or income for the periods indicated (in millions):
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Interest costs on credit facilities and Senior Subordinated Notes (Notes) | $ | 67.1 | $ | 67.0 | $ | 56.8 | ||||
Mark-to-market loss (gain) | — | (0.6 | ) | 1.0 | ||||||
Interest expense on long-term debt | $ | 67.1 | $ | 66.4 | $ | 57.8 | ||||
Interest income, net of other interest expense | $ | 4.5 | $ | 15.2 | $ | 15.3 | ||||
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Interest costs on credit facilities and Senior Subordinated Notes (Notes)(i) | $ | 67.0 | $ | 56.8 | $ | 44.3 | ||||
Mark-to-market adjustment and amortization of basis adjustment(ii) | (0.6 | ) | 1.0 | (9.0 | ) | |||||
Interest expense on long-term debt | $ | 66.4 | $ | 57.8 | $ | 35.3 | ||||
Interest income, net of other interest expense(iii) | $ | 15.2 | $ | 15.3 | $ | 0.3 | ||||
In November 2009, we paid $346.1 million to redeem the outstanding 2011 Notes. We expect the redemption will result in an estimated benefit to our net interest rate onexpense of approximately $14 million in 2010. Assuming we complete the Senior Subordinatedredemption of our 2013 Notes due 2013 (2013 Notes) is fixed at 7.625%.
In addition,in the first quarter of 2010, we have marked-to-marketexpect to further reduce our interest expense by approximately $4 million per quarter after the bifurcatedredemption.
Although The majority of the 2009 balance arises from the amortization of the historical fair value adjustment on the 2011 Notes, from the date of discontinuing fair value hedge accounting to extinguishment, which reduced interest incomeexpense on long-term debt. We also applied fair value hedge accounting to our interest rate swaps and our hedged debt obligation (2011 Notes) until February 2009. The change in fair values each period were recorded in interest expense on long-term debt, except for 2008 was relatively flat comparedthe write-down of the embedded prepayment option due to 2007, the interesthedge de-designation or planned debt redemption which we recorded in other charges.
Income taxes:
Income tax expense for 20082009 was $5.4 million on earnings before tax of $60.4 million compared to an income tax expense of $5.0 million for 2008 on losses before tax of $715.5 million compared to anand income tax expense of $20.8 million in 2007 on earnings before tax of $7.1 million and income tax expense of $14.5 million in 2006 on a loss before tax of $136.1 million. Current income taxes for 20082009 consisted primarily of the tax expense in jurisdictions with current taxes payable and additional tax expensereserves related to aongoing Canadian tax audit.audits. Deferred income taxes for 2009 were comprised primarily of the deferred tax recoveries for losses and future deductible temporary differences in Canada and for reversals of certain valuation allowances previously recorded on deferred income tax assets. Current income taxes for 2008 consisted primarily of tax expense in jurisdictions with current taxes payable and additional tax reserves related to ongoing Canadian tax audits. Deferred income taxes for 2008 were comprised primarily of the deferred tax recoveries for losses and future deductible temporary differences in Canada and certain foreign taxable jurisdictions. Current income taxes for 2007 consisted of tax expense in jurisdictions with current taxes payable and additional tax expense related to a Canadian tax audit, offset by the current tax recovery resulting from the resolution of a U.S. tax audit. Deferred income taxes for 2007 were comprised primarily of the deferred tax expense on unrealized foreign exchange gains in Canada, offset partially by a deferred tax recovery related to restructured European operations. In December 2007, we reorganized our inter-company loans to reduce our future exposure in Canada to taxable foreign exchange fluctuations and our exposure on our future deferred income taxes. Current income taxes for 2006 consisted primarily of the tax expense in certain jurisdictions with current taxes payable and a recovery related to income tax audits in the United States. In addition, net deferred income tax liabilities in 2006 reflected net unrealized foreign exchange gains.
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 quarter to quarter due to the mix and volume of business in lower tax jurisdictions within Europe and Asia, tax holidays and tax incentives that have been negotiated with the respective tax authorities (which expire between 20092010 and 2015), restructuring charges, operating losses, certain tax exposures, the time period in which losses may be used under tax laws and the valuation allowances recorded on deferred income tax assets. We expect to continue to comply with the conditions governing the tax holidays.
In certain jurisdictions, primarily in the Americas and Europe, we currently have significant net operating losses and other deductible temporary differences, which will reduce taxable income in these jurisdictions in future periods. We have determined that a valuation allowance of $591.9$582.6 million is required in respect of our deferred income tax assets as at December 31, 20082009 (December 31, 20072008 — $588.8$591.9 million).
As at December 31, 2008,2009, the net deferred income tax liability balance was $31.2$8.4 million (December 31, 20072008 — $57.3$31.2 million).
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 and reviews by local tax authorities of historical information 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 a significant degree of judgment. Any such increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.
Certain of our subsidiaries provide financing, products and services, to, and may from time to time undertake certain significant transactions with other subsidiaries in different jurisdictions. In general, inter-company transactions, and in particular inter-company financing and transfer pricing policies, are subjected to close review by tax authorities. 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 by local tax authorities. Tax authorities could challenge the validity of our inter-company transactions, including financing and transfer pricing policies which generally involve subjective areas of taxation and a significant degree of judgment. If any of these tax authorities are successful in challenging our inter-company transactions, our income tax expense may be adversely affected and we could also be subject to interest and penalty charges.
In connection with ongoing tax audits in Canada, tax authorities have taken the position that income reported by one of our Canadian subsidiaries in 2001 and 2002through 2003 should have been materially higher as a result of certain inter-company transactions. The successful pursuit of that assertion could result in that subsidiary owing significant amounts of tax, interest and possibly penalties. We believe we have substantial defenses to the asserted position and have adequately accrued for any probable potential adverse tax impact. However, there can be no assurance as to the final resolution of this claim and any resulting proceedings, and if this claim and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material.
In connection with a tax auditsaudit in Brazil, in the United States,fourth quarter of 2009, tax authorities took the position that income reported by our Brazilian subsidiary in 2004 should have been materially higher as a result of certain inter-company transactions. We believe we have substantial defenses to the asserted that our U.S. subsidiaries owed significantposition. However, there can be no assurance as to the final resolution of this matter and, if it is determined adversely to us, the amounts of tax,we may be required to pay for taxes, interest and penalties arising from inter-company transactions.could be material.
We have and will continue to recognize the future benefit of certain Brazilian tax losses on the basis that these tax losses can and will be fully utilized in the fiscal period ending on the date of dissolution of our Brazilian subsidiary. We regularly review Brazilian laws and assess the likelihood of the realization of the future benefit of the tax losses. A significant portion ofchange to the benefit realizable on these asserted deficiencies were resolved in our favour in 2006 which resultedBrazilian losses could result in a reductionsubstantial increase to our current incomenet future tax liabilities in 2006. In the third quarter of 2007, we resolved the remaining deficiencies in our favour which resulted in a reduction to current income tax liabilities for 2007. The tax audit resolution also resulted in a small reduction in the amount of our U.S. tax loss carryforwards for years 1998 to 2004.liabilities.
Recent acquisitions and divestitures:Acquisitions:
In March 2006, we acquired certain assets located in the Philippines which strengthened our relationship with an existing customer. We may, at any time, be engaged in ongoing discussions with respect to possible acquisitions that we expect would enhance our global manufacturing network, expand our service offerings, increase our penetration in various industries, and establish strategic relationships with new or existing customers.customers and/or enhance our global manufacturing network. In order to enhance our competitiveness and expand our revenue base or the services we offer our customers, we may also look to grow our services or capabilities beyond our traditional areas of EMS manufacturing expertise. There can be no assurance that any of these discussions will result in a definitive purchase agreement and, if they do, what the terms or timing of any such agreement would be. There can also be no assurance that an acquisition can be successfully integrated or will generate the returns that we expected.
In January 2010, we completed the acquisition of Invec Solutions Limited, which is based in Scotland. Invec provides warranty management, repair and parts management services to companies in the information technology and consumer electronics markets. The acquisition will enhance our global after-market services by integrating Invec's proprietary reverse logistics software throughout our network. The cash purchase price was $6.4 million.
In June 2006, we sold our plastics business which we operated primarily in Asia. In September 2006, we sold one of our European facilities to a third party as part of our restructuring program. We will continue to evaluate our operations and may propose future divestitures as a result of changes in the market place, and/or our exit from less profitable or non-strategic operations.
Liquidity and Capital Resources
Liquidity
The following table shows key liquidity metrics for the periods indicated (in millions):
| As at December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Cash and cash equivalents | $ | 803.7 | $ | 1,116.7 | $ | 1,201.0 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Cash provided by operations | $ | 39.2 | $ | 351.4 | $ | 208.2 | ||||
Cash used in investing activities | (207.9 | ) | (36.9 | ) | (80.8 | ) | ||||
Cash provided by (used in) financing activities | 3.4 | (1.5 | ) | (43.1 | ) |
| As at December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Cash and cash equivalents | $ | 1,116.7 | $ | 1,201.0 | $ | 937.7 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Cash provided by operations | $ | 351.4 | $ | 208.2 | $ | 293.5 | ||||
Cash used in investing activities | (36.9 | ) | (80.8 | ) | (66.3 | ) | ||||
Cash used in financing activities | (1.5 | ) | (43.1 | ) | (490.5 | ) |
Cash provided by operations:
We generated $293.5 million in cash from operations during 2009 primarily from earnings after adding back non-cash charges and lower working capital requirements. The improvements in A/R and inventory were offset partially by decreases in A/P. The decrease in our A/R balance from the prior year reflects lower revenue and continued strong cash collections, driven in part by changes in customer payment terms. We had not sold any A/R as at December 31, 2008 or December 31, 2009 under our A/R sales program. The decrease in inventory from the prior year reflects improved inventory management and lower volumes.
We generated $208.2 million in cash from operations in 2008 primarily from earnings after adding back non-cash charges, partially offset by higher working capital requirements. Higher working capital was driven primarily by an increase in A/R, partially offset by higher A/P. The year-over-year increase in A/R reflects a lower amount ofthat there were no A/R sold under our A/R sales program as at December 31, 2008 (December 31, 2007 — $225.0 million sold) partially offset by cash collections. Although we did not sell any A/R at the end of 2008, we maintained a cash balance of $1.2 billion at December 31, 2008.
In 2007, we generated $351.4 million in cash primarily from earnings after adding back non-cash charges and lower working capital requirements. Lower working capital was driven primarily by lower inventory levels, partially offset by lower A/P balances. The decrease in inventory reflects improved inventory management. The decrease in A/P is due primarily to the timing of payments. For 2006, we generated $39.2 million in cash from earnings after adding back non-cash charges, partially offset by higher working capital requirements. The higher working capital requirements in 2006 were to support inventory for new customers, partially offset by the timing of payments.
This represents our fourth consecutive year in which we have generated positive cash from operations.
Cash used in investing activities:
During 2008, ourOur capital expenditures were incurred primarily to expandenhance our supply chain and manufacturing capabilities in China, Mexicovarious geographies and Europe to support new customer programs. During 2007, the cash used to purchase equipment and expand facilities was partially offset by cash proceeds from the sale of facilities and assets. During 2006, we invested in capital expenditures primarily to support growth in our lower-cost geographies.
Our capital spending for 20082009 totaled $77.3 million, representing approximately 1.2%1.3% of revenue for the year. We anticipate similar spending levels for 2009.2010.
Cash used in financing activities:
In December 2008,During 2009, we repurchased Notes for an aggregate purchase price ofpaid $495.8 million (2008 — $30.4 million) in cash to repurchase our outstanding 2011 Notes. We terminated our interest rate swap agreements in February 2009 and received $14.7 million in cash. We alsocash as settlement of these agreements. In 2009, we used $8.4 million (2008 — $11.9 million (2007million; 2007 — $3.2 million) in cash to purchase subordinate voting shares in the open market. We reissuereissued these shares to employees as their share unit awards vest.
Table In the first quarter of Contents2010, we paid approximately $29 million in cash to settle the share unit awards that vested in February 2010.
Cash requirements:
We believe that cash flow from operating activities, together with cash on hand and borrowings available under our credit facility and bank overdraft facilities, will be sufficient to fund currently anticipated working capital, planned restructuring and capital spending, and debt service requirements for the next 12 months, including our planned redemption of the 2013 Notes. Historically, we have funded our operations from the proceeds of public offerings of equity and debt instruments, cash generated from operations, bank debt, sales of A/R and equipment lease financings. We expect to continue to enter into debt and equity financings, sales of A/R and lease transactions to fund anticipated growth and acquisitions. The issuance and timing of additional
equity or convertible debt securities could dilute current shareholders' positions. Further, we may issue debt securities that have rights and privileges senior to equity holders, and the terms of this debt could impose restrictions on our operations. The pricing of such debt securities is subject to market conditions at the time of issuance. At December 31, 2009, we had significant cash balances in excess of our debt obligations.
As at December 31, 2008,2009, we have contractual obligations that require future payments as follows (in millions):
| Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Long-term debt(i) | $ | 713.5 | $ | 1.0 | $ | — | $ | 489.4 | $ | — | $ | 223.1 | $ | — | ||||||||
Interest on long-term debt(ii) | 172.9 | 55.6 | 55.6 | 36.2 | 17.0 | 8.5 | — | |||||||||||||||
Operating leases | 151.5 | 47.2 | 33.4 | 22.0 | 8.8 | 7.7 | 32.4 | |||||||||||||||
Pension plan contributions (see (a) below) | 31.9 | 31.9 | — | — | — | — | — | |||||||||||||||
Non-pension post-employment plan payments | 36.7 | 3.1 | 3.0 | 3.2 | 3.3 | 3.5 | 20.6 |
| Total(i) | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 Notes(ii) | $ | 223.1 | $ | 223.1 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Interest on long-term debt(iii) | 2.8 | 2.8 | — | — | — | — | — | |||||||||||||||
Operating leases | 117.8 | 39.5 | 24.3 | 11.7 | 9.2 | 6.9 | 26.2 | |||||||||||||||
Restricted share unit awards(iv) | 29.0 | 29.0 | — | — | — | — | — | |||||||||||||||
Pension plan contributions(v) | 32.6 | 32.6 | — | — | — | — | — | |||||||||||||||
Non-pension post-employment plan payments | 43.2 | 3.8 | 3.8 | 3.9 | 4.0 | 4.1 | 23.6 |
amount outstanding. In June 2004,January 2010, we issued Notes that are due July 2011 with an aggregate principal amount of $500.0 million and a fixed interest rate of 7.875%. In June 2005, we issued Notes that are due July 2013 with an aggregate principal amount of $250.0 million and a fixed interest rate of 7.625%. We entered into agreements to swap the fixed interest on the 2011 Notes with a variable interest rate based on LIBOR plus a margin. Interest on the Notes is payable in January and July of each year until maturity. These Notes are unsecured and are subordinated in right of payment to allannounced our senior debt. We are entitled to redeem the 2011 Notes and will be entitledintention to redeem the 2013 Notes in the first quarter of 2010.
In December 2008, we repurchased a portion of our Notes. We paid $30.4 million to repurchase Notes with a principal amount at maturity of $37.5 million. We may, from time to time, repurchase additional Notespurchase subordinate voting shares in the open market at our discretion. See "Capital Resources — Subsequent Event."
(a) to settle share unit awards vesting in future periods. We have excluded the estimated cash outlay for these future settlements from the above table due to difficulties in estimating future share prices and the number of awards that will ultimately vest.
The following outlines our pension contributions and pension expense for the periods indicated (in millions):
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
| | | (estimated) | |||||||
Contributions: | ||||||||||
Defined benefit plans | $ | 21.0 | $ | 22.0 | $ | 20.1 | ||||
Defined contribution plans | 11.5 | 11.8 | 11.8 | |||||||
$ | 32.5 | $ | 33.8 | $ | 31.9 | |||||
Expense: | ||||||||||
Defined benefit plans | $ | 10.0 | $ | 6.2 | $ | 10.2 | ||||
Defined contribution plans | 11.5 | 11.8 | 11.8 | |||||||
$ | 21.5 | $ | 18.0 | $ | 22.0 | |||||
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | |||||||
| | | (estimated) | |||||||
Contributions: | ||||||||||
Defined benefit plans | $ | 22.0 | $ | 22.3 | $ | 21.5 | ||||
Defined contribution plans | 11.8 | 10.7 | 11.1 | |||||||
$ | 33.8 | $ | 33.0 | $ | 32.6 | |||||
Expense: | ||||||||||
Defined benefit plans | $ | 6.2 | $ | 12.9 | $ | 8.3 | ||||
Defined contribution plans | 11.8 | 10.7 | 11.1 | |||||||
$ | 18.0 | $ | 23.6 | $ | 19.4 | |||||
We maintain multiple defined benefit plans. Approximately one-half of ourOur contribution amount for 2009 is pre-determined for the next two years based on recent actuarial valuations, and the other half is determined annually based on actuarial valuations. Accordingly, our minimum contribution requirements for future years cannot be quantified at this time. The currentglobal economic crisisconditions have impacted our asset returns, primarily in the second half of 2008. Continued volatility in the capital markets will impact future asset values in our pension plans. A significant deterioration in the asset values or asset returns could lead to higher than expected future contributions. Risks associated with actuarial valuation measurement uncertainty 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 results of operations, cash flows or liquidity.
As at December 31, 2008,2009, we have commitments that expire as follows (in millions):
| Total | 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Foreign currency contracts | $ | 587.1 | $ | 570.4 | $ | 16.7 | $ | — | $ | — | $ | — | $ | — | ||||||||
Letters of credit, letters of guarantee and surety and performance bonds | 55.4 | 46.2 | 5.6 | — | — | — | 3.6 | |||||||||||||||
Capital expenditures | 12.0 | 12.0 | — | — | — | — | — |
The contractual obligations chart above does not include
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Foreign currency contracts(i) | $ | 489.2 | $ | 473.2 | $ | 16.0 | $ | — | $ | — | $ | — | $ | — | ||||||||
Letters of credit, letters of guarantee and surety bonds | 50.2 | 50.2 | — | — | — | — | — | |||||||||||||||
Capital expenditures(ii) | 15.0 | 15.0 | — | — | — | — | — | |||||||||||||||
Acquisitions(iii) | 6.4 | 6.4 | — | — | — | — | — |
Cash outlays for our contractual obligations and commitments identified above are expected to be funded by cash on hand. We also have outstanding purchase orders with certain suppliers for the purchase of inventory. These purchase orders are generally short-term. Orders for standard items can typically be cancelled with little or no financial penalty. Our policy regarding non-standard or customized orders dictates that such items are generally ordered specifically for customers who have contractually assumed liability for the inventory. In addition, a substantial portion of the standard items covered by our purchase orders were procured for specific customers based on their purchase orders or forecasts under which the customers have contractually assumed liability for such material. Accordingly, the amount of liability from purchase obligations under these purchase orders cannot be quantified with a reasonable degree of accuracy.
As of December 31, 2008, we had committed approximately $12 million in capital expenditures, principally for machinery and equipment and facilities in our lower-cost geographies to support new customer programs. Based on our current operating plans, we anticipate capital spending for 2009 to be approximately 1% of revenue, and expect to fund this spending from cash on hand. In addition, we regularly review acquisition opportunities and, as a result, could require additional debt or equity financing to fund these transactions.
We have provided routine indemnifications, the terms of which range in duration and often are not explicitly defined. These may include indemnifications against adverse impacts due to changes in tax laws, third-party intellectual property infringement claims and patent infringements by third parties.third-party claims for property damage from negligence. We have also provided indemnifications in connection with the sale of certain businesses and real property. The maximum potential liability from these indemnifications cannot reasonably be estimated. In some cases, we have recourse against other parties to mitigate our risk of loss from these indemnifications. Historically, we have not made significant payments relating to these types of indemnifications.
Litigation and contingencies:
In 2007, securities class action lawsuits were commenced against the Company and our former Chief Executive and Chief Financial Officers in the United States District Court of the Southern District of New York by certain individuals, on behalf of themselves and other unnamed purchasers of our stock, claiming that they were purchasers of our stock during the period January 27, 2005 through January 30, 2007. The plaintiffs allege violations of United States federal securities laws and seek unspecified damages. They allege that during the purported class period we made statements concerning our actual and anticipated future financial results that failed to disclose certain purportedly material adverse information with respect to demand and inventory in our Mexican operations and our information technology and communications divisions. In an amended complaint, the plaintiffs have added one of our directors and Onex Corporation as defendants. All defendants have filed motions to dismiss the amended complaint. These motions are pending. A parallel class proceeding has also been issued against the Company and our former Chief Executive and Chief Financial Officers in the Ontario
Superior Court of Justice, but neither leave nor certification of the action has been granted by that court. We believe that the allegations in these claims are without merit and we intend to defend against them vigorously. However, there can be no assurance that the outcome of the litigation will be favorable to us or that it will not
have a material adverse impact on our financial position or liquidity. In addition, we may incur substantial litigation expenses in defending these claims. We have liability insurance coverage that may cover some of our litigation expenses, potential judgments or settlement costs.
We received a recovery of damages related to certain purchases we made in prior periods as a result of the settlement of a class action lawsuit. We recorded the recovery, net of estimated reserves, in other charges of $23.7 million during the fourth quarter of 2009. Future adjustments to our estimated reserves, if any, will be recorded through other charges.
Capital Resources
Our main objectives in managing our capital resources are to ensure liquidity and to have funds available for working capital or other investments required to grow our business. Our capital resources consist of cash, short-term investments, access to credit facilities and bank overdraft facilities, senior subordinated notes and share capital.
At December 31, 2008,2009, we had total cash of $1.2 billion,$937.7 million, comprised of cash (approximately 35%28%) and short-term investmentscash equivalents (approximately 65%72%). Our current portfolio consists of certificates of deposits and certain money market funds that are secured exclusively by U.S. government securities. Our short-term investments have maturities of less than three months. The majority of our cash and short-term investmentscash equivalents are held with financial institutions each of which had at December 31, 20082009 a Standard and Poor's rating of A-2A-1 or above.
We manage our capitalization levels and make adjustments, as available, for changes in economic conditions. We haveAt December 31, 2009, we had full access to a $300.0$200.0 million credit facility, access to bank overdraft facilities, and we cancould sell up to $250.0 million in A/R, on a committed basis, under an accounts receivableA/R sales program to provide short-term liquidity. Our credit facility has restrictive covenants relating to debt incurrence, and the sale of assets.assets and a change of control. The facility also contains financial covenants that may limit the amount of debt that can be incurred under the facility. We closely monitor our business performance to evaluate compliance with our covenants. Our 2013 Notes, which we intend to redeem in the first quarter of 2010, also have restrictions on financing activities. During 2009, we redeemed our outstanding 2011 Notes. We continue to monitor and review the most cost-effective methods for raising capital, taking into account these restrictions and covenants. Our access to capital markets may be restricted at this time becauseAs of the global economic crisis and capital market weakness.December 31, 2009, we were in compliance with these covenants.
There were no significant changes to our capital structure during 2008. We repurchased 5% of our Notes in December 2008; future repurchases will depend on the price of the Notes in the open market. We have not distributed, nor do we have any current plan to distribute, any dividends to our shareholders.shareholders nor do we have any current plans to repurchase shares through a stock buy-back plan. We have purchased and expect to, from time to time, purchase shares in the open market for the settlement of share unit awards to employees under our long-term incentive plans.
Our strategy on capital risk management has not changed since 2007.2008. Other than the restrictive covenants associated with our debt obligations, noted above, we are not subject to any contractual or regulatorily imposed capital requirements. While some of our international operations are subject to government restrictions on the flow of capital into and out of their jurisdictions, these restrictions have not had a material impact on our operations.
We have access to aOur revolving credit facility for $300.0 million.million expired in April 2009. In April 2009, we renewed this facility on generally similar terms and conditions, and reduced the size of the facility to $200.0 million, with a maturity of April 2011. We have pledged certain assets, including the shares of certain North American subsidiaries, as security.security for the facility. The facility includes a $25.0 million swing-line facility that provides for short-term borrowings up to a maximum of seven days. Borrowings under the facility bear interest at LIBOR plus a margin, except that borrowings under the swing-line facility bear interest at a base rate plus a margin. There were no borrowings outstandingBorrowings bear a higher interest rate under this facility at December 31, 2008. Commitment fees for 2008 were $1.9 million.than under the prior facility.
The facility has restrictive covenants relating to debt incurrence, andthe sale of assets, and a change of control. We are also containsrequired to comply with financial covenants that require usrelated to maintain certain financial ratios.indebtedness, interest coverage and liquidity. We were in compliance with all covenants at December 31, 2008. This2009. There were no borrowings outstanding under our facility expiresat December 31, 2009. Commitment fees for 2009 were $2.1 million. We paid $2.3 million in Aprilupfront commitment fees and closing costs in the second quarter of 2009. GivenThese costs are amortized to interest expense on long-term debt over the current stateterm of the credit markets and our strong liquidity position, we are assessing whether this facility is necessary in our capital structure. There is no assurance that we and our lenders will agree on mutually acceptable terms if we seek a renewal.renewed facility.
We have additional uncommitted bank overdraft facilities available for operating requirements which total $68.0$65.0 million at December 31, 2008.2009. There were no borrowings outstanding under these facilities at December 31, 2008.2009.
In November 2005,2009, we entered intorenewed an agreement to sell certain accounts receivableA/R to a third-party bank (which had at December 31, 20082009 a Standard and Poor's rating of A+), and other qualified purchasers. We can
sell up to $250.0 million in accounts receivable,A/R, on a committed basis, to provide short-term liquidity. The program also provides for the sale of certain accounts receivableA/R in excess of the committed amount at the discretion of the purchasers. WeAt December 31, 2009, we had not sold approximately $75 million in accounts receivable as of September 30,any A/R under the program (December 31, 2008 and we reduced this to— zero dollars sold atsold; December 31, 2008 (December 31, 2007 — $225 million)$225.0 million sold). Based on the level of our cash balances, we had steadily reduced the amount of the accounts receivable sold under this arrangement. This program remains available to us until November 2009.
We believe that cash flow from operating activities, together with cash on hand and borrowings available under our credit facilities, will be sufficient to fund currently anticipated working capital, planned restructuring and capital spending, and debt service requirements for the next 12 months. Historically, we have funded our operations from the proceeds of public offerings of equity and debt securities, cash generated from operations, bank debt, sales of accounts receivable and equipment lease financings. We expect to continue to enter into debt and equity financings, sales of accounts receivable and lease transactions to fund anticipated growth and acquisitions. The issuance and timing of additional equity or convertible debt securities could dilute current shareholders' positions. Further, we may issue debt securities that have rights and privileges senior to equity holders, and the terms of this debt could impose restrictions on our operations. With the current global economic crisis and capital market weakness, such financings and other transactions may not be available on terms acceptable to us or at all. At December 31, 2008, we had cash balances in excess of our debt obligations.2010.
Both Standard and Poor's and Moody's Investors Service provide ratings on our Notes and a corporate rating on Celestica. These credit ratings reflect the agencies' current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations or a specific financial program. The agencies take many factors into consideration when providing a rating including, but not limited to, an industry's operating environment, financial performance of the debtor, creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and the currency in which the obligation is denominated. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the rating organization. A rating does not comment as to market price or suitability for a particular investor.
At February 20,On September 29, 2009, our Standard and Poor's upgraded our corporate rating isto BB- from B+ and our Notes rating isto BB- from B, with a stable outlook. On February 25, 2010, following the announcement of our fourth quarter results and our intention to redeem our outstanding 2013 Notes, Standard and Poor's upgraded our corporate and Notes ratings to BB from BB-, with a stable outlook. The Notes rating, which is 15th13th out of 2022 on the Standard and Poor's rating scale, means that the obligor currently has the capacity to meet its financial commitment on the obligation, but adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. At February 20,On November 6, 2009, our Moody's Investor Service upgraded our corporate rating isto Ba3 from B1 and our Notes rating isto B2 from B3 with a stable outlook. The Notes rating is 16th15th out of 21 on the Moody's Investor Service rating scale. Obligations rated B3B2 are considered to be in the lower-rangemid range of obligations that are judged to be speculative and subject to high credit risk. A reduction in our credit ratings could adversely impact our future cost of borrowing.
Subsequent event:
On February 26, At December 31, 2009, we announced ahad significant cash tender offer to purchase up to $150 million aggregate principal amount of the 2011 Notes at a price of up to one thousand and ten dollars for each one thousand dollars principal amount. This offer to purchase will expire on March 26, 2009. We also terminated our interest rate swap agreementsbalances in the amount of $500 million related to the 2011 Notes. In connection with the termination of the swap agreements, we discontinued fair value hedge accounting on the 2011 Notes and will amortize the prior fair value adjustment on the 2011 Notes as a reduction to interest expense on long-term debt, over the remaining term of the 2011 Notes, using the effective interest rate method. As a result of discontinuing fair value hedge accounting, we will write down the carrying valueexcess of our embedded prepayment options on the 2011 Notes to reflect the change in the fair value after hedge de-designation. We will record the gain or loss on the purchase of the 2011 Notes, as well as the write-down of the embedded prepayment options, through other charges during the first quarter of 2009.debt obligations.
Financial instruments:
Our short-term investment objectives are to preserve principal and to maximize yields without significantly increasing risk, while at the same time not materially restricting our short-term access to cash. To achieve these
objectives, we maintain a portfolio consisting of a variety of securities, including certificates of deposit and money market funds that are secured exclusively by U.S. government securities.
The majority of our cash balances are held in U.S. dollars. We price the majority of our products in U.S. dollars and the majority of our material costs are also denominated in U.S. dollars. However, a significant portion of our non-material costs (including payroll, pensions, facility costs and costs of locally sourced supplies and inventory) 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.
We have a foreign exchange risk management policy in place to control our hedging activities and we do not enter into speculative trades. Our current hedging activity is designed to reduce the variability of our foreign currency costs where we have local manufacturing operations and generally involves entering into contracts to trade U.S. dollars for various currencies at future dates. We traditionally enter into forward exchange contracts to hedge against our cash flows in foreign currencies. At the end of the fourth quarter of 2008,To mitigate foreign exchange translation volatility, we enteredenter into forward exchange contracts to partially hedge our significant balance sheet exposures in certain currencies in order to mitigate foreign exchange translation volatility.currencies. These balance sheet hedges are based on our forecasts of the future position of net assets or liabilities denominated in foreign currencies and, therefore, may not mitigate the full impact of any translation impacts in the future. There is no assurance that our hedging transactions will be successful.
At December 31, 2008,2009, we had forward exchange contracts to trade U.S. dollars in exchange for the following currencies (in millions):
Currency | Amount of U.S. dollars | Weighted average exchange rate of U.S. dollars | Maximum period in months | Fair value gain/(loss) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Canadian dollar | $ | 230.3 | $ | 0.91 | 15 | $ | (22.0 | ) | |||||
Mexican peso | 88.6 | 0.08 | 12 | (9.2 | ) | ||||||||
Thai baht | 77.7 | 0.03 | 12 | (2.6 | ) | ||||||||
Malaysian ringgit | 60.6 | 0.30 | 12 | (2.7 | ) | ||||||||
British pound sterling | 48.1 | 1.49 | 4 | 1.7 | |||||||||
Singapore dollar | 31.0 | 0.71 | 12 | (0.7 | ) | ||||||||
Czech koruna | 26.7 | 0.06 | 7 | (3.8 | ) | ||||||||
Euro | 19.4 | 1.45 | 12 | 0.4 | |||||||||
Brazilian real | 4.7 | 0.41 | 2 | — | |||||||||
Total | $ | 587.1 | $ | (38.9 | ) | ||||||||
Currency | Amount of U.S. dollars | Weighted average exchange rate of U.S. dollars | Maximum period in months | Fair value gain/(loss) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Canadian dollar | $ | 206.5 | $ | 0.92 | 15 | $ | 7.7 | ||||||
British pound sterling | 89.5 | 1.60 | 4 | (0.1 | ) | ||||||||
Thai baht | 50.1 | 0.03 | 12 | 0.2 | |||||||||
Malaysian ringgit | 47.8 | 0.29 | 12 | 0.2 | |||||||||
Mexican peso | 37.1 | 0.08 | 12 | 0.1 | |||||||||
Singapore dollar | 18.9 | 0.70 | 12 | 0.3 | |||||||||
Euro | 13.3 | 1.45 | 3 | — | |||||||||
Romanian lei | 13.1 | 0.33 | 12 | (0.3 | ) | ||||||||
Czech koruna | 12.9 | 0.05 | 6 | (0.1 | ) | ||||||||
Total | $ | 489.2 | $ | 8.0 | |||||||||
Our contracts generally extend for periods of up to 15 months and expire by March 2010. The counterparties to these contracts are financial institutions each of which had at December 31, 2008 a Standard and Poor's rating of A or above.2011. The fair value of these contracts at December 31, 20082009 was a net unrealized gain of $8.0 million (December 31, 2008 — net unrealized loss of $38.9 million (December 31, 2007 — net unrealized gain of $20.0 million). During the first half of 2008, we settled most of the foreign currency forwards that had foreign currency gains at December 31, 2007. The unrealized loss on our forward exchange contracts at December 31, 2008 was due primarily togains or losses are a result of fluctuations in foreign exchange rates between the time the forward contracts were entered into and the valuation date at period end, in particular the strengthening of the U.S. dollarend. The change in the fourth quarter of 2008.
In 2004, we entered into agreements to swap the fixed rate of interest on our 2011 Notes for a variable rate based on LIBOR plus a margin. The notional amount of the agreements, which mature July 2011, is $500.0 million. The fair value of the interest rate swap agreements at 2008 was annet unrealized gain or loss of $17.3 million. The average interest rate onour foreign currency contracts during 2009 is due primarily to the 2011 Notes for 2008 was 6.5% (2007 — 8.3%; 2006 — 8.2%), after reflectingsettlement of contracts with significant losses and the interest rate swaps. The recent global economic crisis could introduce significant volatility to short-term interest rates. We are exposed to interest rate risks due to fluctuationsfavourable movement in the LIBOR rate. A one-percentage point increase inexchange rates for the LIBOR rate would increase interest expense on the 2011 Notes by approximately $5.0 million annually.currencies we hedge. We monitor our hedging program each quarter. The counterparties to these interest rate swap agreementscontracts are financial institutions, each of which had at December 31, 20082009 a Standard and Poor's rating of A or above.
Financial risks:
We are exposed to a variety of financial risks associated with financial instruments as part of our normal operations. We have exposures to the following financial risks arising from financial instruments: market risk, credit risk and liquidity risk.
Market risk: This is the risk that results in changes to market prices, such as foreign exchange rates and interest rates, which could affect our operations or the value of our financial instruments. To manage this risk, we enter into various derivative hedging transactions.
Currency risk: Due to the nature of our international operations, we are exposed to exchange rate fluctuations on our cash receipts, and cash payments and balance sheet exposures denominated in various foreign currencies. The majority of our currency risk is driven by the operational costs incurred in local currencies by our foreign subsidiaries. We currently manage this risk through our hedging program using forecasts of future cash flow hedging program.flows and our balance sheet exposures denominated in foreign currencies.
Interest rate risk: We entered intoare exposed to interest rate swaps to hedge the fair value ofrisks as we have significant cash balances invested at floating rates. Borrowings under our 2011 Notes by swapping the fixed rate ofrevolving credit facility bear interest for a variable interest rate based onat LIBOR plus a margin. We areIf we borrow under this facility, we will be exposed to interest rate risks due to fluctuations in the LIBOR rate. A one-percentage point increase in the LIBOR rate would increase interest expense by approximately $5.0 million annually. See "Capital Resources — Subsequent Event."
Credit risk: Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. To mitigate the risk of financial loss from defaults we only deal with counterparties that we believe are creditworthy. The counterparties tounder our foreign currency forward contracts, and our interest rate swap agreements arethese counterparty financial institutions each of which had at December 31, 20082009 a Standard and Poor's rating of A or above. Therefore,The financial institution with which we renewed our A/R sales program had a Standard and Poor's rating of A+ at December 31, 2009. At December 31, 2009, we had not sold any A/R under this program. We believe thisthat the credit risk of counterparty non-performance is low.
We also provide credit to our customers in the normal course of business. We mitigate this credit risk by monitoring our customers' financial condition and performing ongoing credit evaluations, as well as frequent communications with them, enabling us to monitor current changes in their business operations. We review
concentration of credit risk in establishing our allowance for doubtful accounts and we believe our allowances are adequate. As at December 31, 2008,2009, less than 1% of our gross accounts receivableA/R were over 90 days past due and our allowance for doubtful accounts balance was $13.7$7.5 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 and accrued liabilities are due within 90 days. The repaymentIn the first quarter of 2010, we intend to redeem our Senior Subordinatedoutstanding 2013 Notes, is due July 2011with a principal amount of $223.1 million, at a price of 103.813%, together with accrued and July 2013.unpaid interest to the redemption date. Management believes that cash flow from operations, together with cash on hand, cash from the sale of A/R, and borrowings available under our credit facility and bank overdraft facilities will beare sufficient to support our financial obligations. Our $300.0 million credit facility expires in April 2009. Given our current cash position and the state of the credit markets, we are currently assessing whether we will renew all or a portion of this facility. Regardless of our decision or ability to renew this facility, we believe we have sufficient resources to satisfy our financial obligations.
Related Party Transactions
We had entered into a management services agreement with our parent company (Onex) whereby Onex would provide certain strategic planning, financial and support services to us upon request. Our fee includes a
base fee and a performance incentive fee. This agreement expired December 31, 2008. In 2008, we expensed management fees of approximately $2.7 million (2007 — $1.2 million) payable to Onex.
In 2008, we entered into a manufacturing agreement with a company under the control of our parent company.controlling shareholder. During 2008,2009, we recorded revenue of $42.3 million (2008 — $19.3 millionmillion) from this related party. All transactions with this related party were in the normal course of operations.
All amounts were recorded at the exchange amount, being the amount agreed to by the parties.
Outstanding Share Data
As of February 23, 2009,22, 2010, we had 199.6211.0 million outstanding subordinate voting shares and 29.618.9 million outstanding multiple voting shares. We also had 11.110.7 million outstanding stock options, 7.65.8 million outstanding restricted share units and 7.28.1 million outstanding performance share units, each such option or unit entitling the holder to receive one subordinate voting share pursuant to the terms thereof (subject to time or performance-basedperformance based vesting).
In October 2009, we issued a short form prospectus related to the secondary offering and sale of 10.7 million subordinate voting shares of our company by Onex Corporation and certain of its affiliates (Onex), our controlling shareholder. As part of this secondary offering, Onex converted 10.7 million multiple voting shares to 10.7 million subordinate voting shares in order to effect the sale. We did not receive any proceeds from the sale.
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 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act)) designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the 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 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.
Under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the year. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to meet the requirements of Rules 13a-15 and 15d-15 under the 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.
Changes in internal controls over financial reporting:
During 2008,2009, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management's report on internal control over financial reporting:
Reference is made to our Management's report on page F-1 of our Annual Report. Our auditors, KPMG LLP, an independent registered public accounting firm, have issued an audit report on our internal controls over financial reporting for the year ended December 31, 2008.2009. This report appears on page F-2.
Unaudited Quarterly Financial Highlights (in millions, except per share amounts)
| 2007 | 2008 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||
Revenue | $ | 1,842.3 | $ | 1,937.0 | $ | 2,080.6 | $ | 2,210.5 | $ | 1,835.7 | $ | 1,876.3 | $ | 2,030.8 | $ | 1,935.4 | ||||||||||
Gross profit % | 4.3% | 4.7% | 5.8% | 6.0% | 6.3% | 6.7% | 7.4% | 7.3% | ||||||||||||||||||
Net earnings (loss) | $ | (34.3 | ) | $ | (19.2 | ) | $ | 51.5 | $ | (11.7 | ) | $ | 29.8 | $ | 39.8 | $ | 32.1 | $ | (822.2 | ) | ||||||
# of basic shares | 228.4 | 229.0 | 229.1 | 229.1 | 229.1 | 229.2 | 229.4 | 229.4 | ||||||||||||||||||
# of diluted shares | 228.4 | 229.0 | 229.1 | 229.1 | 229.2 | 230.4 | 230.3 | 229.4 | ||||||||||||||||||
Net earnings (loss): | ||||||||||||||||||||||||||
per share — basic | $ | (0.15 | ) | $ | (0.08 | ) | $ | 0.22 | $ | (0.05 | ) | $ | 0.13 | $ | 0.17 | $ | 0.14 | $ | (3.58 | ) | ||||||
per share — diluted | $ | (0.15 | ) | $ | (0.08 | ) | $ | 0.22 | $ | (0.05 | ) | $ | 0.13 | $ | 0.17 | $ | 0.14 | $ | (3.58 | ) |
| 2008 | 2009 | ||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||
Revenue | $ | 1,835.7 | $ | 1,876.3 | $ | 2,030.8 | $ | 1,935.4 | $ | 1,469.4 | $ | 1,402.2 | $ | 1,556.2 | $ | 1,664.4 | ||||||||||
Gross profit % | 6.3% | 6.7% | 7.4% | 7.3% | 7.6% | 7.3% | 6.9% | 6.6% | ||||||||||||||||||
Net earnings (loss) | $ | 29.8 | $ | 39.8 | $ | 32.1 | $ | (822.2 | ) | $ | 19.2 | $ | 5.3 | $ | (0.6 | ) | $ | 31.1 | ||||||||
# of basic shares | 229.1 | 229.2 | 229.4 | 229.4 | 229.4 | 229.4 | 229.5 | 229.7 | ||||||||||||||||||
# of diluted shares | 229.2 | 230.4 | 230.3 | 229.4 | 229.4 | 230.2 | 229.5 | 232.0 | ||||||||||||||||||
Net earnings (loss): | ||||||||||||||||||||||||||
per share — basic | $ | 0.13 | $ | 0.17 | $ | 0.14 | $ | (3.58 | ) | $ | 0.08 | $ | 0.02 | $ | 0.00 | $ | 0.14 | |||||||||
per share — diluted | $ | 0.13 | $ | 0.17 | $ | 0.14 | $ | (3.58 | ) | $ | 0.08 | $ | 0.02 | $ | 0.00 | $ | 0.13 |
Comparability quarter-to-quarter:
The quarterly data reflects the following:
Fourth quarter 20082009 compared to fourth quarter 2007:2008:
Revenue for the fourth quarter of 20082009 decreased 12%14% to $1.9$1.7 billion from $2.2$1.9 billion for the same period in 2007.2008. Lower revenue primarily from our servers,telecommunications and enterprise communications and storage segments accounted for a 16%12% decrease in total revenue from the prior period. This was offset partially by our telecommunications and industrial segmentsstorage segment which grew primarily due to new customer and program wins. Revenue from our consumer segmentmarket was relatively flat year-over-year, reflecting new business wins from existing customers which offset the decrease in revenue as there was significant ramping infor the fourth quarter of 2007.2009 compared to the same period in 2008. Gross margin increaseddecreased to 7.3%6.6% of revenue for the fourth quarter of 20082009 from 6.0%7.3% for the same period in 2007,2008, primarily due to improved operational resultsreduced revenue, changes in the mix of products manufactured and the mark-to-market adjustment on restricted share unit awards in the fourth quarter of 2009. SG&A for Mexicothe fourth quarter of 2009 of $61.2 million decreased $15.7 million from the same period in 2008 primarily as a result of lower foreign exchange losses and Europe.overall cost reductions, offset partially by the $5.7 million mark-to-market adjustment on the restricted share unit awards in the fourth quarter of 2009. The net loss in the fourth quarter of 2008 included a goodwill impairment charge of $850.5 million. We conduct our annual impairment assessment in the fourth quarter of each year and we determined that there was no impairment in 2007.
Fourth quarter 20082009 compared to third quarter 2008:2009:
Sequentially, revenueRevenue for the fourth quarter of 2008 decreased 5%2009 increased 7% to $1.9$1.7 billion from $2.0$1.6 billion for the third quarter of 20082009. Revenue from all our end markets increased sequentially, other than the telecommunications market which was flat, from the third quarter of 2009. The consumer and server markets benefited from new program wins. Gross margin decreased from 6.9% of revenue in the third quarter of 2009 to 6.6% in the fourth quarter of 2009, primarily dueas a result of the mark-to-market adjustment on the restricted share unit awards, which negatively impacted gross margin in the fourth quarter of 2009 by 0.3%. SG&A increased $7.2 million from the third quarter of 2009 to declines from our servers, enterprise communication and storage segments. This was offset partially by increases in revenue from our consumer, telecommunications and industrial customers. The net loss of $822.2$61.2 million in the fourth quarter of 2008 included a goodwill impairment charge for $850.52009, primarily reflecting the $5.7 million which resulted from
mark-to-market adjustment on the conduct of our annual impairment assessmentrestricted share unit awards in the fourth quarter of each year.2009. The net loss in the third quarter of 2009 included restructuring and other charges totaling $43.5 million. Net earnings in the fourth quarter of 2009 included other recoveries totaling $8.7 million, net of restructuring charges.
Fourth quarter 20082009 actual compared to guidance:
On October 23, 2008, we provided the following guidance for the fourth quarter of 2008:
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Our guidance is provided on an adjusted net earnings (defined below) basis only as it is difficult to forecast the various items impacting GAAP net earnings, such as the amount and timing of our restructuring and debt repurchase activities.
Table A reconciliation of Contentsadjusted net earnings, which is a non-GAAP measure, to Canadian GAAP net earnings is set forth below.
Beginning with the fourth quarter of 2009, we revised the definition of our non-GAAP adjusted net earnings to exclude all stock-based compensation (in addition to the items previously excluded) to allow for a better comparison with our major North American EMS competitors. For consistency, we made similar changes in the definitions of additional non-GAAP metrics: adjusted gross margin, adjusted SG&A, adjusted operating margin (EBIAT) and ROIC. Prior to the fourth quarter of 2009, option expense was the only stock-based compensation item excluded from the adjusted net earnings definition and other non-GAAP metrics. We now exclude (in addition to the items previously excluded) restricted share unit costs and any other stock-based compensation expense that may arise from adjusted net earnings and other non-GAAP measures. We have recalculated prior period comparatives to conform to the current periods' definitions.
Management uses adjusted net earnings (and other non-GAAP metrics) as a measure of enterprise-wide performance. As a result of restructuring activities, acquisitions made by the company, fair value accounting for stock options and securities repurchases, managementManagement believes adjusted net earnings areis a useful measure for the companymanagement, as well as its investors, to facilitate period-to-periodcompare operating comparisons and to allow the comparison of operating results with its competitors in the U.S. and Asia. Excludedperformance from adjustedperiod-to-period. Adjusted net earnings aredo not include the effects of other charges, most significantly the write-down of goodwill and long-lived assets, gains or losses on the repurchase of shares or debt and the related income tax effect of these adjustments, and any significant deferred tax write-offs or recovery.recoveries. We also exclude somethe following recurring charges such ascharges: restructuring costs, total stock-based compensation including option expense,and restricted share unit costs, amortization of intangible assets (except amortization of computer software) and the related income tax effect of these adjustments. The term adjusted net earnings does not have any standardized meaning prescribed by GAAP and is therefore unlikely to benot necessarily comparable to similar measures presented by other companies. Adjusted net earnings areis not a measure of performance under Canadian or U.S. GAAP and should not be considered in isolation or as a substitute for net earnings (loss) prepared in accordance with Canadian or U.S. GAAP. See reconciliation below.
On October 22, 2009, we provided the following guidance for the fourth quarter of 2009:
Q4 09 | ||||
---|---|---|---|---|
Guidance | Actual | |||
Revenue (in billions)(i) | $1.55 to $1.70 | $1.66 | ||
Adjusted net earnings per share(ii) | $0.16 to $0.22 | $0.21 |
Adjusted net earnings per share for the fourth quarter of 2008, using the revised definition, was within our published guidance. Our adjusted net earnings per share of $0.26, includes$0.28 and included a $0.07 per share benefit associated with the reduction in the income tax rate for adjusted net earnings. Excluding the tax benefit, adjusted net earnings per share was $0.19 and was within our published guidance for the fourth quarter of 2008.2008 was $0.21.
The following table issets forth, for the periods indicated, a reconciliation of Canadian GAAP earnings (loss) to adjusted net earnings to Canadian GAAP net earnings (loss) for the indicated periodsand other non-GAAP metrics (in millions, except per share amounts):
| 2007 | 2008 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended December 31 | GAAP | Adjustments | Adjusted | GAAP | Adjustments | Adjusted | |||||||||||||
Revenue | $ | 2,210.5 | $ | — | $ | 2,210.5 | $ | 1,935.4 | $ | — | $ | 1,935.4 | |||||||
Cost of sales(1) | 2,078.5 | (1.7 | ) | 2,076.8 | 1,794.8 | (0.6 | ) | 1,794.2 | |||||||||||
Gross profit | 132.0 | 1.7 | 133.7 | 140.6 | 0.6 | 141.2 | |||||||||||||
SG&A(1) | 75.6 | (1.0 | ) | 74.6 | 80.0 | (1.0 | ) | 79.0 | |||||||||||
Amortization of intangible assets | 5.1 | (5.1 | ) | — | 3.3 | (3.3 | ) | — | |||||||||||
Other charges | 39.2 | (39.2 | ) | — | 861.9 | (861.9 | ) | — | |||||||||||
Operating earnings (loss) — EBIAT | 12.1 | 47.0 | 59.1 | (804.6 | ) | 866.8 | 62.2 | ||||||||||||
Interest expense, net | 9.5 | — | 9.5 | 13.7 | — | 13.7 | |||||||||||||
Net earnings (loss) before tax | 2.6 | 47.0 | 49.6 | (818.3 | ) | 866.8 | 48.5 | ||||||||||||
Income tax expense (recovery) | 14.3 | (1.9 | ) | 12.4 | 3.9 | (14.5 | ) | (10.6 | ) | ||||||||||
Net earnings (loss) | $ | (11.7 | ) | $ | 48.9 | $ | 37.2 | $ | (822.2 | ) | $ | 881.3 | $ | 59.1 | |||||
W.A. # of shares (in millions) — diluted | 229.1 | 229.2 | 229.4 | 229.4 | |||||||||||||||
Earnings (loss) per share — diluted | $ | (0.05 | ) | $ | 0.16 | $ | (3.58 | ) | $ | 0.26 | |||||||||
Year ended December 31 | |||||||||||||||||||
Revenue | $ | 8,070.4 | $ | — | $ | 8,070.4 | $ | 7,678.2 | $ | — | $ | 7,678.2 | |||||||
Cost of sales(1) | 7,648.0 | (4.6 | ) | 7,643.4 | 7,147.1 | (2.9 | ) | 7,144.2 | |||||||||||
Gross profit | 422.4 | 4.6 | 427.0 | 531.1 | 2.9 | 534.0 | |||||||||||||
SG&A(1) | 295.1 | (2.4 | ) | 292.7 | 303.8 | (3.7 | ) | 300.1 | |||||||||||
Amortization of intangible assets | 21.3 | (21.3 | ) | — | 15.1 | (15.1 | ) | — | |||||||||||
Integration costs relating to acquisitions | 0.1 | (0.1 | ) | — | — | — | — | ||||||||||||
Other charges | 47.6 | (47.6 | ) | — | 885.2 | (885.2 | ) | — | |||||||||||
Operating earnings (loss) — EBIAT | 58.3 | 76.0 | 134.3 | (673.0 | ) | 906.9 | 233.9 | ||||||||||||
Interest expense, net | 51.2 | — | 51.2 | 42.5 | — | 42.5 | |||||||||||||
Net earnings (loss) before tax | 7.1 | 76.0 | 83.1 | (715.5 | ) | 906.9 | 191.4 | ||||||||||||
Income tax expense | 20.8 | — | 20.8 | 5.0 | (1.3 | ) | 3.7 | ||||||||||||
Net earnings (loss) | $ | (13.7 | ) | $ | 76.0 | $ | 62.3 | $ | (720.5 | ) | $ | 908.2 | $ | 187.7 | |||||
W.A. # of shares (in millions) — diluted | 228.9 | 229.0 | 229.3 | 229.6 | |||||||||||||||
Earnings (loss) per share — diluted | $ | (0.06 | ) | $ | 0.27 | $ | (3.14 | ) | $ | 0.82 |
| 2008 | 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended December 31 | GAAP | Adjustments | Adjusted | GAAP | Adjustments | Adjusted | |||||||||||||
Revenue | $ | 1,935.4 | $ | — | $ | 1,935.4 | $ | 1,664.4 | $ | — | $ | 1,664.4 | |||||||
Cost of sales(1)(2) | 1,794.8 | (2.7 | ) | 1,792.1 | 1,555.3 | (8.3 | ) | 1,547.0 | |||||||||||
Gross profit(2) | 140.6 | 2.7 | 143.3 | 109.1 | 8.3 | 117.4 | |||||||||||||
SG&A(1)(2)(3) | 76.9 | (4.2 | ) | 72.7 | 61.2 | (9.2 | ) | 52.0 | |||||||||||
Amortization of intangible assets(3) | 6.4 | (3.3 | ) | 3.1 | 6.6 | (1.9 | ) | 4.7 | |||||||||||
Other charges | 861.9 | (861.9 | ) | — | (8.7 | ) | 8.7 | — | |||||||||||
Operating earnings (loss) — EBIAT(4) | (804.6 | ) | 872.1 | 67.5 | 50.0 | 10.7 | 60.7 | ||||||||||||
Interest expense, net | 13.7 | — | 13.7 | 5.7 | — | 5.7 | |||||||||||||
Net earnings (loss) before tax | (818.3 | ) | 872.1 | 53.8 | 44.3 | 10.7 | 55.0 | ||||||||||||
Income tax expense (recovery) | 3.9 | (15.3 | ) | (11.4 | ) | 13.2 | (7.7 | ) | 5.5 | ||||||||||
Net earnings (loss) | $ | (822.2 | ) | $ | 887.4 | $ | 65.2 | $ | 31.1 | $ | 18.4 | $ | 49.5 | ||||||
# of shares (in millions) — diluted | 229.4 | 229.4 | 232.0 | 232.0 | |||||||||||||||
Earnings (loss) per share | $ | (3.58 | ) | $ | 0.28 | $ | 0.13 | $ | 0.21 | ||||||||||
ROIC(5) | 18.8% | 27.5% | |||||||||||||||||
Free cash flow(6) | $ | (17.3 | ) | $ | 27.5 |
| 2008 | 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31 | GAAP | Adjustments | Adjusted | GAAP | Adjustments | Adjusted | |||||||||||||
Revenue | $ | 7,678.2 | $ | — | $ | 7,678.2 | $ | 6,092.2 | $ | — | $ | 6,092.2 | |||||||
Cost of sales(1)(2) | 7,147.1 | (10.3 | ) | 7,136.8 | 5,662.4 | (18.0 | ) | 5,644.4 | |||||||||||
Gross profit(2) | 531.1 | 10.3 | 541.4 | 429.8 | 18.0 | 447.8 | |||||||||||||
SG&A(1)(2)(3) | 292.0 | (13.1 | ) | 278.9 | 244.5 | (20.9 | ) | 223.6 | |||||||||||
Amortization of intangible assets(3) | 26.9 | (15.1 | ) | 11.8 | 21.9 | (8.8 | ) | 13.1 | |||||||||||
Other charges | 885.2 | (885.2 | ) | — | 68.0 | (68.0 | ) | — | |||||||||||
Operating earnings (loss) — EBIAT(4) | (673.0 | ) | 923.7 | 250.7 | 95.4 | 115.7 | 211.1 | ||||||||||||
Interest expense, net | 42.5 | — | 42.5 | 35.0 | — | 35.0 | |||||||||||||
Net earnings (loss) before tax | (715.5 | ) | 923.7 | 208.2 | 60.4 | 115.7 | 176.1 | ||||||||||||
Income tax expense (recovery) | 5.0 | (1.0 | ) | 4.0 | 5.4 | 12.2 | 17.6 | ||||||||||||
Net earnings (loss) | $ | (720.5 | ) | $ | 924.7 | $ | 204.2 | $ | 55.0 | $ | 103.5 | $ | 158.5 | ||||||
# of shares (in millions) — diluted | 229.3 | 229.6 | 230.9 | 230.9 | |||||||||||||||
Earnings (loss) per share — diluted | $ | (3.14 | ) | $ | 0.89 | $ | 0.24 | $ | 0.69 | ||||||||||
ROIC(5) | 14.6% | 22.0% | |||||||||||||||||
Free cash flow(6) | $ | 127.1 | $ | 223.7 |
metrics, which are non-GAAP measures, including comparatives for prior periods, reflect the revised definition. The following table shows how the revised definition has impacted these metrics (in millions, except per share amounts):
| Q4 2008 | 2008 | Q4 2009(a) | 2009(a) | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Adjusted gross profit increase(2) | $ | 2.1 | $ | 7.4 | $ | 2.6 | $ | 10.5 | ||||||
Adjusted SG&A decrease(2) | 3.2 | 9.4 | 2.7 | 11.6 | ||||||||||
EBIAT increase(4) | 5.3 | 16.8 | 5.3 | 22.1 | ||||||||||
Adjusted net earnings increase | 6.1 | 16.5 | 4.8 | 20.0 | ||||||||||
Adjusted net earnings per share increase | $ | 0.02 | $ | 0.07 | $ | 0.02 | $ | 0.09 | ||||||
ROIC% increase(5) | 1.5% | 1.0% | 2.3% | 2.3% |
(a)Excluded the impact of a mark-to-market accounting adjustment related to restricted share unit awards totaling $10.9 million recorded in costthe fourth quarter of 2009 (cost of sales and— $5.2 million; SG&A — $5.7 million). See note 8(e) to the Consolidated Financial Statements.
