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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of March 2003
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CELESTICA INC.
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
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1150 EGLINTON AVENUE EAST
TORONTO, ONTARIO
CANADA, M3C 1H7
(416) 448-5800
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F ______
-----
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _____ No X
------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_________
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CELESTICA INC.
FORM 6-K
MONTH OF MARCH 2003
The following information filed with this Form 6-K is not incorporated by
reference in Celestica's registration statements on Forms S-8 (Nos. 333-9500,
333-9822, 333-9780, 333-71126, 333-66726, 333-63112 and 333-88210) or on Forms
F-3 (Nos. 333-12272, 333-50240 and 333-69278), or the prospectuses included
therein, or any registration statement subsequently filed by Celestica with the
Securities and Exchange Commission:
- - Notice of Annual and Special Meeting of Shareholders and Management
Information Circular and Proxy Statement, the text of which is attached hereto
as Exhibit 99.1;
- - Multiple Voting Shares Proxy for use at the Annual and Special Meeting of
Shareholders, the text of which is attached hereto as Exhibit 99.2;
- - Subordinate Voting Shares Proxy for use at the Annual and Special
Meeting of Shareholders, the text of which is attached hereto as Exhibit 99.3;
- - Celestica's Annual Report for fiscal year 2002, the text of which is
attached hereto as Exhibit 99.4; PROVIDED, that the text under the following
captions is incorporated by reference into such registration statements:
"Management's Discussion and Analysis," "Consolidated Financial Statements"
and "Notes to the Consolidated Financial Statements;"
- - Auditor's Report and Comments by Auditors for U.S. Readers on
Canada-U.S. Reporting Difference, the text of which is attached hereto as
Exhibit 99.5 and is incorporated by reference into such registration
statements; and
- - Consent of KPMG, LLP, Chartered Accountants, the text of which is attached
hereto as Exhibit 99.6 and is incorporated by reference into such registration
statements.
EXHIBITS
- --------
99.1 - Notice of Annual and Special Meeting of Shareholders, dated
March 18, 2003, and Management Information Circular and
Proxy Statement
99.2 - Multiple Voting Shares Proxy
99.3 - Subordinate Voting Shares Proxy
99.4 - Annual Report for fiscal year 2002
99.5 - Auditors Report and Comments by Auditors for U.S. Readers
99.6 - Consent of KPMG LLP
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELESTICA INC.
Date: March 24, 2003 BY: /s/ Elizabeth L. DelBianco
---------------------------------------
Name: Elizabeth L. DelBianco
Title: Vice President & General Counsel
EXHIBIT INDEX
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99.1 - Notice of Annual and Special Meeting of Shareholders,
dated March 18, 2003, and Management Information
Circular and Proxy Statement
99.2 - Multiple Voting Shares Proxy
99.3 - Subordinate Voting Shares Proxy
99.4 - Annual Report for fiscal year 2002
99.5 - Auditors Report and Comments by Auditors for U.S.
Readers
99.6 - Consent of KPMG LLP
EXHIBIT 99.1
[LOGO]
------------------------
NOTICE OF ANNUAL
MEETING OF SHAREHOLDERS
---------------------
NOTICE IS HEREBY GIVEN that the annual meeting (the "Meeting") of
shareholders of CELESTICA INC. (the "Corporation") will be held in the Imperial
Room of the Fairmont Royal York Hotel, 100 Front Street West, Toronto, Ontario,
on Tuesday, the 15th day of April, 2003, at 10:00 a.m. (Toronto time) for the
following purposes:
1. to receive and consider the financial statements of the Corporation for its
financial year ended December 31, 2002, together with the report of the
auditors thereon;
2. to elect directors for the ensuing year;
3. to appoint auditors for the ensuing year and authorize the directors to fix
the auditors' remuneration; and
4. to transact such other business as may properly be brought before the
Meeting and any adjournment or postponement thereof.
Shareholders are requested to complete, sign, date and return the
accompanying form of proxy for use at the Meeting or any adjournment or
postponement thereof, in the envelope provided for that purpose, whether or not
they are able to attend personally.