First quarter 20092010 guidance:
On January 28, 2009,27, 2010, we provided the following guidance for the first quarter of 2009:2010:
| Q1 | |
---|---|---|
Revenue (in billions) | $ | |
Adjusted net earnings per share, using the revised definition | $ |
At the midpoint, our revenue guidance for the first quarter of 20092010 represents a 22%an 8% sequential decrease from our fourth quarter of 2008.2009. This compares to the historic 15% to 20% sequential declines that we have experienced from our fourth quarter to our first quarter of each year. We expect revenuethe impact of seasonality to be less severe than in allprevious years as our end markets to declineguidance also reflects modest end-market growth, new programs and changing product mix in the first quarter reflecting seasonality and the slower economic environment. With the lower revenue guidance, we expect adjusted net earnings to decrease. However, we believe we have made sustainable improvements in our cost structure, thus limiting some of the negative impact from the lower revenue levels.2010.
Our guidance for the first quarter of 20092010 is based on various assumptions which management believes are reasonable under the current circumstances, but may prove to be inaccurate, and many of which involve factors that are beyond the control of the company. The material assumptions may include assumptions regarding the following: forecasts from our customers, which range from 30 days to 90 days; timing and investments associated with ramping new business; general economic and market conditions; currency exchange rates; pricing and competition; anticipated customer demand; supplier performance and pricing; commodity, labor, energy and transportation costs; operational and financial matters; technological developments; and the timing and execution of our restructuring plan. These assumptions are based on management's current views with respect to current plans and events, and are and will be subject to the risks and uncertainties discussed above. Our guidance for the first quarter of 20092010 is given for the purpose of providing information about management's current expectations and plans relating to the first quarter of 2009.2010. Readers are cautioned that such information may not be appropriate for other purposes.
Recent Accounting Developments
(a)
On January 1, 2009, we adopted CICA Handbook Section 3064, "Goodwill and intangible assets." This revised standard establishes guidance for the recognition, measurement and disclosure of goodwill and intangible assets, including internally generated intangible assets. ThisAs required by this standard, which is effective for our first quarterwe have retroactively reclassified $34.0 million of 2009, requires us to retroactively reclassify our computer software assets on our consolidated balance sheet as at December 31, 2008 from property, plant and equipment to intangible assets. In addition, the amortization ofwe have reclassified computer software will be reclassifiedamortization on our consolidated statement of operations from depreciation expense, included in SG&A, to amortization of intangible assets. The adoption of this standard did not change our previously reported net earnings or loss.
(b)
In February 2008, the Canadian Accounting Standards Board announced the adoption of International Financial Reporting StandardsIFRS for publicly accountable enterprises in Canada. Effective January 1, 2011, companies must convert from Canadian GAAP to IFRS. IFRS is effective for our first quarter of 2011.ending March 31, 2011, with comparative data also prepared under IFRS.
We have initiated an IFRS transition project with a formal and detailed project plan and a dedicated project manager. A multi-functional project team consisting of management from finance, taxation, treasury, legal, human resources, IT and operations has been assigned tois engaged on the project. We have also engaged an external IFRS consulting partner.partners. We have established a formal governance structure that includes both a steering committee and an accounting technical review committee, and regular reporting is provided to our senior executive management and to our Board of DirectorsAudit Committee on the project's progress. Our project focuses on the key areas impacted by this conversion, including financial reporting, systems and processes, communications and training. Our transition plan is progressing according to our implementation schedule.
The review of the potential impacts of IFRS was conducted in phases. In phase 1, we worked with independent consultants to complete a diagnostic of the key financial, systems and businesses that would potentially be impacted by our transition to IFRS. In phase 2, we completed our detailed analysis of the potential accounting and reporting differences between Canadian GAAP and IFRS, and made preliminary accounting policy choices. Although we have not completed our evaluation, we have not identified significant changes in our business activities as a result of the IFRS transition. We plan to continually evaluate any such impact during 2010.
Accounting Policies:
AtThe following are our preliminary significant IFRS policy decisions and significant expected accounting differences, based on our analysis of the current IFRS standards. We will provide formal training to our finance staff and other personnel at each of our sites during the first half of 2010. Additional differences between Canadian GAAP and IFRS may be identified once the training is completed and as we conduct the quantification process. As a result, our accounting policy choices may change prior to the adoption of IFRS on January 1, 2011. Although we have identified key accounting policy differences, we cannot at this time we cannot reasonably estimatedetermine the impact of adopting IFRS onthese differences to our consolidated financial statements.
First-time adoption of IFRS (IFRS 1):
Upon transition, a company is required to apply each IFRS on a retrospective basis. However, IFRS 1 has certain mandatory exceptions, as well as limited optional exemptions, in specific areas of certain standards that do not require retrospective application of IFRS. Based on our analysis to date, we expect to apply the following optional exemptions available under IFRS 1 that will be significant to us in preparing our first consolidated financial statements under IFRS:
Business combinations — IFRS 1 allows us to apply this standard on a prospective or retrospective basis. We have elected to apply IFRS 3(revised), Business combinations, on a prospective basis for all business combinations completed after January 1, 2010.
Employee benefits — IFRS 1 provides the option to retrospectively apply the corridor method to actuarial gains or losses or to recognize the cumulative gains or losses deferred under Canadian GAAP through equity at the transition date. We have elected to recognize cumulative actuarial gains or losses at January 1, 2010 through retained deficit for all our employee benefit plans. We have $128.1 million in unrecognized actuarial losses at December 31, 2009 under Canadian GAAP.
Cumulative translation differences — IFRS 1 allows cumulative translation differences for foreign operations to be cleared through equity on transition. Gains or losses from the subsequent disposal of the foreign operations would exclude translation differences arising prior to adopting IFRS. We have elected to reset cumulative translation differences to zero on transition. We have cumulative translation gains of $46.9 million at December 31, 2009.
IFRS to Canadian GAAP differences:
In addition to the IFRS 1 exceptions and exemptions, the following are preliminary differences between our Canadian GAAP accounting policies and those under IFRS that we believe are applicable and significant to Celestica based on our analysis to date:
Pension and other post-employment benefits — Under Canadian GAAP, we generally defer our actuarial gains and losses from defined benefit plans and then amortize using the corridor method. Under IFRS, we expect to recognize all actuarial gains and losses immediately through equity without recording them in the income statement in subsequent periods. Additionally, IFRS has incremental considerations beyond Canadian GAAP with respect to limits on defined benefit assets, minimum funding requirements, and their interaction, which could result in adjustments to the amounts recorded under Canadian GAAP. We are currently reviewing our pension plans in detail to determine the impact upon transition.
Hedge effectiveness measurement — IFRS requires us to incorporate credit risk into the assessment of hedge effectiveness and ineffectiveness and requires more documentation to support the hedging relationships. We expect that our hedging relationships will continue to qualify under IFRS.
Impairment of long-lived assets — Reversal of asset impairment losses is not permitted under Canadian GAAP. IFRS requires the reversal of impairment losses, for assets other than goodwill, if certain criteria are met. Although we have recorded impairment losses against property, plant and equipment and intangible assets under Canadian GAAP, we do not believe at this time that these losses would be reversed under IFRS. However, we will begin to track previous and future impairments as required. Under IFRS, impairment testing is a one-step process. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. Under Canadian GAAP, impairment is tested using a two-step process. We may recognize higher impairment losses under IFRS.
Share-based payments — Under Canadian GAAP, each grant is treated as a single arrangement and compensation expense is determined at the time of grant and amortized over the vesting period, generally three to four years, on a straight-line basis. IFRS requires a separate calculation of compensation expense for awards that vest in installments. Under IFRS, compensation expense will differ from Canadian GAAP based on the changing fair values used for each installment and the timing of recognizing compensation expense, which will be accelerated under IFRS.
Income taxes — The recognition of deferred income taxes for temporary differences arising from inter-company transfers of property and from foreign exchange fluctuations on non-monetary items are prohibited under Canadian GAAP. There are no similar exceptions under IFRS. In addition, other significant differences may include accounting for uncertain tax positions, backwards tracing and differences relating to presentation and disclosure. We will also be impacted by the potential income tax effect of the other IFRS changes noted above.
The impact of IFRS at transition will depend on the IFRS standards in effect at the time, accounting elections that have not yet been made and the prevailing business and economic facts and circumstances. The evolving nature of IFRS may also result in additional accounting changes, some of which may be significant. We will continue to monitor changes in the IFRS standards and will adjust our transition plans accordingly.
Internal control over financial reporting and disclosure controls and procedures:
We have augmented our existing controls and procedures to include controls and procedures regarding the implementation of IFRS. Our quality assurance plan, which forms part of the overall IFRS transition plan, includes project management, communication and training, formal review of financial data with management oversight and certifications, internal audits, controls over financial system changes and the use of disclosure checklists. We expect that as we progress through our IFRS transition, we may adjust our plans.
Financial reporting expertise:
We identified key financial reporting experts at various levels of our business, who received advanced IFRS training from our consulting partners. We have prepared training materials covering the transition plan and applicable accounting standards and have begun detailed training of our global finance organization. We plan to also hold IFRS information sessions for senior management and members of our IFRS steering committee and Audit Committee.
Information systems:
During 2009, we began to identify and assess the impact of IFRS on our financial systems. Our information technology team is in the process of designing solutions to ensure enterprise-wide IFRS compliance in IT systems. We currently are preparing our consolidations system to receive, consolidate and comply with the new reporting and data requirements under IFRS, which includes capturing financial data for the 2010 comparative period.
(c)
In January 2009, the CICA issued Handbook Section 1582, "Business combinations," which replaces the existing standards. This section establishes the standards for the accounting of business combinations, and states
that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent
considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-relatedacquisition related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This standard is equivalent to IFRS on business combinations. This standard is applied prospectively to business combinations with acquisition dates on or after January 1, 2011. EarlierWe do not expect the adoption is permitted. We are currently evaluating the impact of adopting this standard to have a material impact on our consolidated financial statements.statements unless we engage in a significant acquisition.
(d)
In January 2009, the CICA issued Handbook Section 1601, "Consolidated financial statements," which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for 2011. Earlier adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
(e) Financial instruments — disclosures:
Effective December 31, 2009, we adopted the fair value of financial assets and financial liabilities:
In January 2009,amendment issued by the CICA issued EIC-173, "Credit risk and the fair value of financial assets and financial liabilities,Handbook Section 3862, "Financial instruments — disclosures," which requires us to consider our own credit risk as well as the creditenhanced disclosures on liquidity risk of our counterparty when determining thefinancial instruments and new disclosures on fair value measurements of financial assets and liabilities, including derivative instruments. This standard is effective for our first quarter of 2009 and should be applied retrospectively without restatement of prior periodsThese requirements correspond to allthe IFRS on financial assets and liabilities measured at fair value on the date this abstract was issued. Early adoption is encouraged. We adopted this abstract as of December 31, 2008.instruments disclosures. The adoption of this abstractstandard did not have a material impact on our consolidated financial statements.
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 next annual meeting or until a successor is elected or appointed. The following table sets forth certain information regarding the current directors and senior managementexecutive officers of Celestica.
Name | Age | Position with Celestica | Residence | ||||
---|---|---|---|---|---|---|---|
Robert L. Crandall | Chairman of the Board and Director | Florida, US | |||||
William A. Etherington | Director | Ontario, Canada | |||||
Laurette Koellner | 55 | Director | Florida, US | ||||
Richard S. Love | Director | California, US | |||||
Eamon J. Ryan | Director | Ontario, Canada | |||||
Gerald W. Schwartz | Director | Ontario, Canada | |||||
Don Tapscott | Director | Ontario, Canada | |||||
Craig H. Muhlhauser | Director, President and Chief Executive Officer | New Jersey, US | |||||
Paul Nicoletti | Executive Vice President and Chief Financial Officer | Ontario, Canada | |||||
John | Executive Vice President, Global Sales and Supply Chain | New Hampshire, US | |||||
Elizabeth L. DelBianco | Executive Vice President, Chief Legal and Administrative Officer and Corporate Secretary | Ontario, Canada | |||||
John Peri | Executive Vice President, Global Operations | Ontario, Canada | |||||
| |||||||
| |||||||
Mary Gendron | Senior Vice President and Chief Information Officer | Illinois, US | |||||
Peter A. Lindgren | Senior Vice President and General Manager, Growth and Emerging Markets Segment | Colorado, US |
Name | Age | Position with Celestica | Residence | ||||
---|---|---|---|---|---|---|---|
Michael P. McCaughey | Senior Vice President and General Manager, Communications Market Segment | Quebec, Canada | |||||
Darren Myers | Senior Vice President and Corporate Controller | Ontario, Canada | |||||
Robert J. Sellers | Senior Vice President and General Manager, Enterprise and Consumer Market Segments | Hong Kong, China |
The following is a brief biography of each of Celestica's directors and senior management:executive officers:
Robert L. Crandall has been a director of Celestica since 1998 and Chairman of the Board of Directors of Celestica since January 2004. He is the retired Chairman of the Board and Chief Executive Officer of AMR Corporation/American Airlines Inc. Mr. Crandall currently serves on the board of Anixter International Inc., which is a public corporation. He is also Chairman and CEO of Pogo, Inc. and a director of Air Cell, Inc., both of which area privately held companies. Mr. Crandall is a member of the Federal Aviation Administration Management Advisory Committee. Hecompany, and holds a Bachelor of Science degree from the University of Rhode Island and a Master of Business Administration degree from the Wharton School of the University of Pennsylvania.
William A. Etherington has been a director of Celestica since 2001. He was a director and the Non-Executive Chairman of the Board of the Canadian Imperial Bank of Commerce until February 26, 2009 and is also a director of MDS Inc. and Onex Corporation, each of which is a public corporation. Mr. Etherington is also a directorcorporation, and of SS&C Technologies Inc., a private firm. He is a former director and Non-Executive Chairman of the formerBoard of the Canadian Imperial Bank of Commerce. He retired in 2001 as Senior Vice President and Group Executive, Sales and Distribution, IBM Corporation, and Chairman, President and Chief Executive Officer of IBM World Trade Corporation. He retired from IBM in 2001 with over 37 years of service. Mr. Etherington is a member of the President's Council, The University of Western Ontario and director of St. Michael's Hospital. He holds a Bachelor of Science degree in Electrical Engineering and a Doctor of Laws (Hon.) from the University of Western Ontario.
Laurette Koellner has been a director of Celestica since 2009. She is the retired President of Boeing International, a division of The Boeing Company. Previously, she was President of Connexion by Boeing and prior to that was 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, as well as Corporate Controller for The Boeing Company. Ms. Koellner currently serves on the board and as chair of the Regulatory Compliance Committee of AIG Corporation and on the board and as chair of the Audit Committee of Sara Lee Corporation, both of which are public corporations, is a member of the University of Central Florida Dean's Executive Council, and a member of the Council on Foreign Relations. She holds a Bachelor of Science degree in Business Management from the University of Central Florida and a Masters of Business Administration from Stetson University in Deland, Florida. She holds a Certified Professional Contracts Manager designation from the National Contracts Management Association.
Richard S. Love has been a director of Celestica since 1998. He is a former Vice President of Hewlett-PackardHewlett Packard and a former General Manager of the Computer Order Fulfillment and Manufacturing Group for Hewlett-Packard'sHewlett Packard's Computer Systems Organization. Mr. Love has been a director of Celestica since 1998. From 1962 until 1997, he held positions of increasing responsibility with Hewlett-Packard,Hewlett Packard, becoming Vice President in 1992. He is a former director of HMT Technology Corporation (electronics manufacturing) and the Information Technology Industry Council. Mr. Love holds a Bachelor of Science degree in Business Administration and Technology from Oregon State University, and a Master of Business Administration degree from Fairleigh Dickinson University.
Eamon J. Ryan has been a director of Celestica since 2008. He is the former Vice President and General Manager, Europe, Middle East and Africa for Lexmark International Inc. Prior to that, he was the Vice President and General Manager, Printing Services and Solutions Manager, Europe, Middle East and Africa. Mr. Ryan joined Lexmark in 1991 as the President of Lexmark Canada. Before Lexmark, he spent 22 years at IBM Canada, where he held a number of sales and marketing roles in their Office Products and Large Systems divisions. Mr. Ryan's last role at IBM Canada was Director of Operations for theirits Public Sector, a role he held from 1986 to 1990. He holds a Bachelor of Arts degree from the University of Western Ontario.
Gerald W. Schwartz is the Chairman of the Board, President and Chief Executive Officer of Onex. Mr. Schwartz has been a director of Celestica since 1998. Prior to foundingHe is the Chairman of the Board and Chief Executive Officer of Onex in 1983, Mr. Schwartz wasCorporation, a co-founder and President (in 1977) of what is now CanWest Global Communications Corp.public corporation. Mr. Schwartz was inducted into the Canadian Business Hall of Fame in 2004 and was appointed as an Officer of the Order of Canada in 2006. He is also an honorary director of the Bank of Nova Scotia and is a director of Indigo Books & Music Inc., each of which is a public corporation.corporation, and of RSI Home Products, Inc. Mr. Schwartz is Vice Chairman of Mount Sinai Hospital and is a director governor or trustee of a number of other organizations, including Junior Achievement of Toronto, the Canadian Council of Christians and Jews, and The Simon Wiesenthal Center. He holds a Bachelor of Commerce degree and a Bachelor of Laws degree from the University of Manitoba, a Master of Business Administration degree from the Harvard University Graduate School of Business Administration, a Doctor of Laws (Hon.) from St. Francis Xavier University, and a Doctor of Philosophy (Hon.) from Tel Aviv University.
Don Tapscott has been a director of Celestica since 1998. He is Chairman of the thinktank,think-tank nGenera Insight and an adjunct Professor of Management at the University of Toronto's Joseph L. Rotman School of Management. Mr. Tapscott is also an internationally respected authority, consultant and speaker on business strategy and organizational transformation and the author of thirteen widely-read books on the application of technology in business. Mr. TapscottHe is a founding member of the Business and Economic Roundtable on Addiction and Mental Health, andalso a fellow of the World Economic Forum. He has been a director of Celestica since 1998. Mr. Tapscott holds a Bachelor of Science degree in Psychology and Statistics, and a Master of Education degree, specializing in Research Methodology, as well as Doctor of Laws (Hon.) degrees from the University of Alberta and Trent University.
Craig H. Muhlhauser is President and Chief Executive Officer, and since 2007, is also a memberdirector of the Board of Directors.Celestica. Prior to holding his current position, Mr. Muhlhauserhe was President and Executive Vice President of Worldwide Sales and Business Development. Before joining Celestica in May 2005, Mr. Muhlhauser was the President and Chief Executive Officer of Exide Technologies. Mr. MuhlhauserHe was serving as President of Exide Technologies when that entity filed for bankruptcy in 2002, was named Chief Executive Officer of Exide Technologies shortly thereafter and successfully led the company out of bankruptcy protection in 2004. Prior to that, he held the role of Vice President, Ford Motor Company and President, Visteon Automotive Systems. Mr. Muhlhauser also serves on the board of directorsHe was a director of Intermet Corporation, a manufacturer of cast metal components for the automotive, commercial-vehicle and industrial markets,privately held company, which filed for bankruptcy in the USU.S. in August 2008 and
is currently operating under bankruptcy protection. emerged from Chapter 11 protection in September 2009. Throughout his career, he has worked in a range of industries spanning the consumer, industrial, communications, utility, automotive and aerospace and defense sectors. Mr. MuhlhauserHe holds a Master of Science degree in Mechanical Engineering and a Bachelor of Science degree in Aerospace Engineering from the University of Cincinnati.
Paul Nicoletti has been Celestica'sis Executive Vice President and Chief Financial Officer since June 2007. HeOfficer. In this role, he is responsible for overseeing Celestica's accounting, financial and investor relations functions in order to protect and enhance Celestica's shareholder value. He also leads Celestica's corporate development organization which focuses on creating value through acquisitions and partnerships. Previously, he was Senior Vice President, Finance and held the role of Corporate Treasurer, with responsibility for Celestica's global financial operations, segment financial reporting, strategic pricing, corporate tax and all corporate finance and treasury-related matters. Prior to that, Mr. Nicoletti was Vice President, Global Financial Operations, responsible for all financial aspects of Celestica's Canadian and Latin American operations. He was also previously the Controller of Celestica's Canadian EMS operations. Mr. Nicoletti joined IBM in 1989 and was part of the founding management team of Celestica. Throughout his career, he has held a number of senior financial roles in mergers and acquisitions, planning, accounting, pricing and financial strategies. Mr. Nicoletti holds a Bachelor of Arts degree from the University of Western Ontario and a Master of Business Administration degree from York University.
John J. Boucher is Executive Vice President, Global Sales and Supply Chain Management Solutions and Chief Procurement Officer.Solutions. He has led the company's Supply Chain Management Organization since November 2004. In 2008, this organization expanded into a complete Supply Chain Solutions Organization encompassing Solutions Development and integrated services offerings spanning design, fulfillment, after-market and automated manufacturing services. Previously, Mr. Boucher held the position of President, Americas, and was responsible for manufacturing operations in Canada, the U.S., Mexico and Brazil. Before joining Celestica through the company's acquisition of Manufacturers' Services Limited (MSL) in March 2004, he was MSL's Corporate Vice President of Global Supply Chain Management. Prior to joining MSL as part of the company's founding team, Mr. Boucher guided the start-up of after-market operations at Circuit Test Inc. He also spent over 17 years with Digital Equipment Corporation, where he held a number of senior roles, including managing supply chain strategies for the company's Personal Computer Division.
Elizabeth L. DelBianco is Executive Vice President, Chief Legal and Administrative Officer and Corporate Secretary. In this role she oversees human resources, global branding, legal, contracts and communications. Ms. DelBianco joined Celestica in 1998 and since that time has been responsible for managing legal, governance, and compliance matters for Celestica on a global basis. In March of 2007, Ms. DelBianco assumed the leadership of the Global Human Resources function. In this role, she oversees all human resources policies and practices and leads Celestica's efforts to attract, develop and retain key talent. In 2008, her role expanded to include responsibility for overseeing the Global Branding Organization. Ms. DelBianco came to Celestica following a 13-year career as a senior corporate legal advisor in the telecommunications industry. She holds a Bachelor of Arts degree from the University of Toronto, a Bachelor of Laws degree from Queen's University, and a Master of Business Administration degree from the University of Western Ontario. She is admitted to practice in Ontario and New York.
John Peri is Executive Vice President, Global Operations. He is responsible for overseeing Celestica's manufacturing and supply chain operations in Asia, Europe and the Americas. Mr. Peri previously held the role of President, Asia Operations, with responsibility for Celestica's manufacturing footprint in China, Hong Kong, India, Japan, Malaysia, Philippines, Singapore and Thailand. Prior to that, he held senior level positions in the areas of quality, manufacturing excellence, services and regional leadership. Mr. Peri joined IBM Canada in 1984 and was part of the founding management team of Celestica. Over the course of his career, he has held a number of leadership positions in operations, engineering and account management. He holds a Bachelor of Applied Science degree in Industrial Engineering from the University of Toronto.
Michael L. Andrade is Senior Vice President and General Manager, North America. In this role, he is responsible for ensuring Celestica's operating model and business strategies are aligned to drive growth and accelerate customers' success. His primary focus is helping customers overcome obstacles associated with the more sophisticated use of electronics in North America. Mr. Andrade joined Celestica from IBM in 1994 as part of the company's original management team, and has since held positions of increasing responsibility with the company. Prior to his current role, he was the Senior Vice President, Strategic Business Development. His diverse experience spans engineering, finance, operations management, mergers and acquisitions and commodity management. He holds a Bachelor of Engineering Science degree from the University of Western Ontario, a Master of Business Administration degree from York University in Ontario, and is a member of the Professional Engineers of Ontario.
Peter J. Bar is Senior Vice President, Finance. He is responsible for providing financial leadership for the Americas region. Previously, he was Senior Vice President and Corporate Controller, with responsibility for Celestica's external reporting, financial planning, strategic pricing and corporate tax. He joined Celestica in March 1998, as Vice President, Finance, Power Systems. Prior to joining Celestica, Mr. Bar was the Controller for the Personal Systems Group of IBM Canada. During his 14-year career in the information technology industry, he has served in several senior management positions for both IBM Canada and IBM's headquarters in Armonk, New York. Mr. Bar holds a Bachelor of Commerce degree from the University of Toronto and a Chartered Accountant designation.
Mary Gendron is Senior Vice President and Chief Information Officer. She is responsible for aligning Celestica's information technology strategy with its business goals by ensuring that the company's strategic investments in IT tools and processes drive its customers' success. Ms. Gendron recently joined Celestica in October 2008, following a five-year career at The Nielsen Company, one of the largest global information measurement and media companies. Most recently,companies, where she was the Senior Vice President, IT Infrastructure Shared Services. Prior to that, she was the Chief Information Officer at ACNielsen US.U.S. Over the course of her career, Ms. Gendron has held management positions of increasing seniority in information technology and supply chain management at Motorola and Bell Canada. Ms. Gendron holds a Bachelor of Engineering degree from McGill University in Montreal, Quebec.
Peter A. Lindgren is Senior Vice President and General Manager, Growth and Emerging Markets Segment. He leads a focused business unit that drives the strategic direction and growth of Celestica's business within key customer accounts in emerging markets. Previously, Mr. Lindgren held the role of Senior Vice President, Industry Market Segment and prior to that, was Senior Vice President, Business Development, overseeing Celestica's regional marketing and business development teams on a global basis. Prior to that, Mr. Lindgren was Vice President and General Manager, Cisco Global Customer Business Unit. He joined Celestica in February 1998 as Director of Operations in Corporate Development. Mr. Lindgren has worked in the electronics manufacturing services industry since 1985, and held a number of management positions in international operations, sales and marketing, program management and materials with SCI Systems and MTI International. He holds a Bachelor of Arts degree in Business Economics from Colorado College.
Michael P. McCaughey is Senior Vice President and General Manager, Communications Market Segment. He is responsible for the strategic direction of the company's communications business and all key activities associated with Celestica's customer accounts in this sector. Prior to joining Celestica in June 2005, Mr. McCaughey held the role of Senior Vice President, Wireline Network Systems, at Sanmina-SCI. Before joining Sanmina-SCI, Mr. McCaughey held senior roles at Hyperchip Inc. and SCI Systems (prior to that company's merger with Sanmina). He holds a DEC in Electrotechnology from Vanier College, Quebec and studied Electrical Engineering at McGill University in Montreal, Quebec.
Darren Myers is Senior Vice President and Corporate Controller. He is responsible for Celestica's corporate external reporting, financial planning and budgeting related matters. Mr. Myers rejoined Celestica in 2008 following two years as the Vice President, Finance, Small Medium Business for Bell Canada. Prior to that, Mr. Myers was the Vice President, Finance, Global Services at Celestica. He originally joined Celestica in 2000 where he was a key member of the Corporate Development team. Over the course of his career, Mr. Myers has held a number of leadership positions in the areas of operational finance, mergers and acquisitions, and controls
compliance and disclosure. He holds an Honours Bachelor of Commerce degree from McMaster University in Ontario. He is also a Chartered Accountant.
Robert J. Sellers is Senior Vice President and General Manager, Enterprise and Consumer Market Segments, Asia Business Development.Segments. In this role, he is responsible for the strategic direction and growth of Celestica's customers in the global enterprise and consumer markets as well as Asian regional customers.markets. Previously, Mr. Sellers was Senior Vice President, Global Sales, and prior to that, led the sales organization for Celestica's Americas and Asia regions. He joined Celestica in 2003 in the role of Vice President, Market Development in the area of Consumer Electronics. Mr. Sellers has had a 14-year career in the EMS industry with various leadership positions at Sanmina-SCI, SCI, Solectron and Avex. Prior to entering the EMS industry, Mr. Sellers was a highly decorated United States Army officer. He holds a Bachelor of Science degree in Industrial and Operations Engineering from the University of Michigan.
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 members of senior managementexecutive officers were selected.
B. Compensation
Compensation of Directors
Director compensation is set by the Board of Directors on the recommendation of the Compensation Committee and in accordance with director compensation guidelines established by the Nominating and Corporate Governance Committee (Governance(the Governance Committee). Under these guidelines, the Board of Directors seeks to maintain director compensation at a level that is competitive with director compensation at comparable companies. The Compensation Committee engaged Towers PerrinWatson Inc. (Towers Perrin)Watson) to provide benchmarking information in this regard. See "— Compensation Process" and "— Comparator Companies" for a discussion regarding the role of Towers Perrin.Watson. The guidelines also contemplate that at least half of each director's annual retainer and meeting fees be paid in deferred share units (DSUs). Each DSU represents the right to receive one subordinate voting share of the Company or an equivalent value in cash of the Company when the director ceases to be a director.
20082009 Fees
Table 1 sets out the annual retainers and meeting fees paid in 20082009 to the Company's directors (other than Messrs. Schwartz and Muhlhauser who, as officers of Onex and the Company, respectively, did not receive such compensation).
Table 1: Retainers and Meeting Fees for 2008
2009
Annual Board Retainer | $ | 65,000 | ||
Annual Retainer for non-executive Chairman(1) | $ | 130,000 | ||
Annual Retainer for Audit Committee Chair | $ | 20,000 | ||
Annual Retainer for Compensation Committee Chair | $ | 10,000 | ||
Annual Retainer for Executive Committee Chair | $ | 10,000 | ||
Board and Committee Per Day Meeting Fee(2) | $ | 2,500 | ||
Travel Fee(3) | $ | 2,500 | ||
Annual DSU Grant (for directors other than the Chairman) | $ | 65,000 | ||
Annual DSU Grant — Chairman | $ | 130,000 |
Annual Board Retainer | $ | 65,000 | ||
Annual Retainer for Non-Executive Chairman(1) | $ | 130,000 | ||
Annual Retainer for Audit Committee Chair | $ | 20,000 | ||
Annual Retainer for Compensation Committee Chair | $ | 10,000 | ||
Annual Retainer for Executive Committee Chair | $ | 10,000 | ||
Board and Committee Per Day Meeting Fee(2) | $ | 2,500 | ||
Travel Fee(3) | $ | 2,500 | ||
Annual DSU Grant (for directors other than the Chairman) | $ | 120,000 | ||
Annual DSU Grant — Chairman | $ | 180,000 |
DSUs
Directors receive half of their annual retainer and meeting fees (or all of such retainer and fees, if they so elect) in DSUs. The number of DSUs granted in lieu of cash meeting fees is calculated by dividing the cash fee that would otherwise be payable by the closing price of subordinate voting shares on the New York Stock Exchange (NYSE)(the NYSE) on the last business day of the quarter in which the applicable meeting occurred. In the case of annual retainer fees, the number of DSUs granted is calculated by dividing the cash amount that would otherwise be payable quarterly by the closing price of subordinate voting shares on the NYSE on the last business day of the quarter.
Directors also receive annual grants of DSUs. In 2008,2009, each director received $65,000an annual grant of $120,000 worth of DSUs, except for the Chairman, who received $130,000.an annual grant of $180,000, and Ms. Koellner, who joined the Board on April 23, 2009 and received an annual grant of $90,000. The number of DSUs granted is calculated by dividing the cash amount that would otherwise be payable quarterly by the closing price of subordinate voting shares on the NYSE on the last business day of the quarter.
Eligible directors also receive an initial grant of DSUs when they are appointed to the Board of Directors. For individuals who become eligible directors after December 31, 2008, the initial grant is equal to the amount of the annual board retainer multiplied by 150% and divided by the closing price of subordinate voting shares on the NYSE on the last business day of the fiscal quarter immediately preceding the date when the individual becomes an eligible director. The DSUs comprising the initial grant vest upon the retirement of the eligible director. However, if an eligible director retires within a year of becoming an eligible director, all of the DSUs comprising the initial grant are forfeited and cancelled. If an eligible director retires less than two years but more than one year after becoming an eligible director, then two-thirds of the DSUs comprising the initial grant are forfeited and cancelled. If an eligible director retires within three years but more than two years after becoming an eligible director, then one-third of the DSUs comprising the initial grant are forfeited and cancelled. Forfeiture does not apply if a director ceases to be a director due to a change of control.
The compensation paid in 20082009 by the Company to its directors is set out in Table 2. None of the directors received any fee or payment from the Company except as set out below. Mr. Schwartz is an officer of Onex and did not receive any compensation in his capacity as a director of the Company in 2008.2009; however, Onex did receive compensation for providing the services of Mr. Schwartz as a director, see Item 7(B), "Related Party Transactions." Mr. Muhlhauser, as President and Chief Executive Officer of the Company, also did not receive any director's fees from the Company in 2008.2009.
Table 2: Director Fees Earned in 2008
2009
Name | Board Annual Retainer (a) | Chairman Annual Retainer (b) | Committee Chair Annual Retainer (c) | Total Meeting Attendance Fees (d) | Total Annual Retainer and Meeting Fees Payable ((a)+(b)+(c)+(d)) (e) | Portion of Fees Taken in Cash or Applied to DSUs and Value of DSUs (f) | Annual DSU Grant (#) and Value of DSUs(1) (g) | Initial DSU Grant (#) and Value of DSUs (h) | Total ((e)+(g)+(h)) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall | — | $ | 130,000 | $ | 30,000 | $ | 70,000 | $ | 230,000 | 100% DSUs/ $230,000 | 20,788/$130,000 | — | $ | 360,000 | |||||||||||||
William A. Etherington | $ | 65,000 | — | $ | 10,000 | $ | 50,000 | $ | 125,000 | 100% DSUs/ $125,000 | 10,394/$65,000 | — | $ | 190,000 | |||||||||||||
Richard S. Love | $ | 65,000 | — | — | $ | 55,000 | $ | 120,000 | 50% Cash & 50% DSUs/ $60,000 | 10,394/$65,000 | — | $ | 185,000 | ||||||||||||||
Anthony R. Melman(2) | $ | 20,357 | — | — | $ | 7,500 | $ | 27,857 | 100% DSUs/ $27,857 | 3,029/$20,357 | — | $ | 48,214 | ||||||||||||||
Eamon J. Ryan(3) | $ | 16,250 | — | — | $ | 7,500 | $ | 23,750 | 100% DSUs/ $23,750 | 3,525/$16,250 | $ | 27,950/ 180,000 | $ | 220,000 | |||||||||||||
Charles W. Szuluk(4) | $ | 32,500 | — | — | $ | 12,500 | $ | 45,000 | 100% DSUs/ $45,000 | 4,346/$32,500 | — | $ | 77,500 | ||||||||||||||
Don Tapscott | $ | 65,000 | — | — | $ | 25,000 | $ | 90,000 | 100% DSUs/ $90,000 | 10,394/$65,000 | — | $ | 155,000 |
Name | Board Annual Retainer (a) | Chairman Annual Retainer (b) | Committee Chair Annual Retainer (c) | Total Meeting Attendance Fees (d) | Total Annual Retainer and Meeting Fees Payable ((a)+(b)+(c)+(d)) (e) | Portion of Fees Taken in Cash or Applied to DSUs and Value of DSUs(1) (f) | Annual DSU Grant (#) and Value of DSUs(1) (g) | Initial DSU Grant (#) and Value of DSUs (h) | Total ((e)+(g)+(h)) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall | — | $ | 130,000 | $ | 30,000 | $ | 65,000 | $ | 225,000 | 100% DSUs/ $225,000 | 28,752/$180,000 | — | $ | 405,000 | |||||||||||||
William A. Etherington | $ | 65,000 | — | $ | 10,000 | $ | 45,000 | $ | 120,000 | 100% DSUs/ $120,000 | 19,168/$120,000 | — | $ | 240,000 | |||||||||||||
Laurette Koellner(2)(3) | $ | 48,750 | — | — | $ | 27,500 | $ | 76,250 | 100% DSUs/ $76,250 | 10,741/$90,000 | $ | 26,393/ 180,000 | $ | 346,250 | |||||||||||||
Richard S. Love(4) | $ | 65,000 | — | — | $ | 37,500 | $ | 102,500 | 50% Cash & 50% DSUs/ $51,250 | 19,168/$120,000 | — | $ | 222,500 | ||||||||||||||
Eamon J. Ryan(3) | $ | 65,000 | — | — | $ | 25,000 | $ | 90,000 | 100% DSUs/ $90,000 | 19,168/$120,000 | — | $ | 210,000 | ||||||||||||||
Don Tapscott | $ | 65,000 | — | — | $ | 17,500 | $ | 82,500 | 100% DSUs/ $82,500 | 19,168/$120,000 | — | $ | 202,500 |
The total fees earned by the Board of Directors in 20082009 were $661,607.$696,250. In addition, a total annual grant of DSUs worth $394,107$750,000 and an initial grant of DSUs worth $180,000 were issued.
Outstanding Option-Based and Share-Based Awards
In 2005, the Company amended its Long Term Incentive Plan (LTIP) to prohibit the granting of options to acquire subordinate voting shares to directors. Table 3 sets out information relating to option grants to directors which were made between 1998 and 2004 and which remain outstanding. All option grants were made with exercise prices set at the closing market price on the business day prior to the date of grant. Exercise prices range from $10.62 to C$72.60. Options vest over three or four years and expire after ten years. The final grant of
options occurred on May 10, 2004; those options will expire on May 10, 2014. Mr. Schwartz, as an employee of Onex during that period, was not granted options. Mr. Ryan and Ms. Koellner, both of whom became a director on October 24, 2008 and wasdirectors after May 2004, have not been granted any options under the LTIP.
DSUs that were granted prior to January 1, 2007 will be paid out in the form of subordinate voting shares issued from treasury. DSUs granted after January 1, 2007 will be paid out in the form of subordinate voting shares purchased in the open market or an equivalent value in cash. The date used in valuing the DSUs shall be a date within 90 days of the date on which the individual in question ceases to be a director. The DSUs shall be redeemed and payable on or prior to the 90th day following the date on which the individual ceases to be a director. The total number of DSUs outstanding for each director is included in Table 3.3 under the column "Share-Based Awards."
The following table sets out, for each director, information concerning all option-based and share-based awards outstanding as of December 31, 20082009 (this includes awards granted before the most recently completed financial year).
Table 3: Outstanding Option-Based and Share-Based Awards
| Option-Based Awards(1) | Share-Based Awards(2) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the-Money Options ($) | Number of Outstanding Units (#) | Market Payout Value of Outstanding Units ($) | |||||||||||||
Robert L. Crandall Jul. 7, 1999 Jul. 7, 2000 Jul. 7, 2001 Apr. 18, 2003 May 10, 2004 — | 20,000 20,000 20,000 10,000 10,000 — | $ $ $ $ $ | 23.41 48.69 44.23 10.62 18.25 — | Jul. 7, 2009 Jul. 7, 2010 Jul. 7, 2011 Apr. 18, 2013 May 10, 2014 — | — — — — — — | — — — — — 248,621 | $ | — — — — — 1,146,143 | |||||||||||
William A. Etherington Oct. 22, 2001 Apr. 21, 2002 Apr. 18, 2003 May 10, 2004 — | 20,000 5,000 5,000 5,000 — | $ $ $ $ | 35.95 32.40 10.62 18.25 — | Oct. 22, 2011 Apr. 21, 2012 Apr. 18, 2013 May 10, 2014 — | — — — — — | — — — — 97,111 | $ | — — — — 447,682 | |||||||||||
Richard S. Love Jul. 7, 1999 Jul. 7, 2000 Jul. 7, 2001 Apr. 18, 2003 May 10, 2004 — | 10,000 10,000 10,000 2,500 2,500 — | $ $ $ $ $ | 23.41 48.69 44.23 10.62 18.25 — | Jul. 7, 2009 Jul. 7, 2010 Jul. 7, 2011 Apr. 18, 2013 May 10, 2014 — | — — — — — — | — — — — — 52,114 | $ | — — — — — 240,246 | |||||||||||
Eamon J. Ryan | — | — | — | — | 36,627 | $ | 168,850 | ||||||||||||
Don Tapscott Jul. 7, 1999 Jul. 7, 2000 Jul. 7, 2001 Apr. 18, 2003 May 10, 2004 — | 20,000 20,000 20,000 5,000 5,000 — | C$ C$ C$ $ $ | 34.50 72.60 66.78 10.62 18.25 — | Jul. 7, 2009 Jul. 7, 2010 Jul. 7, 2011 Apr. 18, 2013 May 10, 2014 — | — — — — — — | — — — — — 98,632 | $ | — — — — 454,694 |
| Option-Based Awards(1) | Share-Based Awards(2) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the-Money Options ($) | Number of Outstanding Units (#) | Market Payout Value of Outstanding Units ($) | |||||||||||||
Robert L. Crandall | |||||||||||||||||||
Jul. 7, 2000 | 20,000 | $ | 48.69 | Jul. 7, 2010 | — | — | — | ||||||||||||
Jul. 7, 2001 | 20,000 | $ | 44.23 | Jul. 7, 2011 | — | — | — | ||||||||||||
Apr. 18, 2003 | 10,000 | $ | 10.62 | Apr. 18, 2013 | — | — | — | ||||||||||||
May 10, 2004 | 10,000 | $ | 18.25 | May 10, 2014 | — | — | — | ||||||||||||
— | — | — | — | — | 312,807 | $ | 2,952,898 | ||||||||||||
William A. Etherington | |||||||||||||||||||
Oct. 22, 2001 | 20,000 | $ | 35.95 | Oct. 22, 2011 | — | — | — | ||||||||||||
Apr. 21, 2002 | 5,000 | $ | 32.40 | Apr. 21, 2012 | — | — | — | ||||||||||||
Apr. 18, 2003 | 5,000 | $ | 10.62 | Apr. 18, 2013 | — | — | — | ||||||||||||
May 10, 2004 | 5,000 | $ | 18.25 | May 10, 2014 | — | — | — | ||||||||||||
— | — | — | — | — | 135,279 | $ | 1,277,034 | ||||||||||||
Laurette Koellner | — | — | — | — | 46,166 | $ | 435,807 | ||||||||||||
Richard S. Love | |||||||||||||||||||
Jul. 7, 2000 | 10,000 | $ | 48.69 | Jul. 7, 2010 | — | — | — | ||||||||||||
Jul. 7, 2001 | 10,000 | $ | 44.23 | Jul. 7, 2011 | — | — | — | ||||||||||||
Apr. 18, 2003 | 2,500 | $ | 10.62 | Apr. 18, 2013 | — | — | — | ||||||||||||
May 10, 2004 | 2,500 | $ | 18.25 | May 10, 2014 | — | — | — | ||||||||||||
— | — | — | — | — | 79,485 | $ | 750,338 | ||||||||||||
Eamon J. Ryan | — | — | — | — | 70,340 | $ | 664,010 | ||||||||||||
Don Tapscott | |||||||||||||||||||
Jul. 7, 2000 | 20,000 | C$ | 72.60 | Jul. 7, 2010 | — | — | — | ||||||||||||
Jul. 7, 2001 | 20,000 | C$ | 66.78 | Jul. 7, 2011 | — | — | — | ||||||||||||
Apr. 18, 2003 | 5,000 | $ | 10.62 | Apr. 18, 2013 | — | — | — | ||||||||||||
May 10, 2004 | 5,000 | $ | 18.25 | May 10, 2014 | — | — | |||||||||||||
— | — | — | — | — | 130,471 | $ | 1,231,646 |
Directors' Equity Interest
The following table sets out each director's direct or indirect beneficial ownership of, or control or direction over, equity in the Company, and any changes therein since February 25, 2008.23, 2009.
Table 4: Equity Interest Other than Options and
Outstanding Share-Based Awards(1)
Name | Date | SVS(2) # | Market Value* | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall | Feb. 25, 2008 Feb. 23, 2009 Change | 20,000 70,000 50,000 | $ | 219,100 | ||||||
William A. Etherington | Feb. 25, 2008 Feb. 23, 2009 Change | 10,000 10,000 — | $ | 31,300 | ||||||
Richard S. Love | Feb. 25, 2008 Feb. 23, 2009 Change | 5,000 5,000 — | $ | 15,650 | ||||||
Eamon J. Ryan | Feb. 25, 2008 Feb. 23, 2009 Change | — — — | $ | — | ||||||
Gerald W. Schwartz(3) | Feb. 25, 2008 Feb. 23, 2009 Change | 2,236,713 2,184,975 (51,738 | ) | $ | 6,838,972 | |||||
Don Tapscott | Feb. 25, 2008 Feb. 23, 2009 Change | 5,700 5,700 — | $ | 17,841 |
Name | Date | Subordinate Voting Shares(2) # | Market Value* | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall | Feb. 23, 2009 | 70,000 | $ | 745,500 | ||||||
Feb. 22, 2010 | 70,000 | |||||||||
Change | — | |||||||||
William A. Etherington | Feb. 23, 2009 | 10,000 | $ | 106,500 | ||||||
Feb. 22, 2010 | 10,000 | |||||||||
Change | — | |||||||||
Laurette Koellner | Feb. 23, 2009 | — | $ | — | ||||||
Feb. 22, 2010 | — | |||||||||
Change | — | |||||||||
Richard S. Love | Feb. 23, 2009 | 5,000 | $ | 53,250 | ||||||
Feb. 22, 2010 | 5,000 | |||||||||
Change | — | |||||||||
Eamon J. Ryan | Feb. 23, 2009 | — | $ | — | ||||||
Feb. 22, 2010 | — | |||||||||
Change | — | |||||||||
Gerald W. Schwartz(3) | Feb. 23, 2009 | 2,184,975 | $ | 16,741,555 | ||||||
Feb. 22, 2010 | 1,571,977 | |||||||||
Change | (612,998 | ) | ||||||||
Don Tapscott | Feb. 23, 2009 | 5,700 | $ | 60,705 | ||||||
Feb. 22, 2010 | 5,700 | |||||||||
Change | — |
Shareholding Requirements
The Company has minimum shareholding requirements for independent directors (the "Guideline"). The Guideline provides that an independent director who has been on the Board of Directors:
Although directors will not be deemed to have breached the Guideline by reason of a decrease in the market value of the Company's securities, the directors may be required to purchase further securities within a reasonable period of time to comply with the Guideline. The Guideline came into effect on April 22, 2004 and each director's holdings of securities, which for the purposes of the Guideline include all subordinate voting shares, DSUs and RSUs, are reviewed annually each year on December 31. Given the recent downturn in the performance of financial markets as a result of uncertainty in the global economy, the Company has extended the targeted compliance date by one year to April 22, 2010. As of December 31, 20082009, all of the directors of the Company were, or were on track to be, in compliance with the Guideline as set out in the following table.
Table 5: Shareholding Requirements
| Shareholding Requirements | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Director | Target Value (5x annual retainer) | Date by which Target to be Met | Value as of December 31, 2008(3) | On Track as of December 31, 2008(4) | |||||||
Robert L. Crandall | $ | 800,000 | Apr. 22, 2010 | $ | 1,468,843 | Yes | |||||
William A. Etherington | $ | 375,000 | Apr. 22, 2010 | $ | 493,782 | Yes | |||||
Richard S. Love | $ | 325,000 | Apr. 22, 2010 | $ | 263,296 | Yes | |||||
Eamon J. Ryan(1) | — | — | — | — | |||||||
Gerald W. Schwartz(2) | — | — | — | — | |||||||
Don Tapscott | $ | 325,000 | Apr. 22, 2010 | $ | 480,971 | Yes |
| Shareholding Requirements | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Director | Target Value (5x annual retainer) | Date by which Target to be Met | Value as of December 31, 2009(3) | On Track as of December 31, 2009 | |||||||
Robert L. Crandall | $ | 800,000 | Apr. 22, 2010 | $ | 3,613,698 | Yes | |||||
William A. Etherington | $ | 375,000 | Apr. 22, 2010 | $ | 1,371,433 | Yes | |||||
Laurette Koellner | $ | 325,000 | Apr. 23, 2014 | $ | 435,807 | Yes | |||||
Richard S. Love(1) | $ | 325,000 | N/A | $ | 797,538 | N/A | |||||
Craig H. Muhlhauser(2) | — | — | — | — | |||||||
Eamon J. Ryan | $ | 325,000 | Oct. 24, 2013 | $ | 664,010 | Yes | |||||
Gerald W. Schwartz(2) | — | — | — | — | |||||||
Don Tapscott | $ | 325,000 | Apr. 22, 2010 | $ | 1,285,454 | Yes |
Attendance of Directors at Board of Directors and Committee Meetings
The following table sets forth the attendance of directors at Board of Directors and Committee meetings in 2008.from the beginning of 2009 to February 22, 2010.
Table 6: Directors' Attendance at Board of Directors and Committee Meetings
| | | | | | Meetings Attended % | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Director | Board | Audit | Compensation | Governance | Executive | Board | Committee | |||||||||||||||
Robert L. Crandall(1) | 6 of 6 | 6 of 6 | 5 of 5 | 5 of 5 | 14 of 14 | 100% | 100% | |||||||||||||||
William A. Etherington(2) | 6 of 6 | 6 of 6 | 5 of 5 | 5 of 5 | 14 of 14 | 100% | 100% | |||||||||||||||
Richard S. Love | 6 of 6 | — | — | 5 of 5 | — | 100% | 100% | |||||||||||||||
Anthony R. Melman(3) | 1 of 3 | — | — | — | — | 33% | — | |||||||||||||||
Craig H. Muhlhauser | 6 of 6 | — | — | — | — | 100% | — | |||||||||||||||
Eamon J. Ryan(4) | 2 of 2 | — | — | — | — | 100% | — | |||||||||||||||
Gerald W. Schwartz | 5 of 6 | — | — | — | — | 83% | — | |||||||||||||||
Charles W. Szuluk(5) | 2 of 3 | — | 1 of 2 | — | — | 67% | 50% | |||||||||||||||
Don Tapscott | 6 of 6 | 3 of 6 | 4 of 5 | 3 of 5 | — | 100% | 63% |
| | | | | | Meetings Attended % | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Director | Board | Audit | Compensation | Governance | Executive | Board | Committee | |||||||||||||||
Robert L. Crandall(1) | 8 of 8 | 7 of 7 | 6 of 6 | 5 of 5 | 7 of 7 | 100% | 100% | |||||||||||||||
William A. Etherington(2) | 8 of 8 | 7 of 7 | 6 of 6 | 5 of 5 | 7 of 7 | 100% | 100% | |||||||||||||||
Laurette Koellner(3)(4) | 5 of 5 | — | — | — | — | 100% | — | |||||||||||||||
Richard S. Love | 8 of 8 | — | — | 5 of 5 | — | 100% | 100% | |||||||||||||||
Craig H. Muhlhauser | 8 of 8 | — | — | — | — | 100% | — | |||||||||||||||
Eamon J. Ryan(4) | 8 of 8 | — | — | — | — | 100% | — | |||||||||||||||
Gerald W. Schwartz | 8 of 8 | — | — | — | — | 100% | — | |||||||||||||||
Don Tapscott | 4 of 8 | 4 of 7 | 3 of 6 | 2 of 5 | — | 50% | 50% |
Table As of ContentsDecember 31, 2009, no amounts have been set aside or accrued by the Company, except as described herein, to provide pension, retirement and similar benefits to the directors.
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis (CD&A) sets out the policies of the Company for determining compensation paid to the Company's Chief Executive Officer (CEO)(the "CEO"), its Chief Financial Officer (CFO),(the "CFO") and the three other most highly compensated executive officers (collectively, the "Named Executive Officers" or "NEOs"). A description and explanation of the significant elements of compensation awarded to the NEOs during 20082009 is set out in the section entitled2008 "— 2009 Compensation Decisions of this Annual Report.Decisions."
Compensation Objectives
The Company's executive compensation philosophies and practices are designed to attract, motivate and retain the leaders who will drive the success of the Company. The Company benchmarks itself against a comparator group of similarly sized technology companies as set out in Table 7 (the "Comparator Group"), including foursix direct competitors of the Company in the electronics manufacturing services industry: Benchmark Electronics, Inc., Flextronics International Ltd., Jabil Circuit, Inc., Plexus Corp., Sanmina-SCI Corp. and Sanmina-SCI (collectively, the "EMS Competitors").Tyco Electronics Ltd.
Compensation for executives is linked to the Company's performance. Target compensation is positioned at the median of the comparator group for median level performance, with the opportunity for above median compensation for performance that exceeds the median of the Comparator Group and less than median compensation for performance that is below the median of the Comparator Group.
The compensation package is designed to:
Independent Advice
The Compensation Committee has engaged Towers PerrinWatson as its independent compensation consultant to assist in identifying appropriate comparator companies against which to evaluate the Company's compensation levels, to provide data about those companies, and to provide observations and recommendations with respect to the Company's compensation practices versus both the comparator group.group and the market in general.
Management works with Towers PerrinWatson to review and, where appropriate, develop and recommend compensation programs that will ensure the Company's practices are competitive with market practices. Towers PerrinWatson also provides advice to the Compensation Committee on the policy recommendations prepared by management and keeps the Compensation Committee apprised of market trends in executive compensation. Towers PerrinWatson attended portions of all Compensation Committee meetings held in 2008,2009, in person or by telephone, as requested by the Chairman of the Compensation Committee. The Compensation Committee holdsin camera sessions with Towers PerrinWatson at each of its meetings.
Decisions made by the Compensation Committee, however, are the responsibility of the Compensation Committee and may reflect factors and considerations other than the information and recommendations provided by Towers Perrin.Watson.
Each year, the Chairman of the Compensation Committee reviews the scope of activities of Towers PerrinWatson and, if he deems appropriate, approves the corresponding budget. Any services and fees not related to executive compensation must be approved by the Chairman. In 2008,2009, the executive compensation advisor retainer fees paid to Towers Perrin totaled approximatelyWatson totalled C$200,500.199,142. Additional consulting services fees paid to Towers PerrinWatson regarding USinternational executive
benefits totaled approximatelytotalled C$87,30057,072 for 2008.2009 and fees paid for data services (both executive and non-executive) totalled C$22,631. Towers PerrinWatson did not provide any non-executive compensation consulting services in 2008.2009.
Compensation Process
The Compensation Committee reviews and approves compensation for the CEO and the other NEOs, including base salaries, annual incentive awards and equity-based incentive grants. Compensation for the other NEOs is reviewed in consultation with the CEO. The Compensation Committee works with Towers PerrinWatson when determining the compensation of the NEOs, including the CEO. The Compensation Committee's decisions are then reviewed with the Board of Directors.Board.
The Compensation Committee generally meets five times a year. At the July meeting, the Compensation Committee, based on recommendations from Towers Perrin, approvesWatson, selects the comparator group that will be used for the compensation review. At the October meeting, Towers PerrinWatson presents a competitive analysis of the total compensation for each of the NEOs, including the CEO, based on the established comparator group. Using this analysis, the Chief Legal and Administrative Officer (CLO)(the "CLO"), who has responsibility for Human Resources, together with Towers PerrinWatson and the CEO develop base salary and equity-based incentive recommendations for the NEOs, except that the CEO and CLO do not participate in the preparation of their own compensation recommendations. At the December meeting, base salary recommendations for the NEOs for the following year and the value of their equity-based incentives are approved. Previous grants of equity-based awards and the current retention value of same are notreviewed and may be taken into consideration when making this decision. At the January meeting, the Compensation Committee approves the final mix of the equity-based incentives. The CLO is not present at the Compensation Committee meetings when her compensation is discussed.
The foregoing process is also followed for determining the CEO's compensation except that the CLO works with Towers PerrinWatson to develop a proposal for base salary and equity-based incentive grants. The Compensation Committee then reviews the proposal with Towers PerrinWatson in the absence of the CEO. At that time, the Compensation Committee also considers the potential value of the total compensation package for the CEO at different levels of performance and different stock prices.prices to ensure that there is an appropriate link between pay and performance taking into consideration the range of potential total compensation.
In terms of the Company's annual incentive plan, targets based on a management plan approved by the Board of Directors are approved by the Compensation Committee at the beginning of the year. The Compensation Committee reviews the Company's performance relative to these targets and the projected payment at the October and December Compensation Committee meeting.meetings. At the January meeting of the following year, final payments under the plan, as well as the vesting percentages for any previously granted equity-based incentives that have performance vesting criteria, are calculated and approved by the Compensation Committee based on the Company's year endyear-end results as approved by the Audit Committee. These amounts are then paid in February.
Comparator Companies
The Compensation Committee benchmarks salary, target bonusannual incentive and equity-based incentive awards to the Comparator Group. The revenues of the Comparator Group companies are generally in the range of half to twice the Company's revenues. In addition, for 2009 the Committee included in the Comparator Group two of the EMS Competitorsthree electronics manufacturing services competitors whose revenues were outside this range: Benchmark Electronics, Inc., Plexus Corp. and Flextronics International. Each year the Compensation Committee reviews and approves constituent companies of this comparator group.
Table of ContentsInternational Ltd.
The Company's 20082009 Comparator Group consisted of the following companies.
Company Name | 2007 Annual Revenue (millions) | Company Name | 2007 Annual Revenue (millions) | ||||||
---|---|---|---|---|---|---|---|---|---|
Advanced Micro Devices Inc. | $ | 6,013 | NVIDIA Corp. | $ | 4,098 | ||||
Agilent Technologies Inc. | $ | 5,420 | QUALCOMM Inc. | $ | 8,871 | ||||
Applied Materials Inc. | $ | 9,735 | Sanmina-SCI Corp.* | $ | 10,384 | ||||
Benchmark Electronics Inc.* | $ | 2,916 | Sun Microsystems Inc. | $ | 13,873 | ||||
Corning Inc. | $ | 5,860 | Texas Instruments Inc. | $ | 13,835 | ||||
EMC Corp. | $ | 13,230 | Western Digital Corp. | $ | 5,468 | ||||
Flextronics International Ltd.* | $ | 27,558 | Xerox Corp. | $ | 17,228 | ||||
Harris Corp. | $ | 4,243 | |||||||
Jabil Circuit Inc.* | $ | 12,291 | 25th Percentile | $ | 5,308 | ||||
Lexmark International Inc. | $ | 4,974 | 50th Percentile | $ | 7,442 | ||||
Micron Technology Inc. | $ | 5,738 | 75th Percentile | $ | 12,525 | ||||
NCR Corp. | $ | 4,970 | |||||||
Nortel Networks Corp. | $ | 10,948 | Celestica Inc. | $ | 8,070 |
Company Name | 2008 Annual Revenue (millions) | Company Name | 2008 Annual Revenue (millions) | ||||||
---|---|---|---|---|---|---|---|---|---|
Advanced Micro Devices | $ 5,808 | Sanmina-SCI Corp. | $ 7,202 | ||||||
Agilent Technologies Inc. | $ 5,774 | Seagate Technology | $12,708 | ||||||
Applied Materials Inc. | $ 8,129 | Sun Microsystems Inc. | $13,880 | ||||||
Benchmark Electronics, Inc. | $ 2,590 | Texas Instruments Inc. | $12,501 | ||||||
Corning Inc. | $ 5,948 | Tyco Electronics Ltd. | $14,834 | ||||||
EMC Corp (Mass) | $14,876 | Western Digital Corp. | $ 8,074 | ||||||
Flextronics International Ltd. | $30,949 | Xerox Corp. | $17,608 | ||||||
Harris Corp. | $ 5,311 | ||||||||
Jabil Circuit, Inc. | $12,780 | 25th Percentile | $ 5,315 | ||||||
Lexmark International Inc. | $ 4,528 | 50th Percentile | $ 7,202 | ||||||
Micron Technology Inc. | $ 5,841 | 75th Percentile | $12,780 | ||||||
NCR Corp. | $ 5,315 | ||||||||
NVIDIA Corp. | $ 3,425 | Celestica Inc. | $ 7,678 | ||||||
Plexus Corp. | $ 1,842 | Percentile Rank | 53rd percentile |
Financial data as of June 30, 2008.2009. Source: Standard & Poor's Research Insight.Insight
Additionally, broader market compensation data for other similarly sized organizations provided by Towers PerrinWatson is referenced in accordance with a process approved by the Compensation Committee.
Compensation Elements for the Named Executive Officers
The compensation of the Company's NEOs is comprised of the following elements:
Weighting of Compensation Elements
The variable portion of total compensation has the highest weighting at the most senior levels. Annual and equity-based incentive plan rewards are contingent upon organizational performance and ensure a strong alignment with shareholder interests. The weighting of compensation elements for 20082009 is set out in the following table.
Table 8: Weighting of Compensation Elements
| Base Salary | Annual Incentive | Equity-Based Incentives | |||||||
---|---|---|---|---|---|---|---|---|---|---|
CEO | 14.3% | 14.3% | 71.4% | |||||||
EVPs | 20.0% | 16.0% | 64.0% | |||||||
SVPs | 27.1% | 16.2% | 56.7% |
| Base Salary | Annual Incentive | Equity-based Incentives | |||||||
---|---|---|---|---|---|---|---|---|---|---|
CEO | 16.7% | 16.7% | 66.6% | |||||||
EVPs | 22.8% | 18.2% | 59.0% |
Base Salary
The objective of base salary is to attract, reward and retain top talent. Executive positions are benchmarked against the Comparator Group, with base pay targeted at the market median of this group. Base salaries are
reviewed annually and adjusted as appropriate, with consideration given to individual performance, relevant knowledge, experience and an executive's level of responsibility within the organization.
Celestica Team Incentive Plan (CTI)
The objective of the CTI is to reward all eligible employees, including the NEOs, for the achievement of annual corporate, business unit, and individual goals and objectives. Target awards for each of the NEOs are expressed as a percentage of salary and established based on the median of the Comparator Group. Actual awards for the NEOs are based on (i) the achievement of pre-determined corporate and individual goals and (ii) corporate performance relative to that of the EMS Competitors. Actual payouts can vary from 0% for performance below a threshold up to a maximum of 200% of the target bonus. Awards are derived according to the following formula:
For 2008,2009, the business performance goals were comprised of the following elements:
Individual contribution is recognized through the individual component and individual performance factor (IPF)("IPF"). The IPF is based on a review of each NEO's individual performance relative to business results, teamwork and the executive's key accomplishments. This factor can adjust the executive's actual award by a factor of between 0x0.0x and 1.5x.
The Compensation Committee also applies a relative performance factor (RPF) based on an evaluation of the Company's performance for the year relative to that of the EMS Competitors. This evaluation is based on a ROIC basedROIC-based performance metric but is ultimately within the Compensation Committee's discretion. This factor can adjust the executive's actual award by a factor of between 0.5x and 1.5x.
Actual results relative to the targets, as described above, determine the amount of the annual incentive subject to the following: (i) a minimum corporate profitability threshold must be achieved to pay the business performance component and (ii) the maximum award is two times the target.
Equity-Based Incentives
The Company's equity-based incentives for the NEOs consist of restricted share units (RSUs),RSUs, performance share units (PSUs) and stock options. The objectives of the equity-based incentive plans are to:
At the December meeting, the Compensation Committee determines the dollar value of the equity-based grants to be awarded to the NEOs based on the comparator data analysis. PriorThe actual equity mix to be awarded is approved at the January meeting this amountof the Compensation Committee. On the grant date, the dollar value is converted into the number of units that will be granted using an assumed sharethe market price that is determined with reference to the then current trading range of the Company's subordinate voting shares. Forshares as defined by the 2008 grants,applicable plan. RSUs and PSUs can be issued under the assumed share price was $4.50. The actual equity mix to be awarded is then approved atLTIP or the Celestica
January meeting of the Compensation Committee.Share Unit Plan (CSUP). The annual grants are generally made immediately following the blackout period that ends 48 hours after the Company's year endyear-end results have been released.
Target equity-based incentives are determined based on the median awards of the Comparator Group; however, consideration is given to individual performance when determining actual awards. The equity mix varies by employee level and targets a higher percentage of performance elements at the NEO levels where there is a stronger influence on results. The target mix of equity-based incentives is reviewed by the Compensation Committee each year and for 20082009 the targets for the NEOs were as follows:
The CEO has the discretion to issue equity-based awards throughout the year to attract new hires and to retain current employees within limits set by the Compensation Committee. The number of units available throughout the year for these grants is pre-approved by the Compensation Committee at the January meeting. Subject to the Company's blackout periods, these grants typically take place at the beginning of each month. Any grants to senior executivesNEOs must be reviewed with the Compensation Committee at the next meeting and in practice are reviewed in advance with the Chairman of the Compensation Committee.
RSUs
NEOs are granted RSUs under either the Celestica Share Unit Plan (CSUP).LTIP or the CSUP as part of the Company's annual grant. RSUs granted prior to February 2008 are released on the first day of December 1st two years following the grant (i.e.(i.e., RSUs granted in February 2007 will bewere released on December 1,st, 2009). Generally, RSUs granted in February 2008 or later are released one-third on each of the first two anniversaries of the grant date and the final third is released on the first day of December 1st two years following the grant. Grants made throughout the year for new hires or retention purposes will be released at a rate of one-third per year. Each RSU entitles the holder to one subordinate voting share of the Company on the release date. The payout value of the award is based on the number of RSUs being released and the share price at the time of release. The Company has the right to settle proceeds of release in either cash or shares.
PSUs
PSUs
NEOs are granted PSUs under the CSUP. PSUs vest at the end of a three-year performance period subject to pre-determined performance criteria. The number of PSUs that actually vests will range from 0% to 200% of target depending on the Company's ranking in the third year of the performance period relative to that of the EMS Competitors based on an ROIC metric approved by the Compensation Committee. The vesting schedule is outlined in the following table.
Celestica's ROIC Metric | Performance Multiplier | |
---|---|---|
Equal to/greater than highest performance of the EMS Competitors | 200% of target | |
Between the median and highest performance | Prorated between 100%-200% | |
Equal to median performance of the EMS Competitors | 100% of target | |
Between the median and lowest performance | Prorated between 0%-100% | |
Equal to/lower than lowest performance of the EMS Competitors | 0% of target |
The payout value of the award is based on the number of PSUs that vests and the share price at the time of release. Each PSU entitles the holder to receive one subordinate voting share of the Company on the release date. The Company has the right to settle the proceeds in either cash or shares.
Stock Options
Stock options are awarded under the Long Term Incentive Plan (LTIP).LTIP. Stock options vest at a rate of 25% annually on each of the anniversaryfirst four anniversaries of the date of grant and expire after a 10-year term. The payout value of the award is equal to the increase, if any, in share price at the time of exercise over the exercise price, which is the closing market price on the business day prior to the date of the grant.
The value of the stock options granted in respect of 20082009 was determined at the December meeting of the Compensation CommitteeCommittee. The number of stock options granted was determined using (i) an assumed sharethe closing price on February 1, 2010 on the NYSE of $4.50,$10.20, and (ii) a Black-Scholes factor of 0.400.45 determined using the same methodology as is used to determine Black-Scholes for stock option expensing purposes. The Black-Scholes factor was determined using the following variables: (i) volatility of the price of subordinate voting shares, and (ii) the risk-free rate over the expected life of the options. The exercise price for the stock options is the closing price on February 1, 2010, being C$10.77 on the TSX for Messrs. Nicoletti and Peri and Ms. DelBianco, and $10.20 on the NYSE for Messrs. Muhlhauser and Boucher.
In determining the number of options to be granted, the Company keeps within a maximum level for both option "burn rate" and "overhang"."overhang." "Burn rate" refers to the number of shares issued under equity plans in a given year relative to the total number of shares outstanding. In 2005, the Company amended the LTIP to provide that the number of options and share units awarded under the plan in any given year cannot exceed 1.2% of the total number of shares outstanding. "Overhang" refers to the total number of shares reserved for issuance under equity plans at any given time relative to the total number of shares outstanding. The Company has significantly reduced the number of stock option grants awarded and currently has an "overhang" of 11.7%11.3%. In 2005, the Company amended the LTIP to provide that the number of options awarded under the plan in any given year cannot exceed 1.2% of the total number of shares outstanding.
Other Compensation
Benefits
ExecutivesNEOs participate in the Company's health, dental, pension, life insurance and long-term disability programs. Benefit programs are based on market median levels in the local geography.
Perquisites
ExecutivesNEOs are entitled to an annuala bi-annual comprehensive medical at a private health clinic. The Company also pays housing expenses for Mr. Muhlhauser in Toronto, travel costs between his home in New Jersey and Toronto, and the services of a tax advisor.advisor and the associated tax gross-up(s). The Company does not provide any other perquisites.
Celestica Employee Share Ownership Plan (CESOP)(the CESOP)
The CESOP enables eligible employees, including NEOs, to acquire subordinate voting shares, so as to encourage continued employee interest in the Company's operation, growth and development. Under the CESOP, an eligible participant may elect to contribute an amount representing no more than 10% of his or her salary. The Company will contribute 25% of the amount that the employee contributes, up to a maximum of 1% of the employee's salary for the relevant payroll period. Contributions are used to purchase subordinate voting shares of the Company on the open market. The CESOP was suspended on June 1, 2009.
Executive Share Ownership
The Company has share ownership guidelines for the CEO and the other NEOs. The guidelines provide that these individuals are to hold a multiple of their salary in Celestica subordinate voting shares as shown in Table 10 below. Executives subject to ownership guidelines are expected to achieve the specified ownership within a period of five years following the latestlater of: (i) the date of implementation of the guidelines (January 26, 2005);hire, or (ii) the date of hire; or (iii) the date of promotion to a level subject to ownership guidelines. Compliance is reviewed annually as of December 31 of each year.
Table 10: Share Ownership Guidelines
Name | Ownership Guidelines | Share Ownership (Value)(1) | Share Ownership (Multiple of Salary) | ||||||
---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $3,000,000 (3 × salary) | $ | 4,472,548 | 4.5x | |||||
Paul Nicoletti | $1,024,000 (2 × salary) | $ | 1,586,859 | 3.1x | |||||
John Peri | $1,008,000 (2 × salary) | $ | 1,418,681 | 2.8x | |||||
Elizabeth L. DelBianco | $888,000 (2 × salary) | $ | 1,178,265 | 2.7x | |||||
John J. Boucher | $860,000 (2 × salary) | $ | 1,039,716 | 2.4x |
Name | Ownership Guidelines | Share Ownership (Value)(1) | Share Ownership (Multiple of Salary) | ||||||
---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $3,000,000 (3 × salary) | $ | 16,858,905 | 16.9x | |||||
Paul Nicoletti | $1,024,000 (2 × salary) | $ | 5,437,827 | 10.6x | |||||
John Peri | $1,008,000 (2 × salary) | $ | 4,919,401 | 9.8x | |||||
Elizabeth L. DelBianco | $888,000 (2 × salary) | $ | 4,052,054 | 9.1x | |||||
John Boucher | $1,000,000 (2 × salary) | $ | 4,419,959 | 8.8x |
Recoupment Provisions
The Company is subject to theSarbanes-Oxley Act of 2002.2002. Accordingly, if the Company is required to restate financial results due to misconduct or material non-compliance with financial reporting requirements, the CEO and CFO would be required to reimburse the Company for any bonuses or incentive-based compensation they had received during the 12-month period following the restatement, as well as any profits they had realized from the sale of corporate securities during that period.
Under the terms of the stock option grants and the grants made under the LTIP and the CSUP, plan, a NEO may be required by the Company to repay an amount equal to the market value of the shares at the time of release, net of taxes, if, within 12 months of the release date, the executive:
Executives who resign or are terminated for cause also forfeit all unvested RSUs, PSUs and stock options, RSUs and PSUs.options.
20082009 Compensation Decisions
Each element of compensation is considered independently of the other elements. However, the total package is reviewed to ensure that the median total compensation objective for median levels of corporate and individual performance is achieved.
Comparator Companies and Market Positioning
Benchmarking for all elements of NEO compensation was based on the Comparator Group. Salary, target annual incentive and equity-based incentive grants for the NEOs were benchmarked at the market median of the Comparator Group.
Base Salary
The base salaries for the NEOs were reviewed taking into account individual performance and experience, level of responsibility and median competitive data.
In 2008, Mr. Muhlhauser's base salary was increased from $750,000 to $1,000,000 to meet the median of the market.2009, Mr. Boucher received a 24.8%16% increase in base salary as a result of his promotion to Executive Vice President.ensure competitiveness within the market. Messrs. Muhlhauser, Nicoletti and Peri and Ms. DelBianco receiveddid not receive increases in the 0% – 3% range2009 as their existing salaries were competitive with the market.
Celestica Team Incentive Plan (CTI)
Target annual incentive awards for the CEO and other NEOs are 100% of salary and 80% of salary, respectively. For 2008, annual incentiveAnnual incentives take into account both individual and business performances on a variety of factors as set forth below. On average, in 2009 average payments to the NEOs were paid at54% lower than the maximum 200% of target incentive due to above average performance that exceeded the Company's objectives and the performance of the EMS Competitors on certain metrics.previous year.
Business Performance
In 2008,2009, the business performance component payout factor was 119%41.5% based on the following results:
Table 11: Business Performance
Measure | Weight | Percentage Achievement Relative to Target | |||||
---|---|---|---|---|---|---|---|
EBIAT(1) | 40% | 112% | |||||
ROIC, excluding intangibles(2) | 40% | 136% | |||||
Customer Loyalty(3) | 20% | 100% | |||||
Payout Factor | 119% |
Measure | Weight | Percentage Achievement Relative to Target | |||||
---|---|---|---|---|---|---|---|
Operating Margin (EBIAT)(1) | 50% | 57.5% | |||||
Corporate Revenue(2) | 25% | 0.0% | |||||
Return on Invested Capital (ROIC), excluding intangibles(3) | 25% | 51.1% | |||||
Payout Factor | 41.5% |
In assessing operating performance and operational effectiveness, the Company uses certain non-GAAP measures such as adjusted gross margin, operating margin (EBIAT) and ROIC that do not have any standardized meaning prescribed by Canadian or U.S. GAAP and are not necessarily comparable to others or to place new businesssimilar measures presented by other companies. Beginning with the Company.fourth quarter of 2009, the Company revised the definition of its non-GAAP measures to exclude all stock-based compensation expenses (in addition to the items previously excluded) to allow for a better comparison with its major North American EMS competitors. All prior period comparables reflect the revised definition. Additional information regarding these non-GAAP measures can be found in Item 5, "— Management's Discussion and Analysis of Financial Condition and Results were based on customer feedback obtained to a large extent through a survey process administered by an independent third-party service provider.of Operations."
Relative Performance Factor (RPF)
The Company's 20082009 performance was ranked relative to that of the EMS Competitors on a ROIC performance metric. The Company ranked first amongst thesuch EMS Competitors which resulted in a RPF that exceeded the 1.5x cap, resulting in the maximum RPF of 1.5x. For this comparison, the Company used adjusted ROIC, which is calculated as adjusted net earnings divided by average net invested capital.
Individual Performance Factor (IPF)
Each year, the Board of Directors and the CEO agree on performance goals.goals for the CEO. Goals for the other NEOs that will support the CEO's goals are then agreed to and established. For 2008,2009, the CEO's goals focused on: financial performance, customer loyalty, operational effectiveness, growing the business and leadership. Each NEO's
performance is then measured on a number of factors including the formal goals established for the year. Specific measures and achievements for each NEO in 20082009 were:
Chief Executive Officer
In addition to the goals listed above, the Compensation Committee's assessment of Mr. Muhlhauser's performance in 20082009 also reflected outstanding results in a numberthe following achievements of non-GAAP areas.
In 2008, the Company achieved:Company:
The Committee assessed Mr. Muhlhauser's IPF at the maximum of 1.5x reflecting the Company's strong performance in 2008.
Other NEOs
Each of the other NEOs has responsibility for the achievement of the CEO's corporate goals and objectives. The CEO's assessment of each of the other NEO's contributions to the Company's results is largely subjective and based on his judgment of each of the other NEO's contributions as a part of the senior leadership team. The achievement of individual goals is not quantitatively tied to compensation; however, the CEO's overall assessment of each NEO's contributionsachievements is used to determinea factor in determining the IPF.NEO's overall compensation.
Other factors considered in the evaluation of each NEO included the following. following:
Tableintimacy as well as activities affecting financial results. A number of Contents
significant improvementsimportant human resources and communications initiatives were implemented, including programs to improve employee engagement, which resulted in the Company's overall operations. UnderEmployee Engagement Index exceeding the leadership2009 target, and the roll-out of the Company's first global recognition program. The organizations for which Ms. DelBianco (who received an IPFwas responsible successfully managed a number of 1.2),contract, legal and securities matters and drove significant financial recoveries through effective litigation management.
Equity-Based Incentives
Equity grants to NEOs in respect of 20082009 performance consisted of RSUs, PSUs and stock options. The number of RSUs PSUs and options to beunder the LTIP and PSUs under the CSUP issued to the NEOs was based on an assumed sharea market price of $4.50, which was derived fromas defined under the trading rangerespective Plans. Please see "— Compensation Discussion and Analysis — Equity-Based Incentives" for a description of the Company's subordinate voting shares prior to the January Compensation Committee meeting.plans. The actual mix of the grants was approved by the Compensation Committee at a meeting on January 28, 200926, 2010 and the grants were issued on February 3, 2009.2, 2010.
The Company provided the NEOs the following equity-based compensation inon February 20092, 2010 in respect of 20082009 performance. On average, the value of equity granted to the NEOs was 20% lower than the previous year. The total number of options issued for 2009 to the NEOs was equal to 0.21% of outstanding shares, and the total number of options issued for 2009 to all employees receiving options was 0.33% of outstanding shares.
Name | RSUs (#) | PSUs(1) (#) | Stock Options (#) | Intended Compensatory Value of LTI Award(2) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | 444,444 | 388,889 | 694,444 | $ | 5,000,000 | ||||||||
Paul Nicoletti | 160,000 | 140,000 | 250,000 | $ | 1,800,000 | ||||||||
John Peri | 133,333 | 116,667 | 208,333 | $ | 1,500,000 | ||||||||
Elizabeth L. DelBianco | 133,333 | 116,667 | 208,333 | $ | 1,500,000 | ||||||||
John J. Boucher | 133,333 | 116,667 | 208,333 | $ | 1,500,000 |
Name | RSUs (#) | PSUs (#)(1) | Stock Options (#) | Value of LTI Award (000s)(2) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | 160,643 | 137,255 | 217,865 | $ | 4,000 | ||||||||
Paul Nicoletti | 57,831 | 49,412 | 78,431 | $ | 1,440 | ||||||||
John Peri | 48,193 | 41,176 | 65,359 | $ | 1,200 | ||||||||
Elizabeth L. DelBianco | 48,193 | 41,176 | 65,359 | $ | 1,200 | ||||||||
John Boucher | 48,193 | 41,176 | 65,359 | $ | 1,200 |
See "Compensation Discussion and Analysis — Equity-Based Incentives" for the discussion regarding the calculation, terms and vesting schedules of equity awards.
The subordinate voting shares of the Company have been listed and posted for trading under the symbol "CLS" on the NYSE and the TSX since June 30, 1998 (except for the period commencing on November 8, 2004 and ending on May 15, 2006 during which the symbol on the TSX has beenwas CLS.SV). The following chart compares the cumulative total shareholder return of C$100 invested in subordinate voting shares of the Company on December 31, 20032004 (the Company did not declare or pay any dividends during this period) with the cumulative total shareholder return of the S&P/TSX Composite Total Return Index for the period December 31, 20032004 to December 31, 2008.2009.
As can be seen from the performance graph above, an investment in the Company on January 1, 20042005 would have resulted in a 74%41% loss in value over the five yearfive-year period ended December 31, 20082009 compared with a 36%45% increase that would have resulted from an investment in the S&P/TSX Composite Total Return Index over the same period.
The compensation of the Company's NEOs has fluctuated over the same period as the Company dealt with, amongst other things, a significant decline in demand, competitive pressures, operational issues in some regions, significant restructuring and various leadership changes. In 2005,2006, total compensation for NEOs decreased by 46% compared to 2004, from $21.1 million to $11.3 million and, in 2006, by a further 57% compared to the previous year,2005, from $11.3 million in 2005 to $4.9 million (excluding severance costs). The reduction in total compensation for NEOs was largely attributable to reduced long-term incentive grants to certain NEOs. In 2006, total annual compensation for NEOs during this five-year period reached its lowest point and was 77% less than that paid in 2004.
After significant operational challenges were experienced in the second half of 2006, senior management changes were made across the Company. The new management team implemented major process improvements across all areas of the Company with a specific focus on improving profitability, reducing working capital and strengthening the Company's financial position. As management has implemented these changes during 2007 and 2008, the Company's operating performance and financial results have shownshowed significant improvements to the point where the Company was the strongest financial performer amongst the EMS Competitors by the end of 2008. The Company's performance over this two-year period was its best operating performance during the past six years, as well as its being amongst the best performers in the EMS industry on key operating performance metrics. This strong financial performance also contributed to improved outlooks from the Company's key financial rating agencies and multi-year highs in customer satisfaction levels. The performance
graphs set out below illustrate the Company's significant improvements on non-GAAP measures of gross margins, operating margins, asset utilization and ROIC.
During this period of improved performance, total compensation for the NEOs increased to $15.2 million in 2007 and $19.8 million in 2008. These increases were a result of implementing competitive compensation packages for the Company's leadership team, as well as maximum annual incentive payouts due to strong corporate performance in 2008.
In 2009, total compensation for the NEOs declined by 26% from $19.8 million in 2008 to $14.7 million in 2009, reflecting the challenges the Company faced in a year of continued economic uncertainty. The decrease was a result of lower annual incentive payouts and lower long-term incentive grants to reflect generally lower long-term incentive grant levels in the marketplace.
Notwithstanding the foregoing, the Company continues to be amongst the best performers in the electronics manufacturing services industry on key operating performance metrics. This strong financial
performance also contributed to improved outlooks from the Company's key financial debt rating agencies. The performance graphs set out below illustrate the Company's significant improvements on non-GAAP measures of adjusted gross margin, operating margin (EBIAT), asset utilization and return on invested capital. (see "— 2009 Compensation Decisions — Business Performance" for further information on non-GAAP measures).
Adjusted gross margin % of revenue | Operating margin (EBIAT) % of revenue | |
Asset utilization Inventory turns(1) | Return on invested capital | |
In 2009, total compensation for NEOs was 6% less29% higher than that paid in 2004.2005 and was 9.3% of 2009 adjusted earnings, compared to 8.1% of adjusted earnings in 2005.
EXECUTIVE COMPENSATION
Compensation of Named Executive Officers
The following table sets forth the compensation of the Company's Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executives of the Company and its subsidiaries (collectively, the "Named Executive Officers" or "NEOs")NEOs for the financial year ended December 31, 2008.2009.
In light of the significant changes to the requirements, content and format for executive compensation disclosure made by the Canadian Securities Administrators beginning with financial years ending December 31, 2008, the Company has disclosed executive compensation in the Summary Compensation table below for the financial years ended December 31, 2009 and December 31, 2008 only, in accordance with these requirements. Disclosure of executive compensation for the financial year ended December 31, 2007, in accordance with the then applicable requirements, is contained in the Company's management information circular dated March 9, 2008, which is available on www.sedar.com.
Table 13: Summary Compensation for 2008
Table
| | | | Non-Equity Incentive Plan Compensation | | | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name & Principle Position | Salary ($) | Share- Based Awards ($)(1)(3) | Option- Based Awards ($)(2)(3) | Annual Incentive Plans ($)(4) | Pension Value ($) | All Other Compensation ($)(5) | Total Compensation ($) | |||||||||||||||
Craig H. Muhlhauser President and Chief Executive Officer | $ | 937,500 | $ | 3,750,000 | $ | 1,250,000 | $ | 2,000,000 | $ | 13,800 | $ | 168,278 | $ | 8,119,578 | ||||||||
Paul Nicoletti(6) EVP, Chief Financial Officer | $ | 507,562 | $ | 1,350,000 | $ | 450,000 | $ | 818,056 | $ | 48,180 | $ | 16,982 | $ | 3,190,780 | ||||||||
John Peri(6) EVP, Global Operations | $ | 503,977 | $ | 1,125,000 | $ | 375,000 | $ | 806,364 | $ | 41,959 | $ | 298,286 | $ | 3,150,586 | ||||||||
Elizabeth L. DelBianco(6) EVP, Chief Legal & Administrative Officer and Corporate Secretary | $ | 439,924 | $ | 1,125,000 | $ | 375,000 | $ | 709,042 | $ | 33,906 | $ | 17,274 | $ | 2,700,146 | ||||||||
John J. Boucher(7) EVP, Supply Chain Management Solutions & CPO | $ | 422,525 | $ | 1,125,000 | $ | 375,000 | $ | 673,667 | $ | 10,278 | $ | 1,431 | $ | 2,607,901 |
Non-equity Incentive Plan Compensation | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name & Principal Position | Year | Salary ($) | Share- based Awards ($)(1)(3) | Option- based Awards ($)(2)(3) | Annual Incentive Plans ($)(4) | Pension Value ($)(5) | All Other Compensation ($)(6) | Total Compensation ($) | |||||||||||||||||
Craig H. Muhlhauser(7) | 2009 2008 | $ $ | 1,000,000 937,500 | $ $ | 3,000,000 3,750,000 | $ $ | 1,000,000 1,250,000 | $ $ | 904,950 2,000,000 | $ $ | 14,273 13,800 | $ $ | 128,203 168,278 | $ $ | 6,047,426 8,119,578 | ||||||||||
Paul Nicoletti(8) | 2009 2008 | $ $ | 512,000 507,562 | $ $ | 1,080,000 1,350,000 | $ $ | 360,000 450,000 | $ $ | 363,166 818,056 | $ $ | 79,133 48,180 | $ $ | 1,274 16,982 | $ $ | 2,395,573 3,190,780 | ||||||||||
John Peri(8) | 2009 2008 | $ $ | 504,000 503,977 | $ $ | 900,000 1,125,000 | $ $ | 300,000 375,000 | $ $ | 417,156 806,364 | $ $ | 79,749 41,959 | $ $ | 3,376 298,286 | $ $ | 2,204,281 3,150,586 | ||||||||||
Elizabeth L. DelBianco(8) | 2009 2008 | $ $ | 444,000 439,924 | $ $ | 900,000 1,125,000 | $ $ | 300,000 375,000 | $ $ | 367,395 709,042 | $ $ | 59,270 33,906 | $ $ | 1,004 17,274 | $ $ | 2,071,669 2,700,146 | ||||||||||
John Boucher | 2009 2008 | $ $ | 482,500 422,525 | $ $ | 900,000 1,125,000 | $ $ | 300,000 375,000 | $ $ | 261,983 673,667 | $ $ | 11,735 10,278 | $ $ | — 1,431 | $ $ | 1,956,218 2,607,901 |
The following table provides details of each option grant outstanding and the aggregate number of unvested equity-based awards for each of the Named Executive OfficersNEOs as of December 31, 2008.2009.
Table 14: Outstanding Option-Based and Share-Based Awards(1)
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 (#) | Market Payout Value of Share Awards that have not Vested at Minimum ($)(2) | Market Payout Value of Share Awards that have not Vested at Target ($)(2) | Market Payout Value of Share Awards that have not Vested at Maximum ($)(2) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | |||||||||||||||||||||||||
Jun. 6, 2005 | 50,000 | $ | 13.00 | Jun. 6, 2015 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2006 | 74,244 | * | $ | 10.00 | Jan. 31, 2016 | — | 63,000 | — | $ | 290,430 | $ | 580,860 | |||||||||||||
Feb. 2, 2007 | 500,000 | $ | 6.05 | Feb. 2, 2017 | — | 167,000 | $ | 258,160 | $ | 769,870 | $ | 1,281,580 | |||||||||||||
Feb. 2, 2007 | 202,000 | * | $ | 6.05 | Feb. 2, 2017 | — | — | — | — | — | |||||||||||||||
Feb. 5, 2008 | 450,000 | $ | 6.51 | Feb. 5, 2018 | — | 592,500 | $ | 1,694,175 | $ | 2,731,425 | $ | 3,768,675 | |||||||||||||
Feb. 3, 2009 | 694,444 | $ | 4.13 | Feb. 3, 2019 | — | 833,333 | $ | 1,835,554 | $ | 3,441,665 | $ | 5,047,777 | |||||||||||||
Paul Nicoletti | |||||||||||||||||||||||||
Jan. 1, 1999 | 5,600 | C$ | 20.63 | Jan. 1, 2009 | — | — | — | — | — | ||||||||||||||||
Dec. 3, 2002 | 15,000 | C$ | 29.11 | Dec. 3, 2012 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2004 | 13,333 | C$ | 22.75 | Jan. 31, 2014 | — | — | — | — | — | ||||||||||||||||
May 11, 2004 | 3,333 | C$ | 24.92 | May 11, 2014 | — | — | — | — | — | ||||||||||||||||
Dec. 9, 2004 | 13,600 | C$ | 18.00 | Dec. 9, 2014 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2006 | 21,591 | C$ | 11.43 | Jan. 31, 2016 | — | 19,000 | — | $ | 87,590 | $ | 175,180 | ||||||||||||||
Feb. 2, 2007 | 37,880 | C$ | 7.10 | Feb. 2, 2017 | — | 48,610 | $ | 160,068 | $ | 224,092 | $ | 288,116 | |||||||||||||
May 7, 2007 | — | — | — | — | 10,700 | $ | 49,327 | $ | 49,327 | $ | 49,327 | ||||||||||||||
Jul. 31, 2007 | 91,500 | C$ | 6.27 | Jul. 31, 2017 | — | 15,000 | $ | 69,150 | $ | 69,150 | $ | 69,150 | |||||||||||||
Feb. 5, 2008 | 150,000 | C$ | 6.51 | Feb. 5, 2018 | — | 197,500 | $ | 564,725 | $ | 910,475 | $ | 1,256,225 | |||||||||||||
Feb. 3, 2009 | 250,000 | C$ | 5.13 | Feb. 3, 2019 | — | 300,000 | $ | 660,800 | $ | 1,239,000 | $ | 1,817,200 | |||||||||||||
John Peri | |||||||||||||||||||||||||
Jan. 1, 1999 | 9,000 | C$ | 20.63 | Jan. 1, 2009 | — | — | — | — | — | ||||||||||||||||
Dec. 3, 2002 | 25,000 | C$ | 29.11 | Dec. 3, 2012 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2004 | 16,667 | C$ | 22.75 | Jan. 31, 2014 | — | — | — | — | — | ||||||||||||||||
Dec. 9, 2004 | 11,300 | C$ | 18.00 | Dec. 9, 2014 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2006 | 20,455 | C$ | 11.43 | Jan. 31, 2016 | — | 18,000 | — | $ | 82,980 | $ | 165,960 | ||||||||||||||
Feb. 2, 2007 | 40,404 | C$ | 7.10 | Feb. 2, 2017 | — | — | — | — | — | ||||||||||||||||
Feb. 2, 2007 | 80,808 | * | C$ | 7.10 | Feb. 2, 2017 | — | 44,444 | — | $ | 204,887 | $ | 409,774 | |||||||||||||
Feb. 5, 2008 | 130,000 | C$ | 6.51 | Feb. 5, 2018 | — | 171,167 | $ | 489,430 | $ | 789,080 | $ | 1,088,730 | |||||||||||||
Feb. 3, 2009 | 208,333 | C$ | 5.13 | Feb. 3, 2019 | — | 250,000 | $ | 550,665 | $ | 1,032,500 | $ | 1,514,335 |
Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the-money Options ($)(2) | Number of Shares or Units that have not Vested (#) | Market Payout Value of Share Awards that have not Vested at Minimum ($)(3) | Market Payout Value of Share Awards that have not Vested at Target ($)(3) | Market Payout Value of Share Awards that have not Vested at Maximum ($)(3) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | |||||||||||||||||||||||||
Jun. 6, 2005 | 50,000 | $ | 13.00 | Jun. 6, 2015 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2006 | 148,488 | $ | 10.00 | Jan. 31, 2016 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 2, 2007 | 500,000 | $ | 6.05 | Feb. 2, 2017 | $ | 1,695,000 | 111,000 | $ | — | $ | 1,047,840 | $ | 2,095,680 | ||||||||||||
Feb. 2, 2007 | 404,000 | * | $ | 6.05 | Feb. 2, 2017 | $ | 1,369,560 | — | $ | — | $ | — | $ | — | |||||||||||
Feb. 5, 2008 | 450,000 | $ | 6.51 | Feb. 5, 2018 | $ | 1,318,500 | 470,000 | $ | 2,312,800 | $ | 4,436,800 | $ | 6,560,800 | ||||||||||||
Feb. 3, 2009 | 694,444 | $ | 4.13 | Feb. 3, 2019 | $ | 3,687,498 | 833,333 | $ | 4,195,551 | $ | 7,866,664 | $ | 11,537,776 | ||||||||||||
Feb. 2, 2010 | 217,865 | $ | 10.20 | Feb. 2, 2020 | $ | — | 297,898 | $ | 1,638,559 | $ | 3,038,560 | $ | 4,438,561 | ||||||||||||
Paul Nicoletti | |||||||||||||||||||||||||
Dec. 3, 2002 | 15,000 | C$ | 29.11 | Dec. 3, 2012 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2004 | 13,333 | C$ | 22.75 | Jan. 31, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
May 11, 2004 | 3,333 | C$ | 24.92 | May 11, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Dec. 9, 2004 | 13,600 | C$ | 18.00 | Dec. 9, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2006 | 21,591 | C$ | 11.43 | Jan. 31, 2016 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 2, 2007 | 37,880 | C$ | 7.10 | Feb. 2, 2017 | $ | 94,932 | 13,888 | $ | — | $ | 131,103 | $ | 262,205 | ||||||||||||
May 7, 2007 | — | — | — | $ | — | 10,700 | $ | 101,008 | $ | 101,008 | $ | 101,008 | |||||||||||||
Jul. 31, 2007 | 91,500 | C$ | 6.27 | Jul. 31, 2017 | $ | 295,860 | 15,000 | $ | 141,600 | $ | 141,600 | $ | 141,600 | ||||||||||||
Feb. 5, 2008 | 150,000 | C$ | 6.51 | Feb. 5, 2018 | $ | 453,470 | 156,667 | $ | 770,936 | $ | 1,478,936 | $ | 2,186,936 | ||||||||||||
Feb. 3, 2009 | 250,000 | C$ | 5.13 | Feb. 3, 2019 | $ | 1,058,097 | 300,000 | $ | 1,510,400 | $ | 2,832,000 | $ | 4,153,600 | ||||||||||||
Feb. 2, 2010 | 78,431 | C$ | 10.77 | Feb. 2, 2020 | $ | — | 107,243 | $ | 589,876 | $ | 1,093,879 | $ | 1,597,881 | ||||||||||||
John Peri | |||||||||||||||||||||||||
Dec. 3, 2002 | 25,000 | C$ | 29.11 | Dec. 3, 2012 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2004 | 16,667 | C$ | 22.75 | Jan. 31, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Dec. 9, 2004 | 11,300 | C$ | 18.00 | Dec. 9, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2006 | 20,455 | C$ | 11.43 | Jan. 31, 2016 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 2, 2007 | 40,404 | C$ | 7.10 | Feb. 2, 2017 | $ | 101,258 | 44,444 | $ | — | $ | 419,551 | $ | 839,103 | ||||||||||||
Feb. 2, 2007 | 161,616 | * | C$ | 7.10 | Feb. 2, 2017 | $ | 405,031 | — | $ | — | $ | — | $ | — | |||||||||||
Feb. 5, 2008 | 130,000 | C$ | 6.51 | Feb. 5, 2018 | $ | 393,007 | 135,778 | $ | 668,144 | $ | 1,281,744 | $ | 1,895,344 | ||||||||||||
Feb. 3, 2009 | 208,333 | C$ | 5.13 | Feb. 3, 2019 | $ | 881,746 | 250,000 | $ | 1,258,664 | $ | 2,360,000 | $ | 3,461,336 | ||||||||||||
Feb. 2, 2010 | 65,359 | C$ | 10.77 | Feb. 2, 2020 | $ | — | 89,369 | $ | 491,569 | $ | 911,564 | $ | 1,331,559 | ||||||||||||
Elizabeth L. DelBianco | |||||||||||||||||||||||||
Dec. 3, 2002 | 12,000 | C$ | 29.11 | Dec. 3, 2012 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Dec. 18, 2002 | 3,000 | C$ | 23.29 | Dec. 18, 2012 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Apr. 18, 2003 | 8,000 | C$ | 15.35 | Apr. 18, 2013 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2004 | 16,667 | C$ | 22.75 | Jan. 31, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Dec. 9, 2004 | 11,300 | C$ | 18.00 | Dec. 9, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2006 | 21,591 | C$ | 11.43 | Jan. 31, 2016 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 2, 2007 | 18,182 | C$ | 7.10 | Feb. 2, 2017 | $ | 45,567 | 13,333 | $ | — | $ | 125,864 | $ | 251,727 | ||||||||||||
Feb. 5, 2008 | 90,000 | C$ | 6.51 | Feb. 5, 2018 | $ | 272,082 | 125,333 | $ | 616,744 | $ | 1,183,144 | $ | 1,749,544 | ||||||||||||
Feb. 3, 2009 | 208,333 | C$ | 5.13 | Feb. 3, 2019 | $ | 881,746 | 250,000 | $ | 1,258,664 | $ | 2,360,000 | $ | 3,461,336 | ||||||||||||
Feb. 2, 2010 | 65,359 | C$ | 10.77 | Feb. 2, 2020 | $ | — | 89,369 | $ | 491,569 | $ | 911,564 | $ | 1,331,559 |
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 (#) | Market Payout Value of Share Awards that have not Vested at Minimum ($)(2) | Market Payout Value of Share Awards that have not Vested at Target ($)(2) | Market Payout Value of Share Awards that have not Vested at Maximum ($)(2) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Elizabeth L. DelBianco | |||||||||||||||||||||||||
Jan. 1, 1999 | 9,000 | C$ | 20.63 | Jan. 1, 2009 | — | — | — | — | — | ||||||||||||||||
Dec. 3, 2002 | 12,000 | C$ | 29.11 | Dec. 3, 2012 | — | — | — | — | — | ||||||||||||||||
Dec. 18, 2002 | 3,000 | C$ | 23.29 | Dec. 18, 2012 | — | — | — | — | — | ||||||||||||||||
Apr. 18, 2003 | 8,000 | C$ | 15.35 | Apr. 18, 2013 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2004 | 16,667 | C$ | 22.75 | Jan. 31, 2014 | — | — | — | — | — | ||||||||||||||||
Dec. 9, 2004 | 11,300 | C$ | 18.00 | Dec. 9, 2014 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2006 | 21,591 | C$ | 11.43 | Jan. 31, 2016 | — | 19,000 | — | $ | 87,590 | $ | 175,180 | ||||||||||||||
Feb. 2, 2007 | 36,364 | C$ | 7.10 | Feb. 2, 2017 | — | 46,666 | $ | 153,665 | $ | 215,130 | $ | 276,595 | |||||||||||||
Feb. 5, 2008 | 120,000 | C$ | 6.51 | Feb. 5, 2018 | — | 158,000 | $ | 451,780 | $ | 728,380 | $ | 1,004,980 | |||||||||||||
Feb. 3, 2009 | 208,333 | C$ | 5.13 | Feb. 3, 2019 | — | 250,000 | $ | 550,665 | $ | 1,032,500 | $ | 1,514,335 | |||||||||||||
John J. Boucher | |||||||||||||||||||||||||
Jan. 1, 1999 | 1,406 | $ | 12.80 | Jan. 1, 2009 | — | — | — | — | — | ||||||||||||||||
Jan. 20, 1999 | 1,050 | $ | 10.67 | Jan. 20, 2009 | — | — | — | — | — | ||||||||||||||||
Oct. 13, 2000 | 3,750 | $ | 21.83 | Oct. 13, 2010 | — | — | — | — | — | ||||||||||||||||
May 22, 2001 | 6,000 | $ | 19.81 | May 22, 2011 | — | — | — | — | — | ||||||||||||||||
Oct. 31, 2001 | 3,750 | $ | 10.40 | Oct. 31, 2011 | — | — | — | — | — | ||||||||||||||||
May 10, 2002 | 28,125 | $ | 13.52 | May 10, 2012 | — | — | — | — | — | ||||||||||||||||
Feb. 11, 2003 | 5,625 | $ | 12.99 | Feb. 11, 2013 | — | — | — | — | — | ||||||||||||||||
Mar. 15, 2004 | 20,000 | $ | 17.10 | Mar. 15, 2014 | — | — | — | — | — | ||||||||||||||||
Mar. 15, 2004 | 6,667 | $ | 17.10 | Mar. 15, 2014 | — | — | — | — | — | ||||||||||||||||
Dec. 9, 2004 | 25,000 | $ | 14.86 | Dec. 9, 2014 | — | — | — | — | — | ||||||||||||||||
Jan. 31, 2006 | 20,455 | $ | 10.00 | Jan. 31, 2016 | — | 18,000 | — | $ | 82,980 | $ | 165,960 | ||||||||||||||
Feb. 2, 2007 | 30,304 | $ | 6.05 | Feb. 2, 2017 | — | 38,888 | $ | 102,443 | $ | 179,274 | $ | 256,104 | |||||||||||||
Feb. 5, 2008 | 110,000 | $ | 6.51 | Feb. 5, 2018 | — | 144,800 | $ | 413,978 | $ | 667,528 | $ | 921,078 | |||||||||||||
Feb. 3, 2009 | 208,333 | $ | 4.13 | Feb. 3, 2019 | — | 250,000 | $ | 550,665 | $ | 1,032,500 | $ | 1,514,335 |
Name | Number of Securities Underlying Unexercised Options (#) | Option Exercise Price ($) | Option Expiration Date | Value of Unexercised In-the-money Options ($)(2) | Number of Shares or Units that have not Vested (#) | Market Payout Value of Share Awards that have not Vested at Minimum ($)(3) | Market Payout Value of Share Awards that have not Vested at Target ($)(3) | Market Payout Value of Share Awards that have not Vested at Maximum ($)(3) | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
John Boucher | |||||||||||||||||||||||||
Oct. 13, 2000 | 3,750 | $ | 21.83 | Oct. 13, 2010 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
May 22, 2001 | 6,000 | $ | 19.81 | May 22, 2011 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Oct. 31, 2001 | 3,750 | $ | 10.40 | Oct. 31, 2011 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
May 10, 2002 | 28,125 | $ | 13.52 | May 10, 2012 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 11, 2003 | 5,625 | $ | 12.99 | Feb. 11, 2013 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Mar. 15, 2004 | 20,000 | $ | 17.10 | Mar. 15, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Mar. 15, 2004 | 6,667 | $ | 17.10 | Mar. 15, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Dec. 9, 2004 | 25,000 | $ | 14.86 | Dec. 9, 2014 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Jan. 31, 2006 | 20,455 | $ | 10.00 | Jan. 31, 2016 | $ | — | — | $ | — | $ | — | $ | — | ||||||||||||
Feb. 2, 2007 | 30,304 | $ | 6.05 | Feb. 2, 2017 | $ | 102,731 | 16,666 | $ | — | $ | 157,327 | $ | 314,654 | ||||||||||||
Feb. 5, 2008 | 110,000 | $ | 6.51 | Feb. 5, 2018 | $ | 322,300 | 114,867 | $ | 565,144 | $ | 1,084,344 | $ | 1,603,544 | ||||||||||||
Feb. 3, 2009 | 208,333 | $ | 4.13 | Feb. 3, 2019 | $ | 1,106,248 | 250,000 | $ | 1,258,664 | $ | 2,360,000 | $ | 3,461,336 | ||||||||||||
Feb. 2, 2010 | 65,359 | $ | 10.20 | Feb. 2, 2020 | $ | — | 89,369 | $ | 491,569 | $ | 911,564 | $ | 1,331,559 |
The following table provides details of the value of option-based and share-based awards that vested during 20082009 and the value of annual incentive awards paid for 20082009 performance for each Named Executive Officer.NEO.
Table 15: Incentive Plan Awards — Value Vested or Earned in 2008
2009
Name | Option-Based Awards — Value Vested During the Year(1) ($) | Share-Based Awards — Value Vested During the Year(2) ($) | Non-Equity Incentive Plan Compensation — Value Earned During the Year(3) ($) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $ | 57,500 | $ | 1,010,160 | $ | 2,000,000 | ||||
Paul Nicoletti | $ | 39,269 | $ | 103,565 | $ | 818,056 | ||||
John Peri | — | $ | 95,298 | $ | 806,364 | |||||
Elizabeth L. DelBianco | — | $ | 99,449 | $ | 709,042 | |||||
John J. Boucher | $ | 3,485 | $ | 108,449 | $ | 673,667 |
Name | Option-based Awards — Value Vested During the Year ($)(1) | Share-based Awards — Value Vested During the Year ($)(2) | Non-equity Incentive Plan Compensation — Value Earned During the Year ($)(3) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $ | — | $ | 1,495,340 | $ | 904,950 | ||||
Paul Nicoletti | $ | 46,704 | $ | 616,265 | $ | 363,166 | ||||
John Peri | $ | — | $ | 322,282 | $ | 417,156 | ||||
Elizabeth L. DelBianco | $ | — | $ | 570,545 | $ | 367,395 | ||||
John Boucher | $ | — | $ | 457,728 | $ | 261,983 |
released on December 1, 2009 to all NEOs except Mr. Peri at a price of $8.19 on the NYSE for Messrs. Muhlhauser and (ii)Boucher and C$8.58 on the TSX for Mr. Nicoletti and Ms. DelBianco, and (iii) PSUs were released to all NEOs except Mr. Muhlhauser, on January 31, 2008February 2, 2009 at a price of $5.63$4.30 on the NYSE for Mr.Messrs. Boucher and Muhlhauser and C$5.855.37 on the TSX for Messers.Messrs. Nicoletti and Peri and Ms. DelBianco.
All of the preceeding C$ values were converted to U.S. dollars at the average exchange rate for 2009 of 1.1412.
Pension Plans
The following table provides details of the amount of the Celestica contributions to the pension plans and the accumulated value as of December 31, 20082009 for each Named Executive Officer.NEO.