Only shareholders of record at the close of business on March 14, 2003 will
be entitled to vote at the Meeting, except to the extent that a shareholder of
record has transferred any shares after that date and the transferee of such
shares establishes proper ownership and requests not later than 10 days before
the Meeting that the transferee's name be included in the list of shareholders
entitled to vote at the Meeting.
DATED at Toronto, Ontario this 18th day of March, 2003.
By Order of the Board of Directors
/s/ Elizabeth L. DelBianco
--------------------------------
Elizabeth L. DelBianco
Vice-President, General Counsel
and Secretary
[LOGO]
Celestica Inc.
1150 Eglinton Avenue East
Toronto, Ontario, Canada M3C 1H7
MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
IN THIS MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT, ALL DOLLAR
AMOUNTS ARE EXPRESSED IN UNITED STATES DOLLARS, EXCEPT WHERE STATED OTHERWISE.
UNLESS STATED OTHERWISE, ALL REFERENCES TO "US$" OR "$" ARE TO U.S. DOLLARS AND
ALL REFERENCES TO "C$" ARE TO CANADIAN DOLLARS. UNLESS OTHERWISE INDICATED, ANY
REFERENCE IN THIS MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT TO A
CONVERSION BETWEEN US$ AND C$ IS GIVEN AS OF FEBRUARY 28, 2003. AT THAT DATE,
THE CLOSING BUYING RATE IN NEW YORK CITY FOR CABLE TRANSFERS IN CANADIAN DOLLARS
WAS US$1.00 = C$1.4880, AS CERTIFIED FOR CUSTOMS PURPOSES BY THE FEDERAL RESERVE
BANK OF NEW YORK.
MANAGEMENT SOLICITATION
THIS MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT (THE "CIRCULAR") IS
FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES BY OR ON BEHALF OF
MANAGEMENT OF CELESTICA INC. (THE "CORPORATION" OR "CELESTICA") FOR USE AT THE
ANNUAL MEETING (THE "MEETING") OF SHAREHOLDERS OF THE CORPORATION TO BE HELD AT
10:00 A.M. (TORONTO TIME) ON APRIL 15, 2003 IN THE IMPERIAL ROOM OF THE FAIRMONT
ROYAL YORK HOTEL, 100 FRONT STREET WEST, TORONTO, ONTARIO, OR ANY
POSTPONEMENT(S) OR ADJOURNMENT(S) THEREOF, FOR THE PURPOSES SET FORTH IN THE
ACCOMPANYING NOTICE OF MEETING. EXCEPT AS OTHERWISE STATED, THE INFORMATION
CONTAINED HEREIN IS GIVEN AS OF FEBRUARY 28, 2003. IN DECEMBER 1999, CELESTICA
COMPLETED A TWO-FOR-ONE SPLIT OF ITS SUBORDINATE AND MULTIPLE VOTING SHARES BY
WAY OF A STOCK DIVIDEND. ALL HISTORICAL INFORMATION HAS BEEN RESTATED TO REFLECT
THE EFFECT OF THE TWO-FOR-ONE SPLIT ON A RETROACTIVE BASIS.
The solicitation will be primarily by mail, but proxies may also be
solicited personally by regular employees of the Corporation for which no
additional compensation will be paid. The cost of preparing, assembling and
mailing this Circular, the notice of meeting, the form of proxy and any other
material relating to the Meeting has been or will be borne by the Corporation.
The Corporation will reimburse brokers and other entities for costs incurred by
them in mailing soliciting materials to the beneficial owners of shares of the
Corporation in accordance with the rules of the New York Stock Exchange. It is
anticipated that copies of this Circular and accompanying proxy will be
distributed to shareholders on or about March 25, 2003.
PROXIES
VOTING OF PROXIES
THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY ARE OFFICERS OF THE
CORPORATION AND WILL REPRESENT MANAGEMENT OF THE CORPORATION AT THE MEETING. A
SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON OR COMPANY (WHO NEED NOT BE A
SHAREHOLDER), OTHER THAN THE PERSONS DESIGNATED IN THE ACCOMPANYING FORM OF
PROXY, TO REPRESENT THE SHAREHOLDER AT THE MEETING. SUCH RIGHT MAY BE EXERCISED
BY INSERTING THE NAME OF SUCH PERSON OR COMPANY IN THE BLANK SPACE PROVIDED IN
SUCH FORM OF PROXY.
The accompanying form of proxy confers discretionary authority upon the
proxy nominees in respect of amendments or variations to matters identified in
the notice of meeting or other matters that may properly come before the Meeting
or any adjournment(s) or postponement(s) thereof.
As of the date of this Circular, management of the Corporation was not aware
of any such amendments or other matters to come before the Meeting. However, if
any amendments, variations or other matters which are
not now known to management should properly come before the Meeting or any
adjournment(s) or postponement(s) thereof, the shares represented by proxies in
favour of the management nominees will be voted on such matters in accordance
with the best judgment of the proxy nominees.
The shares represented by proxies which are hereby solicited will be voted
for or against, or withheld from voting, as the case may be, in accordance with
the instructions of the shareholder on any ballot that may be called for, and,
if the shareholder specifies a choice with respect to any matter to be acted
upon, the shares shall be voted accordingly.
IN RESPECT OF PROXIES IN WHICH A SHAREHOLDER HAS NOT SPECIFIED THAT THE
PROXY NOMINEES ARE REQUIRED TO VOTE OR WITHHOLD FROM VOTING FOR THE ELECTION OF
DIRECTORS OR THE APPOINTMENT OF AUDITORS OF THE CORPORATION AND AUTHORIZATION OF
THE BOARD OF DIRECTORS TO FIX THE REMUNERATION OF THE AUDITORS OF THE
CORPORATION, THE SHARES REPRESENTED BY SUCH PROXIES IN FAVOUR OF MANAGEMENT
NOMINEES WILL BE VOTED IN FAVOUR OF SUCH MATTERS.
DEPOSIT OF PROXIES
To be effective, proxies must be deposited with Computershare Trust Company
of Canada ("Computershare"), the registrar and transfer agent of the
Corporation, at 100 University Avenue, 9th Floor, Toronto, Ontario, Canada,
M5J 2Y1 not later than 5:00 p.m. (Toronto time) on April 14, 2003 or at least
24 hours, excluding Saturdays and holidays, prior to any adjournment or
postponement of the Meeting at which the proxy is to be used, or deposited with
the Chairman of the Meeting prior to the commencement of the Meeting or any
adjournment or postponement thereof at which the proxy is to be used.
REVOCATION OF PROXIES
Proxies given by shareholders for use at the Meeting may be revoked at any
time prior to their use. In addition to revocation in any other manner permitted
by law, a shareholder who has given a proxy may revoke the proxy by filing an
instrument in writing executed by the shareholder or by the shareholder's
attorney authorized in writing, or if the shareholder is a corporation, by a
duly authorized officer or attorney of such corporation, and deposited at the
office of Computershare shown above at any time up to and including the last
business day preceding the day of the Meeting, or any postponement or
adjournment thereof, at which the proxy is to be used, or with the Chairman of
the Meeting on the day of the Meeting or any adjournment or postponement
thereof, prior to being voted at the Meeting or any adjournment or postponement
thereof. The execution of a proxy will not affect a shareholder's right to
attend the Meeting and vote in person.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
The authorized capital of the Corporation consists of an unlimited number of
preference shares ("Preference Shares"), issuable in series, an unlimited number
of subordinate voting shares ("Subordinate Voting Shares") and an unlimited
number of multiple voting shares ("Multiple Voting Shares"), of which no
Preference Shares, 189,102,903 Subordinate Voting Shares and 39,065,950 Multiple
Voting Shares were issued and outstanding as at February 28, 2003.