Table 16: Defined Contribution Pension Plan
Name | Accumulated Value at Start of Year ($) | Compensatory ($) | Non-compensatory(1) ($) | Accumulated Value at Year End ($) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $ | 61,788 | $ | 13,800 | $ | (2,692 | ) | $ | 72,896 | ||||
Paul Nicoletti | $ | 211,569 | $ | 48,180 | $ | (77,511 | ) | $ | 182,238 | ||||
John Peri | $ | 477,826 | $ | 41,959 | $ | (132,563 | ) | $ | 387,222 | ||||
Elizabeth L. DelBianco | $ | 183,265 | $ | 33,906 | $ | (44,267 | ) | $ | 172,904 | ||||
John J. Boucher | $ | 326,205 | $ | 10,278 | $ | (129,357 | ) | $ | 207,126 |
Name | Accumulated Value at Start of Year ($) | Compensatory ($) | Non-compensatory ($) | Accumulated Value at End of Year ($) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Craig H. Muhlhauser | $ | 72,896 | $ | 14,273 | $ | 40,923 | $ | 128,092 | |||||
Paul Nicoletti(1) | $ | 170,230 | $ | 79,133 | $ | 80,224 | $ | 329,587 | |||||
John Peri(1) | $ | 361,706 | $ | 79,749 | $ | 121,794 | $ | 563,249 | |||||
Elizabeth L. DelBianco(1) | $ | 161,511 | $ | 59,270 | $ | 52,955 | $ | 273,736 | |||||
John Boucher | $ | 207,126 | $ | 11,735 | $ | 107,168 | $ | 326,029 |
Messrs. Muhlhauser and Boucher participate in the "US Plan". The US Plan is a defined contribution pension plan andthat qualifies as a deferred salary arrangement under section 401(k) of the Internal Revenue Code (United States) (the "U.S. Plan"). Under the USU.S. Plan, participating employees may defer 100% of their pre-tax earnings subject to any statutory limitations. The Company may make contributions for the benefit of eligible employees. The USU.S. Plan allows employees to choose how their account balances are invested on their behalf within a range of investment options provided by third partythird-party fund managers. The Company contributes: (i) 3% of eligible compensation for Messrs. Muhlhauser and Boucher, and (ii) up to an additional 3% of eligible compensation by matching 50% of the first 6% contributed by each of them. The maximum contribution of the Company based on the Internal Revenue Code rules and the plan formula for 20082009 is $13,800.$14,700. There are no supplemental plans for U.S. employees.
Messrs. Nicoletti and Peri and Ms. DelBianco participate in the defined contribution portion of the Canadian Pension Plan. The defined contribution portion of the Canadian Pension Plan allows employees to choose how the Company's contributions are invested on their behalf within a range of investment options provided by third partythird-party fund managers. The Company's contributions to this plan on behalf of ana NEO range from 3.6% to 6.75% of salary and paid annual incentive based on the number of years of service. Retirement benefits depend upon the performance of the investment options chosen. Messrs. Nicoletti and Peri and Ms. DelBianco also participate in an unregistered supplementary pension plan (the "Supplementary Plan") that is also a defined contribution plan that is designed to provide benefits equal to the difference between the benefits determined in accordance with the formula set out in the Canadian Pension Plan and Canada Revenue Agency maximum pension benefits. Notional accounts are maintained for each participant in the Supplementary Plan. Participants are entitled to select from among the investment options available in the registered plan for the purpose of determining the return on their notional accounts.
The 20082009 percentage contribution rates are outlined below in Table 17.
Table 17: Celestica Contributions to the Canadian Pension Plan
Name | Contribution % | |||
---|---|---|---|---|
Paul Nicoletti | 6.25% | |||
John Peri | ||||
Elizabeth L. DelBianco | ||||
Termination of Employment and Change in Control Arrangements with Named Executive Officers
The Company has entered into employment agreements with certain of its NEOs in order to provide for certainty to the Company and such NEONEOs with respect to such thingsissues as obligations of confidentiality, non-solicitation and non-competition after termination of employment, the amount of severance to be paid in the event of termination of the NEO's employment of an NEO is terminated, and to provide a retention incentive in the event of a change in control scenario.
Messrs. Muhlhauser and Nicoletti and Ms. DelBianco
The employment agreements of the above notedabove-noted individuals provide that each of them is entitled to certain severance benefits if, during a change in control period at the Company, (definedthey are terminated without cause or resign for good reason as defined in their agreements (which provision is commonly referred to as a "double-trigger" provision). A change in control period is defined in their agreements as the period (a) commencing on the date the Company enters into a binding agreement for a change in control, announces an intention is announced by the Company to effect a change in control or the board adopts a resolution that a change in control has occurred and (b) ending three years after the completion of the change in control or, if a change in control is not completed, one year following the commencement of the period), they are terminated without cause or resign for reasons specified in their agreements.period. The amount of the severance payment for Mr. Muhlhauser is equal to three times his annual base salary and the simple average of his annual incentive for the three prior completed financial years of the Company, together with a portion of his expected annual incentive for the year, based on expected financial results, prorated to the date of termination. The amount of the severance payment for each of Mr. Nicoletti and Ms. DelBianco is equal to three times their annual base salary and target annual incentive, together with a portion of their target annual incentive for the year prorated to the date of termination.
In addition, the The agreements provide for a cash settlement to cover benefits that would otherwise be payable during the severance period, and the continuation of contributions to their pension and retirement plans until the third anniversary following their termination.
Upon a change In addition, in control or upon termination without cause during a change in control period or resignation for reasons specified in their agreements during a change in control period,these circumstances, (a) the options granted to each of them vest immediately, (b) the unvested PCOs and PSUs granted to each of them vest immediately at target level of performance, unless the terms of a PCO or PSU grant provide otherwise, or on such other more favorable terms as the Board of Directors in its discretion may provide, and (c) the RSUs granted to each of them shall vest immediately.
Outside a change in control period, upon termination without cause or resignation for reasons specifiedgood reason as defined in their agreements, the amount of the severance payment for Mr. Muhlhauser is equal to two times his annual base salary and the simple average of his annual incentive for the two prior completed financial years of the Company, together with a portion of his expected annual incentive for the year, based on expected financial results, prorated to the date of termination. The amount of the severance payment for each of Mr. Nicoletti and Ms. DelBianco is equal to two times their annual base salary and target annual incentive, together with a portion of their target annual incentive for the year prorated to the date of termination. There is no accelerated vesting of options, PCOs or PSUs and all unvested options, PCOs and PSUs are cancelled. However, options that would have otherwise vested and become exercisable during the 12 week period following the date of termination shall vest and become exercisable in accordance with the terms of the plan. All RSUs shall vest immediately on a pro rata basis based on the number of full years of employment completed between the date of grant and the termination of employment. In addition, the Company's obligations provide for a cash settlement to cover benefits and contributions to or continuation of their pension and retirement plans for a two-year period following termination. In the event of retirement, the number of RSUs and PSUs vestvests on a proratedpro rata basis based on the number of days between the date of grant and the date of retirement.
The foregoing entitlements are conferred on Messrs. Muhlhauser and Nicoletti and Ms. DelBianco in part upon their fulfillment of certain confidentiality, non-solicitation and non-competition obligations for a period of three years following termination of employment in the case of Mr. Muhlhauser and a period of two years following termination of employment in the case of Mr. Nicoletti and Ms. DelBianco. In the event of a breach of such obligations, the Company is entitled to seek appropriate legal, equitable and other remedies, including injunctive relief.
The following tables summarize the payments to which Messrs. Muhlhauser and Nicoletti and Ms. DelBianco would have been entitled upon a change in control, or if their employment had been terminated on December 31, 20082009 as a result of a change in control, retirement or termination without cause.
Table 18: Mr. Muhlhauser's Benefits
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | — | $ | 3,791,725 | — | $ | 3,791,725 | |||||||
Change in Control — Termination | $ | 5,034,060 | $ | 3,791,725 | $ | 69,408 | $ | 8,895,193 | |||||
Retirement | — | $ | 1,921,890 | — | $ | 1,921,890 | |||||||
Termination without Cause | $ | 3,796,996 | $ | 86,053 | $ | 47,586 | $ | 3,930,635 | |||||
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | $ | — | $ | 19,103,435 | $ | — | $ | 19,103,435 | |||||
Change in Control — Termination | $ | 5,763,950 | $ | 19,103,435 | $ | 75,613 | $ | 24,942,998 | |||||
Retirement | $ | — | $ | 11,873,433 | $ | — | $ | 11,873,433 | |||||
Termination without Cause | $ | 4,763,950 | $ | 2,131,767 | $ | 50,409 | $ | 6,946,126 | |||||
Table 19: Mr. Nicoletti's Benefits
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | — | $ | 1,541,348 | — | $ | 1,541,348 | |||||||
Change in Control — Termination | $ | 3,169,966 | $ | 1,541,348 | $ | 204,399 | $ | 4,915,713 | |||||
Retirement | — | $ | 764,185 | — | $ | 764,185 | |||||||
Termination without Cause | $ | 2,249,653 | $ | 106,749 | $ | 133,874 | $ | 2,490,276 | |||||
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | $ | — | $ | 5,924,738 | $ | — | $ | 5,924,738 | |||||
Change in Control — Termination | $ | 3,174,400 | $ | 5,924,738 | $ | 255,927 | $ | 9,355,065 | |||||
Retirement | $ | — | $ | 3,281,867 | $ | — | $ | 3,281,867 | |||||
Termination without Cause | $ | 2,252,800 | $ | 551,156 | $ | 170,212 | $ | 2,974,168 | |||||
Table 20: Ms. DelBianco's Benefits
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | — | $ | 1,185,472 | — | $ | 1,185,472 | |||||||
Change in Control — Termination | $ | 2,747,538 | $ | 1,185,472 | $ | 160,615 | $ | 4,093,625 | |||||
Retirement | — | $ | 622,781 | — | $ | 622,781 | |||||||
Termination without Cause | $ | 1,949,865 | $ | 58,890 | $ | 104,686 | $ | 2,113,441 | |||||
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits(2) | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | $ | — | $ | 4,591,536 | $ | — | $ | 4,591,536 | |||||
Change in Control — Termination | $ | 2,752,800 | $ | 4,591,536 | $ | 226,514 | $ | 7,570,850 | |||||
Retirement | $ | — | $ | 2,453,796 | $ | — | $ | 2,453,796 | |||||
Termination without Cause | $ | 1,953,600 | $ | 333,914 | $ | 150,603 | $ | 2,438,117 | |||||
Messrs. Peri and Boucher
The terms of employment with the Company for Messrs. Peri and Boucher are governed by the Company's Executive PolicyEmployment Guidelines (the "Executive Guidelines")Executive Guidelines). Upon termination without cause or resignation for reasons specified in the Executive Guidelines within two years following a change in control of the Company (a "double-trigger" provision), Messrs. Peri and Boucher are entitled to a severance payment equal to two times annual base salary and the lower of target or actual annual incentive for the previous year, subject to adjustment for factors including length of service, together with a portion of his annual incentive for the year prorated to the date of termination. In addition, upon a change in control (a) all unvested options granted to Messrs. Peri and Boucher vest on the date of change in control, (b) all unvested RSUs granted to them vest on the date of change in control, and (c) all unvested PSUs granted to them vest on the date of change in control at target level of performance.
Under the Executive Guidelines, the pension and group benefits of Messrs. Peri and Boucher discontinue on the date of termination. In addition, upon a change in control or upon termination without cause or resignation for reasons specified in the Executive Guidelines within two years following a change in control (a) all options granted to Messrs. Peri and Boucher vest immediately, (b) the RSUs granted to them vest immediately, and (c) the PSUs granted to them vest immediately at target level of performance.
Outside of the two-year period following a change in control, upon termination without cause, Messrs. Peri and Boucher are entitled to payments and benefits that are substantially similar to those provided following a termination within two years of a change in control, except that awards vest according to plan provisions(a) vested options may be exercised for a period of 30 days and unvested options are forfeited on the termination date, (b) in respect of RSU grants with no accelerateda 100% vesting at the end of options and PSUs.the term, RSUs vest immediately on a pro-ratapro rata basis based on the full number of years of employment completed between the date of grant and the date of termination.termination, and in respect of RSU grants with one-third vesting over each of three years, unvested RSUs will not be released, and (c) PSUs are forfeited on the termination date. In the event of retirement, (a) options continue to vest and are exercisable until the numberearlier of RSUsthree years following retirement and PSUsthe original expiry date, (b) in respect of RSU grants with a 100% vesting at the end of the term, RSUs vest on a proratedpro rata basis based on the number of days between the date of grant and the date of retirement, and in respect of RSUs grants with one-third vesting over each of three years, unvested RSUs vest on a pro rata basis based on the number of days between the date of the most recent release and the date of retirement, and (c) PSUs vest based on actual performance and are prorated for the number of days between the date of grant and the date of retirement.
Table The foregoing entitlements are conferred on Messrs. Peri and Boucher in part upon their fulfillment of Contentscertain confidentiality, non-solicitation and non-competition obligations for a period of two years following termination of their employment.
The following tables summarize the payments to which Messrs. Peri and Boucher would have been entitled upon a change ofin control, or if their employment had been terminated on December 31, 20082009 as a result of a change in control, retirement or termination without cause.
Table 21: Mr. Peri's Benefits
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | — | $ | 1,238,182 | — | $ | 1,238,182 | |||||||
Change in Control — Termination | $ | 1,534,523 | $ | 1,238,182 | — | $ | 2,772,705 | ||||||
Retirement | — | $ | 620,195 | — | $ | 620,195 | |||||||
Termination without Cause | $ | 1,534,523 | — | — | $ | 1,534,523 | |||||||
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | $ | — | $ | 5,049,465 | — | $ | 5,049,465 | ||||||
Change in Control — Termination | $ | 2,231,556 | $ | 5,049,465 | — | $ | 7,281,021 | ||||||
Retirement | $ | — | $ | 3,192,840 | — | $ | 3,192,840 | ||||||
Termination without Cause | $ | 2,231,556 | $ | — | — | $ | 2,231,556 | ||||||
Table 22: Mr. Boucher's Benefits
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | — | $ | 929,782 | — | $ | 929,782 | |||||||
Change in Control — Termination | $ | 1,295,698 | $ | 929,782 | — | $ | 2,225,480 | ||||||
Retirement | — | $ | 488,833 | — | $ | 488,833 | |||||||
Termination without Cause | $ | 1,295,698 | $ | 34,148 | — | $ | 1,329,846 | ||||||
| Cash Portion(1) | Value of Exercisable/ Vested LTIP | Other Benefits | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Change in Control — No Termination | $ | — | $ | 5,001,010 | — | $ | 5,001,010 | ||||||
Change in Control — Termination | $ | 2,061,983 | $ | 5,001,010 | — | $ | 7,062,993 | ||||||
Retirement | $ | — | $ | 2,723,566 | — | $ | 2,723,566 | ||||||
Termination without Cause | $ | 2,061,983 | $ | — | — | $ | 2,061,983 | ||||||
Securities Authorized for Issuance Under Equity Compensation Plans
Table 23: Equity Compensation Plans as at December 31, 20082009
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(1) (#) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Equity Compensation Plans Approved by Securityholders | Manufacturers' Services Limited (MSL) (plan acquired as part of acquisition) | 213,735 | $ | 15.46 | 0 | |||||||
LTIP (Options) | 8,930,465 | $ | 11.88/C$15.88 | 18,781,037 | ||||||||
LTIP (RSUs) | 62,500 | N/A | 1,016,940 | |||||||||
Total(2): | 9,206,700 | $ | 12.23/C$15.88 | 19,797,977 | ||||||||
Equity Compensation Plans Not Approved by Securityholders | 7,644,577 | N/A | N/A | |||||||||
Total: | 16,851,277 | N/A | 19,797,977 | |||||||||
Plan Category | Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (#) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($) | Securities Remaining Available for Future Issuance Under Equity Compensation Plans(1) (#) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Equity Compensation Plans Approved by Securityholders | Manufacturers' Services Limited (MSL) (plan acquired as part of acquisition) | 209,178 | $15.40 | 0 | |||||||
LTIP (Options) | 10,226,429 | $10.26/C$11.96 | 17,192,717 | ||||||||
LTIP (RSUs) | 62,500 | N/A | 1,016,940 | ||||||||
Total(2) | 10,498,107 | $10.42/C$11.96 | 18,209,657 | ||||||||
Equity Compensation Plans Not Approved by Securityholders | 13,568,142 | N/A | N/A | ||||||||
Total: | 24,066,249 | N/A | 18,209,657 | ||||||||
The LTIP is the only securities-based compensation plan providing for the issuance of securities from treasury under which grants have been made and continue to be made by the Company since the company was listed on the TSX. Under the LTIP, the Board of Directors may in its discretion grant from time to time grant stock options, performance shares, performance share units and stock appreciation rights (SARs)("SARs") to employees and consultants the eligible participants, of the Company and affiliated entities.
Under the LTIP, upUp to 29,000,000 subordinate voting shares may be issued from treasury.treasury pursuant to the LTIP. The number of subordinate voting shares whichthat may be issued from treasury under the LTIP to directors is limited to 2,000,000; however, the Company has decided that no more option grants under the LTIP will be made to directors. Under the LTIP, as of February 23, 2009, 2,209,05822, 2010, 2,930,185 subordinate voting shares have been issued from treasury and 10,931,09010,517,047 subordinate voting shares are issuable under outstanding options. Also as of February 23, 2009, 26,790,94222, 2010, 26,069,815 subordinate voting shares are reserved for issuance from treasury under the LTIP. In addition, the Company may satisfy obligations under the LTIP by acquiring subordinate voting shares in the market.
The LTIP limits the number of subordinate voting shares that may be (a) reserved for issuance to insiders (as defined under TSX rules for this purpose), and (b) issued within a one-year period to insiders pursuant to options or rights granted pursuant to the LTIP, together with subordinate voting shares reserved for issuance under any other employee-related plan of the Company or options for services granted by the Company, in each
case to 10% of the aggregate issued and outstanding subordinate voting shares and MVSmultiple voting shares of the Company. The LTIP also limits the number of subordinate voting shares which may be reserved for issuance to any one participant pursuant to options or SARs granted pursuant to the LTIP, together with subordinate voting shares reserved for issuance under any other employee-related plan of the Company or options for services granted by the Company, to 5% of the aggregate issued and outstanding subordinate voting shares and MVSmultiple voting shares of the Company. The number of grants awarded under the LTIP in any given year cannot exceed 1.2% of the total number of subordinatingsubordinate voting shares.
Options issued under the LTIP may be exercised during a period determined underin the LTIP, which may not exceed ten years. The LTIP also provides that, unless otherwise determined by the Board of Directors, options will terminate within specified time periods following the termination of employment of an eligible participant with the Company or affiliated entities. The exercise price for options issued under the LTIP is the closing price for Celestica subordinate voting shares on the day prior to the grant. The TSX closing price is used for Canadian employees and the NYSE closing price is used for all other employees. The exercise of options may be subject to vesting conditions, including specific time schedules for vesting and performance-based conditions such as share price and financial results. The grant of options to, or exercise of options by, an eligible participant may also be subject to certain share ownership requirements. The LTIP also provides that the Company may, at its discretion, make loans or provide guarantees for loans to assist participants to purchase subordinate voting shares upon the exercise of options or to assist the participants to pay any income tax exigible upon exercise of options provided that in no event shall any such loan be outstanding for more than 10 years from the date of the option grant. The Company has no such loans or guarantees outstanding.
Under the LTIP, eligible participants may be granted SARs, a right to receive a cash amount equal to the difference between the market price of the subordinate voting shares at the time of the grant and the market price of such shares at the time of exercise of the SAR. The market price used for this purpose is the weighted average price for Celestica subordinate voting shares on the TSX during the period five trading days preceding the exercise date. Such amounts may also be payable by the issuance of subordinate voting shares. The exercise of SARs may also be subject to conditions similar to those which may be imposed on the exercise of stock options.
Under the LTIP, eligible participants may be allocated performance units in the form of PSUs or RSUs, which represent the right to receive an equivalent number of subordinate voting shares at a specified release date. The issuance of such shares may be subject to vesting requirements similar to those described above with respect to the exercisability of options and SARs, including such time or performance-based conditions as may be determined by the Board of Directors in its discretion. The number of subordinate voting shares which may be issued from the treasury of the Company under the performance unit program is limited to 2,000,000 and the number of subordinate voting shares which may be issued to any one person pursuant to the performance unit program to any one
person shall not exceed 1% of the aggregate issued and outstanding subordinate voting shares and MVSmultiple voting shares of the Company.
The interests of any participant under the LTIP or in any option, SAR or performance unit are not transferable, subject to limited exceptions.
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:
subject to the application of the anti-dilution or re-organization provisions of the LTIP.
The Board of Directors,may approve amendments to the LTIP or the entitlements granted under it without shareholder approval, may approve amendments, other than those specified above as requiring approval of the shareholders, to the LTIP or the entitlements granted under it including, without limitation:
The Celestica Share Unit Plan (CSUP)CSUP provides for the issuance of RSUs and PSUs in the same manner as provided in the LTIP, except that the Company may not issue shares from treasury to satisfy its obligations under the CSUP and there is no limit on the subordinate voting shares that may be issued under the terms of the CSUP. The issuance of RSUs and PSUs 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-based conditions as determined by the Compensation Committee and approved by the Board of Directors.
C. Board Practices
Members of the Board of Directors are elected until the next annual meeting or until their successors are elected or appointed.
Except for the right to receive deferred compensation, no director is entitled to benefits from Celestica when they cease to serve as a director. See Item 6(B) "Compensation."
Board Committees
The Board of Directors has established four standing committees, each with a specific mandate: the Executive Committee, Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. All of these committees are composed of independent directors.
Executive Committee
The members of the Executive Committee are Mr. Crandall and Mr. Etherington, both of whom are independent directors. The purpose of the Executive Committee is to provide a degree of flexibility and ability to respond to time-sensitive matters where it is impractical to call a meeting of the full Board of Directors. The Committee reviews such matters and makes such recommendations thereon to the Board of Directors as it considers appropriate, including matters designated by the Board of Directors as requiring Committee review. Members of the Committee also meet approximately once a month on an informal basis to review and stay informed about current business issues. The Board of Directors is briefed on these issues at their regularly scheduled meetings or, if the matter is material, between regularly scheduled meetings. No decision of the Committee shall beis effective until it is approved or ratified by the Board of Directors.
Audit Committee
The Audit Committee consists of Mr. Crandall, Mr. Etherington, Mr. Tapscott, Ms. Koellner and Mr. Tapscott,Ryan, all of whom are independent directors and all of whom are financially literate. Ms. Koellner and Mr. Ryan joined the Audit Committee on March 9, 2010. Mr. Crandall and Mr. Etherington have each served as a chief financial officer of a large U.S. and/or Canadian organization. Mr. Tapscott is the Chairman of a strategic consulting firm and has held other executive officer positions with Canadian companies. Ms. Koellner currently serves as the Chair of the Audit Committee of Sara Lee Corporation and she and Mr. Ryan has each held executive officer positions. 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 establishment of the independence of the external auditors and approval of any non-audit mandates 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. The Audit Committee has direct communication channels with the internal and external auditors to discuss and review specific issues and has the authority to retain such independent advisors as it may considerconsiders appropriate. The Audit Committee annually reviews and approves the mandate and plan of the internal audit department.department on an annual basis. The Audit Committee's duties include the responsibility for reviewing financial statements with management and the auditors, monitoring the integrity of Celestica's management information systems and internal control procedures, and reviewing the adequacy of Celestica's processes for identifying and managing risk.
Compensation Committee
The Compensation Committee consists of Mr. Crandall, Mr. Etherington, Mr. Tapscott, Ms. Koellner and Mr. Tapscott,Ryan, all of whom are independent directors. It is the responsibility of the Compensation Committee to define and communicate compensation policies and principles that reflect and support our strategic direction, business goals and desired culture. The mandate of the Compensation Committee includes the following: review and recommend to the Board of Directors Celestica's overall reward/compensation policy, including an executive compensation policy that is consistent with competitive practice and supports organizational objectives and shareholder interests; review annually, and submit to the Board of Directors for approval, the elements of our incentive compensation plans and equity-based plans, including plan design, performance targets, administration and total funds/shares reserved for payment; review and recommend to the Board of Directors the compensation of the CEO based on the Board of Directors' assessment of the annual performance of the CEO; review and recommend to the Board of Directors the compensation of our most senior executives; review our succession plans for key executive positions; and review and approve material changes to our organizational structure and human resource policies.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee consists of Mr. Crandall, Mr. Etherington, Mr. Love, Mr. Tapscott, Ms. Koellner and Mr. Tapscott,Ryan, all of whom are independent directors. The Nominating and Corporate Governance Committee recommends to the Board of Directors the criteria for selecting candidates for nomination to the Board of Directors and the individuals to be nominated for election by the shareholders. The Committee's mandate includes making recommendations to the Board of Directors relating to the Company's approach to corporate governance, developing the Company's corporate governance guidelines, assessing the performance of the CEO relative to corporate goals and objectives established by the Committee, and assessing the effectiveness of the Board of Directors and its committees.
D. Employees
Celestica has over 38,00033,000 permanent and temporary (contract) employees worldwide as at December 31, 2008.2009. The following table sets forth information concerning our employees by geographic location:
| Number of Employees | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Date | Americas | Europe | Asia | |||||||
December 31, 2006 | 12,000 | 5,000 | 25,000 | |||||||
December 31, 2007 | 10,000 | 6,000 | 26,000 | |||||||
December 31, 2008 | 12,000 | 4,000 | 22,000 |
| Number of Employees | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Date | Americas | Europe | Asia | |||||||
December 31, 2007 | 10,000 | 6,000 | 26,000 | |||||||
December 31, 2008 | 12,000 | 4,000 | 22,000 | |||||||
December 31, 2009 | 11,000 | 3,000 | 19,000 |
As at December 31, 2008,2009, approximately 9,0008,000 temporary (contract) employees were engaged by Celestica worldwide. Celestica used, on average, approximately 7,600 temporary (contract) employees throughout 2009. During 2008,2009, approximately 1,3003,200 employees were terminated as a result of restructuring actions. See note 10 to the Consolidated Financial Statements in Item 18 for further information on the restructurings.
The number of employees in the Americas at December 31, 2008 has increased from the prior year, primarily in Mexico to support new business. The number of employees in Europe and Asia at December 31, 2008 has decreased primarily in response to lower volumes in these regions.
Certain information concerning employees is set forth in Item 4, "Information on the Company — Business Overview — Human Resources."
E. Share Ownership
The following table sets forth certain information concerning the direct and beneficial ownership of shares of Celestica at February 23, 200922, 2010 by each director who holds shares and each of the Named Executive Officers and all directors and senior managementexecutive officers of Celestica as a group. Unless otherwise noted, the address of each of
the shareholders named below is Celestica's principal executive office. In this table, multiple voting shares are referred to as "MVS" and subordinate voting shares are referred to as "SVS."
Name of Beneficial Owner(1)(2) | Voting Shares | Percentage of Class | Percentage of all Equity Shares | Percentage of Voting Power | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall(3) | 150,000 SVS | * | * | * | |||||||||
William A. Etherington(4) | 45,000 SVS | * | * | * | |||||||||
Richard S. Love(5) | 40,000 SVS | * | * | * | |||||||||
Eamon J. Ryan | 0 SVS | * | * | * | |||||||||
Gerald W. Schwartz(6)(7) | 29,637,316 MVS | 100.0% | 12.9% | 78.8% | |||||||||
2,184,975 SVS | 1.1% | 1.0% | * | ||||||||||
Don Tapscott(8) | 75,700 SVS | * | * | * | |||||||||
Craig H. Muhlhauser | 1,022,002 SVS | * | * | * | |||||||||
Paul Nicoletti | 195,294 SVS | * | * | * | |||||||||
John Peri | 318,969 SVS | * | * | * | |||||||||
Elizabeth L. DelBianco | 148,374 SVS | * | * | * | |||||||||
John J. Boucher | 187,459 SVS | * | * | * | |||||||||
All directors and senior management as a group (18 persons, including above)(9) | 29,637,316 MVS 4,923,369 SVS | 100.0% 2.5% | 12.9% 2.1% | 78.8% * | |||||||||
Total percentage of all equity shares and total percentage of voting power | 15.1% | 79.3% |
Name of Beneficial Owner(1)(2) | Voting Shares | Percentage of Class | Percentage of all Equity Shares | Percentage of Voting Power | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Robert L. Crandall(3) | 130,000 SVS | * | * | * | |||||||||
William A. Etherington(4) | 45,000 SVS | * | * | * | |||||||||
Laurette Koellner | 0 SVS | * | * | * | |||||||||
Richard S. Love(5) | 30,000 SVS | * | * | * | |||||||||
Eamon J. Ryan | 0 SVS | * | * | * | |||||||||
Gerald W. Schwartz(6)(7) | 18,946,368 MVS | 100.0% | 8.2% | 69.2% | |||||||||
1,571,977 SVS | * | * | * | ||||||||||
Don Tapscott(8) | 55,700 SVS | * | * | * | |||||||||
Craig H. Muhlhauser | 1,686,213 SVS | * | * | * | |||||||||
Paul Nicoletti | 294,415 SVS | * | * | * | |||||||||
John Peri | 445,663 SVS | * | * | * | |||||||||
Elizabeth L. DelBianco | 82,041 SVS | * | * | * | |||||||||
John Boucher | 319,200 SVS | * | * | * | |||||||||
All directors and executive officers as a group (17 persons, including above)(9) | 18,946,368 MVS 5,190,773 SVS | 100.0% 2.5% | 8.2% 2.3% | 69.2% * | |||||||||
Total percentage of all equity shares and total percentage of voting power | 10.5% | 69.9% |
MVSMultiple voting shares and SVSsubordinate voting shares have different voting rights. Subordinate voting shares represent 31% of the aggregate voting rights attached to Celestica's shares. See Item 10, "Additional Information — Memorandum and Articles of Incorporation."
At February 23, 2009,22, 2010, approximately 1,5001,400 persons held options to acquire an aggregate of approximately 11,100,00010,700,000 subordinate voting shares. Most of these options were issued pursuant to our Long-Term Incentive
Plan. See Item 6(B), "Compensation." The following table sets forth information with respect to options outstanding as at February 23, 2009.22, 2010.
Beneficial Holders | Number of subordinate voting shares Under Option | Exercise Price | Year of Issuance | Date of Expiry | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Executive Officers (12 persons in total) | 3,750 | $21.83 | October 13, 2000 | October 13, 2010 | |||||||||
9,750 | $10.40-$19.81 | During 2001 | May 22, 2011-October 31, 2011 | ||||||||||
38,375 | $13.52-C$23.29 | During 2002 | May 10, 2012-December 18, 2012 | ||||||||||
117,000 | $18.66/C$29.11 | December 3, 2002 | December 3, 2012 | ||||||||||
13,625 | $12.99-C$15.35 | During 2003 | February 11, 2013-April 18, 2013 | ||||||||||
112,167 | $17.15/C$22.75 | January 31, 2004 | January 31, 2014 | ||||||||||
38,333 | $17.10-C$24.92 | During 2004 | March 15, 2014-June 8, 2014 | ||||||||||
121,000 | $14.86/C$18.00 | December 9, 2004 | December 9, 2014 | ||||||||||
65,000 | $13.00-C$16.20 | During 2005 | June 6, 2015-July 5, 2015 | ||||||||||
306,444 | $10.00/C$11.43 | January 31, 2006 | January 31, 2016 | ||||||||||
1,316,624 | $6.05/C$7.10 | February 2, 2007 | February 2, 2017 | ||||||||||
141,500 | $5.88/C$6.27 | July 31, 2007 | July 31, 2017 | ||||||||||
1,210,000 | $6.51/C$6.51 | February 5, 2008 | February 5, 2018 | ||||||||||
143,679 | $5.26-C$8.06 | During 2008 | September 5, 2018-November 5, 2018 | ||||||||||
2,291,664 | $4.13/C$5.13 | February 3, 2009 | February 3, 2019 | ||||||||||
Directors who are not Senior Management | 50,000 | $23.41/C$34.50 | July 7, 1999 | July 7, 2009 | |||||||||
50,000 | $48.69/C$72.60 | July 7, 2000 | July 7, 2010 | ||||||||||
50,000 | $44.23/C$66.78 | July 7, 2001 | July 7, 2011 | ||||||||||
20,000 | $35.95 | October 22, 2001 | October 22, 2011 | ||||||||||
5,000 | $32.40 | April 21, 2002 | April 21, 2012 | ||||||||||
22,500 | $10.62 | April 18, 2003 | April 18, 2013 | ||||||||||
22,500 | $18.25 | May 10, 2004 | May 10, 2014 | ||||||||||
All other Celestica Employees (other than MSL) (approximately 1,400 persons in total) | 40,500 | $19.66-$23.88 | During 1999 | May 4, 2009-September 21, 2009 | |||||||||
82,200 | $39.03/C$57.85 | December 7, 1999 | December 7, 2009 | ||||||||||
10,300 | $48.69-$63.44 | During 2000 | July 7, 2010-August 1, 2010 | ||||||||||
54,710 | $56.19/C$86.50 | December 5, 2000 | December 5, 2010 | ||||||||||
13,400 | $24.91-$44.23 | During 2001 | April 9, 2011-July 7, 2011 | ||||||||||
102,490 | $41.89/C$66.06 | December 4, 2001 | December 4, 2011 | ||||||||||
60,800 | $13.10-C$39.57 | During 2002 | May 8, 2012-December 10, 2012 | ||||||||||
750,000 | $18.66/C$29.11 | December 3, 2002 | December 3, 2012 | ||||||||||
100,000 | $10.62-$19.90 | During 2003 | January 31, 2013-December 10, 2013 | ||||||||||
861,180 | $17.15/C$22.75 | January 31, 2004 | January 31, 2014 | ||||||||||
118,675 | $13.28-C$22.89 | During 2004 | January 19, 2014-November 5, 2014 | ||||||||||
230,204 | $14.86/C$18.00 | December 9, 2004 | December 9, 2014 | ||||||||||
60,920 | $9.71-C$16.90 | During 2005 | January 5, 2015-December 5, 2015 | ||||||||||
359,678 | $10.00/C$11.43 | January 31, 2006 | January 31, 2016 | ||||||||||
53,168 | $9.23-C$12.54 | During 2006 | February 6, 2016-December 5, 2016 | ||||||||||
666,624 | $6.05/C$7.10 | February 2, 2007 | February 2, 2017 | ||||||||||
239,883 | $5.47-C$7.76 | During 2007 | February 26, 2017-December 7, 2017 | ||||||||||
748,500 | $6.51/C$6.51 | February 5, 2008 | February 5, 2018 | ||||||||||
231,197 | $4.90-C$9.38 | During 2008 | March 5, 2018-December 5, 2018 | ||||||||||
45,000 | $4.04/C$4.93 | February 5, 2009 | February 5, 2019 | ||||||||||
MSL Employees(1) | 161,267 | $9.73-$58.00 | From 1999 to 2003 | April 1, 2009-September 8, 2013 |
Beneficial Holders | Number of Subordinate Voting Shares Under Option | Exercise Price | Year of Issuance | Date of Expiry | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Executive Officers (10 persons in total) | 3,750 | $21.83 | October 13, 2000 | October 13, 2010 | |||||||||
9,750 | $10.40-$19.81 | During 2001 | May 22, 2011-October 31, 2011 | ||||||||||
38,375 | $13.52-C$23.29 | During 2002 | May 10, 2012-December 18, 2012 | ||||||||||
77,000 | $18.66/C$29.11 | December 3, 2002 | December 3, 2012 | ||||||||||
13,625 | $12.99-C$15.35 | During 2003 | February 11, 2013-April 18, 2013 | ||||||||||
75,500 | $17.15/C$22.75 | January 31, 2004 | January 31, 2014 | ||||||||||
35,000 | $17.10-C$24.92 | During 2004 | March 15, 2014-June 8, 2014 | ||||||||||
86,400 | $14.86/C$18.00 | December 9, 2004 | December 9, 2014 | ||||||||||
65,000 | $13.00-C$16.20 | During 2005 | June 6, 2015-July 5, 2015 | ||||||||||
278,035 | $10.00/C$11.43 | January 31, 2006 | January 31, 2016 | ||||||||||
1,199,201 | $6.05/C$7.10 | February 2, 2007 | February 2, 2017 | ||||||||||
141,500 | $5.88/C$6.27 | July 31, 2007 | July 31, 2017 | ||||||||||
1,050,000 | $6.51/C$6.51 | February 5, 2008 | February 5, 2018 | ||||||||||
133,679 | $5.26-C$8.06 | During 2008 | September 5, 2018-November 5, 2018 | ||||||||||
1,984,304 | $4.13/C$5.13 | February 3, 2009 | February 3, 2019 | ||||||||||
657,949 | $10.20/C$10.77 | February 2, 2010 | February 2, 2020 | ||||||||||
Directors who are not Senior Management | 50,000 | $48.69/C$72.60 | July 7, 2000 | July 7, 2010 | |||||||||
50,000 | $44.23/C$66.78 | July 7, 2001 | July 7, 2011 | ||||||||||
20,000 | $35.95 | October 22, 2001 | October 22, 2011 | ||||||||||
5,000 | $32.40 | April 21, 2002 | April 21, 2012 | ||||||||||
22,500 | $10.62 | April 18, 2003 | April 18, 2013 | ||||||||||
22,500 | $18.25 | May 10, 2004 | May 10, 2014 | ||||||||||
All other Celestica Employees (other than MSL) (approximately 1,300 persons in total) | 10,300 | $48.69-$63.44 | During 2000 | July 7, 2010-August 1, 2010 | |||||||||
52,210 | $56.19/C$86.50 | December 5, 2000 | December 5, 2010 | ||||||||||
14,400 | $24.91-$44.23 | During 2001 | April 9, 2011-October 10, 2011 | ||||||||||
95,390 | $41.89/C$66.06 | December 4, 2001 | December 4, 2011 | ||||||||||
60,800 | $13.10-C$39.57 | During 2002 | May 8, 2012-December 10, 2012 | ||||||||||
743,185 | $18.66/C$29.11 | December 3, 2002 | December 3, 2012 | ||||||||||
98,500 | $10.62-$19.90 | During 2003 | January 31, 2013-December 10, 2013 | ||||||||||
858,592 | $17.15/C$22.75 | January 31, 2004 | January 31, 2014 | ||||||||||
107,508 | $13.28-C$24.92 | During 2004 | January 19, 2014-November 5, 2014 | ||||||||||
254,740 | $14.86/C$18.00 | December 9, 2004 | December 9, 2014 | ||||||||||
49,920 | $9.71-C$16.23 | During 2005 | January 5, 2015-December 5, 2015 | ||||||||||
358,063 | $10.00/C$11.43 | January 31, 2006 | January 31, 2016 | ||||||||||
44,943 | $9.23-C$12.54 | During 2006 | February 6, 2016-December 5, 2016 | ||||||||||
462,381 | $6.05/C$7.10 | February 2, 2007 | February 2, 2017 | ||||||||||
192,869 | $5.47-C$7.76 | During 2007 | February 26, 2017-December 7, 2017 | ||||||||||
610,750 | $6.51/C$6.51 | February 5, 2008 | February 5, 2018 | ||||||||||
202,128 | $4.90-C$9.38 | During 2008 | March 5, 2018-December 5, 2018 | ||||||||||
173,611 | C$5.13 | February 3, 2009 | February 3, 2019 | ||||||||||
64,525 | $4.04-$8.05 | During 2009 | February 5, 2019-November 5, 2019 | ||||||||||
90,414 | $10.20/C$10.77 | February 2, 2010 | February 2, 2020 | ||||||||||
MSL Employees(1) | 158,037 | $9.73-$58.00 | During 2000 to 2003 | June 1, 2010-September 8, 2013 |
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 at February 23, 200922, 2010 by each person known to Celestica to own beneficially, directly or indirectly, 5% or more of the subordinate voting shares or the multiple voting shares. In this table, multiple voting shares are referred to as "MVS" and subordinate voting shares are referred to as "SVS." MVSMultiple voting shares and SVSsubordinate voting shares have different voting rights. Subordinate voting shares represent 31% of the aggregate voting rights attached to Celestica's shares. See Item 10, "Additional Information — Memorandum and Articles of Incorporation."
Name of Beneficial Owner(1) | Type of Ownership | Number of Shares | Percentage of Class | Percentage of all Equity Shares | Percentage of Voting Power | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Onex Corporation(2)(3) | Direct and Indirect | 29,637,316 MVS | 100.0% | 12.9% | 78.8% | |||||||||||
1,996,231 SVS | 1.0% | * | * | |||||||||||||
Gerald W. Schwartz(2)(4) | Direct and Indirect | 29,637,316 MVS | 100.0% | 12.9% | 78.8% | |||||||||||
2,184,975 SVS | 1.1% | 1.0% | * | |||||||||||||
MacKenzie Financial Corporation(5)(6) | Indirect | 31,678,931 SVS | 15.9% | 13.8% | 3.4% | |||||||||||
Letko, Brosseau & Ass. Inc.(7)(8) | Indirect | 13,754,240 SVS | 6.9% | 6.0% | 1.5% | |||||||||||
Barclays Global Investors(9)(10) | Indirect | 12,975,227 SVS | 6.5% | 5.7% | 1.4% | |||||||||||
Total percentage of all equity shares and total percentage of voting power | 39.4% | 85.2% |
Name of Beneficial Owner(1) | Type of Ownership | Number of Shares | Percentage of Class | Percentage of all Equity Shares | Percentage of Voting Power | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Onex Corporation(2)(3) | Direct and Indirect | 18,946,368 MVS | 100.0% | 8.2% | 69.2% | ||||||||||
1,451,320 SVS | * | * | * | ||||||||||||
Gerald W. Schwartz(2)(4) | Direct and Indirect | 18,946,368 MVS | 100.0% | 8.2% | 69.2% | ||||||||||
1,571,977 SVS | * | * | * | ||||||||||||
MacKenzie Financial Corporation(5)(6) | Indirect | 29,298,003 SVS | 13.9% | 12.7% | 4.3% | ||||||||||
Greystone Managed Investments Inc.(7)(8) | Indirect | 13,831,978 SVS | 6.6% | 6.0% | 2.0% | ||||||||||
Letko, Brosseau & Ass. Inc.(9)(10) | Indirect | 13,336,991 SVS | 6.3% | 5.8% | 1.9% | ||||||||||
Total percentage of all equity shares and total percentage of voting power | 33.5% | 77.7% |
The share provisions provide "coat-tail" protection to the holders of the subordinate voting shares by providing that the multiple voting shares will be converted automatically into subordinate voting shares upon any transfer thereof, except (i) a transfer to Onex or any affiliate of Onex or (ii) a transfer of 100% of the outstanding multiple voting shares to a purchaser who also has offered to purchase all of the outstanding subordinate voting shares for a per share consideration identical to, and otherwise on the same terms as, that offered for the multiple voting shares and the multiple voting shares held by such purchaser thereafter shall be subject to the provisions relating to conversion as if all references to Onex were references to such purchaser. In addition, if (i) any holder of any multiple voting shares ceases to be an affiliate of Onex or (ii) Onex and its affiliates cease to have the right, in all cases, to exercise the votes attached to, or to direct the voting of, any of the multiple voting shares held by Onex and its affiliates, such multiple voting shares shall convert automatically into subordinate voting shares on a one-for-one basis. For these purposes, (i) "Onex""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 multiple voting shares beneficially owned directly or indirectly by Onex immediately prior to such transaction and is controlled by the same person or persons as controlled by 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 by such person. Onex, which
owns all of the outstanding multiple voting shares, has entered into an agreement with ComputerShareComputershare Trust Company of Canada, as trustee for the benefit of the holders of the subordinate voting shares, that has the effect of preventing transactions that otherwise would deprive the holders of subordinate voting shares of rights under applicable provincial takeovertake-over bid
legislation to which they would have been entitled in the event of a takeovertake-over bid for the multiple voting shares if the multiple voting shares had been subordinate voting shares.
During the year, Onex converted approximately 11 million multiple voting shares into subordinate voting shares. Onex sold these subordinate voting shares as part of this shareholder is: 161 Bay Street, Suite 2500, Toronto, Ontario, Canada M5J 2S1.
Onex's ownership percentages have not changed significantly during the past few years.prior year. MacKenzie Financial Corporation and Letko, Brosseau & Ass. Inc. were major shareholders in 2007, 2008 and 2008. Phillips, Hager & North Investment Management Ltd., Tetrem Capital Management Ltd. and Brandes Investment Partners, LP reduced their ownership percentages of SVS below 5% for 2008.2009. Barclays Global Investors ceased to hold 5% of subordinate voting shares during 2009. Greystone Managed Investments Inc. became a holder of 5% or more of the SVSsubordinate voting shares during 2008.2009.
Holders
On February 23, 2009,22, 2010, there were approximately 2,0001,900 holders of record of subordinate voting shares, of which 506466 holders, holding approximately 52%49% of the outstanding subordinate voting shares, were resident in the United States and 460431 holders, holding approximately 48%51% of the outstanding subordinate voting shares, were resident in Canada.
B. Related Party Transactions
Onex, which, directly or indirectly, owns all of the outstanding multiple voting shares, has entered into an agreement with Celestica and with ComputerShareComputershare Trust Company of Canada, as trustee for the benefit of the holders of the subordinate voting shares, to ensure that the holders of the subordinate voting shares will not be deprived of any rights under applicable Ontario provincial take-over bid legislation to which they would be entitled in the event of a take-over bid as if the multiple voting shares and subordinate voting shares were of a single class of shares.
On January 1, 2009, Celestica and Onex entered into a Services Agreement for the services of Mr. Schwartz as a director of the Company. The term of the Services Agreement is for one year and shall automatically renew for successive one-year terms unless either party provides a notice of intent not to renew. Onex receives compensation under the Services Agreement in an amount equal to $200,000 per year, payable in equal quarterly instalments in arrears in DSUs. The number of DSUs is determined using the closing price of the subordinate voting shares on the NYSE on the last day of the fiscal quarter in respect of which the instalment is to be paid.
Certain information concerning other related party transactions is set forth in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Result of Operations — Liquidity and Capital Resources — Related Party Transactions."
Indebtedness of Directors and Senior Officers
As at February 23, 2009,22, 2010, no executive officer or member of the Board of Directors of Celestica was indebted to Celestica in connection with the purchase of subordinate voting shares or in connection with any other transaction.
C. Interests of Experts and Counsel
Not applicable.
A. Consolidated Statements and Other Financial Information
See Item 18, "Financial Statements."
Litigation
We are party to litigation from time to time. We currently are not party to any legal proceedings which management expects will have a material adverse effect on the results of operations, business, prospects or financial condition of Celestica. We are a party to certain securities class action lawsuits commenced against Celestica that contain claims against the Company and other persons. These lawsuits allege, among other things, that during the purported class period we made statements concerning our actual and anticipated future financial results that failed to disclose certain purportedly material adverse information with respect to demand and inventory in our Mexican operations and our information technology and communications divisions. See Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations." We believe that the allegations in these claims are without merit and we intend to defend against them vigorously. However, there can be no assurance that the outcome of the litigation will be favorable to us or will not have a material adverse impact on our financial position or liquidity. In addition, we may incur substantial litigation expenses in defending these claims. We have liability insurance coverage that may cover some of our litigation expenses, potential judgments or settlement costs.
Dividend Policy
We have not declared or paid any dividends to our shareholders. We will retain earnings for general corporate purposes to promote future growth; as such, our Board of Directors does not anticipate paying any dividends for the foreseeable future. Our Board of Directors will review this policy from time to time, having regard to our financial condition, financing requirements and other relevant factors.
B. Significant Changes
None.
A. Offer and Listing Details
Market Information
The subordinate voting shares are listed on the New York Stock Exchange (the "NYSE") and the Toronto Stock Exchange (the "TSX"). In the following tables, subordinate voting shares are referred to as "SVS."
The annual high and low market prices for the five most recent fiscal years based on market closing prices.
| NYSE | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
Year ended December 31, 2004 | $ | 21.15 | $ | 12.25 | 334,246,600 | |||||
Year ended December 31, 2005 | 14.65 | 9.26 | 221,567,700 | |||||||
Year ended December 31, 2006 | 12.02 | 7.68 | 189,612,500 | |||||||
Year ended December 31, 2007 | 8.01 | 5.32 | 327,398,900 | |||||||
Year ended December 31, 2008 | 9.74 | 3.27 | 424,530,000 |
| NYSE | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
Year ended December 31, 2005 | $14.65 | $9.26 | 221,567,700 | |||||||
Year ended December 31, 2006 | 12.02 | 7.68 | 189,612,500 | |||||||
Year ended December 31, 2007 | 8.01 | 5.32 | 327,398,900 | |||||||
Year ended December 31, 2008 | 9.74 | 3.27 | 424,530,000 | |||||||
Year ended December 31, 2009 | 10.09 | 2.59 | 277,960,000 |
| TSX | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
Year ended December 31, 2004 | C$ | 27.84 | C$ | 15.47 | 266,103,490 | |||||
Year ended December 31, 2005 | 14.66 | 9.29 | 183,773,547 | |||||||
Year ended December 31, 2006 | 13.93 | 8.90 | 183,891,193 | |||||||
Year ended December 31, 2007 | 9.48 | 5.68 | 300,052,192 | |||||||
Year ended December 31, 2008 | 9.68 | 4.31 | 276,670,000 |
| TSX | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
Year ended December 31, 2005 | C$14.66 | C$9.29 | 183,773,547 | |||||||
Year ended December 31, 2006 | 13.93 | 8.90 | 183,891,193 | |||||||
Year ended December 31, 2007 | 9.48 | 5.68 | 300,052,192 | |||||||
Year ended December 31, 2008 | 9.68 | 4.31 | 276,670,000 | |||||||
Year ended December 31, 2009 | 10.80 | 3.41 | 193,290,000 |
The high and low market prices for each full fiscal quarter for the two most recent fiscal years based on market closing prices.
| NYSE | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | ||||||||
| (Price per SVS) | | |||||||||
Year ended December 31, 2007 | |||||||||||
First quarter | $ | 8.01 | $ | 5.93 | 102,440,993 | ||||||
Second quarter | 7.09 | 6.25 | 72,485,248 | ||||||||
Third quarter | 6.43 | 5.32 | 79,135,203 | ||||||||
Fourth quarter | 7.22 | 5.56 | 73,337,456 | ||||||||
Year ended December 31, 2008 | |||||||||||
First quarter | $ | 6.86 | $ | 4.92 | 107,030,000 | ||||||
Second quarter | 9.74 | 6.46 | 137,190,000 | ||||||||
Third quarter | 8.64 | 6.44 | 94,330,000 | ||||||||
Fourth quarter | 6.14 | 3.27 | 85,980,000 |
| TSX | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||||||||||||||
| (Price per SVS) | | ||||||||||||||||||||
Year ended December 31, 2007 | ||||||||||||||||||||||
First quarter | C$ | 9.48 | C$ | 6.90 | 100,748,656 | |||||||||||||||||
Second quarter | 7.87 | 6.72 | 58,908,400 | | NYSE | |||||||||||||||||
Third quarter | 6.85 | 5.72 | 57,432,064 | | High | Low | Volume | |||||||||||||||
Fourth quarter | 6.95 | 5.68 | 82,963,072 | | (Price per SVS) | | ||||||||||||||||
Year ended December 31, 2008 | Year ended December 31, 2008 | Year ended December 31, 2008 | ||||||||||||||||||||
First quarter | C$ | 6.96 | C$ | 4.91 | 65,310,000 | First quarter | $6.86 | $4.92 | 107,030,000 | |||||||||||||
Second quarter | 9.68 | 6.65 | 81,230,000 | Second quarter | 9.74 | 6.46 | 137,190,000 | |||||||||||||||
Third quarter | 9.14 | 6.51 | 54,130,000 | Third quarter | 8.64 | 6.44 | 94,330,000 | |||||||||||||||
Fourth quarter | 6.95 | 4.31 | 76,000,000 | Fourth quarter | 6.14 | 3.27 | 85,980,000 | |||||||||||||||
Year ended December 31, 2009 | Year ended December 31, 2009 | |||||||||||||||||||||
First quarter | $4.90 | $2.59 | 71,890,000 | |||||||||||||||||||
Second quarter | 7.74 | 3.73 | 86,630,000 | |||||||||||||||||||
Third quarter | 10.09 | 6.15 | 60,450,000 | |||||||||||||||||||
Fourth quarter | 9.77 | 7.89 | 58,990,000 |
| TSX | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | ||||||||
| (Price per SVS) | | |||||||||
Year ended December 31, 2008 | |||||||||||
First quarter | C$6.96 | C$4.91 | 65,310,000 | ||||||||
Second quarter | 9.68 | 6.65 | 81,230,000 | ||||||||
Third quarter | 9.14 | 6.51 | 54,130,000 | ||||||||
Fourth quarter | 6.95 | 4.31 | 76,000,000 | ||||||||
Year ended December 31, 2009 | |||||||||||
First quarter | C$5.98 | C$3.41 | 45,030,000 | ||||||||
Second quarter | 8.60 | 4.65 | 57,970,000 | ||||||||
Third quarter | 10.80 | 7.23 | 44,120,000 | ||||||||
Fourth quarter | 10.13 | 8.54 | 46,170,000 |
The high and low market prices for each month for the most recent six months based on market closing prices.
| NYSE | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
August 2008 | $ | 8.63 | $ | 7.65 | 19,654,327 | |||||
September 2008 | 8.29 | 6.44 | 39,229,775 | |||||||
October 2008 | 6.14 | 3.66 | 46,247,157 | |||||||
November 2008 | 5.26 | 3.27 | 19,519,974 | |||||||
December 2008 | 5.65 | 3.97 | 20,208,641 | |||||||
January 2009 | 4.90 | 4.30 | 18,634,254 |
| NYSE | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
August 2009 | $8.85 | $7.75 | 12,467,309 | |||||||
September 2009 | 10.09 | 8.50 | 23,916,370 | |||||||
October 2009 | 9.77 | 7.89 | 20,818,851 | |||||||
November 2009 | 9.18 | 8.05 | 16,545,028 | |||||||
December 2009 | 9.63 | 8.19 | 21,626,326 | |||||||
January 2010 | 9.91 | 9.06 | 20,870,861 |
| TSX | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
August 2008 | C$ | 9.14 | C$ | 8.07 | 13,927,012 | |||||
September 2008 | 8.75 | 6.51 | 21,532,000 | |||||||
October 2008 | 6.69 | 4.68 | 27,138,721 | |||||||
November 2008 | 6.90 | 4.31 | 25,662,143 | |||||||
December 2008 | 6.95 | 4.76 | 23,196,449 | |||||||
January 2009 | 5.98 | 5.29 | 12,505,654 |
| TSX | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| High | Low | Volume | |||||||
| (Price per SVS) | | ||||||||
August 2009 | C$9.61 | C$8.55 | 9,990,424 | |||||||
September 2009 | 10.80 | 9.39 | 22,626,783 | |||||||
October 2009 | 10.07 | 8.55 | 14,905,345 | |||||||
November 2009 | 9.59 | 8.54 | 9,221,702 | |||||||
December 2009 | 10.13 | 8.57 | 22,043,920 | |||||||
January 2010 | 10.54 | 9.63 | 15,499,603 |
B. Plan of Distribution
Not applicable.