The holders of Subordinate Voting Shares and Multiple Voting Shares are
entitled to vote on all matters brought before a meeting of the shareholders
together as a single class, except in respect of matters where only the holders
of shares of one class or a series of shares are entitled to vote separately
pursuant to applicable law. The Subordinate Voting Shares carry one vote per
share and the Multiple Voting Shares carry 25 votes per share. Generally, all
matters to be voted on by shareholders must be approved by a simple majority of
the votes cast in respect of Multiple Voting Shares and Subordinate Voting
Shares held by persons present in person or by proxy, voting together as a
single class. The presence, in person or by proxy, of at least two shareholders
representing not less than 35% of the total number of issued voting shares is
necessary for a quorum at the Meeting.
Only shareholders of record at the close of business on March 14, 2003 will
be entitled to vote at the Meeting or any adjournment(s) or postponement(s)
thereof, except to the extent that a person has transferred any shares after
that date and the transferee of such shares establishes proper ownership and
requests not later
2
than 10 days before the Meeting or any adjournment or postponement thereof that
the transferee's name be included in the list of shareholders entitled to vote
at the Meeting.
As of February 28, 2003 the only persons or corporations who, to the
knowledge of the Corporation, its directors or officers, own beneficially,
directly or indirectly, or exercise control or direction over, in excess of 10%
of any class of the voting securities of the Corporation are as follows:
PERCENTAGE OF
PERCENTAGE ALL EQUITY PERCENTAGE OF
NAME OF BENEFICIAL OWNER(1) TYPE OF OWNERSHIP NUMBER OF SHARES OF CLASS SHARES VOTING POWER
- --------------------------- ------------------- ---------------------- ---------- ------------- -------------
Onex Corporation(2)...... Direct and Indirect 39,065,950 Multiple 100% 17.1% 83.8%
Voting Shares 1.8% 1.5% *
3,483,238 Subordinate
Voting Shares
Gerald W. Schwartz(3).... Direct and Indirect 39,065,950 Multiple 100% 17.1% 83.8%
Toronto, Ontario Voting Shares 1.9% 1.6% *
3,671,982 Subordinate
Voting Shares
- -------------
* Less than 1%
(1) As used in this table, "beneficial ownership" means sole or shared power to
vote or direct the voting of the security, or the sole or shared investment
power with respect to a security (I.E., the power to dispose, or direct a
disposition, of a security). A person is deemed at any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days of such date. More than one person may be deemed to
have beneficial ownership of the same securities.
(2) Includes 11,635,958 Multiple Voting Shares held by wholly-owned subsidiaries
of Onex Corporation ("Onex"), 1,540,734 Subordinate Voting Shares held in
trust for Celestica Employee Nominee Corporation as agent for and on behalf
of certain executives and employees of Celestica pursuant to certain of
Celestica's employee share purchase and option plans, 33,754 Subordinate
Voting Shares representing an undivided interest of approximately 10.2% in
330,872 Subordinate Voting Shares, and 280,376 Subordinate Voting Shares
directly or indirectly held by certain officers of Onex Corporation which
Onex Corporation has the right to vote. Of these shares, 9,214,320
Subordinate Voting Shares may be delivered, at the issuer's option, upon the
exercise or redemption, or at maturity or acceleration, of exchangeable
debentures due 2025 issued by certain subsidiaries of Onex and 1,757,467
Subordinate Voting Shares may be delivered, at the option of Onex or certain
persons related to Onex, to satisfy the obligations of such persons under
equity forward agreements. If a debenture is exercised or an equity forward
agreement is settled and the issuer of the debenture or, in the case of an
equity forward agreement, Onex does not elect to satisfy its obligations in
cash rather than delivering Subordinate Voting Shares, if the issuer or
Onex, as the case may be, does not hold a sufficient number of Subordinate
Voting Shares to satisfy its obligations, the requisite number of Multiple
Voting Shares held by such person will immediately be converted into
Subordinate Voting Shares, which will be delivered to satisfy such
obligations.
(3) Includes 188,744 Subordinate Voting Shares owned by a company controlled by
Mr. Schwartz and all of the shares of Celestica beneficially owned by Onex
Corporation, or in respect of which Onex Corporation exercises control or
direction, of which 1,077,500 Subordinate Voting Shares are subject to
options granted to Mr. Schwartz pursuant to certain management incentive
plans of Onex Corporation. Mr. Schwartz is a director of Celestica and the
Chairman of the Board, President and Chief Executive Officer of Onex
Corporation, and controls Onex Corporation through his ownership of shares
with a majority of the voting rights attaching to all shares of Onex
Corporation. Accordingly, Mr. Schwartz may be deemed to be the beneficial
owner of the Celestica shares owned by Onex Corporation.