C. Markets
The subordinate voting shares are listed on the NYSE and the TSX.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expense of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Incorporation
Information regarding Celestica's memorandum and articles of incorporation is hereby incorporated by reference to this Annual Report on Form 20-F for the fiscal year ended December 31, 2005, as filed with the SEC on March 21, 2006.
Shareholder Rights and Limitations
The rights and preferences attaching to our subordinate voting shares and multiple voting shares are described in the section entitled "Description of Capital Stock" of our registration statement on Form F-3 (Reg. No. 333-69278), filed with the SEC on September 12, 2001. The rights and preferences attaching to our 77/8% Senior Subordinated Notes due 2011 are described in the2001, which section entitled "Description of Notes" of our Rule 424(b) prospectus, filed with the SEC on June 14, 2004. The rights and preferences attaching to our 75/8% Senior Subordinated Notes due 2011 are described in the section entitled "Description of Notes" of our Rule 424(b) prospectus, filed with the SEC on June 20, 2005. Those sections areis hereby incorporated by reference into this Annual Report.
Additional information concerning the rights and limitations of shareholders found in Celestica's articles of incorporation is hereby incorporated by reference to our registration statement on Form F-4 (Reg. No. 333-9636).
C. Material Contracts
Information about material contracts, other than contracts entered into in the ordinary course of business, to which Celestica or any member of Celestica's group is a party, for the two years immediately preceding the publication of this Annual Report are described in Item 5, "Operating and Financial Review and Prospects — Liquidity and Capital Resources — Capital Resources."
D. Exchange Controls
Canada has no system of exchange controls. There are no Canadian restrictions on the repatriation of capital or earnings of a Canadian public company to non-resident investors. There are no laws of Canada or exchange restrictions affecting the remittance of dividends, interest, royalties or similar payments to non-resident holders of Celestica's securities, except as described under Item 10(E), "Taxation," below.
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 subordinate voting shares and who, for purposes of the Income Tax Act (Canada) (the "Canadian Tax Act") and the Canada-United States Income Tax Convention (1980) (the "Tax Treaty"), at all relevant times is resident in the United States 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 subordinate voting shares as capital property, and does not use or hold, and is not deemed to use or hold, the subordinate voting shares 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 subordinate voting shares are designated insurance property (as defined in the Canadian Tax Act).
This summary is based on 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 January 27, 2009,March 4, 2010, and Celestica's understanding of the current published administrative practices of the Canada Revenue Agency.
This summary is not exhaustive 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 subordinate voting shares 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.
Taxation of Dividends
By virtue of the Canadian Tax Act and the Tax Treaty, dividends (including stock dividends) on subordinate voting shares paid or credited or deemed to be paid or credited to a U.S. Holder who is the beneficial owner (or is deemed to be 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.
Disposition of Subordinate Voting Shares
A U.S. Holder will not be subject to tax under the Canadian Tax Act in respect of any capital gain realized on the disposition or deemed disposition of subordinate voting shares unless the subordinate voting shares constitute or are deemed to constitute "taxable Canadian property" (as defined in the Canadian Tax Act) (other than treaty-protected property, as defined in the Canadian Tax Act) at the time of such disposition. Shares of a corporation resident in Canada that are listed on a designated stock exchange for purposes of the Canadian Tax Act will be "taxable Canadian property" under the Canadian Tax Act if, at any time during the five-year period immediately preceding the disposition or deemed disposition of the share, the U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length, or the U.S. Holder together with such persons owned 25% or more of the issued shares of any class or series of shares of the corporation that issued the shares. Provided that they are listed on a designated stock exchange for purposes of the Canadian Tax Act (which includes the TSX and NYSE), subordinate voting shares acquired by a U.S. Holder generally will not be taxable Canadian property to a U.S. Holder unless the foregoing 25% ownership threshold applies to the U.S. Holder with respect to Celestica or the subordinate voting shares are otherwise deemed by the Canadian Tax Act to be taxable Canadian property. Even if the subordinate voting shares are taxable Canadian property to a U.S. Holder, they generally will be treaty-protected property if the value of such shares at the time of disposition is not derived principally from real property situated in Canada. Consequently, any gain realized by the U.S. Holder upon the disposition of the subordinate voting shares generally will be exempt from tax under the Canadian Tax Act.
Material United States Federal Income Tax Considerations
The following discussion describes the material United States federal income tax consequences to United States Holders (as defined below) of subordinate voting shares. A United States Holder is a citizen or resident of the United States, a corporation (or other entity taxable as a corporation), partnership or limited liability company created or organized in or under the laws of the United States or of any political subdivision 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 States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) the trust has made an election under applicable U.S. Treasury regulations to be treated as a United States person. If a partnership (or limited liability company that is treated as a partnership) holds subordinate voting shares, the tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership. If you are a partner of a partnership holding subordinate voting shares, 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 subordinate voting shares. This summary considers only United States Holders who will own subordinate voting shares as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). In this context, the term "capital assets" means, in general, assets held for investment by a taxpayer. Material aspects of U.S. federal income tax relevant to non-United States Holders are also discussed below.
This discussion is based on current provisions of the Internal Revenue Code, current and proposed Treasury regulations promulgated thereunder and administrative and judicial decisions as of March 4, 2008,December 23, 2009, 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 States Holder based on the United States 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 States Holders who are subject to special treatment, including 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," taxpayers who hold subordinate voting shares
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 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 subordinate voting shares through a limited liability company or through a partnership or other pass-through entity (such as an S corporation). For U.S. federal income tax purposes, income earned through a foreign or domestic partnership or similar entity is generally 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 the subordinate voting shares.
Taxation of Dividends Paid on Subordinate Voting Shares
Subject to the discussion of the passive foreign investment company (PFIC) rules below, in the event that we pay a dividend, a United States Holder will be required to include in gross income as ordinary income the amount of any distribution paid on subordinate voting shares, 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 Company's current or accumulated earnings and profits will be foreign source "passive category income" for U.S. foreign tax credit purposes and 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 States Holder's tax basis in the subordinate voting shares 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 States Holder will be includible in the income of the United States Holder in a dollar amount calculated by reference to the exchange rate on the date the distribution is received. A United States 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 States Holders should consult their own tax advisors regarding the treatment of a foreign currency gain or loss.
United States Holders will generally have the option of claiming the amount of any Canadian income taxes withheld either as a deduction from gross income or as a dollar-for-dollar credit against their U.S. federal income tax liability, subject to specified conditions and limitations. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the Canadian income taxes withheld, but these individuals generally may still claim a credit against their U.S. federal income tax liability. The amount of foreign income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. The total amount of allowable foreign tax credits in any year cannot exceed the pre-credit U.S. tax liability for the year attributable to foreign source taxable income and further limitations may apply under the alternative minimum tax. A United States Holder will be denied a foreign tax credit with respect to Canadian income tax withheld from dividends received on subordinate voting shares to the extent that he or she has not held the subordinate voting shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent that he or she is under an obligation to make related payments with respect to substantially similar or related property. Instead, a deduction may be allowed. Any days during which a
United States Holder has substantially diminished his or her risk of loss on his or her subordinate voting shares are not counted toward meeting the 16-day holding period.
Subject to possible future changes in U.S. tax law, individuals, estates or trusts who receive "qualified dividend income" (excluding dividends from a PFIC) in taxable years beginning after December 31, 2002 and before January 1, 2011 generally will be taxed at a maximum U.S. federal rate of 15% (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
subordinate voting shares should constitute "qualified dividend income" for United States federal income tax purposes and that holders who are individuals (as well as certain trusts and estates) should be entitled to the reduced rates 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.
Taxation of Disposition of Subordinate Voting Shares
Subject to the discussion of the PFIC rules below, upon the sale, exchange or other disposition of subordinate voting shares, a United States 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 States Holder's adjusted tax basis in the subordinate voting shares will generally be the initial cost, but may be adjusted for various reasons including the receipt by such United States Holder of a distribution that was not made up wholly of earning and profits as described above under the heading "Taxation of Dividends Paid on subordinate voting shares." A United States Holder that uses the cash method of accounting calculates the dollar value of the proceeds received on the sale date as of the date that the sale settles, while a United States Holder who uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the "trade date," unless he or she has elected to use the settlement date to determine his or her proceeds of sale. Capital gain from the sale, exchange or other disposition of shares held more than one year is long-term capital gain and is eligible for a maximum 15% rate of taxation for non-corporate taxpayers. A reduced rate does not apply to capital gains realized by a United States 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 States Holder on a sale, exchange or other disposition of subordinate voting shares generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. A United States Holder who receives foreign currency upon disposition of subordinate voting shares 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 States 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 the 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, averaged over the year and ordinarily determined based on fair market value and including the 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 we were a PFIC and a United States Holder did not make an election to treat the company as a "qualified electing fund" and did not make a mark-to-market election, each as described below, then:
ordinary income for that year. A United States 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 special PFIC rules will not apply to a United States Holder if the United States Holder makes an election to treat the company as a "qualified electing fund" in the first taxable year in which he or she owns subordinate voting shares and if we comply with reporting requirements. 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 States 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 Internal Revenue Service, or IRS. A shareholder makes the election by attaching a completed IRS Form 8621, including 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 States Holder must file a completed IRS Form 8621 every year.
A United States 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 States Holder's adjusted tax basis in the PFIC shares. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election. The subordinate voting shares would be treated as publicly traded for purposes of the mark-to-market election and, therefore, such election would 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 States Holders are strongly urged to consult their tax advisors concerning this election if we are classified as a PFIC.
AlthoughDespite the fact that we are engaged in an active business, we may have beenare unable to conclude that we were not a PFIC in 2008.2009, though we believe, based on our internally performed analysis, that such status is unlikely. The tests in determining PFIC status include the determination of the value of all assets of the Company 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, based on our current business plan, we may be a PFIC in 20092010 or in a future year. A United States Holder who holds subordinate voting shares 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 qualifying electing fund election. Although we have agreed to supply United States Holders with the information needed to report income and gain pursuant to this election in the event that we are classified as a PFIC, if we were determined to be a PFIC with respect to a year in which we had not thought that we would be so treated, the information needed to enable United States Holders to make a qualifying electing fund election would not have been provided. United States 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 qualifying electing fund elections with respect to subordinate voting shares in the event that we are treated as a PFIC.
Tax Consequences for Non-United States Holders of Subordinate Voting Shares
Except as described in "Information Reporting and Back-up Withholding" below, a non-United States Holderholder of subordinate voting shares that is not a United States Holder (non-United States 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, subordinate voting shares unless:
Information Reporting and Back-up Withholding
Payments made within the United States, or by a U.S. payor or U.S. middleman, of dividends and proceeds arising from certain sales or other taxable dispositions of subordinate voting shares will be subject to information reporting. Backup withholding tax, at the rate of 28%, will apply if a United States Holder (a) fails to furnish the United States Holder's correct U.S. taxpayer identification number (generally on Form W-9), (b) is notified by the IRS that the United States 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 States Holder has furnished the United States Holder's correct U.S. taxpayer identification number and that the IRS has not notified the United States Holder that the United States Holder is subject to backup withholding tax. However, United States 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 States Holder's U.S. federal income tax liability, if any, or will be refunded, if the United States Holder follows the requisite procedures and timely furnishes the required information to the IRS. United States Holders should consult their own tax advisors regarding the information reporting and backup withholding tax rules.
Non-United States Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on or upon the disposition of shares, provided in some instances that the non-United States Holder provides a taxpayer identification number, certifies to his foreign status or otherwise establishes an exemption.
IRS CIRCULAR 230 DISCLOSURE: TO ENSURE COMPLIANCE WITH TREASURY DEPARTMENT REGULATIONS, YOU ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES IN THIS DOCUMENT IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THIS DOCUMENT; AND (C) YOU SHOULD SEEK ADVICE BASED ON YOUR OWN PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
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 necessarily complete. If the contract or document is filed as an exhibit to this Annual Report or is incorporated by reference, 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 review a copy of our filings with the SEC, including exhibits and schedules filed with this Annual Report, at the SEC's public reference facilities in Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such materials from the Public Reference Section of the SEC, Room 1580, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. We began to file electronically with the SEC in November 2000.
You may read and copy any reports, statements or other information that we file with the SEC at the addresses indicated above and you may also access some of them electronically at the website set forth above. These SEC filings are also available to the public 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 (http://www.sedar.com).
You may access other information about Celestica on our website athttp://www.celestica.com.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Exchange Rate Risk
We have entered into foreign currency contracts to hedge foreign currency risk. These financial instruments include, to varying degrees, elements of market risk. The table below provides information about our foreign currency contracts. The table presents the notional amounts and weighted average exchange rates by expected (contractual) maturity dates. These notional amounts generally are used to calculate the contractual payments to
be exchanged under the contracts. At December 31, 2009, these contracts had a fair value net unrealized gain of U.S. $8.0 million.
| Expected Maturity Date | | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 and thereafter | Total | Fair Value Gain (Loss) | ||||||||||||||||||
Forward Exchange Agreements | ||||||||||||||||||||||||||
Contract amount in millions | ||||||||||||||||||||||||||
Receive C$/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 190.5 | $ | 16.0 | $ | — | $ | — | $ | — | $ | — | $ | 206.5 | $ | 7.7 | ||||||||||
Average exchange rate | 0.91 | 0.94 | ||||||||||||||||||||||||
Pay British Pound Sterling/Receive U.S. $ | ||||||||||||||||||||||||||
Contract amount | $ | 89.5 | — | — | — | — | — | $ | 89.5 | $ | (0.1 | ) | ||||||||||||||
Average exchange rate | 1.60 | |||||||||||||||||||||||||
Receive Thai Baht/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 50.1 | — | — | — | — | — | $ | 50.1 | $ | 0.2 | |||||||||||||||
Average exchange rate | 0.03 | |||||||||||||||||||||||||
Receive Malaysian Ringgit/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 47.8 | — | — | — | — | — | $ | 47.8 | $ | 0.2 | |||||||||||||||
Average exchange rate | 0.29 | |||||||||||||||||||||||||
Receive Mexican Peso/Pay U.S. $ | ||||||||||||||||||||||||||
Contract amount | $ | 37.1 | — | — | — | — | — | $ | 37.1 | $ | 0.1 | |||||||||||||||
Average exchange rate | 0.08 | |||||||||||||||||||||||||
Receive Singapore $/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 18.9 | — | — | — | — | — | $ | 18.9 | $ | 0.3 | |||||||||||||||
Average exchange rate | 0.70 | |||||||||||||||||||||||||
Receive U.S.$/Pay Euro | ||||||||||||||||||||||||||
Contract amount | $ | 13.3 | — | — | — | — | — | $ | 13.3 | $ | — | |||||||||||||||
Average exchange rate | 1.45 | |||||||||||||||||||||||||
Receive Romanian Lei/Pay U.S. $ | ||||||||||||||||||||||||||
Contract amount | $ | 13.1 | — | — | — | — | — | $ | 13.1 | $ | (0.3 | ) | ||||||||||||||
Average exchange rate | 0.33 | |||||||||||||||||||||||||
Receive Czech Koruna/Pay U.S. $ | ||||||||||||||||||||||||||
Contract amount | $ | 12.9 | — | — | — | — | — | $ | 12.9 | $ | (0.1 | ) | ||||||||||||||
Average exchange rate | 0.05 | |||||||||||||||||||||||||
Total | $ | 473.2 | $ | 16.0 | $ | — | $ | — | $ | — | $ | — | $ | 489.2 | $ | 8.0 | ||||||||||
At December 31, 2008, thesewe had foreign currency contracts covering various currencies in an aggregate notional amount of $587.1 million. These contracts had a fair value net unrealized loss of U.S.$38.9 $38.9 million. The change in the net unrealized gains and losses on our contracts during 2009 was due primarily to the favourable movement in the exchange rates for the currencies that we hedge and the settlement of contracts with significant losses.
| Expected Maturity Date | | | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 and thereafter | Total | Fair Value Gain (Loss) | ||||||||||||||||||
Forward Exchange Agreements | ||||||||||||||||||||||||||
Contract amount in millions | ||||||||||||||||||||||||||
Receive C$/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 213.6 | $ | 16.7 | $ | — | $ | — | $ | — | $ | — | $ | 230.3 | $ | (22.0 | ) | |||||||||
Average exchange rate | $ | 0.92 | $ | 0.82 | ||||||||||||||||||||||
Receive Mexican Peso/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 88.6 | — | — | — | — | — | $ | 88.6 | $ | (9.2 | ) | ||||||||||||||
Average exchange rate | $ | 0.08 | ||||||||||||||||||||||||
Receive Thai Baht/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 77.7 | — | — | — | — | — | $ | 77.7 | $ | (2.6 | ) | ||||||||||||||
Average exchange rate | $ | 0.03 | ||||||||||||||||||||||||
Receive Malaysian Ringgit/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 60.6 | — | — | — | — | — | $ | 60.6 | $ | (2.7 | ) | ||||||||||||||
Average exchange rate | $ | 0.30 | ||||||||||||||||||||||||
Receive British Pound Sterling/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 48.1 | — | — | — | — | — | $ | 48.1 | 1.7 | ||||||||||||||||
Average exchange rate | $ | 1.49 | ||||||||||||||||||||||||
Receive Singapore $/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 31.0 | — | — | — | — | — | $ | 31.0 | $ | (0.7 | ) | ||||||||||||||
Average exchange rate | $ | 0.71 | ||||||||||||||||||||||||
Receive Czech Koruna/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 26.7 | — | — | — | — | — | $ | 26.7 | $ | (3.8 | ) | ||||||||||||||
Average exchange rate | $ | 0.06 | ||||||||||||||||||||||||
Receive U.S.$/Pay Euro | ||||||||||||||||||||||||||
Contract amount | $ | 19.4 | — | — | — | — | — | $ | 19.4 | 0.4 | ||||||||||||||||
Average exchange rate | 1.45 | |||||||||||||||||||||||||
Receive Brazilian Real/Pay U.S.$ | ||||||||||||||||||||||||||
Contract amount | $ | 4.7 | — | — | — | — | — | $ | 4.7 | — | ||||||||||||||||
Average exchange rate | $ | 0.41 | ||||||||||||||||||||||||
Total | $ | 570.4 | $ | 16.7 | $ | — | $ | — | $ | — | $ | — | $ | 587.1 | $ | (38.9 | ) | |||||||||
Interest Rate Risk
Our debt includes capital lease commitments amounting to $1.0 million. These capital lease commitments are not sensitive to changes inBorrowings under our revolving credit facility bear interest rates.
In June 2004, we issued our 2011 Notes with an aggregate principal amount of $500.0 million due 2011, with a fixed interest rate of 7.875%. In connection with the notes offering, we entered into interest rate swap agreements which hedge the fair value of the 2011 Notes by swapping the fixed rate of interest for a variable rate based onat LIBOR plus a margin. The notional amount of the agreements is $500.0 million. The agreements are effective as of June 2004 and mature July 2011. The average interest rate on the 2011 Notes for 2008 was 6.5% (2007 — 8.3%; and 2006 — 8.2%), after reflecting the interest rate swap. As a result of entering into the interest rate swap agreements,If we borrow under this facility, we are exposed to interest rate risks due to fluctuations in the LIBOR rate. A one-percentage point increase in the LIBOR rate would increase interest expense, assuming maximum borrowings under our credit facility, by approximately $5.0$2.0 million annually. We designatedSee note 7 to the interest rate swap agreements as fair value hedges.Consolidated Financial Statements in Item 18.
At December 31, 2008, we recognized $17.3 million in other long-term assets to reflect2009, the approximate fair value of the interest rate swap agreements.
Tableour Senior Subordinated Notes was 103% of Contents
We terminated the interest rate swaps in February 2009.its face value on December 31, 2009, based on quoted market rates or prices. The Senior Subordinated Notes were redeemed on March 2, 2010. See note 22 to the Consolidated Financial Statements in Item 18.
At December 31, 2008, the approximate fair value of our 77/8% Senior Subordinated Notes and 75/8% Senior Subordinated Notes were 93% and 83% of their face values on December 31, 2008, respectively, based on quoted market rates or prices. See note 22 to the Consolidated Financial Statements in Item 18.
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.
Item 1.13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 2.14. Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 3.15. Controls and Procedures
Information concerning our controls and procedures is set forth in Item 5, "Operating and Financial Review and Prospects — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Controls and Procedures."
The attestation report from our auditors KPMG LLP is set forth on page F-2 of our financial statements.
Item 16A. Audit Committee Financial Expert
The Board of Directors has considered the extensive financial experience of Mr. Crandall and Mr. Etherington, including their respective experiences serving as the Chief Financial Officer of a large U.S.
and/or Canadian organization, and has determined that each of them is an audit committee financial expert within the meaning of the U.S. Sarbanes Oxley Act of 2002.
The Board of Directors also determined that Messrs. Crandall and Etherington are independent directors, as that term is defined in the NYSE listing standards.
The Board of Directors has adopted a Finance Code of Professional Conduct for Celestica's CEO, our senior finance officers and all personnel in the finance organization to deter wrongdoing and promote honest and ethical conduct in the practice of financial management; full, fair, accurate, timely and understandable disclosure; and compliance with all applicable laws and regulations. These professionals are expected to abide by this code as well as Celestica's Business Conduct Governance policy and all of our other applicable business policies, standards and guidelines.
The Finance Code of Professional Conduct and the Business Conduct Governance policy can be accessed electronically athttp://www.celestica.com. Celestica will provide a copy of such policies free of charge to any person who so requests. Requests should be directed to clsir@celestica.com, by mail to Celestica Investor Relations, 12 Concorde Place, 5th Floor,844 Don Mills Road, Toronto, Ontario, Canada M3C 3R8,1V7, or by telephone at 416-448-2211.
Item 16C. Principal Accountant Fees and Service
The external auditor is engaged to provide services pursuant to pre-approval policies and procedures established by the Audit Committee of Celestica's Board of Directors. 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 does so only if it considers that these services are compatible with the external auditor's independence.
Our auditors are KPMG LLP. KPMG did not provide any financial information systems design or implementation services to us during 20072008 or 2008.2009. The Audit Committee has determined that the provision of the non-audit services by KPMG does not compromise KPMG's independence.
Audit Fees
KPMG billed $3.4 million in 2009 and $4.2 million in 2008 and $3.9 million in 2007 for audit services.
Audit-Related Fees
KPMG billed $0.3 million in 2009 and $0.1 million in 2008 and $0.2 million in 2007 for audit-related services.
Tax Fees
KPMG billed $0.5 million in 2009 and $0.6 million in 2008 and 2007 for tax compliance, tax advice and tax planning services.
All Other Fees
KPMG did not perform any other services for us.
Pre-approval Policies and Procedures Percentage of Services Approved by Audit Committee
All KPMG services and fees are approved by the Audit Committee.
Percentage of Hours Expended on KPMG's engagement not performed by KPMG's full-time, permanent employees (if greater than 50%)
N/A
Item 16D. Exemptions from the Listing Standards for Audit Committees
None.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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 Canadian Securities Administrators, the NYSE and by the U.S. Securities and Exchange Commission under its rules and those mandated by the United States Sarbanes Oxley Act of 2002. Today, we meet and often exceed not only corporate governance legal requirements in Canada and the United States, but also the best practices recommended by securities regulators. 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. Celestica complies with the TSX rules. The 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 company in the open market. NYSE rules require approval of all equity compensation plans regardless of whether new issuances or treasury shares are used.
We submitted a certificate of Craig H. Muhlhauser, our CEO, to the NYSE in 20082009 certifying that he was not aware of any violation by Celestica of its corporate governance listing standards.
Corporate Social Responsibility
We have a heritage of strong corporate citizenship. Wecitizenship and uphold a set of corporate valuespolicies and principles that places importance onfocus our corporate social responsibility including environmental protection,initiatives across five key focus areas: labour, ethics, the respectful and fair treatment of employees,environment, occupational health and safety, ethics and corporate giving. We also uphold a business conduct governance policy
Our guiding policies and principles include:
In 2004, along with OEMs including IBM, HP and Dell and several EMS peers, we co-developed the
In 2010, we are launching our first tier suppliers.integrated Corporate Social Responsibility Information Package. This package will include our Corporate Social Responsibility Report, Environmental Sustainability Report and Business Conduct Governance Policy and will be available on our corporate website athttp://www.celestica.com. These documents outline our high standards for business ethics, the policies we value and uphold, the progress we have made as a socially responsible organization and the key milestones we are working to achieve in 2010.
Item 1.17. Financial Statements
Not applicable.
Item 2.18. 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 | ||
Consolidated Balance Sheets as at December 31, | F-4 | |
Consolidated Statements of Operations for the years ended December 31, | F-5 | |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, | F-6 | |
Consolidated Statements of Shareholders' Equity for the years ended December 31, | F-7 | |
Consolidated Statements of Cash Flows for the years ended December 31, | F-8 | |
Notes to the Consolidated Financial Statements | F-9 |
The following exhibits have been filed as part of this Annual Report:
| | Incorporated by Reference | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||
1. | Articles of Incorporation and Bylaws as currently in effect: | |||||||||||||||||
1.1 | Certificate and Articles of Incorporation | F-1 | 333-8700 | April 29, 1998 | 3.1 | |||||||||||||
1.2 | Certificate and Articles of Amendment effective October 22, 1996 | F-1 | 333-8700 | April 29, 1998 | 3.2 | |||||||||||||
1.3 | Certificate and Articles of Amendment effective January 24, 1997 | F-1 | 333-8700 | April 29, 1998 | 3.3 | |||||||||||||
1.4 | Certificate and Articles of Amendment effective October 8, 1997 | F-1 | 333-8700 | April 29, 1998 | 3.4 | |||||||||||||
1.5 | Certificate and Articles of Amendment effective April 29, 1998 | F-1/A | 333-8700 | June 1, 1998 | 3.5 | |||||||||||||
1.6 | Articles of Amendment effective June 26, 1998 | F-1 | 333-10030 | February 16, 1999 | 3.6 | |||||||||||||
1.7 | Restated Articles of Incorporation effective June 26, 1998 | F-1 | 333-10030 | February 16, 1999 | 3.7 | |||||||||||||
1.8 | Restated Articles of Incorporation effective November 20, 2001 | 20-F | 001-14832 | April 21, 2003 | 1.8 | |||||||||||||
1.9 | Restated Article of Incorporation effective May 13, 2003 | 20-F | 001-14832 | May 19, 2004 | 1.9 | |||||||||||||
1.10 | Bylaw No. 1 | 20-F | 001-14832 | May 22, 2001 | 1.8 | |||||||||||||
1.11 | Bylaw No. 2 | F-1 | 333-8700 | April 29, 1998 | 3.9 | |||||||||||||
1.12 | Bylaw No. 3 | 20-F | 001-14832 | May 19, 2004 | 1.12 | |||||||||||||
1.13 | Bylaw No. 4 | 20-F | 001-14832 | May 19, 2004 | 1.13 | |||||||||||||
1.14 | Bylaw No. A | 20-F | 001-14832 | May, 2004 | 1.14 | |||||||||||||
2. | Instruments defining rights of holders of equity or debt securities: | |||||||||||||||||
2.1 | See Certificate and Articles of Incorporation and amendments thereto identified above | |||||||||||||||||
2.2 | Form of Subordinate Voting Share Certificate | F-1/A | 333-8700 | June 25, 1998 | 4.1 | |||||||||||||
2.3 | Indenture, dated as of June 16, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee | 6-K | 0001-14832 | June 17, 2004 | 4.11 | |||||||||||||
2.4 | First Supplemental Indenture, dated as of June 16, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee, to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 6-K | 0001-14832 | June 17, 2004 | 4.21 | |||||||||||||
2.5 | Second Supplemental Indenture, dated as of December 30, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee, to the First Supplemental Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee, to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 20-F | 0001-14832 | March 21, 2005 | 2.7 |
| | Incorporated by Reference | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||
1. | Articles of Incorporation and Bylaws as currently in effect: | |||||||||||||||||
1.1 | Certificate and Articles of Incorporation | F-1 | 333-8700 | April 29, 1998 | 3.1 | |||||||||||||
1.2 | Certificate and Articles of Amendment effective October 22, 1996 | F-1 | 333-8700 | April 29, 1998 | 3.2 | |||||||||||||
1.3 | Certificate and Articles of Amendment effective January 24, 1997 | F-1 | 333-8700 | April 29, 1998 | 3.3 | |||||||||||||
1.4 | Certificate and Articles of Amendment effective October 8, 1997 | F-1 | 333-8700 | April 29, 1998 | 3.4 | |||||||||||||
1.5 | Certificate and Articles of Amendment effective April 29, 1998 | F-1/A | 333-8700 | June 1, 1998 | 3.5 | |||||||||||||
1.6 | Articles of Amendment effective June 26, 1998 | F-1 | 333-10030 | February 16, 1999 | 3.6 | |||||||||||||
1.7 | Restated Articles of Incorporation effective June 26, 1998 | F-1 | 333-10030 | February 16, 1999 | 3.7 | |||||||||||||
1.8 | Restated Articles of Incorporation effective November 20, 2001 | 20-F | 001-14832 | April 21, 2003 | 1.8 | |||||||||||||
1.9 | Restated Article of Incorporation effective May 13, 2003 | 20-F | 001-14832 | May 19, 2004 | 1.9 | |||||||||||||
1.10 | Restated Article of Incorporation effective June 25, 2004 | X | ||||||||||||||||
1.11 | Bylaw No. 1 | X | ||||||||||||||||
1.12 | Bylaw No. 2 | F-1 | 333-8700 | April 29, 1998 | 3.9 | |||||||||||||
1.13 | Bylaw No. 3 | 20-F | 001-14832 | May 19, 2004 | 1.12 | |||||||||||||
1.14 | Bylaw No. A | 20-F | 001-14832 | May, 2004 | 1.14 | |||||||||||||
2. | Instruments defining rights of holders of equity or debt securities: | |||||||||||||||||
2.1 | See Certificate and Articles of Incorporation and amendments thereto identified above | |||||||||||||||||
2.2 | Form of Subordinate Voting Share Certificate | F-1/A | 333-8700 | June 25, 1998 | 4.1 | |||||||||||||
2.3 | Indenture, dated as of June 16, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee | 6-K | 0001-14832 | June 17, 2004 | 4.11 | |||||||||||||
2.4 | First Supplemental Indenture, dated as of June 16, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee, to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 6-K | 0001-14832 | June 17, 2004 | 4.21 | |||||||||||||
2.5 | Second Supplemental Indenture, dated as of December 30, 2004, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee, to the First Supplemental Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee, to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 20-F | 0001-14832 | March 21, 2005 | 2.7 |
| | Incorporated by Reference | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||
2.6 | Third Supplemental Indenture, dated as of June 23, 2005, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 6-K | 0001-14832 | June 20, 2005 | 4.22 | |||||||||||||
2.7 | Fourth Amended and Restated Revolving Term Credit Agreement, April 12, 2007, between: Celestica Inc., the Subsidiaries of Celestica Inc. specified therein as Designated Subsidiaries, CIBC World Markets, as Joint Lead Arranger, RBC Capital Markets, as Joint Lead Arranger and Co-Syndication Agent, Canadian Imperial Bank of Commerce, a Canadian Chartered Bank, as Administrative Agent, Banc of America Securities LLC, as Co-Syndication Agent and the financial institutions named in Schedule A, as lenders | 20-F | 0001-14832 | March 25, 2008 | 2.7 | |||||||||||||
4. | Certain Contracts: | |||||||||||||||||
4.1 | Amended and Restated Management Services Agreement, dated as of July 1, 2003, among Celestica Inc., Celestica North America Inc. and Onex Corporation | F-4 | 333-110362 | November 10, 2003 | 10.1 | |||||||||||||
4.2 | Executive Employment Agreement, dated as of July 26, 2007, between Celestica Inc., Celestica International Inc. and Celestica Corporation and Craig H. Muhlhauser | 20-F | 0001-14832 | March 25, 2008 | 4.4 | |||||||||||||
4.3 | Executive Employment Agreement, dated as of July 26, 2007, between Celestica Inc., Celestica International Inc. and Paul Nicoletti | 20-F | 0001-14832 | March 25, 2008 | 4.5 | |||||||||||||
4.4 | Executive Employment Agreement, dated as of January 1, 2008, between Celestica Inc., Celestica International Inc. and Elizabeth L. DelBianco | 20-F | 0001-14832 | March 25, 2008 | 4.6 | |||||||||||||
4.5 | Executive Employment Agreement, dated as of July 22, 2004, between Celestica Inc., Celestica International Inc. and Peter J. Bar | 20-F | 001-14832 | March 21, 2005 | 4.9 | |||||||||||||
4.6 | Amended and Restated Celestica Inc. — Long-Term Incentive Plan | 20-F | 001-14832 | March 22, 2001 | 3.17-1 | |||||||||||||
4.7 | Canadian Share Unit Plan | 20-F | 001-14832 | March 21, 2005 | 4.16 | |||||||||||||
4.8 | Manufacturers' Services Limited 2000 Equity Incentive Plan, as amended | X | ||||||||||||||||
8.1 | Subsidiaries of Registrant | X | ||||||||||||||||
12.1 | Chief Executive Officer Certification | X | ||||||||||||||||
12.2 | Chief Financial Officer Certification | X | ||||||||||||||||
13.1 | Certification required by Rule 13a-14(b)* | X | ||||||||||||||||
15.1 | Celestica Audit Committee Mandate | 20-F | 001-14832 | March 21, 2006 | 15.1 | |||||||||||||
15.2 | Consent of KPMG LLP, Chartered Accountants | X |
| | Incorporated by Reference | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit Number | Description | Form | File No. | Filing Date | Exhibit No. | Filed Herewith | ||||||||||||
2.6 | Third Supplemental Indenture, dated as of June 23, 2005, between Celestica Inc. and JPMorgan Chase Bank, N.A., as trustee to the Indenture, dated as of June 16, 2004, between Celestica Inc. and the trustee | 6-K | 0001-14832 | June 27, 2005 | 4.22 | |||||||||||||
2.7 | Fifth Revolving Term Credit Agreement, April 7, 2009, between: Celestica Inc., the Subsidiaries of Celestica Inc. specified therein as Designated Subsidiaries, CIBC World Markets, as Joint Lead Arranger, RBC Capital Markets, as Joint Lead Arranger and Co-Syndication Agent, Canadian Imperial Bank of Commerce, a Canadian Chartered Bank, as Administrative Agent, Banc of America Securities LLC, as Co-Syndication Agent and the financial institutions named in Schedule A, as lenders | X | ||||||||||||||||
4. | Certain Contracts: | |||||||||||||||||
4.1 | Services Agreement, dated as of January 1, 2009, between Celestica Inc. and Onex Corporation | X | ||||||||||||||||
4.2 | Executive Employment Agreement, dated as of July 26, 2007, between Celestica Inc., Celestica International Inc. and Celestica Corporation and Craig H. Muhlhauser | 20-F | 0001-14832 | March 25, 2008 | 4.4 | |||||||||||||
4.3 | Executive Employment Agreement, dated as of July 26, 2007, between Celestica Inc., Celestica International Inc. and Paul Nicoletti | 20-F | 0001-14832 | March 25, 2008 | 4.5 | |||||||||||||
4.4 | Executive Employment Agreement, dated as of January 1, 2008, between Celestica Inc., Celestica International Inc. and Elizabeth L. DelBianco | 20-F | 0001-14832 | March 25, 2008 | 4.6 | |||||||||||||
4.5 | Amended and Restated Celestica Inc. Long-Term Incentive Plan | X | ||||||||||||||||
4.6 | Canadian Share Unit Plan | 20-F | 001-14832 | March 21, 2005 | 4.16 | |||||||||||||
4.7 | D2D Employee Share Purchase and Option Plan (1997) | F-1/A | 333-8700 | June 1, 1998 | 10.20 | |||||||||||||
4.8 | Celestica 1997 U.K. Approved Share Option Scheme | F-1 | 333-8700 | April 29, 1998 | 10.19 | |||||||||||||
4.9 | 1998 U.S. Executive Share Purchase and Option Plan | S-8 | 333-9500 | October 8, 1998 | 4.6 | |||||||||||||
8.1 | Subsidiaries of Registrant | X | ||||||||||||||||
11.1 | Finance Code of Professional Conduct | X | ||||||||||||||||
11.2 | Business Conduct Governance Policy | X | ||||||||||||||||
12.1 | Chief Executive Officer Certification | X | ||||||||||||||||
12.2 | Chief Financial Officer Certification | X | ||||||||||||||||
13.1 | Certification required by Rule 13a-14(b)* | X | ||||||||||||||||
15.1 | Celestica Audit Committee Mandate | 20-F | 001-14832 | March 21, 2006 | 15.1 | |||||||||||||
15.2 | Consent of KPMG LLP, Chartered Accountants | X |
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/ ELIZABETH L. DELBIANCO Elizabeth L. DelBianco Executive Vice President Chief Legal and Administrative Officer | |||
Date: March |
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. The Company's internal control system was designed to provide reasonable assurance to its management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles. 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.
Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management's authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and communication flows are effective and to monitor performance, including performance of internal control procedures.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 20082009 based on the criteria set forth in the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as of December 31, 2008,2009, the Company's internal control over financial reporting is effective. The Company's independent auditors, KPMG LLP, have issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
February 11, 200910, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Celestica Inc.
We have audited Celestica Inc.'s (the "Company") internal control over financial reporting as of December 31, 2008,2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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.
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 Canadian and U.S. 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have conducted our audits on the consolidated financial statements, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Our report dated February 11, 2009 (February 26, 2009 as to note 22)10, 2010 expressed an unqualified opinion on those consolidated financial statements.
Toronto, Canada February | /s/ KPMG LLP Chartered Accountants, Licensed Public Accountants |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Celestica Inc.
We have audited the accompanying consolidated balance sheets of Celestica Inc. (the "Company") as of December 31, 20072008 and 20082009 and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2008.2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20072008 and 20082009 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 20082009 in conformity with Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 20 to the consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2008,2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 11, 200910, 2010 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Toronto, Canada February | /s/ KPMG LLP Chartered Accountants, Licensed Public Accountants |
CELESTICA INC.
CONSOLIDATED BALANCE SHEETS
(in millions of U.S. dollars)
| As at December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (note 19) | $ | 1,116.7 | $ | 1,201.0 | ||||
Accounts receivable (note 2(e)) | 941.2 | 1,074.0 | ||||||
Inventories (notes 2(f) and (s)) | 791.9 | 787.4 | ||||||
Prepaid and other assets (note 14(1)) | 126.2 | 87.1 | ||||||
Income taxes recoverable | 19.8 | 14.1 | ||||||
Deferred income taxes (note 11) | 3.8 | 8.2 | ||||||
2,999.6 | 3,171.8 | |||||||
Property, plant and equipment (note 4) | 466.0 | 467.5 | ||||||
Goodwill (note 5) | 850.5 | — | ||||||
Intangible assets (note 5) | 35.2 | 20.1 | ||||||
Other long-term assets (note 6) | 119.2 | 126.8 | ||||||
$ | 4,470.5 | $ | 3,786.2 | |||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,029.8 | $ | 1,090.6 | ||||
Accrued liabilities (notes 10(a), 14(1), 20(d) and (g)) | 402.6 | 463.1 | ||||||
Income taxes payable | 14.0 | 13.5 | ||||||
Deferred income taxes (note 11) | — | 0.2 | ||||||
Current portion of long-term debt (note 7) | 0.2 | 1.0 | ||||||
1,446.6 | 1,568.4 | |||||||
Long-term debt (note 7) | 758.3 | 732.1 | ||||||
Accrued pension and post-employment benefits (notes 13 and 20(c)) | 70.4 | 63.2 | ||||||
Deferred income taxes (note 11) | 63.3 | 47.2 | ||||||
Other long-term liabilities | 13.7 | 9.8 | ||||||
2,352.3 | 2,420.7 | |||||||
Shareholders' equity: | ||||||||
Capital stock (note 8(b)) | 3,585.2 | 3,588.5 | ||||||
Warrants (note 8(b) and (c)) | 3.1 | — | ||||||
Contributed surplus | 190.3 | 204.4 | ||||||
Deficit | (1,716.3 | ) | (2,436.8 | ) | ||||
Accumulated other comprehensive income (note 9) | 55.9 | 9.4 | ||||||
2,118.2 | 1,365.5 | |||||||
$ | 4,470.5 | $ | 3,786.2 | |||||
Commitments, contingencies and guarantees (note 16). | ||||||||
Canadian and United States accounting policy differences (note 20). | ||||||||
Subsequent event (note 22). |
| As at December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (note 19) | $ | 1,201.0 | $ | 937.7 | ||||
Accounts receivable (note 2(e)) | 1,074.0 | 828.1 | ||||||
Inventories (note 2(f)) | 787.4 | 676.1 | ||||||
Prepaid and other assets (note 14(d)(1)) | 87.1 | 74.5 | ||||||
Income taxes recoverable | 14.1 | 21.2 | ||||||
Deferred income taxes (note 11) | 8.2 | 5.2 | ||||||
3,171.8 | 2,542.8 | |||||||
Property, plant and equipment (note 4) | 433.5 | 393.8 | ||||||
Intangible assets (note 5) | 54.1 | 32.3 | ||||||
Other long-term assets (note 6) | 126.8 | 137.2 | ||||||
$ | 3,786.2 | $ | 3,106.1 | |||||
Liabilities and Shareholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,090.6 | $ | 927.1 | ||||
Accrued liabilities (notes 10(a), 14(d)(1), 20(d) and (g)) | 463.1 | 331.9 | ||||||
Income taxes payable | 13.5 | 38.0 | ||||||
Current portion of long-term debt (note 7) | 1.0 | 222.8 | ||||||
1,568.2 | 1,519.8 | |||||||
Long-term debt (note 7) | 732.1 | — | ||||||
Accrued pension and post-employment benefits (notes 13 and 20(c)) | 63.2 | 75.4 | ||||||
Deferred income taxes (note 11) | 47.4 | 28.0 | ||||||
Other long-term liabilities | 9.8 | 7.1 | ||||||
2,420.7 | 1,630.3 | |||||||
Shareholders' equity: | ||||||||
Capital stock (note 8(b)) | 3,588.5 | 3,591.2 | ||||||
Contributed surplus | 204.4 | 210.6 | ||||||
Deficit | (2,436.8 | ) | (2,381.8 | ) | ||||
Accumulated other comprehensive income | 9.4 | 55.8 | ||||||
1,365.5 | $ | 1,475.8 | ||||||
$ | 3,786.2 | $ | 3,106.1 | |||||
Commitments, contingencies and guarantees (note 16). | ||||||||
Canadian and United States accounting policy differences (note 20). | ||||||||
Subsequent events (note 22). |
See accompanying notes to consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars, except per share amounts)
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Revenue | $ | 8,811.7 | $ | 8,070.4 | $ | 7,678.2 | |||||
Cost of sales | 8,359.9 | 7,648.0 | 7,147.1 | ||||||||
Gross profit | 451.8 | 422.4 | 531.1 | ||||||||
Selling, general and administrative expenses (SG&A) (notes 2(n) and (o)) | 285.6 | 295.1 | 303.8 | ||||||||
Amortization of intangible assets (note 5) | 27.0 | 21.3 | 15.1 | ||||||||
Integration costs related to acquisitions (note 3) | 0.9 | 0.1 | — | ||||||||
Other charges (note 10) | 211.8 | 47.6 | 885.2 | ||||||||
Interest on long-term debt (note 7) | 67.1 | 66.4 | 57.8 | ||||||||
Interest income, net of interest expense | (4.5 | ) | (15.2 | ) | (15.3 | ) | |||||
Earnings (loss) before income taxes | (136.1 | ) | 7.1 | (715.5 | ) | ||||||
Income taxes expense (recovery) (note 11): | |||||||||||
Current | (40.7 | ) | 14.4 | 18.4 | |||||||
Deferred | 55.2 | 6.4 | (13.4 | ) | |||||||
14.5 | 20.8 | 5.0 | |||||||||
Net loss | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | ||
Basic loss per share | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | ||
Diluted loss per share | $ | (0.66 | ) | $ | (0.06 | ) | $ | (3.14 | ) | ||
Shares used in computing per share amounts (in millions): | |||||||||||
Basic | 227.2 | 228.9 | 229.3 | ||||||||
Diluted | 227.2 | 228.9 | 229.3 | ||||||||
Net loss in accordance with U.S. GAAP (note 20) | $ | (149.3 | ) | $ | (16.1 | ) | $ | (725.8 | ) | ||
Basic loss per share, in accordance with U.S. GAAP (note 20) | $ | (0.66 | ) | $ | (0.07 | ) | $ | (3.17 | ) | ||
Diluted loss per share, in accordance with U.S. GAAP (note 20) | $ | (0.66 | ) | $ | (0.07 | ) | $ | (3.17 | ) |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Revenue | $ | 8,070.4 | $ | 7,678.2 | $ | 6,092.2 | |||||
Cost of sales | 7,648.0 | 7,147.1 | 5,662.4 | ||||||||
Gross profit | 422.4 | 531.1 | 429.8 | ||||||||
Selling, general and administrative expenses (SG&A) (notes 2(o) and 2(s)(1)) | 271.7 | 292.0 | 244.5 | ||||||||
Amortization of intangible assets (notes 2(s)(1) and 5) | 44.7 | 26.9 | 21.9 | ||||||||
Integration costs related to acquisitions (note 3) | 0.1 | — | — | ||||||||
Other charges (note 10) | 47.6 | 885.2 | 68.0 | ||||||||
Interest on long-term debt (note 7) | 66.4 | 57.8 | 35.3 | ||||||||
Interest income, net of interest expense | (15.2 | ) | (15.3 | ) | (0.3 | ) | |||||
Earnings (loss) before income taxes | 7.1 | (715.5 | ) | 60.4 | |||||||
Income taxes expense (recovery) (note 11): | |||||||||||
Current | 14.4 | 18.4 | 33.6 | ||||||||
Deferred | 6.4 | (13.4 | ) | (28.2 | ) | ||||||
20.8 | 5.0 | 5.4 | |||||||||
Net earnings (loss) | $ | (13.7 | ) | $ | (720.5 | ) | $ | 55.0 | |||
Basic earnings (loss) per share | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 | |||
Diluted earnings (loss) per share | $ | (0.06 | ) | $ | (3.14 | ) | $ | 0.24 | |||
Shares used in computing per share amounts (in millions): | |||||||||||
Basic | 228.9 | 229.3 | 229.5 | ||||||||
Diluted (note 2(r)) | 228.9 | 229.3 | 230.9 | ||||||||
Net earnings (loss) in accordance with U.S. GAAP (note 20) | $ | (16.1 | ) | $ | (725.8 | ) | $ | 39.0 | |||
Basic earnings (loss) per share, in accordance with U.S. GAAP (note 20) | $ | (0.07 | ) | $ | (3.17 | ) | $ | 0.17 | |||
Diluted earnings (loss) per share, in accordance with U.S. GAAP (note 20) | $ | (0.07 | ) | $ | (3.17 | ) | $ | 0.17 |
See accompanying notes to consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions of U.S. dollars)
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Net loss | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | ||
Other comprehensive income (loss), net of tax (note 9): | |||||||||||
Foreign currency translation gain | 7.1 | 8.7 | 11.5 | ||||||||
Net gain (loss) on derivatives designated as cash flow hedges | — | 37.5 | (53.1 | ) | |||||||
Reclass net gain on derivatives designated as cash flow hedges to operations | — | (16.3 | ) | (4.9 | ) | ||||||
Comprehensive income (loss) | $ | (143.5 | ) | $ | 16.2 | $ | (767.0 | ) | |||
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Net earnings (loss) | $ | (13.7 | ) | $ | (720.5 | ) | $ | 55.0 | |||
Other comprehensive income (loss), net of tax (note 9): | |||||||||||
Currency translation adjustment | 8.7 | 11.5 | (1.6 | ) | |||||||
Reclass foreign currency translation to other charges | — | — | 1.8 | ||||||||
Change from derivatives designated as hedges | 21.2 | (58.0 | ) | 46.2 | |||||||
Comprehensive income (loss) | $ | 16.2 | $ | (767.0 | ) | $ | 101.4 | ||||
See accompanying notes to consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in millions of U.S. dollars)
| Capital Stock (note 8) | Warrants (note 8) | Contributed Surplus | Deficit | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2005 | $ | 3,562.3 | $ | 8.4 | $ | 169.9 | $ | (1,545.6 | ) | ||||
Shares issued | 14.3 | — | — | — | |||||||||
Stock-based compensation costs (note 8) | — | — | 8.8 | — | |||||||||
Other | — | — | 0.6 | — | |||||||||
Net loss for the year | — | — | — | (150.6 | ) | ||||||||
Balance — December 31, 2006 | 3,576.6 | 8.4 | 179.3 | (1,696.2 | ) | ||||||||
Change in accounting policy (note 2(n)) | — | — | — | (6.4 | ) | ||||||||
Shares issued | 8.6 | — | — | — | |||||||||
Warrants cancelled | — | (5.3 | ) | 5.3 | — | ||||||||
Stock-based compensation costs (note 8) | — | — | 5.1 | — | |||||||||
Other | — | — | 0.6 | — | |||||||||
Net loss for the year | — | — | — | (13.7 | ) | ||||||||
Balance — December 31, 2007 | 3,585.2 | 3.1 | 190.3 | (1,716.3 | ) | ||||||||
Shares issued | 3.3 | — | — | — | |||||||||
Warrants cancelled | — | (3.1 | ) | 3.1 | — | ||||||||
Stock-based compensation costs (note 8) | — | — | 10.0 | — | |||||||||
Other | — | — | 1.0 | — | |||||||||
Net loss for the year | — | — | — | (720.5 | ) | ||||||||
Balance — December 31, 2008 | $ | 3,588.5 | $ | — | $ | 204.4 | $ | (2,436.8 | ) | ||||
| Capital Stock (note 8) | Warrants (note 8) | Contributed Surplus | Deficit | Accumulated other comprehensive income (note 9) | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2006 | $ | 3,576.6 | $ | 8.4 | $ | 179.3 | $ | (1,696.2 | ) | $ | 26.5 | (a) | ||||
Change in accounting policy | — | — | — | (6.4 | ) | (0.5 | ) | |||||||||
Shares issued | 8.6 | — | — | — | — | |||||||||||
Warrants cancelled | — | (5.3 | ) | 5.3 | — | — | ||||||||||
Stock-based compensation costs (note 8) | — | — | 5.1 | — | — | |||||||||||
Other | — | — | 0.6 | — | — | |||||||||||
Net loss for the year | — | — | — | (13.7 | ) | — | ||||||||||
Change from derivatives designated as hedges | — | — | — | — | 21.2 | |||||||||||
Currency translation adjustments | — | — | — | — | 8.7 | |||||||||||
Balance — December 31, 2007 | 3,585.2 | 3.1 | 190.3 | (1,716.3 | ) | 55.9 | ||||||||||
Shares issued | 3.3 | — | — | — | — | |||||||||||
Warrants cancelled | — | (3.1 | ) | 3.1 | — | — | ||||||||||
Stock-based compensation costs (note 8) | — | — | 10.0 | — | — | |||||||||||
Other | — | — | 1.0 | — | — | |||||||||||
Net loss for the year | — | — | — | (720.5 | ) | — | ||||||||||
Change from derivatives designated as hedges | — | — | — | — | (58.0 | ) | ||||||||||
Currency translation adjustments | — | — | — | — | 11.5 | |||||||||||
Balance — December 31, 2008 | 3,588.5 | — | 204.4 | (2,436.8 | ) | 9.4 | ||||||||||
Shares issued | 2.7 | — | — | — | — | |||||||||||
Stock-based compensation costs (note 8) | — | — | 17.6 | — | — | |||||||||||
Reclass to accrued liabilities (b) | — | — | (13.3 | ) | — | — | ||||||||||
Other | — | — | 1.9 | — | — | |||||||||||
Net earnings for the year | — | — | — | 55.0 | — | |||||||||||
Change from derivatives designated as hedges | — | — | — | — | 46.2 | |||||||||||
Currency translation adjustments | — | — | — | — | 0.2 | |||||||||||
Balance — December 31, 2009 | $ | 3,591.2 | $ | — | $ | 210.6 | $ | (2,381.8 | ) | $ | 55.8 | |||||
See accompanying notes to consolidated financial statements.
CELESTICA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Cash provided by (used in): | |||||||||||
Operations: | |||||||||||
Net loss | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | ||
Items not affecting cash: | |||||||||||
Depreciation and amortization | 134.2 | 130.8 | 109.2 | ||||||||
Deferred income taxes (note 11) | 55.2 | 6.4 | (13.4 | ) | |||||||
Non-cash charge for option issuances (note 8(d)) | 5.1 | 7.0 | 6.6 | ||||||||
Restructuring charges (note 10) | 47.9 | 5.1 | 1.1 | ||||||||
Other charges (note 10) | 34.6 | 14.0 | 850.3 | ||||||||
Other | 1.9 | 18.0 | 16.6 | ||||||||
Changes in non-cash working capital items: | |||||||||||
Accounts receivable | (24.8 | ) | 32.0 | (132.8 | ) | ||||||
Inventories | (172.0 | ) | 406.0 | 4.5 | |||||||
Prepaid and other assets | 2.7 | (6.8 | ) | 22.5 | |||||||
Income taxes recoverable | 72.1 | 11.4 | 5.7 | ||||||||
Accounts payable and accrued liabilities | 108.0 | (237.6 | ) | 58.9 | |||||||
Income taxes payable | (75.1 | ) | (21.2 | ) | (0.5 | ) | |||||
Non-cash working capital changes | (89.1 | ) | 183.8 | (41.7 | ) | ||||||
Cash provided by operations | 39.2 | 351.4 | 208.2 | ||||||||
Investing: | |||||||||||
Acquisitions (note 3) | (19.1 | ) | — | — | |||||||
Purchase of property, plant and equipment | (189.1 | ) | (63.7 | ) | (88.8 | ) | |||||
Proceeds, net of cash divested from sale of operations or assets | 1.0 | 27.0 | 7.7 | ||||||||
Other | (0.7 | ) | (0.2 | ) | 0.3 | ||||||
Cash used in investing activities | (207.9 | ) | (36.9 | ) | (80.8 | ) | |||||
Financing: | |||||||||||
Repurchase of Senior Subordinated Notes (Notes) (note 7(d)) | — | — | (30.4 | ) | |||||||
Repayment of long-term debt | (0.6 | ) | (0.6 | ) | (0.4 | ) | |||||
Financing costs | — | (1.4 | ) | (0.5 | ) | ||||||
Issuance of share capital | 5.3 | 3.5 | 2.1 | ||||||||
Other | (1.3 | ) | (3.0 | ) | (13.9 | ) | |||||
Cash provided by (used in) financing activities | 3.4 | (1.5 | ) | (43.1 | ) | ||||||
Increase (decrease) in cash | (165.3 | ) | 313.0 | 84.3 | |||||||
Cash and cash equivalents, beginning of year | 969.0 | 803.7 | 1,116.7 | ||||||||
Cash and cash equivalents, end of year | $ | 803.7 | $ | 1,116.7 | $ | 1,201.0 | |||||
Supplemental cash flow information (note 19). |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Cash provided by (used in): | |||||||||||
Operations: | |||||||||||
Net earnings (loss) | $ | (13.7 | ) | $ | (720.5 | ) | $ | 55.0 | |||
Items not affecting cash: | |||||||||||
Depreciation and amortization | 130.8 | 109.2 | 100.4 | ||||||||
Deferred income taxes (recovery) (note 11) | 6.4 | (13.4 | ) | (28.2 | ) | ||||||
Stock-based compensation (notes 8(d) and (e)) | 13.2 | 23.4 | 28.0 | ||||||||
Restructuring charges (note 10) | 5.1 | 1.1 | 3.8 | ||||||||
Other charges (note 10) | 14.0 | 850.3 | 9.5 | ||||||||
Other | 11.8 | (0.2 | ) | (4.0 | ) | ||||||
Changes in non-cash working capital items: | |||||||||||
Accounts receivable | 32.0 | (132.8 | ) | 244.9 | |||||||
Inventories | 406.0 | 4.5 | 110.2 | ||||||||
Prepaid and other assets | (6.8 | ) | 22.5 | 21.7 | |||||||
Income taxes recoverable | 11.4 | 5.7 | (7.1 | ) | |||||||
Accounts payable and accrued liabilities | (237.6 | ) | 58.9 | (265.2 | ) | ||||||
Income taxes payable | (21.2 | ) | (0.5 | ) | 24.5 | ||||||
Non-cash working capital changes | 183.8 | (41.7 | ) | 129.0 | |||||||
Cash provided by operations | 351.4 | 208.2 | 293.5 | ||||||||
Investing: | |||||||||||
Purchase of property, plant and equipment | (63.7 | ) | (88.8 | ) | (77.3 | ) | |||||
Proceeds from sale of operations or assets | 27.0 | 7.7 | 10.0 | ||||||||
Other | (0.2 | ) | 0.3 | 1.0 | |||||||
Cash used in investing activities | (36.9 | ) | (80.8 | ) | (66.3 | ) | |||||
Financing: | |||||||||||
Repurchase of Senior Subordinated Notes (note 7(d)) | — | (30.4 | ) | (495.8 | ) | ||||||
Proceeds from termination of swap agreements (note 7(d)) | — | — | 14.7 | ||||||||
Repayment of capital lease obligations | (0.6 | ) | (0.4 | ) | (1.0 | ) | |||||
Financing costs | (1.4 | ) | (0.5 | ) | (2.8 | ) | |||||
Issuance of share capital | 3.5 | 2.1 | 2.7 | ||||||||
Other | (3.0 | ) | (13.9 | ) | (8.3 | ) | |||||
Cash used in financing activities | (1.5 | ) | (43.1 | ) | (490.5 | ) | |||||
Increase (decrease) in cash | 313.0 | 84.3 | (263.3 | ) | |||||||
Cash and cash equivalents, beginning of year | 803.7 | 1,116.7 | 1,201.0 | ||||||||
Cash and cash equivalents, end of year | $ | 1,116.7 | $ | 1,201.0 | $ | 937.7 | |||||
Supplemental cash flow information (note 19). |
See accompanying notes to consolidated financial statements.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars)
1. BASIS OF PRESENTATION:
We prepare our financial statements in accordance with generally accepted accounting principles in Canada (Canadian GAAP). Except as outlined in note 20, these financial statements are, in all material respects, in accordance with accounting principles generally accepted in the United States (U.S. GAAP).
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of consolidation:
These consolidated financial statements include our subsidiaries. Subsidiaries that are acquired during the year are consolidated from their respective dates of acquisition. Inter-company transactions and balances are eliminated on consolidation.
(b) Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We applied significant estimates and assumptions to our valuations against accounts receivable, inventory and income taxes, to the amount and timing of restructuring charges or recoveries, to the fair values used in testing goodwill and long-lived assets, and to valuing our financial instruments and pension costs. Actual results could differ materially from those estimates and assumptions, especially in light of the current economic environment and uncertainties.
(c) Revenue:
We derive most of our revenue from the sale of electronic equipment that we have built to customer specifications. We recognize revenue from product sales when allwe deliver the goods or the goods are received by our customers; title and risk of the following criteriaownership have been met: shipment has occurred; title has passed; persuasive evidence of an arrangement exists; performance has occurred; receivables are reasonably assured of collection; and customer specified test criteria have been met. We have no further performance obligations after revenue has been recognized, other than our standard manufacturing warranty. We have contractual arrangements with the majority of our customers that require the customer to purchase unused inventory that we have purchased to fulfill that customer's forecasted manufacturing demand. We account for raw material returns as reductions in inventory and do not recognize revenue on these transactions.
We provide warehousing services in connection with manufacturing services to certain customers. We assess the contracts to determine whether the manufacturing and warehousing services can be accounted for as separate units of accounting. If the services do not constitute separate units of accounting, or the manufacturing services do not meet all of the revenue recognition requirements, we defer recognizing revenue until we have shipped the products to our customer.
We also derive revenue from design, engineering, fulfillment and after-market services. We recognize services revenue for short-term contracts as we perform the services and for long-term contracts on a percentage-of-completion basis.
(d) Cash and cash equivalents:
Cash and cash equivalents include cash on account and short-term investments with original maturities of less than three months. See note 19.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(e) Allowance for doubtful accounts:
We record an allowance for doubtful accounts against accounts receivable that management believes are impaired. We record specific allowances against customer receivables based on our knowledge of the financial condition of our customers. We also consider the aging of the receivables, customer and industry concentrations, the current business environment, and historical experience. See notes 14(c)14(a) and 18.
(f) Inventories:
We value our inventory on a first-in, first-out basis at the lower of cost and net realizable value. Cost includes direct materials, labor and overhead. In determining the net realizable value, we consider factors such as shrinkage, the aging of and future demand for the inventory, contractual arrangements with customers, and our ability to redistribute inventory to other programs or return inventory to suppliers. See note 2(s)(1).
| 2007 | 2008 | |||||
---|---|---|---|---|---|---|---|
Raw materials | $ | 543.7 | $ | 533.1 | |||
Work in progress | 92.5 | 106.4 | |||||
Finished goods | 155.7 | 147.9 | |||||
$ | 791.9 | $ | 787.4 | ||||
| 2008 | 2009 | |||||
---|---|---|---|---|---|---|---|
Raw materials | $ | 533.1 | $ | 527.7 | |||
Work in progress | 106.4 | 54.1 | |||||
Finished goods | 147.9 | 94.3 | |||||
$ | 787.4 | $ | 676.1 | ||||
During 2009, we recorded a net inventory valuation reversal through cost of sales of $1.0 (2008 — net provision of $19.6) to reflect changes in the value of our inventory to net realizable value.
(g) Property, plant and equipment:
We carry property, plant and equipment at cost and depreciate these assets over their estimated useful lives or lease terms on a straight-line basis. The estimated useful lives for our principal asset categories are as follows:
Buildings | 25 years | |
Building/leasehold improvements | Up to 25 years or term of lease | |
Office equipment | 5 years | |
Machinery and equipment | 3 to 7 years | |
|
We expense maintenance and repair costs as incurred.
(h) Goodwill:
We are required toTo the extent we have goodwill, we evaluate goodwillit annually or whenever events or changes in circumstances ("triggering events") indicate that we may not recover the carrying amount. Absent of any triggering events during the year, we conduct our goodwill assessment in the fourth quarter of the year to correspond with our planning cycle. We test impairment, using the two-step method, at the reporting unit level, by comparing the reporting unit's carrying amount to its fair value. We estimate the fair values of the reporting units using a combination of a market capitalization approach, a multiples approach and discounted cash flows. To the extent a reporting unit's carrying amount exceeds its fair value, we may have an impairment of goodwill. We measure impairment by comparing the implied fair value of goodwill, determined in a manner similar to a purchase price allocation, to its carrying amount. In the fourth quarter of each year,2008, we perform our annual goodwill assessment and determined that therethe entire goodwill balance of $850.5 was no impairment for 2006impaired, and 2007. In the fourth quarterwrote it off as of 2008, we recorded an impairment charge.December 31, 2008. See note 5(d)10(b). The process of determining fair values is subjective and requires management to exercise a significant amount of judgment in making assumptions about future results, including revenue and expense projections, and discount rates and market multiples, at the reporting unit level.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(i) Intangible assets:
IntangibleWe carry intangible assets at cost and amortize these assets on a straight-line basis over their estimated useful lives. The estimated useful lives are comprised of intellectual property and other intangible assets.as follows:
Intellectual property | 3 to 5 years | |
Other intangible assets | 4 to 10 years | |
Computer software assets | 1 to 10 years |
Intellectual property assets consist primarily of certain non-patented intellectual property and process technology, and we amortize these assets on a straight-line basis over their estimated useful lives, to a maximum of five years.technology. Other intangible assets consist primarily of customer relationships and contract intangibles. We amortize other intangibleComputer software assets on a straight-line basis over their estimated useful lives, to a maximumconsist primarily of 10 years.software licenses.
(j) Impairment or disposal of long-lived assets:
We review long-lived assets (comprised of property, plant and equipment and intangible assets) for impairment on an annual basis or whenever events or changes in circumstances ("triggering events") indicate that we may not recover the carrying amount. Absent of any triggering events during the year, we conduct our long-lived assets assessment in the fourth quarter of the year to correspond with our planning cycle. We must classify assets as either held-for-use or available-for-sale. We recognize an impairment loss on an asset used when the carrying amount exceeds the projected undiscounted future net cash flows we expect from its use and disposal. We measure the loss as the amount by which the carrying amount exceeds its fair value, which we determine using either discounted cash flows when quotedor estimates of market prices are notvalue for certain assets, where available. The process of determining fair values is subjective and requires management to exercise judgment in making assumptions about future results, including revenue and cash flowexpense projections and discount rates, as well as the valuation and use of appraisals for property. For assets available-for-sale, we recognize an impairment loss when the carrying amount exceeds the fair value less costs to sell. We have recorded impairment charges in 2006, 2007, 2008 and 2008.2009. See note 10(c).
(k) Pension and non-pension post-employment benefits:
We accrue our obligations under employee benefit plans and the related costs, net of plan assets. The cost of pensions and other post-employment benefits earned by employees is actuarially determined using the projected benefit method pro-ratedprorated on service, and management's best estimate of expected plan investment performance, salary escalation, compensation levels at time of retirement, retirement ages, the discount rate used in measuring the liability and expected healthcare costs. Actual results could differ materially from the estimates originally made by management. Changes in these assumptions could impact future pension expense and pension funding. For the purpose of calculating the expected return on plan assets, we value assets at fair value. We amortize past service costs arising from plan amendments on a straight-line basis over the average remaining service period of employees active at the date of amendment. We amortize actuarial gains or losses exceeding 10% of a plan's accumulated benefit obligations or the fair market value of the plan assets at the beginning of the year, over the average remaining service period of active employees, except for plans where all, or almost all, of the employees are no longer active, in which we amortize over the average remaining life of the former employees. We measure plan assets and the accrued benefit obligations at December 31. The average amortization period of the pension plans is 29 years for 2007 and 27 years for 2008.2008 and 2009. The average remaining service period of active employees covered by the other post-employment benefits plans is 19 years for both 20072008 and 2008.2009. Curtailment gains or losses may arise from significant changes to a plan. We offset curtailment gains against unrecognized losses and record any excess gains when the curtailment occurs and all curtailment losses in the period in which it is probable that a curtailment will occur. Settlement gains or losses may arise from transactions in which we substantially discharge or settle all or part of our accrued benefit obligation thereby substantially eliminating the risks associated with the accrued benefit obligation and the assets used to effect the
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
settlement. We recognize settlement gains or losses through operations in the period in which the settlement occurs. When the restructuring of a benefit plan gives rise to both a curtailment and a settlement, the curtailment is accounted for prior to the settlement. We record pension assets as other long-term assets and pension liabilities as accrued pension and post-employment benefits.
(l) Deferred financing costs:
We record financing costs as a reduction to the cost of the related debt which we amortize to operations using the effective interest rate method.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(m) Income taxes:
We use the asset and liability method of accounting for income taxes. We recognize deferred income tax assets and liabilities for future income tax consequences that are attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We record a valuation allowance against deferred income tax assets when management believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We recognize the effect of changes in tax rates in the period of substantive enactment.
We record an income tax expense or recovery based on the income earned or loss incurred in each tax jurisdiction and the substantively enacted tax rate applicable to that income or loss. In the ordinary course of business, there are many transactions for which the ultimate tax outcome is uncertain. The final tax outcome of these matters may be different from the estimates originally made by management in determining our income tax provisions. We recognize a tax benefit related to tax uncertainties when it is probable based on our best estimate of the amount that will ultimately be realized. A change to these estimates could impact the income tax provision. We recognize accrued interest and penalties relating to tax uncertainties in current income tax expense.
(n) Foreign currency translation and hedging:
Foreign currency translation:
The majority of our subsidiaries are integrated operations and have a U.S. dollar functional currency. For such subsidiaries, we translate monetary assets and liabilities denominated in foreign currencies into U.S. dollars at the year-end rate of exchange. We translate non-monetary assets and liabilities denominated in foreign currencies at historic rates, and we translate revenue and expenses 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 record these exchange gains and losses in our statement of operations.
We recorded the following foreign exchange gains and losses in SG&A:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Foreign exchange loss (gain) | $ | (9.1 | ) | $ | (2.9 | ) | $ | 16.4 |
We translate the accounts of our self-sustaining foreign operations, for which the functional currency is not the U.S. dollar, into U.S. dollars using the current rate method. We translate assets and liabilities at the year-end rate of exchange, and we translate revenue and expenses at the average exchange rates prevailing during the month of the transaction. We defer gains and losses arising from the translation of these foreign operations in the foreign currency translation account included in other comprehensive income (loss).
Foreign currency hedging:
We may enter into forward exchange and option contracts to hedge the cash flow risk associated with firm purchase commitments and forecasted transactions in foreign currencies and foreign-currency denominated balances. We do not enter into derivatives for speculative purposes.
WeFor relationships in which we intend to apply hedge accounting, we have formally documented our relationshipsthe relationship between hedging instruments and hedged items, as well as our risk management objectives and
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We have also formally assessed, both at the hedge's inception and at the end of each
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
quarter, whether the derivatives used in hedged transactions are highly effective in offsetting changes in the cash flows of hedged items.
Effective January 1, 2007, we adopted the accounting standards for cash flow hedges and fair value hedges. See the financial instruments section below. Our risk management objectives and hedging activities are described in note 14.
In certain circumstances, we have not designated forward contracts as hedges and therefore have marked these contracts to market each period, resulting in a gain or loss in our consolidated statement of operations.
Prior to 2007, we included gains and losses on hedges of firm commitments in We record the cost of the hedged transaction when they occurred. We recognized gains and losses on hedges of forecasted transactions in earnings ingain or loss from these forward contracts at the same period and on the same financial statement caption aslocation where the underlying hedged transaction. We accruedexposures are recognized in our consolidated statement of operations. For our non-designated hedges against our balance sheet exposures denominated in foreign exchange translation gains and losses oncurrencies, we record the gain or loss from these forward contracts used to hedge foreign-currency denominated amounts on the balance sheet as current assets or current liabilities and recognized gains or losses in the statement of operations, offsetting the respective translation gains or losses on the foreign-currency denominated amounts. We amortized the forward premium or discount over the term of the forward contract. We recognized gains and losses on hedged forecasted transactions in earnings immediately when the hedge was no longer effective or the forecasted transactions were no longer expected.SG&A expenses.
Interest rate hedging:
In connection with the issuance of our Senior Subordinated Notes due 2011 (2011 Notes) in June 2004, we entered into agreements to swap the fixed interest rate for a variable interest rate. We have formally documented the hedging relationship, as well as our risk management objectives and strategy for undertaking this hedge. We recordrecorded the payments or receipts under the swap agreements as interest expense on long-term debt. In February 2009, we terminated the interest rate swap agreements. See notenotes 7 and 14.
Financial instruments:
Effective January 1, 2007, we adopted CICA Handbook Section 1530, "Comprehensive income," Section 3855, "Financial instruments — recognition and measurement," Section 3861, "Financial instruments — disclosure and presentation," and Section 3865, "Hedges." We were not required to restate prior results.
The accounting standards require that we recognize all financial assets and financial liabilities on our consolidated balance sheet at fair value, except for loans and receivables, held-to-maturity investments and non-trading financial liabilities, which are carried at their amortized cost. In accordance with the accounting standards, we have recordedWe also record certain specific elements of our Notes at fair value while keeping the remaining amounts at cost or amortized cost. See notes 7 and 14 for further details.
All derivatives, including embedded derivatives that must be separately accounted for, are measured at fair value in our consolidated balance sheet. We continue to designate our hedgeshedging relationships as either cash flow hedges or fair value hedges.
In a cash flow hedge, changes in the fair value of the hedging derivative, to the extent that it is effective, are recorded in other comprehensive income (loss) (OCI) until the asset or liability being hedged is recognized in operations. Any cash flow hedge ineffectiveness is recognized in operations immediately. For hedges that are discontinued before the end of the original hedge term, the unrealized hedge gain (loss) in OCI is amortized to operations over the remaining term of the original hedge. If the hedged item ceases to exist before the end of the original hedge term, the unrealized hedge gain (loss) in OCI is recognized in operations immediately. The effective portion of hedge gain (loss) in OCI is released to operations as the hedged items are recognized in operations and at the same location where the hedged items are recorded in our consolidated statements of operations. Based on our current cash flow hedges, most of the underlying expenses that are being hedged are included in cost of sales.
In a fair value hedge, changes in the fair value of hedging derivatives are offset in operations by the changes in the fair value relating to the hedged risk of the asset, liability or cash flows being hedged. Any fair value hedge ineffectiveness is recognized in operations immediately.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
Derivatives may be embedded in financial instruments (the "host instrument"). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are similar to those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in operations. We have elected January 1, 2003 as our transition date for identifying contracts with embedded derivatives. We have prepayment options that are embedded in our Notes which meet the criteria for bifurcation. The impact of the prepayment options on our consolidated financial statements is described under the transitional adjustments belowSee notes 7(d) and in note 7(e)(e).
We are required to present a "consolidated statement of comprehensive income (loss)" as part of our consolidated financial statements. Comprehensive income (loss) is comprised of net income (loss), changes in the fair value of derivative instruments designated as cash flow hedges and the net unrealized foreign currency translation gain (loss) arising from self-sustaining foreign operations, which was previously classified as a separate component of shareholders' equity. Subsequent releases from OCI to operations is dependent on when the hedged items designated under cash flow hedges are recognized in operations, or upon de-recognition of the net investment in a self-sustaining foreign operation.
In determining the fair value of our financial instruments, we used a variety of methods and assumptions that are based on market conditions and risks existing on each reporting date. Broker quotes and standard
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
market conventions and techniques, such as discounted cash flow analysis and option pricing models, are used to determine the fair value of our financial instruments, including derivatives and hedged debt obligations. In determining the fair value of our financial instruments, we also consider the credit quality of the financial instruments, including our own credit risk as well as the credit risks of our counterparties. See note 14. All methods of fair value measurement result in a general approximation of value and such value may never be realized.
The transitional impact of adopting these standards and recording our derivatives on January 1, 2007 at fair value on our consolidated financial statements is as follows:
| Increase (decrease) | |||
---|---|---|---|---|
Prepaid and other assets | $ | 5.5 | ||
Other long-term assets | (10.3 | ) | ||
Accrued liabilities | 5.8 | |||
Long-term debt — embedded option and debt obligation | 1.9 | |||
Long-term debt — unamortized debt issue costs | (11.5 | ) | ||
Other long-term liabilities | 8.1 | |||
Long-term deferred income taxes liability | (2.2 | ) | ||
Opening deficit | 6.4 | |||
Accumulated other comprehensive loss — cash flow hedges | 0.5 |
As required by these standards, we have marked-to-marketWe mark-to-market the bifurcated embedded prepayment options in our debt instruments and haveNotes until the options are extinguished. We also applied the fair value hedge accounting to our interest rate swaps and our hedged debt obligation (2011 Notes). until February 2009. The changes in fair values each period are recorded in interest expense on long-term debt.debt, except for the write-down of the embedded prepayment option due to hedge de-designation or debt redemption which we recorded in other charges. The mark-to-market adjustment fluctuates each period as it is dependent on market conditions,
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
including future interest rates, implied volatilities and credit spreads. The impact of these adjustments on our results of operations is as follows:
| Year ended December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2008 | |||||
Increase (decrease) in interest expense on long-term debt | $ | (0.6 | ) | $ | 1.0 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Increase (decrease) in interest expense on long-term debt | $ | (0.6 | ) | $ | 1.0 | $ | (9.0 | ) |
Cash flow hedges: We are required to disclose the classifications of our financial instruments into the following specific categories:
— financial assets held-for-trading | — loans and receivables | |
— held-to-maturity investments | — available-for-sale financial assets | |
— financial liabilities held-for-trading | — financial liabilities measured at amortized cost |
The classification of our financial instruments is as follows:
As at January 1, 2007, we recordedOur cash and cash equivalents are comprised of cash and short-term investments. See note 19. We classify accounts receivable as loans and receivables. Our derivative assets of $5.8are included in prepaid and other assets and other long-term assets. Our derivative liabilities are included in accrued liabilities and other long-term liabilities. The majority of $6.0our derivative assets and liabilities arise from foreign currency forward contracts and interest rate swap agreements. Our foreign currency forward contracts are recorded at fair value onand the majority of our consolidated balance sheet in relation to ourforeign currency forward contracts are designated as cash flow hedges, with a corresponding balance of $0.2 recorded in the opening accumulated other comprehensive loss. In addition, we reclassified $0.3 of net deferred foreign exchange losseshedges. Our interest rate swap agreements related to opening accumulated other comprehensive loss.
Fair value hedges:
In connection with the issuance of our 2011 Notes in June 2004, we entered into agreements to swap the fixed interest rate for a variable interest rate. We havewere recorded at fair value and were designated the swap agreements as fair value hedges. Ashedges, prior to their termination in the first quarter of 2009. See note 14(d)(2). Accounts payable and the majority of our accrued liabilities, excluding derivative liabilities, are classified as financial liabilities which are recorded at January 1, 2007, weamortized cost. Our Notes, which are comprised of elements recorded a derivative liability of $7.9 (excluding an interest accrual of $2.0) for the swap agreements in other long-term liabilities. A correspondingat fair value adjustment was not recorded against the 2011 Notes because the prior hedge relationship was not a qualified type under Section 3865, after bifurcation of the embedded prepayment option in accordance with Section 3855. We decreased the deferred income tax liability by $2.6 and recorded a loss of $5.3 to opening deficit. On January 1, 2007, we redesignated a new hedging relationship which qualified for fair value hedge accounting in accordance with Section 3865.
Embedded derivatives:
The prepayment options embedded in our Notes qualify as embedded derivatives which must be bifurcated for reporting. As at January 1, 2007, we bifurcated the fair value of the embedded derivative asset of $9.3 from the Notes. As a result of recording this asset, the amortized cost, of long-term debt increased.are classified as financial liabilities. See note 7. We also recorded a cumulative adjustment of $1.9 against the opening deficit. Subsequent changes in the fair value of the embedded derivatives are recorded in operations.
Effective interest rate method:
We incurred underwriting commissions and expenses relating to our Notes offerings. We have reclassified these costsdo not currently designate any financial assets as a reduction of the cost of the debt and we use the effective interest rate method to amortize the costs to operations.
As at January 1, 2007, we reclassified $10.3 of unamortized debt issue costs from other long-term assets to long-term debt and recorded an adjustment to reflect the balance had we used the effective interest rate method from inception. This resulted in a $1.2 increase in unamortized debt issue costs, a decrease of $0.8 in opening deficit and an increase of $0.4 in deferred income tax liability.held-for-trading or available-for-sale.
(o) Research and development:
We incur costs relating to research and development activities. We expense these costs as incurred unless development costs meet certain criteria for capitalization. Total research and development costs recorded in SG&A for 20082009 were $7.6 (2007$7.0 (2008 — $2.5; 2006$7.6; 2007 — $4.7)$2.5). No amounts were capitalized.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(p) Restructuring charges:
We record restructuring charges relating to workforce reductions, facility consolidations and costs associated with exiting businesses. These restructuring charges, which include employee terminations and
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
contractual lease obligations, are only recorded when we incur the liability and can measure its fair value. The recognition of restructuring charges requires management to make certain judgments and estimates regarding the nature, timing and amounts associated with the planned restructuring activities, including estimating future sublease income and the net recoverable amount of property, plant and equipment to be disposed of. The estimated liability may change subsequent to its initial recognition, requiring adjustments to the expense and liability recorded. At the end of each reporting period, we evaluate the appropriateness of the remaining accrued balances.
(q) Stock-based compensation and other stock-based payments:
We account for employee stock options using the fair-value method of accounting. We recognize compensation expense over the vesting period, on a straight-line basis. We recognize the effect of actual forfeitures as they occur. See notes 8(d) and (e) outlining our stock-based compensation plans.
(r) LossEarnings (loss) per share and weighted average shares outstanding:
We follow the treasury stock method for calculating diluted loss per share.share results. The diluted per share calculation includes employeereflects the potential dilution from stock options. As a result of our net losses for 2007 and 2008, approximately 0.1 million and 0.3 million, stock options were excluded from the diluted per share calculations for 2007 and warrants, if dilutive.2008, respectively.
(s) Changes in accounting policies:
(1) Inventories:
Effective January 1, 2008, we adopted CICA Handbook Section 3031, "Inventories," which requires inventory to be measured at the lower of cost and net realizable value. This standard provides additional guidance on the types of costs that can be capitalized and requires the reversal and disclosure of previous inventory write-downs if economic circumstances have changed to support higher inventory values. The adoption of this standard did not have a material impact on our consolidated financial statements.
During 2008, we recorded a net inventory provision through cost of sales of $19.6 to write-down the value of our inventory to net realizable value.
(2) Financial instruments:
Effective January 1, 2008, we adopted CICA Handbook Section 3862, "Financial instruments — disclosures," and Section 3863, "Financial instruments — presentation." These standards provide additional guidance on disclosing risks related to recognized and unrecognized financial instruments and how those risks are managed. See note 14. The adoption of these standards did not have a material impact on our consolidated financial statements.
Section 3862 requires us to disclose the classifications of our financial instruments into the following specific categories:
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The classification of our financial instruments is as follows:
Our cash and cash equivalents are comprised of cash and short-term investments. See note 19. We classify accounts receivable under loans and receivables. Our derivative assets are included in prepaid and other assets and other long-term assets. Our derivative liabilities are included in accrued liabilities. The majority of our derivative assets and liabilities arise from foreign currency forward contracts and interest rate swap agreements. Our foreign currency forward contracts are recorded at fair value and the majority of our foreign currency forward contracts are designated as cash flow hedges. Our interest rate swap agreements related to our 2011 Notes are recorded at fair value and are designated as fair value hedges. See note 14(2). Accounts payable and the majority of our accrued liabilities, excluding derivative liabilities, are classified as financial liabilities which are recorded at amortized cost. Our Notes, which are recorded in long-term debt, are classified as financial liabilities. See note 7. The carrying values of our Notes are comprised of elements recorded at fair value and amortized cost. We do not currently have any financial assets designated as available-for-sale.
(3) Capital disclosures:
Effective January 1, 2008, we adopted CICA Handbook Section 1535, "Capital disclosures," which provides guidance for disclosing information about an entity's capital and how it manages its capital. This standard requires the disclosure of the entity's capital management objectives, policies and processes. See note 15. The adoption of this standard did not have a material impact on our consolidated financial statements.
(4) Accounting changes:
In January 2007, we adopted CICA Handbook Section 1506, "Accounting changes," which requires that voluntary changes in accounting policy be made only if the changes result in financial statements that provide reliable and more relevant information. It also requires that prior period errors be corrected retrospectively. The adoption of this standard did not impact our consolidated financial statements.
(t) Recently issued accounting pronouncements:
(1) Goodwill and intangible assets:
On January 1, 2009, we adopted CICA Handbook Section 3064, "Goodwill and intangible assets." This revised standard establishes guidance for the recognition, measurement and disclosure of goodwill and intangible assets, including internally generated intangible assets. ThisAs required by this standard, which is effective for our first quarter of 2009, requires us towe have retroactively reclassify ourreclassified computer software assets on our consolidated balance sheet from property, plant and equipment to intangible assets. In addition, the amortization ofWe have also reclassified computer software will be reclassifiedamortization on our consolidated statement of operations from depreciation expense, included in SG&A, to amortization of intangible assets. There was no impact on previously reported net earnings or loss. See note 5.
(2) Financial instruments — disclosures:
Effective December 31, 2009, we adopted the amendment issued by the CICA to Handbook Section 3862, "Financial instruments — disclosures," which requires enhanced disclosures on liquidity risk of financial instruments and new disclosures on fair value measurements of financial instruments. These requirements correspond to the IFRS guidelines on financial instruments disclosures. See note 14. The adoption of this amendment did not have a material impact on our consolidated financial statements.
(t) Recently issued accounting pronouncements:
(1) International financial reporting standards (IFRS):
In February 2008, the Canadian Accounting Standards Board announced the adoption of International Financial Reporting Standards for publicly accountable enterprises. IFRS will replace Canadian GAAP effective January 1, 2011. IFRS is effective for our first quarter of 2011 and will require that we restate our 2010 comparative numbers.numbers under IFRS. We have started an IFRS conversion project to evaluate the impact of implementing the new standards. AtOur transition plan is progressing according to our implementation schedule. We have disclosed our preliminary IFRS accounting policy decisions in our 2009 management's discussion and analysis. Although we have identified key accounting policy differences, we cannot at this time we cannot reasonably estimatedetermine the impact of adopting IFRS on our consolidated financial statements.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(3)(2) Business combinations:
In January 2009, the CICA issued Handbook Section 1582, "Business combinations," which replaces the existing standards. This section establishes the standards for the accounting of business combinations, and states that all assets and liabilities of an acquired business will be recorded at fair value. Obligations for contingent
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
considerations and contingencies will also be recorded at fair value at the acquisition date. The standard also states that acquisition-related costs will be expensed as incurred and that restructuring charges will be expensed in the periods after the acquisition date. This standard is equivalent to the IFRS on business combinations. This standard is applied prospectively to business combinations with acquisition dates on or after January 1, 2011. EarlierWe do not expect the adoption is permitted. We are currently evaluating the impact of adopting this standard to have a material impact on our consolidated financial statements.statements unless we engage in a significant acquisition.
(4)(3) Consolidated financial statements:
In January 2009, the CICA issued Handbook Section 1601, "Consolidated financial statements," which replaces the existing standards. This section establishes the standards for preparing consolidated financial statements and is effective for 2011. Earlier adoption is permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
(5) Credit risk and the fair value of financial assets and financial liabilities:
In January 2009, the CICA issued EIC-173, "Credit risk and the fair value of financial assets and financial liabilities," which requires us to consider our own credit risk as well as the credit risk of our counterparty when determining the fair value of financial assets and liabilities, including derivative instruments. This standard is effective for our first quarter of 2009 and should be applied retrospectively without restatement of prior periods to all financial assets and liabilities measured at fair value on the date this abstract was issued. Early adoption is encouraged. We adopted this abstract as of December 31, 2008. The adoption of this abstract did not have a material impact on our consolidated financial statements.
3. ACQUISITIONS AND DIVESTITURES:INTEGRATION COSTS:
In March 2006, we acquired certain assets located in the Philippines for a cash purchase price of $19.1. Amortizable intangible assets arising from this acquisition were $7.6, primarily for customer relationships and contract intangibles. In June 2006, we sold our plastics business for net cash proceeds of $18.5. Our plastics business was located primarily in Asia. We reported a loss on sale of $33.2 which we recorded as other charges. See note 10. This loss included $20.0 in goodwill allocated to the plastics business.
We expense integration costs relating to the establishment of business processes, infrastructure and information systems for acquired operations. None of the integration costs incurred related to existing operations.
Also see note 22.
4. PROPERTY, PLANT AND EQUIPMENT:
| 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Depreciation | Net Book Value | |||||||
Land | $ | 42.5 | $ | — | $ | 42.5 | ||||
Buildings | 218.9 | 50.4 | 168.5 | |||||||
Building/leasehold improvements | 83.6 | 57.5 | 26.1 | |||||||
Office equipment | 38.4 | 32.4 | 6.0 | |||||||
Machinery and equipment | 740.2 | 549.8 | 190.4 | |||||||
$ | 1,123.6 | $ | 690.1 | $ | 433.5 | |||||
| 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Depreciation | Net Book Value | |||||||
Land | $ | 35.7 | $ | — | $ | 35.7 | ||||
Buildings | 207.2 | 53.9 | 153.3 | |||||||
Building/leasehold improvements | 90.6 | 63.9 | 26.7 | |||||||
Office equipment | 36.1 | 33.1 | 3.0 | |||||||
Machinery and equipment | 686.5 | 511.4 | 175.1 | |||||||
$ | 1,056.1 | $ | 662.3 | $ | 393.8 | |||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
4. PROPERTY, PLANT AND EQUIPMENT:
| 2007 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Depreciation | Net Book Value | |||||||
Land | $ | 39.7 | $ | — | $ | 39.7 | ||||
Buildings | 197.1 | 42.0 | 155.1 | |||||||
Building/leasehold improvements | 84.4 | 56.1 | 28.3 | |||||||
Office equipment | 39.0 | 32.9 | 6.1 | |||||||
Machinery and equipment | 758.5 | 560.6 | 197.9 | |||||||
Computer software | 249.7 | 210.8 | 38.9 | |||||||
$ | 1,368.4 | $ | 902.4 | $ | 466.0 | |||||
| 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Depreciation | Net Book Value | |||||||
Land | $ | 42.5 | $ | — | $ | 42.5 | ||||
Buildings | 218.9 | 50.4 | 168.5 | |||||||
Building/leasehold improvements | 83.6 | 57.5 | 26.1 | |||||||
Office equipment | 38.4 | 32.4 | 6.0 | |||||||
Machinery and equipment | 740.1 | 549.8 | 190.3 | |||||||
Computer software (see note 2(t)(1)) | 256.2 | 222.1 | 34.1 | |||||||
$ | 1,379.7 | $ | 912.2 | $ | 467.5 | |||||
As of December 31, 2008,2009, we have $22.0 (2007$23.0 (December 31, 2008 — $25.4)$22.0) of assets that are available-for-sale, primarily land and buildings, as a result of the restructuring actions we implemented. We have programs underway to sell these assets.
Property, plant and equipment at December 31, 2009 includes $6.4 (2007$5.9 (December 31, 2008 — $12.5)$6.4) of assets under capital lease and accumulated depreciation of $5.0 (2007$4.9 (2008 — $11.8)$5.0) related thereto.
Depreciation and rental expense for 20082009 was $91.1 (2007$75.4 (2008 — $106.1; 2006$91.1; 2007 — $103.2)$106.1) and $49.1 (2007$51.6 (2008 — $55.9; 2006$49.1; 2007 — $66.5)$55.9), respectively.
5. GOODWILL AND INTANGIBLE ASSETS:
Goodwill:
| 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Amortization | Net Book Value | |||||||
Intellectual property | $ | 119.4 | $ | 118.8 | $ | 0.6 | ||||
Other intangible assets | 201.1 | 181.6 | 19.5 | |||||||
Computer software assets (note 2(s)(1)) | 256.1 | 222.1 | 34.0 | |||||||
$ | 576.6 | $ | 522.5 | $ | 54.1 | |||||
| 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Amortization | Net Book Value | |||||||
Intellectual property | $ | 111.3 | $ | 111.3 | $ | — | ||||
Other intangible assets | 189.9 | 181.0 | 8.9 | |||||||
Computer software assets (note 2(s)(1)) | 255.7 | 232.3 | 23.4 | |||||||
$ | 556.9 | $ | 524.6 | $ | 32.3 | |||||
The following table details the changes in goodwill:intangible assets:
Balance December 31, 2006 (a) | $ | 854.8 | ||
Acquisition adjustment (b) | (4.3 | ) | ||
Balance December 31, 2007 (a) (c) | 850.5 | |||
Impairment (d) | (850.5 | ) | ||
Balance December 31, 2008 | $ | — | ||
| Intellectual Property | Other Intangible Assets | Computer Software Assets | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance — December 31, 2007 | $ | 1.7 | $ | 33.5 | $ | 38.9 | $ | 74.1 | |||||
Amortization | (1.1 | ) | (14.0 | ) | (11.8 | ) | (26.9 | ) | |||||
Addition | — | — | 6.9 | 6.9 | |||||||||
Balance — December 31, 2008 (i) | 0.6 | 19.5 | 34.0 | 54.1 | |||||||||
Amortization | (0.2 | ) | (8.6 | ) | (13.1 | ) | (21.9 | ) | |||||
Impairment (ii) | (0.4 | ) | (2.0 | ) | — | (2.4 | ) | ||||||
Addition | — | — | 2.5 | 2.5 | |||||||||
Balance — December 31, 2009 | $ | — | $ | 8.9 | $ | 23.4 | $ | 32.3 | |||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
In 2007, we reduced goodwill by $4.3 resulting from a decrease in the tax liabilities relating to a previous acquisition.
Amortization expense is as follows:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Amortization of intellectual property | $ | 2.1 | $ | 1.1 | $ | 0.2 | ||||
Amortization of other intangible assets | 19.2 | 14.0 | 8.6 | |||||||
Amortization of computer software assets | 23.4 | 11.8 | 13.1 | |||||||
$ | 44.7 | $ | 26.9 | $ | 21.9 | |||||
We estimate our abilityfuture amortization expense as follows, based on the existing intangible asset balances:
2010 | $ | 15.6 | ||
2011 | 13.9 | |||
2012 | 2.8 | |||
$ | 32.3 | |||
6. OTHER LONG-TERM ASSETS:
| 2008 | 2009 | |||||
---|---|---|---|---|---|---|---|
Deferred pension (note 13) | $ | 83.2 | $ | 104.4 | |||
Land rights | 11.8 | 10.9 | |||||
Fair value of interest rate swaps (note 14(d)(2)) | 17.3 | — | |||||
Deferred income taxes (note 11) | 8.0 | 14.4 | |||||
Other | 6.5 | 7.5 | |||||
$ | 126.8 | $ | 137.2 | ||||
7. LONG-TERM DEBT:
| 2008 | 2009 | |||||
---|---|---|---|---|---|---|---|
Secured, revolving credit facility (a) | $ | — | $ | — | |||
Senior Subordinated Notes due 2011 (2011 Notes) (b)(c)(d) | 489.4 | — | |||||
Senior Subordinated Notes due 2013 (2013 Notes) (b)(d) | 223.1 | 223.1 | |||||
Embedded prepayment option at fair value (d)(e) | (19.2 | ) | (1.5 | ) | |||
Basis adjustments on debt obligation (e) | 4.9 | 3.1 | |||||
Unamortized debt issue costs | (7.0 | ) | (1.9 | ) | |||
Fair value adjustment of 2011 Notes attributable to interest rate risks (d)(e) | 40.9 | — | |||||
732.1 | 222.8 | ||||||
Capital lease obligations | 1.0 | — | |||||
733.1 | 222.8 | ||||||
Less current portion (b) | 1.0 | 222.8 | |||||
$ | 732.1 | $ | — | ||||
Intangible assets:
| 2007 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Amortization | Net Book Value | |||||||
Intellectual property | $ | 119.6 | $ | 117.9 | $ | 1.7 | ||||
Other intangible assets | 201.1 | 167.6 | 33.5 | |||||||
$ | 320.7 | $ | 285.5 | $ | 35.2 | |||||
| 2008 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Cost | Accumulated Amortization | Net Book Value | |||||||
Intellectual property | $ | 119.4 | $ | 118.8 | $ | 0.6 | ||||
Other intangible assets | 201.1 | 181.6 | 19.5 | |||||||
$ | 320.5 | $ | 300.4 | $ | 20.1 | |||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The following table detailsunder this facility than under the changes in intangible assets:
| Intellectual Property | Other Intangible Assets | Total | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Balance December 31, 2006 | $ | 3.8 | $ | 56.3 | $ | 60.1 | ||||
Amortization | (2.1 | ) | (19.2 | ) | (21.3 | ) | ||||
Acquisition adjustment (i) | — | (3.2 | ) | (3.2 | ) | |||||
Impairment (ii) | — | (0.4 | ) | (0.4 | ) | |||||
Balance December 31, 2007 | 1.7 | 33.5 | 35.2 | |||||||
Amortization | (1.1 | ) | (14.0 | ) | (15.1 | ) | ||||
Balance December 31, 2008 (iii) | $ | 0.6 | $ | 19.5 | $ | 20.1 | ||||
Amortization expense is as follows:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Amortization of intellectual property | $ | 7.0 | $ | 2.1 | $ | 1.1 | ||||
Amortization of other intangible assets | 20.0 | 19.2 | 14.0 | |||||||
$ | 27.0 | $ | 21.3 | $ | 15.1 | |||||
We estimate our future amortization expense as follows, based on the existing intangible asset balances:
2009 | $ | 9.4 | ||
2010 | 6.9 | |||
2011 | 3.8 | |||
$ | 20.1 | |||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
6. OTHER LONG-TERM ASSETS:
| 2007 | 2008 | |||||
---|---|---|---|---|---|---|---|
Deferred pension (note 13) | $ | 88.4 | $ | 83.2 | |||
Land rights | 13.1 | 11.8 | |||||
Fair value of interest rate swaps (note 14(2)) | 8.7 | 17.3 | |||||
Deferred income taxes (note 11) | 2.2 | 8.0 | |||||
Other | 6.8 | 6.5 | |||||
$ | 119.2 | $ | 126.8 | ||||
7. LONG-TERM DEBT:
| 2007 | 2008 | |||||
---|---|---|---|---|---|---|---|
Secured, revolving credit facility due 2009 (a) | $ | — | $ | — | |||
Senior Subordinated Notes due 2011 (2011 Notes) (b)(c)(d) | 500.0 | 489.4 | |||||
Senior Subordinated Notes due 2013 (2013 Notes) (b)(d) | 250.0 | 223.1 | |||||
Embedded prepayment option at fair value (e) | (6.5 | ) | (19.2 | ) | |||
Basis adjustments on debt obligation (e) | 6.5 | 4.9 | |||||
Unamortized debt issue costs (b) | (9.6 | ) | (7.0 | ) | |||
Fair value adjustment of 2011 Notes attributable to interest rate risks (e) | 17.9 | 40.9 | |||||
758.3 | 732.1 | ||||||
Capital lease obligations | 0.2 | 1.0 | |||||
758.5 | 733.1 | ||||||
Less current portion | 0.2 | 1.0 | |||||
$ | 758.3 | $ | 732.1 | ||||
The facility has restrictive covenants relating to debt incurrence and sale of assets and also contains financial covenants that require us to maintain certain financial ratios. A change of control is an event of default.$2.1. Based on the required financial ratios at December 31, 2008,2009, we have full access to the $300.0 available under this facility. We were in compliance with all covenants at December 31, 2008.2009.
We also have uncommitted bank overdraft facilities available for operating requirements which total $68.0$65.0 at December 31, 2008.2009. There were no borrowings outstanding under these facilities at December 31, 2008.2009.
In June 2005, we issued the 2013 Notes with an aggregatea principal amount of $250.0 and a fixed interest rate of 7.625%. We will be entitled to redeem theThe 2013 Notes on or after July 1, 2009 at various premiums above face value.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
We incurred underwriting commissions and expenses on the Notes which we deferred and are amortizing over the term of the debt using the effective interest rate method. The Notes are unsecured and are subordinated in right of payment to all our senior debt.secured debt (see note 7(a)). The 2013 Notes have restrictive covenants that limit our ability to pay dividends, repurchase our own stock or repay debt that is subordinated to these Notes. These covenants also place limitations on the sale of assets and our ability to incur additional debt. We were in compliance with all covenants at December 31, 2008.2009. In January 2010, we announced our intention to redeem our outstanding 2013 Notes. See note 22. As a result, we reclassified our 2013 Notes from long-term debt to current portion of long-term debt on our consolidated balance sheet as at December 31, 2009.
In 2009, we paid $495.8, excluding accrued interest, to repurchase 2011 Notes with a principal amount of $489.4. We recognized a gain of $19.5 on the repurchase of the 2011 Notes which we recorded in other charges. See note 10. The gain was measured based on the carrying value of the repurchased portion of the 2011 Notes on the date of repurchase. In February 2009, we terminated the interest rate swap agreements related to the 2011 Notes and received $14.7 in cash, excluding accrued interest, as settlement of these agreements. In connection with the termination of the swap agreements, we discontinued fair value hedge accounting on the 2011 Notes. In 2009, we recorded a write-down, through other charges, of $16.7 in the carrying value of the embedded prepayment option on the 2011 Notes primarily to reflect the change in fair value upon hedge de-designation. See note 10. We amortized the historical fair value adjustment on the 2011 Notes until the Notes were redeemed, using the effective interest rate method. This amortization was recorded as a reduction to interest expense on long-term debt. Also see note 22.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of $13.1 for 2008 is recorded as a reduction of interest expense on long-term debt. U.S. dollars)
As a result of bifurcating the prepayment option from the Notes, a basis adjustment iswas added to the cost of the long-term debt. ThisWe amortize the basis adjustment is amortized over the term of the debt using the effective interest rate method. TheThis amortization of the basis adjustment for 2008 of $1.1 is recorded as a reduction of interest expense on long-term debt. The changeunamortized fair value adjustment on the 2011 Notes decreased from $40.9 at December 31, 2008 to zero at December 31, 2009 primarily as a result of the debt repurchases and hedge de-designation described in note 7(d). After the hedge de-designation, we amortized the fair value of the debt obligation attributableadjustment to movement in the benchmark interest rates resulted in a loss of $23.8 for 2008, which increased interest expense on long-term debt. Also seedebt until the 2011 Notes were redeemed. Upon redemption of the 2011 Notes in 2009, the related basis adjustment, the unamortized debt issue costs and the unamortized fair value adjustment were eliminated in determining the gain that we recorded in other charges.
We applied fair value hedge accounting to our interest rate swaps and our hedged debt obligation (2011 Notes) until February 2009. We also mark-to-market the bifurcated embedded prepayment options in our debt instruments until the options are extinguished. The changes in the fair values each period are recorded in interest expense on long-term debt, except for the write-down of the embedded prepayment option due to hedge de-designation or debt redemption which we recorded in other charges. The mark-to-market adjustment fluctuates each period as it is dependent on market conditions, including future interest rates, implied volatility and credit spreads. See note 2(n) which summarizes the impact of our mark-to-market adjustments and our fair value hedge accounting.
As at December 31, 2008, principal repayments due within each of the next five years on all long-term debt are as follows:
2009 | $ | 1.0 | ||
2010 | — | |||
2011 | 489.4 | |||
2012 | — | |||
2013 | 223.1 | |||
$ | 713.5 | |||
8. CAPITAL STOCK:
(a) Authorized:
We are authorized to issue an unlimited number of subordinate voting shares (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. Except as otherwise required by law, the SVS and MVS vote together as a single class on all matters submitted to a vote of shareholders, including the election of directors. 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.
(b) Issued and outstanding:
Number of Shares (in millions) | SVS | MVS | Total SVS and MVS outstanding | Warrants (note 8(c)) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance December 31, 2007 | 199.2 | 29.6 | 228.8 | 0.4 | |||||||||
Other share issuances (i) | 0.4 | — | 0.4 | — | |||||||||
Other (ii) | — | — | — | (0.4 | ) | ||||||||
Balance December 31, 2008 | 199.6 | 29.6 | 229.2 | — | |||||||||
Other share issuances (iii) | 0.3 | — | 0.3 | — | |||||||||
Other (iv) | 10.7 | (10.7 | ) | — | — | ||||||||
Balance December 31, 2009 | 210.6 | 18.9 | 229.5 | — | |||||||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(b) Issued and outstanding:
Number of Shares (in millions) | SVS | MVS | Total SVS and MVS outstanding | Warrants | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance December 31, 2006 | 198.2 | 29.6 | 227.8 | 1.1 | |||||||||
Other share issuances (i) | 1.0 | — | 1.0 | — | |||||||||
Other (ii) | — | — | — | (0.7 | ) | ||||||||
Balance December 31, 2007 | 199.2 | 29.6 | 228.8 | 0.4 | |||||||||
Other share issuances (iii) | 0.4 | — | 0.4 | — | |||||||||
Other (iv) | — | — | — | (0.4 | ) | ||||||||
Balance December 31, 2008 | 199.6 | 29.6 | 229.2 | — | |||||||||
Amount | SVS | MVS | Total SVS and MVS outstanding | Warrants | SVS | MVS | Total SVS and MVS outstanding | Warrants (note 8(c)) | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance December 31, 2006 | $ | 3,471.2 | $ | 105.4 | $ | 3,576.6 | $ | 8.4 | ||||||||||||||||||
Balance December 31, 2007 | $ | 3,479.8 | $ | 105.4 | $ | 3,585.2 | $ | 3.1 | ||||||||||||||||||
Other share issuances (i) | 8.6 | — | 8.6 | — | 3.3 | — | 3.3 | — | ||||||||||||||||||
Other (ii) | — | — | — | (5.3 | ) | — | — | — | (3.1 | ) | ||||||||||||||||
Balance December 31, 2007 | 3,479.8 | 105.4 | 3,585.2 | 3.1 | ||||||||||||||||||||||
Balance December 31, 2008 | 3,483.1 | 105.4 | 3,588.5 | — | ||||||||||||||||||||||
Other share issuances (iii) | 3.3 | — | 3.3 | — | 2.7 | — | 2.7 | — | ||||||||||||||||||
Other (iv) | — | — | — | (3.1 | ) | 38.0 | (38.0 | ) | — | — | ||||||||||||||||
Balance December 31, 2008 | $ | 3,483.1 | $ | 105.4 | $ | 3,588.5 | $ | — | ||||||||||||||||||
Balance December 31, 2009 | $ | 3,523.8 | $ | 67.4 | $ | 3,591.2 | $ | — | ||||||||||||||||||
2007 Capital transactions:
2008 Capital transactions:
(c) Warrants:
In connection with the Manufacturer's Services Limited (MSL)an acquisition in 2004, we issued Series A and Series B warrants to replace the outstanding MSL warrants. The Series A warrants expired in 2007 and the Series B warrants expired in 2008.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)have expired.
Long-Term Incentives:
Long-Term Incentive Plan (LTIP):
Under the LTIP, we may grant stock options, performance options, performance share units and stock appreciation rights to eligible employees, executives and consultants. Under the LTIP, up to 29.0 million SVS may be issued from treasury.
Share Unit Plan (SUP):
Under the SUP, we may grant restricted share units and performance share units to eligible employees. Under the SUP, we will satisfy the delivery of the share units by purchasing SVS in the open market or by cash, rather than issuing SVS from treasury.
(d) Stock option plans:
We have granted stock options and performance options as part of our LTIP. Options are granted at prices equal to the market value on the day prior to the date of the grant and are exercisable during a period not to exceed 10 years from the grant date.
We havehad ESPO plans that were available to certain employees and executives. Pursuant to the ESPO plans, our employees and executives were offered the opportunity to purchase, at prices equal to market value, SVS and, in connection with such purchase, receive options to acquire an additional number of SVS based on the number of SVS acquired by them under the ESPO plans. The exercise price for the options iswas equal to the price per share paid for the corresponding SVS acquired under the ESPO plans. The ESPO options expired in 2008.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
price per share paid for the corresponding SVS acquired under the ESPO plans. The ESPO options expired in 2008.