TRUST AGREEMENT
Onex Corporation, which, directly or indirectly, owns all of the outstanding
Multiple Voting Shares, has entered into an agreement with Computershare, as
trustee for the benefit of the holders of the Subordinate Voting Shares, which
has the effect of preventing transactions that otherwise would deprive the
holders of Subordinate Voting Shares of rights under applicable provincial
take-over bid legislation to which they would be entitled in the event of a
take-over bid for the Multiple Voting Shares if the Multiple Voting Shares were
Subordinate Voting Shares.
3
MATTERS FOR CONSIDERATION OF SHAREHOLDERS
ELECTION OF DIRECTORS
It is proposed to nominate the eight persons listed below for election as
directors of the Corporation to hold office until the next annual meeting of
shareholders or until their successors are elected or appointed. Other than
Mr. Szuluk, all such proposed nominees are now directors of the Corporation and
have been since the dates indicated. The Articles of the Corporation provide for
a minimum of three and a maximum of 20 directors. By resolution dated March 7,
2003, the board of directors of the Corporation (the "Board of Directors") set
the number of directors of the Corporation to be elected at the Meeting at
eight.
Unless authority to do so is withheld, proxies given pursuant to this
solicitation by the management of the Corporation will be voted for the election
as directors of the proposed nominees listed below. Management of the
Corporation does not contemplate that any of the nominees will be unable, or for
any reason unwilling, to serve as a director, but if that should occur for any
reason prior to their election, the proxy nominees may, in their discretion,
nominate and vote for another nominee.
A brief statement of the business experience, age and principal occupation
for each person nominated for election as a director of the Corporation is set
forth below. There are no contracts, arrangements or understandings between any
director or executive officer or any other person pursuant to which any of the
nominees has been nominated.
NAME AND MUNICIPALITY BENEFICIALLY OWNED DIRECTLY
OF RESIDENCE AGE BECAME A DIRECTOR OR INDIRECTLY(1)
- --------------------- -------- ------------------ ---------------------------------------
Eugene V. Polistuk(2) 56 October 1996 720,892 Subordinate Voting Shares(6)
AURORA, ONTARIO
Robert L. Crandall(2)(3)(4)(5) 67 July 1998 110,000 Subordinate Voting Shares(7)
DALLAS, TEXAS 15,130 Liquid Yield Option-TM- Notes(8)
William Etherington(3)(4)(5) 61 October 2001 16,250 Subordinate Voting Shares(9)
TORONTO, ONTARIO
Richard S. Love(3)(4)(5) 65 July 1998 105,000 Subordinate Voting Shares(10)
LOS ALTOS HILLS, CALIFORNIA
Anthony R. Melman(2)(4)(5) 55 October 1996 450,000 Subordinate Voting Shares(11)
TORONTO, ONTARIO
Gerald W. Schwartz 61 July 1998 39,065,950 Multiple Voting Shares(12)
TORONTO, ONTARIO 3,671,982 Subordinate Voting Shares(12)
Charles W. Szuluk 60 -- None
VERO BEACH, FLORIDA
Don Tapscott(3)(4)(5) 55 September 1998 93,000 Subordinate Voting Shares(13)
TORONTO, ONTARIO
- ------------
(1) As used in this table, "beneficial ownership" means sole or shared power to
vote or direct the voting of the security, or the sole or shared investment
power with respect to a security (I.E., the power to dispose, or direct a
disposition, of a security). A person is deemed at any date to have
"beneficial ownership" of any security that such person has a right to
acquire within 60 days of such date. Certain shares subject to options
granted pursuant to management investment plans of Onex are included as
owned beneficially by named individuals although the exercise of these
options is subject to Onex meeting certain financial targets. More than one
person may be deemed to have beneficial ownership of the same securities.