Stock option transactions were as follows:
Number of Options (in millions) | Shares | Weighted Average Exercise Price | |||||
---|---|---|---|---|---|---|---|
Outstanding at December 31, 2005 | 14.5 | $ | 21.73 | ||||
Granted | 1.8 | $ | 9.96 | ||||
Exercised | (1.0 | ) | $ | 5.60 | |||
Forfeited/Expired | (3.8 | ) | $ | 23.63 | |||
Outstanding at December 31, 2006 | 11.5 | $ | 20.62 | ||||
Granted | 2.7 | $ | 6.42 | ||||
Exercised | (0.7 | ) | $ | 4.99 | |||
Forfeited/Expired | (5.3 | ) | $ | 27.25 | |||
Outstanding at December 31, 2007 | 8.2 | $ | 15.58 | ||||
Granted | 2.4 | $ | 5.97 | ||||
Exercised | (0.2 | ) | $ | 7.95 | |||
Forfeited/Expired | (1.3 | ) | $ | 13.58 | |||
Outstanding at December 31, 2008 | 9.1 | $ | 12.35 | ||||
Shares reserved for issuance upon exercise of stock options or awards (in millions) | 27.0 | ||||||
Number of Options (in millions) | Shares | Weighted Average Exercise Price | |||||
---|---|---|---|---|---|---|---|
Outstanding at December 31, 2006 | 11.5 | $ | 20.62 | ||||
Granted | 2.7 | $ | 6.42 | ||||
Exercised | (0.7 | ) | $ | 4.99 | |||
Forfeited/Expired | (5.3 | ) | $ | 27.25 | |||
Outstanding at December 31, 2007 | 8.2 | $ | 15.58 | ||||
Granted | 2.4 | $ | 5.97 | ||||
Exercised | (0.2 | ) | $ | 7.95 | |||
Forfeited/Expired | (1.3 | ) | $ | 13.58 | |||
Outstanding at December 31, 2008 | 9.1 | $ | 12.35 | ||||
Granted | 2.4 | $ | 4.51 | ||||
Exercised | (0.3 | ) | $ | 6.36 | |||
Forfeited/Expired | (0.8 | ) | $ | 21.44 | |||
Outstanding at December 31, 2009 | 10.4 | $ | 10.75 | ||||
Shares reserved for issuance upon exercise of stock options or awards (in millions) | 26.7 | ||||||
The following options were outstanding as at December 31, 2008:2009:
Plan | 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) | | ||||||||||||
LTIP | $ 4.76 - $ 5.77 | 1.9 | $ | 5.43 | 8.8 | 0.2 | $ | 5.68 | ||||||||||
$ 5.88 - $ 6.05 | 1.4 | $ | 6.04 | 8.1 | 0.4 | $ | 6.04 | |||||||||||
$ 6.25 - $ 8.75 | 1.4 | $ | 6.64 | 9.0 | 0.1 | $ | 7.02 | |||||||||||
$ 9.21 - $14.00 | 1.0 | $ | 10.40 | 6.7 | 0.6 | $ | 10.65 | |||||||||||
$14.19 - $18.46 | 1.4 | $ | 16.31 | 4.6 | 1.3 | $ | 16.25 | |||||||||||
$18.50 - $25.75 | 1.4 | $ | 20.31 | 4.1 | 1.4 | $ | 20.34 | |||||||||||
$28.05 - $70.32 | 0.4 | $ | 47.02 | 2.0 | 0.4 | $ | 47.02 | |||||||||||
MSL | $ 9.73 - $12.99 | 0.1 | $ | 11.91 | 3.1 | 0.1 | $ | 11.91 | ||||||||||
$13.07 - $58.00 | 0.1 | $ | 18.23 | 2.6 | 0.1 | $ | 18.23 | |||||||||||
9.1 | 4.6 | |||||||||||||||||
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) | | |||||||||||
$ 4.04 - $ 4.90 | 2.3 | $ | 4.47 | 9.1 | — | $ | — | |||||||||
$ 5.26 - $ 6.05 | 1.6 | $ | 5.94 | 7.4 | 0.8 | $ | 5.99 | |||||||||
$ 6.18 - $ 6.75 | 2.3 | $ | 6.45 | 7.9 | 0.6 | $ | 6.53 | |||||||||
$ 6.93 - $10.00 | 0.8 | $ | 8.88 | 7.0 | 0.5 | $ | 9.33 | |||||||||
$10.13 - $17.15 | 1.6 | $ | 15.07 | 4.6 | 1.4 | $ | 15.14 | |||||||||
$17.20 - $27.68 | 1.3 | $ | 22.13 | 3.3 | 1.3 | $ | 22.13 | |||||||||
$27.91 - $82.12 | 0.3 | $ | 50.79 | 1.4 | 0.3 | $ | 50.79 | |||||||||
$ 9.73 - $13.33 | 0.1 | $ | 11.96 | 2.5 | 0.1 | $ | 11.96 | |||||||||
$13.52 - $58.00 | 0.1 | $ | 18.80 | 1.6 | 0.1 | $ | 18.80 | |||||||||
10.4 | 5.1 | |||||||||||||||
We have applied fair-value method of accounting for stock option awards granted after January 1, 2003 and, accordingly, have recorded compensation expense. Prior to January 1, 2003, we accounted for stock option awards using the settlement method and no compensation expense was recognized. For awards granted in 2002, we have disclosed the pro forma earnings and per share information as if we had accounted for employee stock options under the fair-value method. We were not required to determine the pro forma impact of awards granted prior to January 1, 2002.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
We amortize the estimated fair value of options to expense over the vesting period of three to four years, on a straight-line basis. We determined the fair value of the options using the Black-Scholes option pricing model with the following weighted average assumptions:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Risk-free rate | 4.5% - 5.0% | 3.6% - 4.8% | 1.0% - 3.3% | |||||||
Dividend yield | 0.0% | 0.0% | 0.0% | |||||||
Volatility factor of the expected market price of our shares | 34% - 65% | 35% - 52% | 38% - 59% | |||||||
Expected option life (in years) | 3.5 - 5.5 | 4.0 - 5.5 | 4.0 - 5.5 | |||||||
Weighted-average fair value of options granted | $5.55 | $2.57 | $3.12 |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Risk-free rate | 3.6% - 4.8% | 1.0% - 3.3% | 1.9% - 3.0% | |||||||
Dividend yield | 0.0% | 0.0% | 0.0% | |||||||
Volatility factor of the expected market price of our shares | 35% - 52% | 38% - 59% | 38% - 47% | |||||||
Expected option life (in years) | 4.0 - 5.5 | 4.0 - 5.5 | 5.5 | |||||||
Weighted-average fair value of options granted | $2.57 | $3.12 | $1.60 |
For 2008,2009, we expensed $6.6 (2007$5.9 (2008 — $7.0; 2006$6.6; 2007 — $5.1)$7.0) relating to the fair value of options granted after January 1, 2003.
The pro forma disclosure relating to options granted in 2002 is as follows:
| Year ended December 31 | |||
---|---|---|---|---|
| 2006 | |||
Loss as reported | $ | (150.6 | ) | |
Deduct: Stock-based compensation costs using fair-value method | (4.1 | ) | ||
Pro forma net loss | $ | (154.7 | ) | |
Loss per share: | ||||
Basic — as reported | $ | (0.66 | ) | |
Basic — pro forma | $ | (0.68 | ) | |
Diluted — as reported | $ | (0.66 | ) | |
Diluted — pro forma | $ | (0.68 | ) |
All of the 2002 option grants were fully vested by the end of 2006 and, therefore, do not impact our 2007 or 2008 pro forma disclosure.options.
(e) Restricted share units and performance share units:awards:
We have granted restricted share units (RSUs) and performance share units (PSUs) as part of our LTIP and SUP. These grants generally entitle the holder to receive one SVS or, at our discretion, the cash equivalent of the market value of a share at the date of vesting. Historically, we have settled these awards with shares purchased in the open market. The grant date faircost of equity-settled awards is based on the market value of RSUs and PSUs is amortizedour SVS at the time of grant. We amortize this cost to compensation expense over the vesting period on a straight-line basis.basis with a corresponding charge through contributed surplus.
During the fourth quarter of 2009, we decided to settle the share unit awards vesting in the first quarter of 2010 with cash. Cash-settled awards are accounted for as liabilities and remeasured based on our share price at each reporting period until the settlement date. As a result of our decision to settle these awards with cash, we reclassified the accumulated balance of $13.3, representing the grant date fair value of vested awards, from contributed surplus to accrued liabilities. We adjusted this liability to the market value of our underlying SVS at December 31, 2009, with a corresponding charge to compensation expense. We recorded a mark-to-market adjustment of $10.9 (cost of sales — $5.2; SG&A — $5.7) in the fourth quarter of 2009. Management's current intention is to settle all future share unit awards in the form of shares purchased in the open market and, as a result will continue to account for these share units as equity awards.
The weighted-average grant date fair value of thesethe share units for 2008awarded in 2009 was $6.52 (2007$4.19 (2008 — $6.10; 2006$6.52; 2007 — $10.00)$6.10). A total of $16.8$33.0, including the $10.9 mark-to-market adjustment described above, has been recognized for share unit awards in cost of sales and SG&A in 2008 (20072009 (2008 — $6.2; 2006$16.8; 2007 — $10.9) for RSUs and PSUs.$6.2).
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
RSUs granted before 2008 completely vest at the end of their respective terms, which is generally three years. RSUs granted in 2008 and thereafter vest approximately one-third each year. PSUs vest at the end of their respective terms, generally three years, to the extent that performance conditions have been met.
Number of RSUs and PSUs (in millions) | RSUs | Vested | PSUs | Vested | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2006 | 2.1 | 0.1 | 2.0 | — | |||||||||
Granted | 1.6 | 0.8 | |||||||||||
Forfeited/Expired | (0.5 | ) | (1.0 | ) | |||||||||
Exercised | (0.8 | ) | — | ||||||||||
Outstanding at December 31, 2007 | 2.4 | — | 1.8 | — | |||||||||
Granted | 3.2 | 2.1 | |||||||||||
Forfeited/Expired | (0.4 | ) | (0.5 | ) | |||||||||
Exercised | (0.8 | ) | (0.1 | ) | |||||||||
Outstanding at December 31, 2008 | 4.4 | — | 3.3 | — | |||||||||
Number of RSUs and PSUs (in millions) | RSUs | Vested | PSUs | Vested | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2006 | 2.1 | 0.1 | 2.0 | — | |||||||||
Granted | 1.6 | 0.8 | |||||||||||
Forfeited/Expired | (0.5 | ) | (1.0 | ) | |||||||||
Exercised | (0.8 | ) | — | ||||||||||
Outstanding at December 31, 2007 | 2.4 | — | 1.8 | — | |||||||||
Granted | 3.2 | 2.1 | |||||||||||
Forfeited/Expired | (0.4 | ) | (0.5 | ) | |||||||||
Exercised | (0.8 | ) | (0.1 | ) | |||||||||
Outstanding at December 31, 2008 | 4.4 | — | 3.3 | — | |||||||||
Granted | 4.4 | 4.6 | |||||||||||
Forfeited/Expired | (0.3 | ) | (0.2 | ) | |||||||||
Exercised | (1.9 | ) | (0.7 | ) | |||||||||
Outstanding at December 31, 2009 | 6.6 | — | 7.0 | — | |||||||||
9. ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX:
| Year ended December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2008 | |||||
Opening balance of foreign currency translation account | $ | — | $ | 35.2 | |||
Transitional adjustment — January 1, 2007 | 26.5 | — | |||||
Foreign currency translation gain | 8.7 | 11.5 | |||||
Closing balance | 35.2 | 46.7 | |||||
Opening balance of unrealized net gain on cash flow hedges | — | 20.7 | |||||
Transitional adjustment — January 1, 2007 (note 2(n)) | (0.5 | ) | — | ||||
Net gain (loss) on cash flow hedges (i) | 37.5 | (53.1 | ) | ||||
Reclass net gain on cash flow hedges to operations (ii) | (16.3 | ) | (4.9 | ) | |||
Closing balance (iii) | 20.7 | (37.3 | ) | ||||
Accumulated other comprehensive income | $ | 55.9 | $ | 9.4 | |||
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Opening balance of foreign currency translation account | $ | — | $ | 35.2 | $ | 46.7 | ||||
Transitional adjustment — January 1, 2007 | 26.5 | — | — | |||||||
Currency translation adjustment | 8.7 | 11.5 | (1.6 | ) | ||||||
Release of cumulative currency translation to other charges (note (10)) | — | — | 1.8 | |||||||
Closing balance | 35.2 | 46.7 | 46.9 | |||||||
Opening balance of unrealized net gain (loss) on cash flow hedges | — | 20.7 | (37.3 | ) | ||||||
Transitional adjustment — January 1, 2007 | (0.5 | ) | — | — | ||||||
Net gain (loss) on cash flow hedges (i) | 37.5 | (53.1 | ) | 14.4 | ||||||
Net loss (gain) on cash flow hedges reclassified to operations (ii) | (16.3 | ) | (4.9 | ) | 31.8 | |||||
Closing balance (iii) | 20.7 | (37.3 | ) | 8.9 | ||||||
Accumulated other comprehensive income | $ | 55.9 | $ | 9.4 | $ | 55.8 | ||||
We expect that the majority of lossesthe gains on cash flow hedges reported in the 20082009 accumulated other comprehensive income balance will be reclassified to operations during 2009.2010, primarily through cost of sales, as the underlying expenses being hedged are incurred.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
10. OTHER CHARGES:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Restructuring (a) | $ | 178.1 | $ | 37.3 | $ | 35.3 | ||||
Goodwill impairment (b) | — | — | 850.5 | |||||||
Long-lived asset impairment (c) | 1.4 | 15.1 | 8.8 | |||||||
Gain on repurchase of Notes (note 7(d)) | — | — | (7.6 | ) | ||||||
Loss on sale of operations (note 3) | 33.2 | — | — | |||||||
Other | (0.9 | ) | (4.8 | ) | (1.8 | ) | ||||
$ | 211.8 | $ | 47.6 | $ | 885.2 | |||||
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Restructuring (a) | $ | 37.3 | $ | 35.3 | $ | 83.1 | ||||
Goodwill impairment (b) | — | 850.5 | — | |||||||
Long-lived asset impairment (c) | 15.1 | 8.8 | 12.3 | |||||||
Gain on repurchase of Notes (note 7(d)) | — | (7.6 | ) | (19.5 | ) | |||||
Write-down of embedded prepayment option (note 7(d)) | — | — | 16.7 | |||||||
Recovery of damages (d) | — | — | (23.7 | ) | ||||||
Release of cumulative translation adjustment (e) | — | — | 1.8 | |||||||
Other (f) | (4.8 | ) | (1.8 | ) | (2.7 | ) | ||||
$ | 47.6 | $ | 885.2 | $ | 68.0 | |||||
(a) Restructuring:
Between 2001 and 2004, we announced global restructuring plans as a result of end market weakness and the shifting of manufacturing capacity from higher-cost regions in North America and Europe to lower-cost regions in Asia. During 2005 and 2006, we announced further plans to improve capacity utilization and accelerate margin improvements, primarily in our North America and Europe regions as end-market demand and profitability had not recovered to sustainable levels.
In January 2008, we estimated that an additional restructuring chargecharges of between $50 toand $75 would be recorded throughout 2008 and 2009. AsIn light of the continued uncertain economic environment, we finalizeddetermined that further restructuring actions were required to improve our overall utilization and reduce overhead costs, and in July 2009 plan in the fourth quarter of 2008, we estimated that our restructuring costs would reach the high end of our previously announced range of $50 to $75. We will continue to evaluate our operations and may propose additional restructuring actions as a result. During 2008,charges of between $75 and $100. Combined, we expect to incur total restructuring charges of between $150 and $175 associated with this program. We recorded $35.3 in restructuring charges.charges in 2008 and $83.1 in 2009 related to this program. We expect to complete the remainder of the restructuring actions by the end of 2009.2010. As we finalize the detailed plans of these restructuring actions, we will recognize the related charges. The recognition of these charges requires management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to our expense and the liability amounts recorded.
Our restructuring actions included consolidating facilities and reducing our workforce. Approximately 36,100 employees have been terminated since 2001. The majority of the employees terminated were manufacturing and plant employees. Approximately 32,900 employees have been terminated since 2001. Approximately 70%65% of thesethe employee terminations to date were in the Americas, 25% in Europe and 5%10% in Asia. For leased facilities that were no longer used,have been vacated, the lease costs included in the restructuring costs represent future lease payments less estimated sublease recoveries. Adjustments are made to lease and other contractual obligations to reflect incremental cancellation fees paid for terminating certain facility leases and to reflect higher accruals for other leases due to delays in the timing of sublease recoveries, and changes in estimated sublease rates, or changes in use, relating principally to facilities in the Americas. We recorded non-cash charges to write-down certain long-lived assets (70%(65% in the Americas, 20%25% in Europe and 10% in Asia) which became impaired as a result of the rationalization of facilities. We expect our long-term lease and other contractual obligations to be paid out over the remaining lease terms through 2015. Our restructuring liability is recorded in accrued liabilities.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
Details of the activity through the accrued restructuring liability and the non-cash charge are as follows:
| Employee termination costs | Lease and other contractual obligations | Facility exit costs and other | Total accrued liability | Non-cash charge | Total charge | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2001 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Provision | 90.7 | 35.3 | 12.4 | 138.4 | 98.6 | 237.0 | |||||||||||||
Cash payments | (51.2 | ) | (1.6 | ) | (2.9 | ) | (55.7 | ) | — | — | |||||||||
December 31, 2001 | 39.5 | 33.7 | 9.5 | 82.7 | 98.6 | 237.0 | |||||||||||||
Provision /adjustments | 124.7 | 63.1 | 5.8 | 193.6 | 191.8 | 385.4 | |||||||||||||
Cash payments | (77.1 | ) | (14.7 | ) | (7.5 | ) | (99.3 | ) | — | — | |||||||||
December 31, 2002 | 87.1 | 82.1 | 7.8 | 177.0 | 290.4 | 622.4 | |||||||||||||
Provision /adjustments | 68.8 | 24.4 | 4.0 | 97.2 | (2.3 | ) | 94.9 | ||||||||||||
Cash payments | (112.0 | ) | (44.4 | ) | (8.9 | ) | (165.3 | ) | — | — | |||||||||
December 31, 2003 | 43.9 | 62.1 | 2.9 | 108.9 | 288.1 | 717.3 | |||||||||||||
Provision /adjustments | 101.3 | 10.9 | 6.2 | 118.4 | 35.3 | 153.7 | |||||||||||||
Cash payments | (110.6 | ) | (32.0 | ) | (4.1 | ) | (146.7 | ) | — | — | |||||||||
December 31, 2004 | 34.6 | 41.0 | 5.0 | 80.6 | 323.4 | 871.0 | |||||||||||||
Provision /adjustments | 122.7 | 20.7 | 5.7 | 149.1 | 11.0 | 160.1 | |||||||||||||
Cash payments | (106.6 | ) | (12.7 | ) | (9.0 | ) | (128.3 | ) | — | — | |||||||||
December 31, 2005 | 50.7 | 49.0 | 1.7 | 101.4 | 334.4 | 1,031.1 | |||||||||||||
Provision /adjustments | 115.2 | 9.1 | 5.9 | 130.2 | 47.9 | 178.1 | |||||||||||||
Cash payments | (89.8 | ) | (16.7 | ) | (6.1 | ) | (112.6 | ) | — | — | |||||||||
Settlement (i) | (23.2 | ) | — | — | (23.2 | ) | — | — | |||||||||||
December 31, 2006 | 52.9 | 41.4 | 1.5 | 95.8 | 382.3 | 1,209.2 | |||||||||||||
Provision /adjustments | 20.7 | 8.6 | 2.9 | 32.2 | 5.1 | 37.3 | |||||||||||||
Cash payments | (64.6 | ) | (13.5 | ) | (3.8 | ) | (81.9 | ) | — | — | |||||||||
December 31, 2007 | 9.0 | 36.5 | 0.6 | 46.1 | 387.4 | 1,246.5 | |||||||||||||
Provision /adjustments | 31.9 | 1.4 | 0.9 | 34.2 | 1.1 | 35.3 | |||||||||||||
Cash payments | (22.2 | ) | (11.2 | ) | (1.3 | ) | (34.7 | ) | — | — | |||||||||
December 31, 2008 | $ | 18.7 | $ | 26.7 | $ | 0.2 | $ | 45.6 | $ | 388.5 | $ | 1,281.8 | |||||||
| Employee termination costs | Lease and other contractual obligations | Facility exit costs and other | Total accrued liability | Non-cash charge | Total charge | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
January 1, 2001 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||
Provision | 90.7 | 35.3 | 12.4 | 138.4 | 98.6 | 237.0 | |||||||||||||
Cash payments | (51.2 | ) | (1.6 | ) | (2.9 | ) | (55.7 | ) | — | — | |||||||||
December 31, 2001 | 39.5 | 33.7 | 9.5 | 82.7 | 98.6 | 237.0 | |||||||||||||
Provision /adjustments | 124.7 | 63.1 | 5.8 | 193.6 | 191.8 | 385.4 | |||||||||||||
Cash payments | (77.1 | ) | (14.7 | ) | (7.5 | ) | (99.3 | ) | — | — | |||||||||
December 31, 2002 | 87.1 | 82.1 | 7.8 | 177.0 | 290.4 | 622.4 | |||||||||||||
Provision /adjustments | 68.8 | 24.4 | 4.0 | 97.2 | (2.3 | ) | 94.9 | ||||||||||||
Cash payments | (112.0 | ) | (44.4 | ) | (8.9 | ) | (165.3 | ) | — | — | |||||||||
December 31, 2003 | 43.9 | 62.1 | 2.9 | 108.9 | 288.1 | 717.3 | |||||||||||||
Provision /adjustments | 101.3 | 10.9 | 6.2 | 118.4 | 35.3 | 153.7 | |||||||||||||
Cash payments | (110.6 | ) | (32.0 | ) | (4.1 | ) | (146.7 | ) | — | — | |||||||||
December 31, 2004 | 34.6 | 41.0 | 5.0 | 80.6 | 323.4 | 871.0 | |||||||||||||
Provision /adjustments | 122.7 | 20.7 | 5.7 | 149.1 | 11.0 | 160.1 | |||||||||||||
Cash payments | (106.6 | ) | (12.7 | ) | (9.0 | ) | (128.3 | ) | — | — | |||||||||
December 31, 2005 | 50.7 | 49.0 | 1.7 | 101.4 | 334.4 | 1,031.1 | |||||||||||||
Provision /adjustments | 115.2 | 9.1 | 5.9 | 130.2 | 47.9 | 178.1 | |||||||||||||
Cash payments | (89.8 | ) | (16.7 | ) | (6.1 | ) | (112.6 | ) | — | — | |||||||||
Settlement | (23.2 | ) | — | — | (23.2 | ) | — | — | |||||||||||
December 31, 2006 | 52.9 | 41.4 | 1.5 | 95.8 | 382.3 | 1,209.2 | |||||||||||||
Provision /adjustments | 20.7 | 8.6 | 2.9 | 32.2 | 5.1 | 37.3 | |||||||||||||
Cash payments | (64.6 | ) | (13.5 | ) | (3.8 | ) | (81.9 | ) | — | — | |||||||||
December 31, 2007 | 9.0 | 36.5 | 0.6 | 46.1 | 387.4 | 1,246.5 | |||||||||||||
Provision /adjustments | 31.9 | 1.4 | 0.9 | 34.2 | 1.1 | 35.3 | |||||||||||||
Cash payments | (22.2 | ) | (11.2 | ) | (1.3 | ) | (34.7 | ) | — | — | |||||||||
December 31, 2008 | 18.7 | 26.7 | 0.2 | 45.6 | 388.5 | 1,281.8 | |||||||||||||
Provision /adjustments | 69.9 | 6.5 | 2.9 | 79.3 | 3.8 | 83.1 | |||||||||||||
Cash payments | (64.9 | ) | (12.4 | ) | (2.6 | ) | (79.9 | ) | — | — | |||||||||
December 31, 2009 | $ | 23.7 | $ | 20.8 | $ | 0.5 | $ | 45.0 | $ | 392.3 | $ | 1,364.9 | |||||||
(b) Goodwill:
Our goodwill balance prior to the impairment charge described below was $850.5 and was established primarily as a result of an acquisition in 2001. All goodwill was allocated to the Asia reporting unit.
During the fourth quarter of 2008, we soldperformed our annual goodwill impairment assessment. We completed our step one analysis using a combination of valuation approaches including a market capitalization approach, a multiples approach and a discounted cash flow. The market capitalization approach used our publicly traded stock price to determine fair value, adjusted upward for a control premium, which we allocated to the Asia reporting unit on a prorata basis based on earnings. The multiples approach used an average of comparable trading multiples of our production facilities in Europemajor competitors to arrive at a third party as part of our restructuring program.fair value, adjusted upward for a control premium. We reportedapplied a total of $61.2 in other charges with respect20% control premium to this facility, comprised of incremental employee termination and transaction closing costs totaling $20.9 and a non-cash loss of $40.3. The purchaser agreed to retain all employees. As part of the agreement, the purchaser assumed liabilitiesfair values, which we previously recorded as accruals for employee termination costs.
(b) Goodwill impairment:
In 2006 and 2007, we conducted our annual impairment assessment and determined there was no goodwill impairment. In 2008, we recordedbelieve is a non-cash charge of $850.5 in connection with our annual impairment assessment. See note 5(d).reasonable estimate based
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
on past transactions in the EMS industry at December 31, 2008. The discounted cash flow method used revenue and expense projections and risk-adjusted discount rates to determine fair value. The process of determining fair value is subjective and required management to exercise a significant amount of judgment in determining future growth rates, discount rates and tax rates, among other factors. At that time, the economic environment had negatively impacted our ability to forecast future demand which in turn resulted in our use of higher discount rates, reflecting the risk and uncertainty in the markets. We discounted our three-year projections using a 27% discount rate. We averaged the fair values derived from the above approaches to determine the estimated fair value of the Asia reporting unit. The results of our step one analysis indicated potential impairment in our Asia reporting unit, which was corroborated by a combination of factors including a significant and sustained decline in our market capitalization, which was significantly below our book value, and the then deteriorating macro environment, which resulted in a decline in expected future demand. We performed the second step of the goodwill impairment assessment to quantify the amount of impairment. We engaged an independent third-party consultant to assist with our step two analysis. This involved calculating the implied fair value of goodwill, determined in a manner similar to a purchase price allocation, and comparing the residual amount to the carrying amount of goodwill. Based on our analysis incorporating the declining market capitalization in 2008, as well as the significant end market deterioration and economic uncertainties impacting expected future demand at that time, we concluded that the entire goodwill balance as of December 31, 2008 of $850.5 was impaired. The goodwill impairment charge was non-cash in nature and did not affect our liquidity, cash flows from operating activities, or our compliance with debt covenants. The goodwill impairment charge was not deductible for income tax purposes and, therefore, we did not record a corresponding tax benefit in 2008.
(c) Long-lived asset impairment:
In 2006, we recorded a non-cash impairment charge of $1.4 primarily against property, plant and equipment in the Americas. In 2007, we recorded a non-cash impairment charge of $15.1 primarily against property, plant and equipment in the Americas and Europe. In 2008, we recorded a non-cash impairment charge of $8.8 against property, plant and equipment in the Americas and Europe. In 2009, we recorded a non-cash impairment charge of $12.3 against property, plant and equipment primarily in Japan.
We tested impairment of long-lived assets in the fourth quarter of each year. We used the two-step method, by comparing the carrying amount of an asset, or group of assets, to the undiscounted cash flows from the use and eventual disposal of the asset. If the carrying amount exceeded the undiscounted cash flows, we performed step two by comparing the fair value of the asset to its carrying amount to determine the amount of impairment. We estimated fair value using discounted cash flows or estimates of market value for certain assets, where available. We used revenue and expense projections based on site submissions which were discounted using risk-adjusted rates. We worked with independent brokers to obtain the market prices to support our real property values.
(d) Recovery of damages:
In 2009, we received a recovery of damages related to certain purchases we made in prior periods as a result of the settlement of a class action lawsuit. When the cash was received, we recorded the recovery, net of estimated reserves, of $23.7 through other charges. Future adjustments to our estimated reserves, if any, will be recorded through other charges.
(e) Release of cumulative translation adjustment:
We recorded a net loss of $1.8 for the release of the cumulative currency translation adjustment related to a liquidated foreign subsidiary.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(f) Other:
We recognized recoveries on the sale of certain assets that were previously written down through other charges.
11. INCOME TAXES:
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Earnings (loss) before income tax: | |||||||||||
Canadian operations | $ | (91.5 | ) | $ | (143.2 | ) | $ | (154.7 | ) | ||
Foreign operations | (44.6 | ) | 150.3 | (560.8 | ) | ||||||
$ | (136.1 | ) | $ | 7.1 | $ | (715.5 | ) | ||||
Current income tax expense (recovery): | |||||||||||
Canadian operations | $ | (1.2 | ) | $ | 15.6 | $ | 0.4 | ||||
Foreign operations | (39.5 | ) | (1.2 | ) | 18.0 | ||||||
$ | (40.7 | ) | $ | 14.4 | $ | 18.4 | |||||
Deferred income tax expense (recovery): | |||||||||||
Canadian operations | $ | 57.8 | $ | 8.7 | $ | (4.9 | ) | ||||
Foreign operations | (2.6 | ) | (2.3 | ) | (8.5 | ) | |||||
$ | 55.2 | $ | 6.4 | $ | (13.4 | ) | |||||
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Earnings (loss) before income tax: | |||||||||||
Canadian operations | $ | (143.2 | ) | $ | 252.7 | $ | (318.6 | ) | |||
Foreign operations | 150.3 | (968.2 | ) | 379.0 | |||||||
$ | 7.1 | $ | (715.5 | ) | $ | 60.4 | |||||
Current income tax expense (recovery): | |||||||||||
Canadian operations | $ | 15.6 | $ | 0.4 | $ | 29.5 | |||||
Foreign operations | (1.2 | ) | 18.0 | 4.1 | |||||||
$ | 14.4 | $ | 18.4 | $ | 33.6 | ||||||
Deferred income tax expense (recovery): | |||||||||||
Canadian operations | $ | 8.7 | $ | (4.9 | ) | $ | (23.1 | ) | |||
Foreign operations | (2.3 | ) | (8.5 | ) | (5.1 | ) | |||||
$ | 6.4 | $ | (13.4 | ) | $ | (28.2 | ) | ||||
The overall income tax provision differs from the provision computed at the statutory rate as follows:
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Combined Canadian federal and provincial income tax rate | 36.1 | % | 36.1 | % | 33.5 | % | |||||
Income tax expense (recovery) based on earnings or loss before income taxes at statutory rate | $ | (49.1 | ) | $ | 2.6 | $ | (239.7 | ) | |||
Impact on income taxes from: | |||||||||||
Manufacturing and processing deduction | 1.6 | 5.2 | (4.9 | ) | |||||||
Foreign income taxed at lower rates | (50.2 | ) | (92.4 | ) | 216.8 | ||||||
Unrealized foreign exchange on Canadian companies' loans | 73.5 | 47.8 | (4.2 | ) | |||||||
Other, including non-taxable and non-deductible items | 6.2 | 34.3 | (0.7 | ) | |||||||
Change in valuation allowance | 32.5 | 23.3 | 3.1 | ||||||||
Amortization and write-down of non-deductible goodwill and other intangible assets | — | — | 34.6 | ||||||||
Income tax expense | $ | 14.5 | $ | 20.8 | $ | 5.0 | |||||
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Combined Canadian federal and provincial income tax rate | 36.1 | % | 33.5 | % | 33.0 | % | |||||
Income tax expense (recovery) based on earnings or loss before income taxes at statutory rate | $ | 2.6 | $ | (239.7 | ) | $ | 19.9 | ||||
Impact on income taxes from: | |||||||||||
Manufacturing and processing deduction | 5.2 | (4.9 | ) | 2.5 | |||||||
Foreign income taxed at lower rates | (92.4 | ) | 297.2 | (119.2 | ) | ||||||
Foreign exchange | 71.2 | (131.9 | ) | 79.2 | |||||||
Other, including non-taxable and non-deductible items | 10.9 | 46.6 | 32.3 | ||||||||
Change in valuation allowance | 23.3 | 3.1 | (9.3 | ) | |||||||
Write-down of non-deductible goodwill | — | 34.6 | — | ||||||||
Income tax expense | $ | 20.8 | $ | 5.0 | $ | 5.4 | |||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
Deferred income tax assets and liabilities are recognized for future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred income tax assets and liabilities are comprised of the following:
| December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||
Deferred income tax assets: | ||||||||
Income tax effect of operating losses carried forward | $ | 557.2 | $ | 555.1 | ||||
Accounting provisions not currently deductible | 69.9 | 45.6 | ||||||
Property, plant and equipment, intangible and other assets | 61.5 | 78.5 | ||||||
Share issue and debt issue costs | 0.1 | — | ||||||
Restructuring accruals | 20.1 | 12.4 | ||||||
708.8 | 691.6 | |||||||
Valuation allowance | (588.8 | ) | (591.9 | ) | ||||
120.0 | 99.7 | |||||||
Deferred income tax liabilities: | ||||||||
Deferred pension asset | (12.7 | ) | (15.1 | ) | ||||
Unrealized foreign exchange gains | (164.6 | ) | (113.1 | ) | ||||
Share issue and debt issue costs | — | (2.7 | ) | |||||
(177.3 | ) | (130.9 | ) | |||||
Deferred income tax liability, net | $ | (57.3 | ) | $ | (31.2 | ) | ||
| December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | ||||||
Deferred income tax assets: | ||||||||
Income tax effect of operating losses carried forward | $ | 555.1 | $ | 583.4 | ||||
Accounting provisions not currently deductible | 45.6 | 28.8 | ||||||
Property, plant and equipment, intangible and other assets | 78.5 | 98.4 | ||||||
Restructuring accruals | 12.4 | 13.5 | ||||||
691.6 | 724.1 | |||||||
Valuation allowance | (591.9 | ) | (582.6 | ) | ||||
99.7 | 141.5 | |||||||
Deferred income tax liabilities: | ||||||||
Deferred pension asset | (15.1 | ) | (14.3 | ) | ||||
Unrealized foreign exchange gains | (113.1 | ) | (134.0 | ) | ||||
Share issue and debt issue costs | (2.7 | ) | (1.6 | ) | ||||
(130.9 | ) | (149.9 | ) | |||||
Deferred income tax liability, net | $ | (31.2 | ) | $ | (8.4 | ) | ||
The net deferred income tax asset (liability) is classified as follows:
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2008 | |||||
Current | $ | 3.8 | $ | 8.0 | |||
Long-term | (61.1 | ) | (39.2 | ) | |||
Total | $ | (57.3 | ) | $ | (31.2 | ) | |
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2008 | 2009 | |||||
Current | $ | 8.2 | $ | 5.2 | |||
Long-term | (39.4 | ) | (13.6 | ) | |||
Total | $ | (31.2 | ) | $ | (8.4 | ) | |
In certain jurisdictions, we currently have significant operating losses and other deductible temporary differences that will reduce taxable income in these jurisdictions in future periods. We have determined that a valuation allowance of $591.9$582.6 is required in respect of our deferred income tax assets as at December 31, 2009 (December 31, 2008 (2007 — $588.8)$591.9).
In 2006, we recorded net deferred income tax liabilities relating to net unrealized foreign exchange gains in Canada. We determined during the fourth quarter of 2006 that certain foreign exchange losses accrued on Canadian assets may not be available to offset the unrealized foreign exchange gains accrued on Canadian liabilities. This was due to the potential timing of realization of foreign exchange gains and losses and/or potential challenges that, more likely than not, would result in a lack of availability of the unrealized foreign exchange losses to offset the unrealized foreign exchange gains.
The aggregate amount of undistributed earnings of our foreign subsidiaries, for which no deferred income tax liability has been recorded, is $980.0$443.1 as at December 31, 2009 (December 31, 2008 (2007 — $885.1)$980.0). We intend to indefinitely re-invest income in these foreign subsidiaries.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
We have been granted tax incentives, including tax holidays, for our China, Czech Republic, Malaysia, Philippines and Thailand subsidiaries. The tax benefit arising from these incentives is approximately $26.2, or $0.11 per diluted share, for 2009, $42.6, or $0.19 per diluted share, for 2008 and $45.0, or $0.20 per diluted share, for 2007 and $41.2 or $0.18 per diluted share for 2006. These2007. As of December 31, 2009, we have tax incentives that expire between 20092010 and 2015, and are subject to certain conditions with which we intend to comply.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
As at December 31, 2008,2009, our operating loss carry forwards by year of expiry are as follows:
Year of Expiry | Americas | Europe | Asia | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2009 | $ | 2.0 | $ | 0.1 | $ | 9.6 | $ | 11.7 | |||||
2010 | 7.1 | 310.2 | — | 317.3 | |||||||||
2011 | 11.6 | 165.4 | 1.5 | 178.5 | |||||||||
2012 | 15.0 | 32.6 | 23.0 | 70.6 | |||||||||
2013 | 19.0 | 20.5 | 14.4 | 53.9 | |||||||||
2014 | 57.0 | — | 7.1 | 64.1 | |||||||||
2015 - 2028 | 831.5 | 81.9 | 9.8 | 923.2 | |||||||||
Indefinite | 268.8 | 292.2 | 45.8 | 606.8 | |||||||||
$ | 1,212.0 | $ | 902.9 | $ | 111.2 | $ | 2,226.1 | ||||||
Year of Expiry | Americas | Europe | Asia | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2010 | $ | 1.6 | $ | 289.4 | $ | — | $ | 291.0 | |||||
2011 | 6.2 | 164.6 | — | 170.8 | |||||||||
2012 | 14.7 | 29.1 | 10.4 | 54.2 | |||||||||
2013 | 21.2 | 22.9 | 9.5 | 53.6 | |||||||||
2014 | 23.6 | 17.0 | 5.6 | 46.2 | |||||||||
2015 | 30.7 | — | 1.8 | 32.5 | |||||||||
2016 - 2028 | 810.5 | 62.5 | — | 873.0 | |||||||||
Indefinite | 373.3 | 228.6 | 38.6 | 640.5 | |||||||||
$ | 1,281.8 | $ | 814.1 | $ | 65.9 | $ | 2,161.8 | ||||||
See note 16 regarding income tax contingencies.
12. RELATED PARTY TRANSACTIONS:
In 2008, management fees of $2.7 (2007 — $1.2; 2006 — $1.0) were charged by our parent company, based on the terms of a management agreement. These fees were recorded at the exchange amount, being the amount agreed to by the parties.
In 2008, we entered into a manufacturing agreement with a company under the control of our parent company.controlling shareholder. During 2008,2009, we recorded revenue of $19.3$42.3 (2008 — $19.3) from this related party. As at December 31, 2008,2009, we had $7.1$3.9 due from this related party. All transactions with this related party were in the normal course of operations and were recorded at the exchange amount, being the amount agreed to by the parties.
See note 8(b)(iv).
13. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS:
We provide pension and non-pension post-employment benefit plans for our employees. Pension benefits include traditional pension plans as well as supplemental pension plans. Some employees in Canada, Japan and the United Kingdom and the Philippines participate in defined benefit plans. Defined contribution plans are offered to employees, mainly in Canada and the U.S.
We provide non-pension post-employment benefits (other benefit plans) to retired and terminated employees in Canada, the U.S., Mexico and Thailand. These benefits include one-time retirement and termination benefits, medical, surgical, hospitalization coverage, supplemental health, dental and group life insurance.
Our pension funding policy is to contribute amounts sufficient to meet minimum local statutory funding requirements that are based on actuarial calculations. We may make additional discretionary contributions based on actuarial assessments. Contributions made by us to support ongoing plan obligations have been included in the deferred asset or liability accounts on the balance sheet. The most recent statutory pension actuarial valuations were completed using measurement dates as of April 2007 and December 2005 and April 2007.2008. The
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
measurement dates to be used for the next actuarial valuation for pensions will be April 2010 and December 2008 and April 2010.2011.
We currently fund our non-pension post-employment benefit plans as we incur benefit payments. The most recent actuarial valuations for non-pension post-employment benefits were completed using measurement dates of May 2005January 2008 and January 2008.October 2009. The measurement dates of the next actuarial valuations for non-pension post-employment benefits will be January 20092010 and January 2010.October 2012. We accrue the expected costs of providing non-pension post-employment benefits during the periods in which the employees render service.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The measurement date used for the accounting valuation for pension and non-pension post-employment benefits is December 31, 2008.2009.
Pension fund assets are invested primarily in fixed income and equity securities. Asset allocation between fixed income and equity is adjusted based on the expected life of the plan and the expected retirement of the plan participants. Currently, the asset allocation allows for 39%-50%45%-53% investment in fixed income, and 46%-73%45%-53% investment in equities through mutual funds, and 4%-7%1% in real estate/other investments. We employ passive investment approaches in our pension plan asset management strategy. Our pension funds do not invest directly in equities or derivative instruments. 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 market investment funds. All of our plan assets are measured at their fair value using quoted prices in active markets and can be classified as level 1 of the fair value hierarchy. These plan assets are held with counterparty financial institutions each having a Standard and Poor's rating of A or above at December 31, 2009. We believe that the counterparty concentration risk is low.
The table below presents the market value of the assets as follows:
| Fair Market Value at December 31 | Actual Asset Allocation (%) at December 31 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2007 | 2008 | |||||||||
Equities through mutual funds | $ | 205.2 | $ | 133.0 | 48% | 46% | |||||||
Fixed income | 198.1 | 134.8 | 46% | 47% | |||||||||
Other | 26.4 | 18.7 | 6% | 7% | |||||||||
Total | $ | 429.7 | $ | 286.5 | 100% | 100% | |||||||
| Fair Market Value at December 31 | Actual Asset Allocation (%) at December 31 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2008 | 2009 | |||||||||
Equities through mutual funds | $ | 133.0 | $ | 171.3 | 46% | 48% | |||||||
Fixed income | 134.8 | 181.1 | 47% | 51% | |||||||||
Other | 18.7 | 4.9 | 7% | 1% | |||||||||
Total | $ | 286.5 | $ | 357.3 | 100% | 100% | |||||||
The following tables provide a summary of the estimated financial position of our pension and non-pension post-employment benefit plans:
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2007 | 2008 | ||||||||||
Plan assets, beginning of year | $ | 384.1 | $ | 429.7 | $ | — | $ | — | ||||||
Employer contributions | 21.0 | 22.0 | 3.0 | 2.7 | ||||||||||
Actual return on assets | 14.8 | (56.9 | ) | — | — | |||||||||
Voluntary employee contributions | 0.2 | 0.1 | — | — | ||||||||||
Plan settlements | (0.6 | ) | — | — | — | |||||||||
Benefits paid | (22.2 | ) | (23.8 | ) | (3.0 | ) | (2.7 | ) | ||||||
Foreign currency exchange rate changes | 32.4 | (84.6 | ) | — | — | |||||||||
Plan assets, end of year | $ | 429.7 | $ | 286.5 | $ | — | $ | — | ||||||
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2008 | 2009 | ||||||||||
Plan assets, beginning of year | $ | 429.7 | $ | 286.5 | $ | — | $ | — | ||||||
Employer contributions | 22.0 | 22.3 | 2.7 | 3.2 | ||||||||||
Actual return on assets | (56.9 | ) | 41.6 | — | — | |||||||||
Voluntary employee contributions | 0.1 | 0.1 | — | — | ||||||||||
Plan settlements | — | (8.6 | ) | — | — | |||||||||
Benefits paid | (23.8 | ) | (20.8 | ) | (2.7 | ) | (3.2 | ) | ||||||
Foreign currency exchange rate changes | (84.6 | ) | 36.2 | — | — | |||||||||
Plan assets, end of year | $ | 286.5 | $ | 357.3 | $ | — | $ | — | ||||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2007 | 2008 | ||||||||||
Projected benefit obligations, beginning of year | $ | 456.7 | $ | 473.3 | $ | 67.1 | $ | 81.1 | ||||||
Service cost | 4.9 | 2.4 | 2.8 | 2.5 | ||||||||||
Interest cost | 23.1 | 23.0 | 3.8 | 4.2 | ||||||||||
Voluntary employee contributions | 0.2 | 0.1 | — | — | ||||||||||
Actuarial losses (gains) | (23.1 | ) | (54.1 | ) | 1.7 | (4.6 | ) | |||||||
Plan amendments | — | — | 0.3 | — | ||||||||||
Plan curtailments | (1.3 | ) | — | (1.3 | ) | (1.2 | ) | |||||||
Plan settlements | (0.6 | ) | — | — | — | |||||||||
Benefits paid | (22.2 | ) | (23.8 | ) | (3.0 | ) | (2.7 | ) | ||||||
Foreign currency exchange rate changes | 35.6 | (94.2 | ) | 9.7 | (13.2 | ) | ||||||||
Projected benefit obligations, end of year | $ | 473.3 | $ | 326.7 | $ | 81.1 | $ | 66.1 | ||||||
Excess of projected benefit obligations over plan assets | $ | (43.6 | ) | $ | (40.2 | ) | $ | (81.1 | ) | $ | (66.1 | ) | ||
Unrecognized actuarial losses | 123.7 | 117.5 | 33.3 | 21.3 | ||||||||||
Unrecognized net transition obligation and prior service cost | (4.0 | ) | (4.9 | ) | (10.3 | ) | (7.6 | ) | ||||||
Deferred (accrued) pension cost | $ | 76.1 | $ | 72.4 | $ | (58.1 | ) | $ | (52.4 | ) | ||||
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2008 | 2009 | ||||||||||
Accrued benefit obligations, beginning of year | $ | 473.3 | $ | 326.7 | $ | 81.1 | $ | 66.1 | ||||||
Service cost | 2.4 | 2.9 | 2.5 | 2.2 | ||||||||||
Interest cost | 23.0 | 20.0 | 4.2 | 4.4 | ||||||||||
Voluntary employee contributions | 0.1 | 0.1 | — | — | ||||||||||
Actuarial losses (gains) | (54.1 | ) | 26.8 | (4.6 | ) | (6.8 | ) | |||||||
Plan curtailments | — | (0.2 | ) | (1.2 | ) | (0.7 | ) | |||||||
Plan settlements | — | (8.1 | ) | — | — | |||||||||
Benefits paid | (23.8 | ) | (20.8 | ) | (2.7 | ) | (3.2 | ) | ||||||
Foreign currency exchange rate changes | (94.2 | ) | 39.1 | (13.2 | ) | 7.9 | ||||||||
Accrued benefit obligations, end of year | $ | 326.7 | $ | 386.5 | $ | 66.1 | $ | 69.9 | ||||||
Excess of accrued benefit obligations over plan assets | $ | (40.2 | ) | $ | (29.2 | ) | $ | (66.1 | ) | $ | (69.9 | ) | ||
Unrecognized actuarial losses | 117.5 | 124.1 | 21.3 | 16.3 | ||||||||||
Unrecognized net transition obligation and prior service cost | (4.9 | ) | (4.1 | ) | (7.6 | ) | (8.2 | ) | ||||||
Deferred (accrued) pension cost | $ | 72.4 | $ | 90.8 | $ | (52.4 | ) | $ | (61.8 | ) | ||||
The following table reconciles the deferred (accrued) pension balances to those reported as of December 31, 20072008 and 2008:2009:
| 2007 | 2008 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension Plans | Other Benefit Plans | Total | Pension Plans | Other Benefit Plans | Total | |||||||||||||
Accrued pension and post-employment benefits | $ | (12.3 | ) | $ | (58.1 | ) | $ | (70.4 | ) | $ | (10.8 | ) | $ | (52.4 | ) | $ | (63.2 | ) | |
Deferred pension assets (note 6) | 88.4 | — | 88.4 | 83.2 | — | 83.2 | |||||||||||||
$ | 76.1 | $ | (58.1 | ) | $ | 18.0 | $ | 72.4 | $ | (52.4 | ) | $ | 20.0 | ||||||
| 2008 | 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pension Plans | Other Benefit Plans | Total | Pension Plans | Other Benefit Plans | Total | |||||||||||||
Accrued pension and post-employment benefits | $ | (10.8 | ) | $ | (52.4 | ) | $ | (63.2 | ) | $ | (13.6 | ) | $ | (61.8 | ) | $ | (75.4 | ) | |
Deferred pension assets (note 6) | 83.2 | — | 83.2 | 104.4 | — | 104.4 | |||||||||||||
$ | 72.4 | $ | (52.4 | ) | $ | 20.0 | $ | 90.8 | $ | (61.8 | ) | $ | 29.0 | ||||||
The following table outlines the net periodic benefit cost as follows:
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2006 | 2007 | 2008 | |||||||||||||
Service cost | $ | 5.9 | $ | 4.9 | $ | 2.4 | $ | 4.5 | $ | 2.8 | $ | 2.5 | |||||||
Interest cost | 19.2 | 23.1 | 23.0 | 3.5 | 3.8 | 4.2 | |||||||||||||
Expected return on assets | (19.5 | ) | (22.7 | ) | (23.1 | ) | — | — | — | ||||||||||
Net amortization of prior service cost | (0.1 | ) | (0.1 | ) | (0.1 | ) | (0.8 | ) | (0.8 | ) | (0.7 | ) | |||||||
Net amortization of actuarial losses | 8.0 | 5.0 | 3.9 | 1.1 | 1.1 | 1.0 | |||||||||||||
Curtailment/settlement loss (gain) | 2.1 | (0.2 | ) | 0.1 | 0.6 | (0.3 | ) | (0.5 | ) | ||||||||||
15.6 | 10.0 | 6.2 | 8.9 | 6.6 | 6.5 | ||||||||||||||
Defined contribution pension plan expense | 20.1 | 11.5 | 11.8 | — | — | — | |||||||||||||
Total expense for the year | $ | 35.7 | $ | 21.5 | $ | 18.0 | $ | 8.9 | $ | 6.6 | $ | 6.5 | |||||||
| Pension Plans Year ended December 31 | Other Benefit Plans Year ended December 31 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2007 | 2008 | 2009 | |||||||||||||
Service cost | $ | 4.9 | $ | 2.4 | $ | 2.9 | $ | 2.8 | $ | 2.5 | $ | 2.2 | |||||||
Interest cost | 23.1 | 23.0 | 20.0 | 3.8 | 4.2 | 4.4 | |||||||||||||
Expected return on assets | (22.7 | ) | (23.1 | ) | (15.9 | ) | — | — | — | ||||||||||
Net amortization of prior service cost | (0.1 | ) | (0.1 | ) | (0.3 | ) | (0.8 | ) | (0.7 | ) | (0.7 | ) | |||||||
Net amortization of actuarial losses | 5.0 | 3.9 | 4.1 | 1.1 | 1.0 | 0.8 | |||||||||||||
Curtailment/settlement loss (gain) | (0.2 | ) | 0.1 | 2.1 | (0.3 | ) | (0.5 | ) | (0.5 | ) | |||||||||
10.0 | 6.2 | 12.9 | 6.6 | 6.5 | 6.2 | ||||||||||||||
Defined contribution pension plan expense | 11.5 | 11.8 | 10.7 | — | — | — | |||||||||||||
Total expense for the year | $ | 21.5 | $ | 18.0 | $ | 23.6 | $ | 6.6 | $ | 6.5 | $ | 6.2 | |||||||
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The following table outlines the actuarial assumption percentages used in measuring the projectedaccrued benefit obligations at December 31 and the net periodic benefit costs for the year ended December 31 as follows:
| Pension Plans | Other Benefit Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2006 | 2007 | 2008 | ||||||||||||||
Weighted average discount rate (i) for: | ||||||||||||||||||||
Projected benefit obligations | 5.0 | 5.4 | 5.9 | 5.5 | 5.6 | 6.5 | ||||||||||||||
Net periodic benefit cost | 4.7 | 5.0 | 5.4 | 5.3 | 5.5 | 5.6 | ||||||||||||||
Weighted average rate of compensation increase for: | ||||||||||||||||||||
Projected benefit obligations | 3.5 | 3.7 | 3.2 | 3.6 | 3.4 | 4.7 | ||||||||||||||
Net periodic benefit cost | 3.4 | 3.5 | 3.7 | 3.5 | 3.6 | 3.4 | ||||||||||||||
Weighted average expected long-term rate of return on plan assets (ii) for: | ||||||||||||||||||||
Net periodic benefit cost | 5.7 | 5.8 | 5.9 | — | — | — | ||||||||||||||
Healthcare cost trend rate (iii) for: | ||||||||||||||||||||
Projected benefit obligations | — | — | — | 8.0 | 7.8 | 7.3 | ||||||||||||||
Net periodic benefit cost | — | — | — | 9.3 | 8.0 | 7.8 | ||||||||||||||
Estimated rate for the following 12-month net periodic benefit cost | — | — | — | 8.0 | 7.8 | 7.3 |
| Pension Plans | Other Benefit Plans | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2007 | 2008 | 2009 | ||||||||||||||
Weighted average discount rate (i) for: | ||||||||||||||||||||
Accrued benefit obligations | 5.4 | 5.9 | 5.7 | 5.6 | 6.5 | 6.4 | ||||||||||||||
Net periodic benefit cost | 5.0 | 5.4 | 5.9 | 5.5 | 5.6 | 6.5 | ||||||||||||||
Weighted average rate of compensation increase for: | ||||||||||||||||||||
Accrued benefit obligations | 3.7 | 3.2 | 3.5 | 3.4 | 4.7 | 4.7 | ||||||||||||||
Net periodic benefit cost | 3.5 | 3.7 | 3.2 | 3.6 | 3.4 | 4.7 | ||||||||||||||
Weighted average expected long-term rate of return on plan assets (ii) for: | ||||||||||||||||||||
Net periodic benefit cost | 5.8 | 5.9 | 5.8 | — | — | — | ||||||||||||||
Healthcare cost trend rate (iii) for: | ||||||||||||||||||||
Accrued benefit obligations | — | — | — | 7.8 | 7.3 | 7.6 | ||||||||||||||
Net periodic benefit cost | — | — | — | 8.0 | 7.8 | 7.3 | ||||||||||||||
Estimated rate for the following 12-month net periodic benefit cost | — | — | — | 7.8 | 7.3 | 7.6 |
Management applied significant judgment in determining these assumptions. We evaluate these assumptions on a regular basis taking into consideration current market conditions and historical market data. Actual results could differ materially from those estimates and assumptions.
Assumed healthcare trend rates impact the amounts reported for healthcare plans. A one percentage-pointone-percentage point change in the assumed healthcare trend rates has the following impact:
| Other Benefit Plans Year ended December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | ||||||
1% Increase | ||||||||
Effect on projected benefit obligation | $ | 14.1 | $ | 10.8 | ||||
Effect on service cost and interest cost | 1.2 | 1.2 | ||||||
1% Decrease | ||||||||
Effect on projected benefit obligation | $ | (10.9 | ) | $ | (7.8 | ) | ||
Effect on service cost and interest cost | (0.9 | ) | (0.9 | ) |
| Other Benefit Plans Year ended December 31 | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | ||||||
1% Increase | ||||||||
Effect on accrued benefit obligation | $ | 10.8 | $ | 7.8 | ||||
Effect on service cost and interest cost | 1.2 | 1.2 | ||||||
1% Decrease | ||||||||
Effect on accrued benefit obligation | $ | (7.8 | ) | $ | (6.5 | ) | ||
Effect on service cost and interest cost | (0.9 | ) | (0.8 | ) |
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
At December 31, 2008,2009, we have pension plans that have accrued benefit obligations of $213.0$255.2 in excess of plan assets of $164.4.$211.0. We also have pension plans with plan assets of $122.1$146.3 that are in excess of accrued benefit obligations of $113.7.$131.3.
At December 31, 2008,2009, the total accumulated benefit obligations for the pension plans was $324.4$385.3 and the projectedaccrued benefit obligations for the non-pension post-employment benefit plans was $66.1.$69.9.
In 2008,2009, we made contributions to the pension plans of $33.8,$33.0, of which $11.8$10.7 was for defined contribution plans and $22.0$22.3 was for defined benefit plans. We may, from time to time, make voluntary contributions to the pension plans. In 2008,2009, we made contributions to the non-pension post-employment benefit plans of $2.7$3.2 to fund benefit payments.
In conjunction with certain restructuring activities, we settled the pension obligations of two plans for an aggregate of $8.6.
The estimated future benefit payments for the next 10 years, which reflect expected future service, and estimated employer contributions are as follows:
| Year | Pension Benefits | Other Benefits | ||||||
---|---|---|---|---|---|---|---|---|---|
Expected benefit payments: | 2009 | $ | 16.0 | $ | 3.1 | ||||
2010 | 16.3 | 3.0 | |||||||
2011 | 16.9 | 3.2 | |||||||
2012 | 17.7 | 3.3 | |||||||
2013 | 17.9 | 3.5 | |||||||
2014 - 2018 | 95.3 | 20.6 | |||||||
Expected employer contributions: | 2009 | $ | 31.9 | $ | 3.1 |
| Year | Pension Benefits | Other Benefits | ||||||
---|---|---|---|---|---|---|---|---|---|
Expected benefit payments: | 2010 | $ | 18.3 | $ | 3.8 | ||||
2011 | 18.6 | 3.8 | |||||||
2012 | 18.9 | 3.9 | |||||||
2013 | 19.1 | 4.0 | |||||||
2014 | 19.3 | 4.1 | |||||||
2015 - 2019 | 100.2 | 23.6 | |||||||
Expected employer contributions: | 2010 | $ | 32.6 | $ | 3.8 |
14. FINANCIAL INSTRUMENTS:
(a) Financial risk management objectives:
We have exposures to a variety of financial risks through our operations. In addition to credit risk and liquidity risk that we face in the normal course of business, there is also market risk associated with interest rate movements on outstanding debt obligations and exchange rate movements on non-U.S. dollar denominated receipts and payments. We have regularly monitoredmonitor these risks and have established policies and business practices to mitigate the adverse effects of these potential exposures. We have used certain types of derivative financial instruments to reduce the effects of some of these risks. We do not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
Currency risk: Due to the nature of our international operations, we are exposed to exchange rate fluctuations when we haveon our cash receipts, and cash payments madeand balance sheet exposures denominated in various foreign currencies. The majority of currency risk is driven by the operational costs incurred in local currencies by our subsidiaries. We currently manage thisour currency risk through our hedging program using forecasts of future cash flow hedging program.flows and balance sheet exposures denominated in foreign currencies. See note 2(n).
Our major currency exposures, as of December 31, 2008,2009, are summarized in U.S. dollardollars equivalents in the following table. For purposes of this table, we have excluded items such as pensions, post-employment benefits
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
and income taxes, in accordance with the financial instruments standard. The local currency amounts have been converted to U.S. dollar equivalents using the spot rates as of December 31, 2008.2009.
| Chinese renminbi | Brazilian real | Canadian dollar | Thai baht | Malaysian ringgit | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash and cash equivalents | $ | 23.7 | $ | 1.8 | $ | 40.0 | $ | 0.7 | $ | 5.7 | ||||||
Accounts receivable | 42.8 | 13.6 | 0.1 | — | 0.1 | |||||||||||
Other financial assets | 2.6 | 7.0 | — | 1.4 | 0.4 | |||||||||||
Accounts payable and accrued liabilities | (23.1 | ) | (1.7 | ) | (55.7 | ) | (16.9 | ) | (18.5 | ) | ||||||
Other financial liabilities | (5.7 | ) | (2.6 | ) | — | — | — | |||||||||
Net financial assets (liabilities) | $ | 40.3 | $ | 18.1 | $ | (15.6 | ) | $ | (14.8 | ) | $ | (12.3 | ) | |||
| Mexican peso | Thai baht | Malaysian ringgit | Canadian dollar | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash and cash equivalents | $ | 0.5 | $ | 1.0 | $ | 0.9 | $ | 54.8 | |||||
Accounts receivable | — | — | 0.2 | — | |||||||||
Other financial assets | — | 1.3 | 0.3 | 0.3 | |||||||||
Accounts payable and accrued liabilities | (20.4 | ) | (14.0 | ) | (12.6 | ) | (44.0 | ) | |||||
Net financial assets (liabilities) | $ | (19.9 | ) | $ | (11.7 | ) | $ | (11.2 | ) | $ | 11.1 | ||
At December 31, 2008,2009, a one-percentage point strengthening or weakening of the following currencies against the U.S. dollar for our financial instruments denominated in these non-functional currencies has the following impact:
| Chinese renminbi | Brazilian real | Canadian dollar | Thai baht | Malaysian ringgit | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (decrease) | ||||||||||||||||
1% Strengthening | |||||||||||||||||
Net earnings | $ | 0.4 | $ | 0.1 | $ | (0.2 | ) | $ | (0.1 | ) | $ | (0.1 | ) | ||||
Other comprehensive income | — | — | 2.0 | 0.7 | 0.6 | ||||||||||||
1% Weakening | |||||||||||||||||
Net earnings | (0.4 | ) | (0.1 | ) | 0.2 | 0.1 | 0.1 | ||||||||||
Other comprehensive income | — | — | (1.9 | ) | (0.7 | ) | (0.6 | ) |
| Mexican peso | Thai baht | Malaysian ringgit | Canadian dollar | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1% Strengthening | ||||||||||||||
Net earnings | $ | — | $ | (0.1 | ) | $ | (0.2 | ) | $ | — | ||||
Other comprehensive income | 0.1 | 0.5 | 0.4 | 2.0 | ||||||||||
1% Weakening | ||||||||||||||
Net earnings | — | 0.1 | 0.2 | — | ||||||||||
Other comprehensive income | (0.1 | ) | (0.5 | ) | (0.4 | ) | (2.0 | ) |
Interest rate risk: In connection with the 2011 Notes, we entered intoWe are exposed to interest rate swap agreements that hedge against the fair value of the 2011 Notes by swapping the fixed rate ofrisks as we have significant cash balances invested at floating rates. Borrowings under our revolving credit facility bear interest for a variable rate based onat LIBOR plus a margin. As a result,If we areborrow under this facility, we will be exposed to interest rate risks due to fluctuations in the LIBOR rate. A one-percentage point increase in the LIBOR rate would increase interest expense, assuming maximum borrowings under our credit facility, by approximately $5.0$2.0 annually.
Credit risk: Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. With respect to our financial market activities, we have adopted a policy of dealing only with creditworthy counterparties to 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.
Concentration of credit risk: We also provide credit to our customers in the normal course of business. Financial instruments that potentially subject us to concentrations of credit risk are primarily accounts receivable, inventory repurchase obligations of customers, and non-cancelable purchases of inventory. We perform ongoing credit evaluations of our customers' financial conditions. In certain instances, we may obtain letters of credit or other forms of security from our customers. We consider our concentrations of credit risk in determining our estimates of reserves for potential credit losses. In addition, we maintain cash and short-term investments in high-quality investments or on deposit with major financial institutions.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The carrying amount of financial assets recorded in the financial statements, net of any allowances or reserves for losses, represents our estimate of maximum exposure to credit risk. As of December 31, 2008,2009, less than 1% of our gross accounts receivable are over 90 days past due. Accounts receivable are net of an allowance for doubtful accounts of $13.7$7.5 at December 31, 2009 (December 31, 2008 (2007 — $21.5)$13.7).
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(b) Fair values:
We used the following methods and assumptions to estimate the fair value of each class of financial instruments:
The carrying amounts of cash and short-term investments,cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.
The carrying amounts and fair values of our financial instruments, where there are differences, are as follows:
| December 31, 2007 | December 31, 2008 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value (ii) | Carrying Amount | Fair Value (ii) | |||||||||
2011 Notes (i) | $ | 514.2 | $ | 480.0 | $ | 512.6 | $ | 452.7 | |||||
2013 Notes (i) | 253.7 | 233.8 | 226.5 | 185.2 |
| 2008 | 2009 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value (ii) | Carrying Amount | Fair Value (ii) | |||||||||
2011 Notes (i) | $ | 512.6 | $ | 452.7 | $ | — | $ | — | |||||
2013 Notes (i) | 226.5 | 185.2 | 224.7 | 230.9 |
The carrying values of our Notes are comprised of elements recorded at fair value and amortized cost. Bifurcated embedded prepayment options in the Notes are recorded at fair value using option pricing models. We have applied fair value hedge accounting to our 2011 Notes. The change in the fair value of the 2011 Notes due to the hedged interest rate risk has been reflected in the carrying value of the 2011 Notes. See note 7(e). Our 2013 Notes are not hedged and, therefore, are recorded at amortized cost except for the embedded prepayment options which are recorded at fair value.
The fair value of our hedged debt obligation (2011 Notes) in relation to the hedged interest rate risk is estimated by discounting future cash flows at current interest rates. The fair values of the prepayment options embedded in our Notes are estimated using option pricing models with inputs of observable market data, including future interest rates, implied volatilities and credit spreads. For our 2011 Notes, we previously applied fair value hedge accounting and changes in the fair value due to the hedged interest rate risk were reflected in the carrying value of the 2011 Notes.
(c) Fair value measurements:
Effective December 31, 2009, we adopted the amendment issued by the CICA to Handbook Section 3862, "Financial instruments — disclosures," which requires enhanced disclosures on fair value measurements of
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
financial instruments. The amendment establishes a three-level fair value hierarchy that reflects the significance of the inputs used to measure fair value. The three levels of fair value hierarchy based on the reliability of inputs are as follows:
In the table below, we have segregated all financial assets and liabilities that are measured at fair value into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. We have no financial assets or liabilities measured using level 3 inputs.
Financial assets and liabilities measured at fair value as at December 31, 2008 and 2009 in the financial statements are summarized below:
| 2008 | 2009 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | |||||||||||||
Assets: | |||||||||||||||||||
Cash equivalents (money market funds) | $ | 390.1 | $ | — | $ | 390.1 | $ | 321.6 | $ | — | $ | 321.6 | |||||||
Derivatives — foreign currency forward contracts | — | 4.2 | 4.2 | — | 9.4 | 9.4 | |||||||||||||
Derivatives — interest rate swap agreements | — | 17.3 | 17.3 | — | — | — | |||||||||||||
$ | 390.1 | $ | 21.5 | $ | 411.6 | $ | 321.6 | $ | 9.4 | $ | 331.0 | ||||||||
Liabilities: | |||||||||||||||||||
Derivatives — foreign currency forward contracts | $ | — | $ | 43.1 | $ | 43.1 | $ | — | $ | 1.4 | $ | 1.4 | |||||||
$ | — | $ | 43.1 | $ | 43.1 | $ | — | $ | 1.4 | $ | 1.4 | ||||||||
Money market funds are valued using a market approach based on the quoted market prices of identical instruments. Derivatives include foreign currency forward contracts and interest rate swap agreements. Foreign currency forward 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. The fair values of our cancelable interest rate swap agreements were estimated using a discounted cash flow analysis with inputs of observable market data including future interest rates, implied volatilities and credit spreads. The interest rate swap agreements were terminated in February 2009. There were no transfers of fair value measurements between level 1 and level 2 of the fair value hierarchy in 2008 and 2009.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
(d) Derivatives and hedging activities:
All derivative financial instruments are recorded at fair value on our consolidated balance sheet. The counterparties to the contracts are financial institutions each of which had at December 31, 2008 a Standard and Poor's rating of A or above. Therefore, we believe the credit risk of counterparty non-performance is low.
Currency | Amount of U.S. dollars | Weighted average exchange rate of U.S. dollars | Maximum period in months | Fair value gain/(loss) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Canadian dollar | $ | 230.3 | $ | 0.91 | 15 | $ | (22.0 | ) | |||||
Mexican peso | 88.6 | 0.08 | 12 | (9.2 | ) | ||||||||
Thai baht | 77.7 | 0.03 | 12 | (2.6 | ) | ||||||||
Malaysian ringgit | 60.6 | 0.30 | 12 | (2.7 | ) | ||||||||
British pound sterling | 48.1 | 1.49 | 4 | 1.7 | |||||||||
Singapore dollar | 31.0 | 0.71 | 12 | (0.7 | ) | ||||||||
Czech koruna | 26.7 | 0.06 | 7 | (3.8 | ) | ||||||||
Euro | 19.4 | 1.45 | 12 | 0.4 | |||||||||
Brazilian real | 4.7 | 0.41 | 2 | — | |||||||||
Total | $ | 587.1 | $ | (38.9 | ) | ||||||||
Currency | Amount of U.S. dollars | Weighted average exchange rate of U.S. dollars | Maximum period in months | Fair value gain/(loss) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Canadian dollar | $ | 206.5 | $ | 0.92 | 15 | $ | 7.7 | ||||||
British pound sterling | 89.5 | 1.60 | 4 | (0.1 | ) | ||||||||
Thai baht | 50.1 | 0.03 | 12 | 0.2 | |||||||||
Malaysian ringgit | 47.8 | 0.29 | 12 | 0.2 | |||||||||
Mexican peso | 37.1 | 0.08 | 12 | 0.1 | |||||||||
Singapore dollar | 18.9 | 0.70 | 12 | 0.3 | |||||||||
Euro | 13.3 | 1.45 | 3 | — | |||||||||
Romanian lei | 13.1 | 0.33 | 12 | (0.3 | ) | ||||||||
Czech koruna | 12.9 | 0.05 | 6 | (0.1 | ) | ||||||||
Total | $ | 489.2 | $ | 8.0 | |||||||||
At December 31, 2008,2009, the fair value of these contracts was a net unrealized gain of $8.0 (December 31, 2008 — net unrealized loss of $38.9 (2007 — unrealized gain of $20.0)$38.9). This is comprised of $4.1$9.4 of derivative assets recorded in prepaid and other assets and $43.0other long-term assets, and $1.4 of derivative liabilities recorded in accrued liabilities. The decreasechange in the fair value of these forward exchange contracts for 20082009 is due primarily to unrealized losses from the fluctuationsfavourable movement in foreign exchange rates infor the second half of 2008currencies that we hedge and the settlement of certain foreign currency forwardscontracts with significant gains during the first half of 2008.losses. The unrealized gains or losses are a result of fluctuations in foreign exchange rates between the time the currency forward contracts were entered into and the valuation date at period end.
We have not designated certain forward contracts to trade U.S. dollars as hedges, most significantly our British pound sterling contract, and have marked these contracts to market each period through operations.
Fair value hedge ineffectiveness arisesarose when the change in the fair values of our swap agreements, our hedged debt obligation and its embedded derivatives, and the amortization of the related basis adjustments dodid not offset each other during a reporting period. The fair value hedge ineffectiveness for our 2011 Notes iswas recorded in interest expense on long-term debt and amounted to a loss of $0.9$1.4 for 2008.2009. This fair value hedge ineffectiveness iswas primarily driven by the difference in the credit risk used to value our hedged debt obligation as compared to the credit risk used to value our interest rate swaps. During the fourth quarterAs a result of 2008, we repurchased a portion of our 2011 Notes. See note 7(d). Since the portion of our 2011 Notes that we repurchased in 2008 is considered insignificant,discontinuing our fair value hedge relationship remained effective as of December 31, 2008 and we continued to applyon our 2011 Notes in 2009, no further fair value hedge accounting to our 2011 Notes. Also seeineffectiveness will occur. See note 2(n) which summarizes the impact of our mark-to-market adjustments and our fair value hedge accounting.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
15. CAPITAL MANAGEMENT:
Our main objectives in managing our capital resources are to ensure liquidity and to have funds available for working capital or other investments required to grow our business. Our capital resources consist of cash, short-term investments, access to credit facilities and bank overdraft facilities, senior subordinated notes and share capital.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
We manage our capitalization levels and make adjustments, as available, for changes in economic conditions. We have full access to a $300.0$200.0 credit facility, access to bank overdraft facilities and we cancould sell up to $250.0 in accounts receivable, on a committed basis, under an accounts receivable sales program to provide short-term liquidity. Our credit facility has restrictive covenants relating to debt incurrence, and the sale of assets.assets and a change of control. The facility also contains financial covenants that may limit the amount of debt that can be incurred under the facility. We closely monitor our business performance to evaluate compliance with our covenants. Our 2013 Notes, which we intend to redeem in the first quarter of 2010, also have restrictions on financing activities. We continue to monitor and review the most cost-effective methods for raising capital, taking into account these restrictions and covenants. Our credit facility expires in April 20092011 and we are currently assessing whether we will renew all or a portion of this facility. Ourour accounts receivable sales program is available until November 2009.2010.
There were no significant changesDuring 2009, we redeemed our outstanding 2011 Notes. In January 2010, we announced our intention to redeem our capital structure during 2008.outstanding 2013 Notes. See note 22. We have not distributed, nor do we have any current plan to distribute, any dividends to our shareholders. We have and expect to, from time to time, purchase shares in the open market for the settlement of share unit awards to employees under our long-term incentive plans.
Our strategy on capital risk management has not changed since 2007.2008. Other than the restrictive covenants associated with our debt obligations noted above, we are not subject to any contractual or regulatorily imposed capital requirements. While some of our international operations are subject to government restrictions on the flow of capital into and out of their jurisdictions, these restrictions have not had a material impact on our operations.
16. COMMITMENTS, CONTINGENCIES AND GUARANTEES:
At December 31, 2008,2009, we have operating leases that require future payments as follows:
| Operating Leases | |||
---|---|---|---|---|
2009 | $ | 47.2 | ||
2010 | 33.4 | |||
2011 | 22.0 | |||
2012 | 8.8 | |||
2013 | 7.7 | |||
Thereafter | 32.4 |
| Operating Leases | |||
---|---|---|---|---|
2010 | $ | 39.5 | ||
2011 | 24.3 | |||
2012 | 11.7 | |||
2013 | 9.2 | |||
2014 | 6.9 | |||
Thereafter | 26.2 |
We have contingent liabilities in the form of letters of credit, letters of guarantee and surety and performance bonds which we provided to various third parties. These guarantees cover various payments, including customs and excise taxes, utility commitments and certain bank guarantees. At December 31, 2008,2009, these contingent liabilities amounted to $55.4 (2007$50.2 (December 31, 2008 — $74.4)$55.4).
In addition to the above guarantees, we have also provided routine indemnifications, whose terms range in duration and often are not explicitly defined. These may include indemnifications against adverse impacts due to changes in tax laws, third party intellectual property infringement claims and patent infringements by third parties.party claims for property damage from negligence. We have also provided indemnifications in connection with the sale of certain businesses and real property. The maximum potential liability from these indemnifications cannot be reasonably estimated. In some cases, we have recourse against other parties to mitigate our risk of loss from these indemnifications. Historically, we have not made significant payments relating to these types of indemnifications.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
Litigation:
In the normal course of our operations, we are subject to litigation and claims from time to time. We may also be subject to lawsuits, investigations and other claims, including environmental, labor, product, customer
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
disputes and other matters. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not always possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies will not have a material adverse impact on our results of operations, financial position or liquidity.
In 2007, securities class action lawsuits were commenced against the Company and our former Chief Executive and Chief Financial Officers, in the United States District Court of the Southern District of New York by certain individuals, on behalf of themselves and other unnamed purchasers of our stock, claiming that they were purchasers of our stock during the period January 27, 2005 through January 30, 2007. The plaintiffs allege violations of United States federal securities laws and seek unspecified damages. They allege that during the purported class period we made statements concerning our actual and anticipated future financial results that failed to disclose certain purportedly adverse information with respect to demand and inventory in our Mexican operations and our information technology and communications divisions. In an amended complaint, the plaintiffs have added one of our directors and Onex Corporation as defendants. All defendants have filed motions to dismiss the amended complaint. Those motions are pending. A parallel class proceeding has also been issued against the Company and our former Chief Executive and Chief Financial Officers in the Ontario Superior Court of Justice, but neither leave nor certification of the action has been granted by that court. We believe that the allegations in these claims are without merit and we intend to defend against them vigorously. However, there can be no assurance that the outcome of the litigation will be favorable to us or that it will not have a material adverse impact on our financial position or liquidity. In addition, we may incur substantial litigation expenses in defending these claims. We have liability insurance coverage that may cover some of our litigation expenses, potential judgments or settlement costs.
Income taxes:
We are subject to tax audits and reviews by local tax authorities. Tax authorities of historical information which could challengeresult 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 a significant degree of judgment. If any of these tax authorities isare successful in challenging our inter-company transactions,with their challenges, our income tax expense may be adversely affected and we could also be subjectedsubject to interest and penalty charges.
In connection with ongoing tax audits in Canada, tax authorities have taken the position that income reported by one of our Canadian subsidiaries in 2001 and 2002through 2003 should have been materially higher as a result of certain inter-company transactions. The successful pursuit of that assertion could result in that subsidiary owing significant amounts of tax, interest and possibly penalties. We believe we have substantial defenses to the asserted position and have adequately accrued for any probable potential adverse tax impact. However, there can be no assurance as to the final resolution of this claim and any resulting proceedings, and if this claim and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material.
In connection with a tax auditsaudit in the United States, tax authorities asserted that our United States subsidiaries owed significant amounts of tax, interest and penalties arising from inter-company transactions. A significant portion of these asserted deficiencies were resolved in our favourBrazil, in the fourth quarter of 2006 which resulted2009, tax authorities took the position that income reported by our Brazilian subsidiary in 2004 should have been materially higher as a result of certain inter-company transactions. We believe we have substantial defenses to the asserted position. However, there can be no assurance as to the final resolution of this matter and, if it is determined adversely to us, the amounts we may be required to pay for taxes, interest and penalties could be material.
We have and will continue to recognize the future benefit of certain Brazilian tax losses on the basis that these tax losses can and will be fully utilized in the fiscal period ending on the date of dissolution of our Brazilian subsidiary. We regularly review Brazilian laws and assess the likelihood of the realization of the future benefit of the tax losses. A change to the benefit realizable on these Brazilian losses could result in a reductionsubstantial increase to our current incomenet future tax liabilities in 2006. In the third quarter of 2007, we resolved the remaining deficiencies in our favour which resulted in a reduction to current income tax liabilities in that quarter. The tax audit resolution also resulted in a small reduction in the amount of our U.S. tax loss carryforwards for years 1998 to 2004.liabilities.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
17. SEGMENT AND GEOGRAPHIC INFORMATION:
The accounting standards establish the criteria for the disclosure of certain information in the interim and annual financial statements regarding operating segments, products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Our operating segment is comprised of our electronics manufacturing services business. Our chief operating decision maker is our Chief Executive Officer.
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Consumer | 18% | 22% | 26% | ||||||||
Enterprise communications | 28% | 28% | 25% | ||||||||
Servers | 17% | 19% | 16% | ||||||||
Telecommunications | 18% | 14% | 15% | ||||||||
Storage | 10% | 10% | 10% | ||||||||
Industrial, aerospace and defense | 9% | 7% | 8% |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Consumer | 19% | 23% | 29% | ||||||||
Enterprise Communications | 28% | 25% | 21% | ||||||||
Telecommunications | 14% | 15% | 15% | ||||||||
Servers | 19% | 16% | 13% | ||||||||
Storage | 10% | 10% | 12% | ||||||||
Industrial, Aerospace and Defense, and Healthcare | 10% | 11% | 10% |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
China | 19% | 18% | 19% | ||||||||
Thailand | 20% | 17% | 18% | ||||||||
Mexico | 15% | 14% | 14% | ||||||||
Canada | 11% | 12% | 11% |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
China | 18% | 19% | 16% | ||||||||
Thailand | 17% | 18% | 18% | ||||||||
Mexico | 14% | 14% | 23% | ||||||||
Canada | 12% | 11% | * |
| December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
China | 20% | 21% | 23% | ||||||||
Canada | 19% | 18% | 16% | ||||||||
Thailand | 14% | 16% | 13% | ||||||||
Mexico | 11% | — | 13% |
| December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
China | 23% | 25% | 24% | ||||||||
Canada | 11% | 10% | 10% | ||||||||
Thailand | 18% | 14% | 13% | ||||||||
Mexico | * | 14% | 19% |
18. SIGNIFICANT CUSTOMERS:
During 2006,2007, two customers individually comprised 11% and 10% of total revenue. At December 31, 2006,2007, no customer represented more than 10% of total accounts receivable.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
During 2007, two customers individually comprised 11% and 10% of total revenue. At December 31, 2007, no customer represented more than 10% of total accounts receivable.
During 2008, no customer represented more than 10% of total revenue. At December 31, 2008, two customers individually represented more than 10% of total accounts receivable.
During 2009, one customer individually comprised 17% of total revenue. At December 31, 2009, one customer represented more than 10% of total accounts receivable.
19. SUPPLEMENTAL CASH FLOW INFORMATION:
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Paid (recovered) during the year: | |||||||||||
Interest (a) | $ | 70.5 | $ | 76.6 | $ | 65.4 | |||||
Taxes (b) | $ | (36.5 | ) | $ | 23.2 | $ | 17.0 |
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Paid during the year: | |||||||||||
Interest (a) | $ | 76.6 | $ | 65.4 | $ | 64.8 | |||||
Taxes (b) | $ | 23.2 | $ | 17.0 | $ | 16.6 |
Cash is comprised of the following:
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2007 | 2008 | |||||
Cash (i) | $ | 328.7 | $ | 406.2 | |||
Short-term investments (i) | 788.0 | 794.8 | |||||
$ | 1,116.7 | $ | 1,201.0 | ||||
| December 31 | ||||||
---|---|---|---|---|---|---|---|
| 2008 | 2009 | |||||
Cash (i) | $ | 406.2 | $ | 259.8 | |||
Cash equivalents (i) | 794.8 | 677.9 | |||||
$ | 1,201.0 | $ | 937.7 | ||||
20. CANADIAN AND UNITED STATES ACCOUNTING POLICY DIFFERENCES:
Our consolidated financial statements have been prepared in accordance with Canadian GAAP. The significant differences between Canadian and U.S. GAAP, and their effects on our consolidated financial statements, are described below:
Consolidated statements of operations:
The following table reconciles net lossearnings (loss) and other comprehensive income (loss), as reported in the accompanying consolidated statements of operations and consolidated statements of other comprehensive
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
income (loss), respectively, to net lossearnings (loss) and other comprehensive income (loss) that would have been reported had the consolidated financial statements been prepared in accordance with U.S. GAAP:
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | ||||||||
Net loss in accordance with Canadian GAAP | $ | (150.6 | ) | $ | (13.7 | ) | $ | (720.5 | ) | ||
Gain on foreign exchange contract, net of tax (a) | 3.2 | — | (15.3 | ) | |||||||
Impact of debt instruments and interest rate swaps, net of tax (b)(iii) | — | (1.4 | ) | 2.4 | |||||||
Tax uncertainties (h) | — | — | 7.6 | ||||||||
Stock-based compensation expense (e) | (1.9 | ) | (1.0 | ) | — | ||||||
Net loss in accordance with U.S. GAAP | $ | (149.3 | ) | $ | (16.1 | ) | $ | (725.8 | ) | ||
Other comprehensive income (loss): | |||||||||||
Other comprehensive income in accordance with Canadian GAAP | 7.1 | 29.9 | (46.5 | ) | |||||||
Net loss on derivatives designated as cash flow hedges, net of tax ((b)(i)) | (4.8 | ) | — | — | |||||||
Changes to funded status of defined benefit pension and other post-employment benefit plans (c) | — | 6.5 | 16.3 | ||||||||
Minimum pension liability, net of tax (c) | (38.1 | ) | — | — | |||||||
Comprehensive income (loss) in accordance with U.S. GAAP | $ | (185.1 | ) | $ | 20.3 | $ | (756.0 | ) | |||
| Year ended December 31 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | ||||||||
Net earnings (loss) in accordance with Canadian GAAP | $ | (13.7 | ) | $ | (720.5 | ) | $ | 55.0 | |||
Gain on foreign exchange contract, net of tax (a) | — | (15.3 | ) | — | |||||||
Impact of debt instruments and interest rate swaps, net of tax (b) | (1.4 | ) | 2.4 | (8.9 | ) | ||||||
Tax uncertainties (h) | — | 7.6 | (7.6 | ) | |||||||
Stock-based compensation expense (e) | (1.0 | ) | — | 0.5 | |||||||
Net earnings (loss) in accordance with U.S. GAAP | $ | (16.1 | ) | $ | (725.8 | ) | $ | 39.0 | |||
Other comprehensive income (loss): | |||||||||||
Other comprehensive income (loss) in accordance with Canadian GAAP | 29.9 | (46.5 | ) | 46.4 | |||||||
Changes to funded status of defined benefit pension and other post-employment benefit plans (c) | 6.5 | 16.3 | (1.8 | ) | |||||||
Comprehensive income (loss) in accordance with U.S. GAAP | $ | 20.3 | $ | (756.0 | ) | $ | 83.6 | ||||
The following table details the computation of U.S. GAAP basic and diluted lossearnings (loss) per share:
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Loss attributable to common shareholders — basic and diluted | $ | (149.3 | ) | $ | (16.1 | ) | $ | (725.8 | ) | |
Weighted average shares — basic (in millions) | 227.2 | 228.9 | 229.3 | |||||||
Weighted average shares — diluted (in millions)(1) | 227.2 | 228.9 | 229.3 | |||||||
Basic loss per subordinate voting share(2) | $ | (0.66 | ) | $ | (0.07 | ) | $ | (3.17 | ) | |
Basic loss per multiple voting share(2) | $ | (0.66 | ) | $ | (0.07 | ) | $ | (3.17 | ) | |
Diluted loss per share | $ | (0.66 | ) | $ | (0.07 | ) | $ | (3.17 | ) |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Net earnings (loss) attributable to common shareholders — basic and diluted | $ | (16.1 | ) | $ | (725.8 | ) | $ | 39.0 | ||
Weighted average shares — basic (in millions) | 228.9 | 229.3 | 229.5 | |||||||
Weighted average shares — diluted (in millions) (1) | 228.9 | 229.3 | 230.9 | |||||||
Basic earnings (loss) per subordinate voting share (2) | $ | (0.07 | ) | $ | (3.17 | ) | $ | 0.17 | ||
Basic earnings (loss) per multiple voting share (2) | $ | (0.07 | ) | $ | (3.17 | ) | $ | 0.17 | ||
Diluted earnings (loss) per share | $ | (0.07 | ) | $ | (3.17 | ) | $ | 0.17 |
Under U.S. GAAP, we applied the two-class method as required by EITF 03-6, "Participating securities and the two-class method under FASB No. 128," which requires the disclosure of basic per share amounts for each class of shares assuming 100% of earnings are distributed as dividends to each class of shares based on their contractual rights. For purposes of this calculation, our MVS and SVS holders share ratably, as a single class, in any dividends declared. See note 8(a). Canadian GAAP does not require similar disclosures.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The cumulative effect of these adjustments on our shareholders' equity is as follows:
| As at December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Shareholders' equity in accordance with Canadian GAAP | $ | 2,094.6 | $ | 2,118.2 | $ | 1,365.5 | ||||
Gain on foreign exchange contract, net of tax (a) | 15.3 | 15.3 | — | |||||||
Net loss on cash flow hedges ((b)(i)) | (0.5 | ) | — | — | ||||||
Impact of debt instruments and interest rate swaps, net of tax ((b)(iii)) | — | 5.5 | 7.9 | |||||||
Recognition of funded status of benefit plans, net of tax (c) | (149.0 | ) | (142.5 | ) | (126.2 | ) | ||||
Tax uncertainties (h) | — | — | 7.6 | |||||||
Shareholders' equity in accordance with U.S. GAAP | $ | 1,960.4 | $ | 1,996.5 | $ | 1,254.8 | ||||
| As at December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Shareholders' equity in accordance with Canadian GAAP | $ | 2,118.2 | $ | 1,365.5 | $ | 1,475.8 | ||||
Gain on foreign exchange contract, net of tax (a) | 15.3 | — | — | |||||||
Impact of debt instruments and interest rate swaps, net of tax (b) | 5.5 | 7.9 | (1.0 | ) | ||||||
Recognition of funded status of benefit plans, net of tax (c) | (142.5 | ) | (126.2 | ) | (128.0 | ) | ||||
Tax uncertainties (h) | — | 7.6 | — | |||||||
Shareholders' equity in accordance with U.S. GAAP | $ | 1,996.5 | $ | 1,254.8 | $ | 1,346.8 | ||||
(ii) In 2004, we entered into interest rate swap agreements to hedge the fair value of our 2011 Notes by swapping the fixed rate of interest for a variable interest rate. Under U.S. GAAP, we recorded a liability of $9.9 (less $3.4 in taxes) as at December 31, 2006, representing theWe applied fair value of the swap agreements, and a corresponding losshedge accounting to operations. We also recorded an asset of $9.9 (less $3.4 in taxes) as at December 31, 2006, representing the incremental fair value of theour 2011 Notes attributable toand interest rate swaps using the risk being hedged, and a corresponding gain to operations. There was no net impact to the statement of operations.
(iii) Effective January 1, 2007, the prepayment options in our Notes qualified as embedded derivatives under Canadian GAAP and were bifurcated for reporting. This bifurcation iswas not required under U.S. GAAP and therefore, the transitional adjustments related to the bifurcation of embedded prepayment options recorded against opening deficit, as well as the subsequent fair value adjustments recorded in operations for the embedded derivatives and amortization of the related basis adjustments due to the bifurcation, arewere reversed for U.S. GAAP. Under U.S. GAAP, we recorded a gain of $1.3 ($1.9 less $0.6 in taxes) in 2007 to reverse the transitional adjustment recorded in opening deficit for Canadian GAAP. This
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
was offset by a loss of $1.3 ($1.9 less $0.6 in taxes) in 2007 in operations to reverse the fair value adjustments and amortization of basis adjustments recorded for Canadian GAAP. There was no net impact on shareholders' equity under U.S. GAAP in 2007. Under U.S. GAAP, for 2008, we recorded a loss of $0.2 ($0.3 less $0.1 in taxes) in 2009 (2008 — loss of $10.1 ($14.2 less $4.1 in taxes)) to operations to reverse the fair value adjustments and amortization of basis adjustments recorded for Canadian GAAP.
Due to the bifurcation of the embedded prepayment options, our prior hedge relationship between the 2011 Notes and the interest rate swaps became a non-qualified type for fair value hedge accounting under Canadian GAAP. Under Canadian GAAP, as part of the transitional adjustments of the revised standards for financial instruments and hedging, we recorded a derivative liability of $7.9 as of January 1, 2007 for the interest rate swaps. This transitionalA loss of $5.6 ($7.9 less $2.3 in taxes) was added back to shareholders' equity for U.S. GAAP. On January 1, 2007, we redesignated a new hedging relationship between our 2011 Notes and the interest rate swaps, together with the bifurcated embedded prepayment options, to qualify for fair value hedge accounting under Canadian GAAP. For Canadian GAAP, we adopted the "long-haul" method to evaluate the effectiveness of this hedge relationship on an ongoing basis and to calculate the changes in the fair values of the hedging instrument and related hedged item due to the hedged risks. For 2007, the difference in the changes in fair values between the interest rate swaps and the hedged debt obligation amounted to a loss of $3.5 ($1.3 plus $2.2 in taxes) for Canadian GAAP which was added back to operations for U.S. GAAP. For 2008, theThe difference in the changes in fair values between the interest rate swaps and the hedged debt obligation amounted to a loss of $14.2 ($15.2 less $1.0 in taxes) for 2008 (2007 — loss of $3.5 ($1.3 plus $2.2 in taxes)) for Canadian GAAP which iswas added back to operations for U.S. GAAP. For 2009, the difference in the changes in fair values between the interest rate swaps and the hedged debt obligation amounted to a gain of $1.8 ($1.8 less nil in
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
taxes) prior to hedge de-designation under Canadian GAAP which was deducted from operations for U.S. GAAP.
Since bifurcation of our embedded prepayment options is not required under U.S. GAAP, we continuecontinued to apply fair value hedge accounting to our 2011 Notes and interest rate swaps, in 2007, using the "shortcut" method with the assumption that there is no ineffectiveness for U.S. GAAP. In 2007, we recorded an increase of $16.6 in the fair value of the interest rate swap, with a corresponding gain of $11.8 ($16.6 less $4.8 in taxes) to operations. We also recorded an increase of $16.6 in the fair value of the 2011 Notes attributable to the interest rate risk being hedged, and a corresponding loss of $15.4 ($16.6 less $1.2 in taxes) to operations. The difference in the tax rates applied to the gain on the interest rate swaps and the loss on the hedged debt obligation resulted in a loss of $3.6 charged to operations under U.S. GAAP for 2007. In 2008, we recorded an increase of $8.6 in the fair value of the interest rate swap, with a corresponding gain of $6.1 ($8.6 less $2.5 in taxes) to operations. During the fourth quarter of 2008, we repurchased a portion of our 2011 Notes. As a result, under U.S. GAAP we de-designated a fair value hedge relationship of $50.0 with one of our counterparty banks on the date of repurchase. We continuecontinued to apply the "shortcut" method to the remaining $450.0 of 2011 Notes. In 2008, we also recorded an increase of $8.5 in the fair value of the 2011 Notes attributable to the interest rate risk being hedged, and a corresponding loss of $7.3 ($8.5 less $1.2 in taxes) to operations for U.S. GAAP. The difference in the tax rates applied to the gain on the interest rate swaps and the loss on hedged debt obligation resulted in a loss of $1.2 charged to operations under U.S. GAAP for 2008. In February 2009, we terminated our interest rate swap agreements and discontinued fair value hedge accounting on the 2011 Notes. In 2009, we recorded a decrease of $2.6 in the fair value of the interest rate swap agreements prior to termination, with a corresponding loss of $2.0 ($2.6 less $0.6 in taxes) to operations for U.S. GAAP. In 2009, we also recorded a decrease of $2.4 in the fair value of the remaining designated portion of $450.0 of 2011 Notes prior to hedge de-designation, with a corresponding gain of $2.1 ($2.4 less $0.3 in taxes) to operations for U.S. GAAP. The difference in the tax rates applied resulted in a gain of $0.1 to operations under U.S. GAAP for 2009.
We also started to amortizeIn connection with the termination of the interest rate swap agreements in February 2009, we discontinued fair value hedge accounting and amortized the cumulative fair value adjustment to the de-designated portion of outstanding balance of 2011 Notes based on the effective interest rate method over the remaining term of the Notes. SinceFor 2009, the de-designation was made close to the year-end date,difference in the amount of amortization between Canadian and U.S. GAAP resulted in a loss of cumulative fair value adjustment did not have a material impact on$3.2 ($3.7 less $0.5 in taxes) charged to operations for 2008.under U.S. GAAP.
The gain on the repurchase of Notes must bewas adjusted under U.S. GAAP since the carrying values of the Notes arewere not affected by the bifurcation of embedded derivatives, or by the subsequent fair value adjustments under Canadian GAAP. Differences also occurIn addition, differences occurred as we applyapplied the "long-haul" method under Canadian GAAP compared to the "shortcut" method under U.S. GAAP. We also accounted for the amortization of the cumulative fair value adjustment to the hedged debt obligation on a different basis due to the timing differences in the hedge de-designation under U.S. GAAP. In 2008, we recorded a loss of $0.5 ($0.6 less $0.1 in taxes) to operations to adjust the gain on debt repurchases for U.S. GAAP.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
taxes) to operations for U.S. GAAP.
CELESTICA INC.
As at December 31, 2006, the minimum pension liabilityNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of $92.0, with no tax effect, that was required to be recorded under U.S. GAAP, was reclassified as part of the adjustment to record the funded status of the benefit plans under FAS 158.dollars)
Other disclosures required under U.S. GAAP:
Effective January 1, 2006, we adopted SFAS No. 123(R)the standard "Share-based payments." This standard requires companies to expense the fair value of stock-based compensation awards through operations, including estimating forfeitures at the time of grant in order to estimate the amount of stock-based awards that will ultimately vest. We elected to apply the modified prospective transition method as permitted by SFAS No. 123(R) to account for stock option awards outstanding as at December 31, 2005. In accordance with this transition method, we have included in our U.S. GAAP results, the costs of options granted prior to December 31, 2005 that were unvested and outstanding as of December 31, 2005, using estimated forfeiture rates.
As a result of adopting SFAS No. 123(R), we recorded an additional $1.9 to our U.S. GAAP compensation expense for 2006. Diluted net loss per share for 2006 was approximately $0.03 higher than if we had continued to account for stock-based compensation under APB Opinion No. 25. We recorded an additional $1.0 to our U.S. GAAP compensation expense for 2007.
We applied the fair value method of accounting for awards granted subsequent to December 31, 2005. The fair value of options was determined using the Black-Scholes option pricing model on the grant date. We amortize the estimated fair value of options to expense over the vesting period, on a straight-line basis. The assumptions used in the Black-Scholes calculation are disclosed in note 8.
As of December 31, 2008,2009, we have total compensation costs relating to unvested stock option awards that have not yet been recognized of $9.9 (2007$33.6 (December 31, 2008 — $9.0)$30.4), net of estimated forfeitures. Compensation cost will be amortized on a straight-line basis over the remaining weighted-average period of approximately two years and will be adjusted for subsequent changes in estimated forfeitures. We recorded an additional $1.0 to our U.S. GAAP compensation expense for 2007. There was no difference between Canadian and U.S. GAAP for 20082008. We recorded a reduction of $0.5 to our U.S. GAAP compensation expense.expense for 2009.
As of December 31, 2008,2009, the weighted average remaining life of exercisable options is 4.95.0 years.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | |||||||
Accumulated other comprehensive income in accordance with Canadian GAAP | $ | 26.5 | $ | 55.9 | $ | 9.4 | ||||
Opening balance of accumulated net gain (loss) on cash flow hedges | 4.3 | (0.5 | ) | — | ||||||
Transitional adjustment — January 1, 2007 (note 9) | — | 0.5 | — | |||||||
Net loss on derivatives designated as cash flow hedges, net of tax ((b)(i)) | (4.8 | ) | — | — | ||||||
Closing balance | (0.5 | ) | — | — | ||||||
Opening balance related to pension and non-pension post-employment benefit plans | (53.9 | ) | (149.0 | ) | (142.5 | ) | ||||
Minimum pension liability, net of tax (c) | (38.1 | ) | — | — | ||||||
Recognition of funded status of defined benefit pension and other post-employment benefit plans, net of tax (c) | (57.0 | ) | 6.5 | 16.3 | ||||||
Closing balance | (149.0 | ) | (142.5 | ) | (126.2 | ) | ||||
Accumulated other comprehensive loss in accordance with U.S. GAAP | $ | (123.0 | ) | $ | (86.6 | ) | $ | (116.8 | ) | |
| Year ended December 31 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | |||||||
Accumulated other comprehensive income in accordance with Canadian GAAP | $ | 55.9 | $ | 9.4 | $ | 55.8 | ||||
Opening balance of accumulated net loss on cash flow hedges | $ | (0.5 | ) | $ | — | $ | — | |||
Transitional adjustment — January 1, 2007 (note 9) | 0.5 | — | — | |||||||
Closing balance | — | — | — | |||||||
Opening balance related to pension and non-pension post-employment benefit plans | $ | (149.0 | ) | $ | (142.5 | ) | $ | (126.2 | ) | |
Recognition of funded status of defined benefit pension and other post-employment benefit plans, net of tax (c) | 6.5 | 16.3 | (1.8 | ) | ||||||
Closing balance | (142.5 | ) | (126.2 | ) | (128.0 | ) | ||||
Accumulated other comprehensive loss in accordance with U.S. GAAP | $ | (86.6 | ) | $ | (116.8 | ) | $ | (72.2 | ) | |
We record a liability for future warranty costs based on management's best estimate of probable claims under our product or service warranties. The accrual is based on the terms of the warranty which vary by customer, product or service and historical experience. We regularly evaluate the appropriateness of the remaining accrual.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
The following table details the changes in the warranty liability:
| 2006 | 2007 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | 23.9 | $ | 23.2 | $ | 24.8 | |||||
Accruals | 14.3 | 15.5 | 14.0 | ||||||||
Payments | (15.0 | ) | (13.9 | ) | (18.1 | ) | |||||
Balance at December 31 | $ | 23.2 | $ | 24.8 | $ | 20.7 | |||||
| 2007 | 2008 | 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | 23.2 | $ | 24.8 | $ | 20.7 | |||||
Accruals | 15.5 | 14.0 | 3.9 | ||||||||
Payments | (13.9 | ) | (18.1 | ) | (10.8 | ) | |||||
Balance at December 31 | $ | 24.8 | $ | 20.7 | $ | 13.8 | |||||
Effective 2007, we adopted FIN 48,the standard "Accounting for uncertainty in income taxes," for U.S. GAAP. This standard prescribes a recognition and measurement model for the accounting of uncertain tax positions. FIN 48positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48The standard also provides guidance on de-recognition of tax benefits, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of this standard did not have a material impact on our U.S. GAAP results.
In 2008, we recorded a provision of $7.6 to account for tax uncertainties under Canadian GAAP, which we did not recognize under U.S. GAAP due to timing. We will recognizerecognized these tax uncertainties for U.S. GAAP in 2009.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, inclusive of interest and penalties, is as follows:
| 2007 | 2008 | ||||||
---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | 88.3 | $ | 79.8 | ||||
Additions based on tax provisions related to the current year | 12.8 | 3.8 | ||||||
Increases (reductions) due to foreign exchange | 9.8 | (9.8 | ) | |||||
Increases for tax positions of prior years | — | 9.3 | ||||||
Reductions relating to settlements | (31.1 | ) | (12.3 | ) | ||||
Balance at December 31 | $ | 79.8 | $ | 70.8 | ||||
| 2007 | 2008 | 2009 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1 | $ | 88.3 | $ | 79.8 | $ | 70.8 | |||||
Additions based on tax provisions related to the current year | 12.8 | 3.8 | 1.4 | ||||||||
Increases (reductions) due to foreign exchange | 9.8 | (9.8 | ) | 9.3 | |||||||
Increases for tax positions of prior years | — | 9.3 | 64.8 | ||||||||
Reductions relating to settlements | (31.1 | ) | (12.3 | ) | (11.4 | ) | |||||
Balance at December 31 | $ | 79.8 | $ | 70.8 | $ | 134.9 | |||||
The total amount of unrecognized tax benefits for 20082009 of $61.5 (2007$108.9 (2008 — $61.5; 2007 — $79.8), if recognized, would reduce our annual effective tax rate. We expect our unrecognized tax benefits to change significantly over the next 12 months as a result of ongoing Canadian and foreign tax audits. However, we are unable to estimate the range of possible change.
We recognize accrued interest and penalties related to unrecognized tax benefits in current tax expense. We accrued net potential interest and penalties of $3.2$30.7 related to the unrecognized tax benefits during 2008 (20072009 (2008 — $3.2; 2007 — $5.7) and in total, as of December 31, 2008,2009, we have recorded a net liability for potential interest and penalties of $20.3 (2007$55.8 (December 31, 2008 — $17.1)$20.3).
We are subject to taxes in the following jurisdictions: Canada, United States, Mexico, Brazil, Spain, Czech Republic, Romania, Hungary, Switzerland, France, the United Kingdom, Hong Kong, China, Japan, Thailand, Singapore and Malaysia, all with varying statutes of limitations.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
Generally, the tax years 2001 through 20082009 remain subject to examination by tax authorities with the exception of the following jurisdictions in which earlier years remain subject to examination by tax authorities:
| Years | ||||
---|---|---|---|---|---|
Canada (specific item under waiver) | |||||
Hong Kong |
Effective January 1,In 2008, we adopted FASBthe standard SFAS No. 157, "Fair value measurements," which defines fair value establishes a framework and prescribes methods for measuring fair value, and outlines the additional disclosure requirements on the useincluding a three level hierarchy of fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levelsSee note 14 for the disclosure of fair value hierarchy based on the reliability of inputs are as follows:
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
We have segregated allour financial assets and liabilities thatwhich are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below. FAS No. 157-2 delayed the effective date for non-financial assets and liabilities until January 1, 2009, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
Financial assets and liabilities measured at fair value as at December 31, 2008 and 2009.
Effective January 1, 2009, these standards also applied to non-financial assets and liabilities. In 2009, we recorded an impairment charge to write-down certain assets included in the financial statements on a recurring basis are summarized below:
| Level 1 | Level 2 | Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Assets: | |||||||||||
Cash equivalents (money market funds) | $ | 390.1 | $ | — | $ | 390.1 | |||||
Derivatives — foreign currency forward contracts | — | 4.2 | 4.2 | ||||||||
Derivatives — interest rate swap agreements | — | 17.3 | 17.3 | ||||||||
$ | 390.1 | $ | 21.5 | $ | 411.6 | ||||||
Liabilities: | |||||||||||
Derivatives — foreign currency forward contracts | $ | — | $ | 43.1 | $ | 43.1 | |||||
$ | — | $ | 43.1 | $ | 43.1 | ||||||
Money market funds are valued using a market approach based on the quoted market prices of identical instruments. Derivatives include foreign currency forward contractsproperty, plant and interest rate swap agreements. Foreign currency forward contracts are valued using an income approach based on the present value, by comparing the current quoted market forward ratesequipment to our contract rates and discounting the values with appropriate market observable credit risk adjusted rates.fair value. The fair valuesvalue of our cancelable interest rate swap agreements are estimatedthose assets at December 31, 2009 was $18.4 which we measured using the discounted cash flow analysis withlevel 3 inputs of observable market data including future interest rates, implied volatilities and credit spreads. Currently, we have not measuredin the fair value hierarchy.
We carry property, plant and equipment at amortized cost. We record impairment losses when the carrying amount of any financial instruments usingassets exceed the undiscounted future net cash flows we expect from their use and disposal. The process of determining fair values is subjective and we exercise judgment in making assumptions about future results, including revenue and expense projections and discount rates, as well as the valuation and use of appraisals for property. The process and assumptions used to determine these fair values qualify as level 3 (significant unobservable)unobservable inputs. We will continue to amortize these assets using their new fair values, over the remaining useful lives of the assets.
In February 2007, FASB issued SFAS No. 159,2008, we adopted the standard "The fair value option for financial assets and financial liabilities, — including an amendment of FASB Statement No. 115," which permitspermitted entities to elect to measure its financial instruments and certain other eligible items at fair value, with unrealized gains and losses resulting from changes in fair value to be recognized in operations at each subsequent reporting date. The fair value election may be applied on an instrument by instrument basis, with a few exceptions. The adoption of this standard in 2008 did not have a material impact on our consolidated financial statements. We have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with U.S. GAAP.
In December 2007, FASB issued SFAS No. 141R,Effective January 1, 2009, we adopted the standard "Business combinations (revised 2007)," which requires the use of fair value accounting for business combinations. Equity securities issued as consideration in a business combination will beare recorded at fair value as of the acquisition date as opposed to the date when the terms of the business combination has beenwere agreed to and announced. In addition, transaction costs must beare expensed under the newthis standard. This standard is to be applied prospectively and effective for acquisitions closing on or after January 1, 2009. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements unless we engage in a significant acquisition.
Effective for 2009, we adopted the standard "Disclosures about derivative instruments and hedging activities (an amendment)," which changes the disclosure requirements related to an entity's derivative instruments and hedging activities. Entities are required to provide enhanced disclosures with respect to (1) how and why they use derivative instruments, (2) how derivative instruments and related hedged items are accounted for under the existing standards, and (3) how derivative instruments and related hedged items affect its financial position, financial performance and its cash flows. See notes 2(n), 7 and 14.
CELESTICA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in millions of U.S. dollars)
In March 2008, FASB issued SFAS No. 161, "Disclosures about derivative instruments and hedging activities — an amendment of FASB Statement No. 133," which changesEffective for 2009, we adopted the disclosure requirements about an entity's derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why they use derivative instruments, (2) how derivative instruments and related hedged items are accounted for under the existing standard SFAS No. 133, and (3) how derivative instruments and related hedged items affect its financial position, financial performance and its cash flows. This standard is effective for 2009. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.
In May 2008, FASB issued SFAS No. 162, "The hierarchy of generally accepted accounting principles,"Subsequent events," which establishes a framework for the sourcing and selectiongeneral standards of accounting principlesfor and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be used in the preparation of financial statements in accordance with U.S. GAAP. SFAS No. 162 will be effective 60 days following the Securities Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411.issued. The adoption of this standard willdid not have a material impact on our consolidated financial statements.
Effective for 2009, we adopted the standard "The FASB accounting standards codification and the hierarchy of generally accepted accounting principles," which establishes the source of authoritative accounting principles recognized by the FASB to be applied in the presentation of financial statements in conformity with U.S. GAAP. The adoption of this standard did not have a material impact on our consolidated financial statements.
Effective for 2009, we adopted the standard "Employers disclosure about post-retirement benefit plan assets," which requires additional disclosures about plan assets for defined benefit pension and other post-retirement benefit plans. Disclosures are required on investment policies and strategies, categories of plan assets, fair value measurement of plan assets and concentration risks. See note 13. This standard also requires plan sponsors to classify their plan assets using the fair value hierarchy to determine fair value. The three levels of fair value hierarchy, based on the reliability of inputs, is described in note 14. All of our plan assets were measured at fair value using level 1 inputs, such as quoted prices in active markets. The adoption of this standard did not have a material impact on our consolidated financial statements.
21. COMPARATIVE INFORMATION:
We have reclassified certain prior year information to conform to the current year's presentation.
22. SUBSEQUENT EVENT:EVENTS:
On February 26, 2009, In January 2010, we completed the acquisition of Scotland-based, Invec Solutions Limited. Invec provides warranty management, repair and parts management services to companies in the information technology and consumer electronics markets. The cash purchase price was $6.4.
In January 2010, we announced a cash tender offerour intention to purchase up to $150 aggregateredeem the outstanding 2013 Notes with a principal amount of $223.1. In accordance with the 2011terms of the 2013 Notes, we will redeem the Notes at a price of up to one thousand103.813% of the principal amount, together with accrued and ten dollars for each one thousand dollars principal amount. This offer to purchase will expire on March 26, 2009. We also terminated ourunpaid interest rate swap agreements in the amount of $500 related to the 2011 Notes. In connection with the termination of the swap agreements, we discontinued fair value hedge accountingredemption date. Based on the 2011 Notes and will amortize the prior fair value adjustment on the 2011 Notes as a reduction to interest expense on long-term debt, over the remaining term of the 2011 Notes, using the effective interest rate method. As a result of discontinuing fair value hedge accounting, we will writedown the carrying value at December 31, 2009 of the embedded prepayment options$222.8, we expect to incur a loss of approximately $9 on the 2011 Notes to reflect the change in fair value after hedge de-designation. Weredemption, which we will record the gain or loss on the purchase of the 2011 Notes, as well as the write-down of the embedded prepayment options, through other chargescharges. We expect to complete the redemption during the first quarter of 2009.2010 using existing cash resources. As a result, we have reclassified the 2013 Notes from long-term debt to current portion of long-term debt on our consolidated balance sheet.