(2) Member of the Corporation's Executive Committee.
(3) Member of the Corporation's Audit Committee.
(4) Member of the Corporation's Compensation Committee.
(5) Member of the Corporation's Nominating and Corporate Governance Committee
(6) Represents 122,559 Subordinate Voting Shares held directly and 598,333
Subordinate Voting Shares subject to exercisable options as described in the
table on page 8.
4
(7) Represents 10,000 Subordinate Voting Shares and 100,000 Subordinate Voting
Shares subject to exercisable options at exercise prices between $8.75 and
$48.69.
(8) Each Liquid Yield Option-TM- Note is convertible into 5.6748 Subordinate
Voting Shares at the option of the holder.
(9) Represents 10,000 Subordinate Voting Shares and 6,250 Subordinate Voting
Shares subject to exercisable options at exercise prices between $32.40 and
$35.95.
(10) Represents 5,000 Subordinate Voting Shares and 100,000 Subordinate Voting
Shares subject to exercisable options at exercise prices between $8.75 and
$48.69.
(11) Includes 274,588 Subordinate Voting Shares owned by Onex which are subject
to options granted to Mr. Melman pursuant to certain management investment
plans of Onex.
(12) Includes 188,744 Subordinate Voting Shares owned by a company controlled by
Mr. Schwartz and all of the shares of Celestica beneficially owned by Onex
or in respect of which Onex Corporation exercises control or direction, of
which 1,077,500 Subordinate Voting Shares are subject to options granted to
Mr. Schwartz pursuant to certain management incentive plans of Onex.
Mr. Schwartz is the Chairman of the Board, President and Chief Executive
Officer of Onex, and controls Onex through his ownership of shares with a
majority of the voting rights attaching to all shares of Onex. Accordingly,
Mr. Schwartz may be deemed to be the beneficial owner of shares of Celestica
owned by Onex.
(13) Represents 93,000 Subordinate Voting Shares subject to exercisable options
at exercise prices between $8.75 and $48.69.
EUGENE V. POLISTUK is the founder, Chairman of the Board of Directors and
Chief Executive Officer of Celestica. He has been the Chief Executive Officer of
Celestica since its establishment in 1994, and was the Corporation's President
until February 2001. Since 1986, Mr. Polistuk has been instrumental in charting
Celestica's transformation and executing the company's successful evolution from
its early history as an operating unit with IBM, to a standalone public company
and leader in the electronics manufacturing services industry. Previously,
Mr. Polistuk spent 25 years with IBM Canada where, over the course of his
career, he managed all key functional areas of the business. In 1994, he was
presented with the '2T5 Meritorious Service Medal' in recognition of his
meritorious service in and for the profession, by his peers in the University of
Toronto Engineering Alumni Association. And more recently, in 2002,
Mr. Polistuk was inducted by the University of Toronto into its Engineering Hall
of Distinction for his contributions to engineering and society. Mr. Polistuk
holds a Bachelor of Applied Science degree in Electrical Engineering from the
University of Toronto and a Doctor of Engineering (Hon.) from Ryerson
University.
ROBERT L. CRANDALL is the retired Chairman of the Board and Chief Executive
Officer of AMR Corporation/ American Airlines Inc. Mr. Crandall was appointed
Lead Director of Celestica in December 2002. He is also a director of Anixter
International Inc., the Halliburton Company, and i2 Technologies Inc. He also
serves on the International Advisory Board of American International
Group, Inc. Mr. Crandall 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 is a corporate director serving on the boards of
Celestica, Canadian Imperial Bank of Commerce, Dofasco Inc., MDS Inc. and AT&T
Canada. He is the former Senior Vice President and Group Executive, Sales and
Distribution, IBM Corporation, and Chairman, President and Chief Executive
Officer of IBM World Trade Corporation. After joining IBM Canada in 1964,
Mr. Etherington ran successively larger portions of the company's business in
Canada, Latin America, Europe and from the corporate office in Armonk,
New York. He retired from IBM after a 37-year career. Mr. Etherington holds a
Bachelor of Science degree in Electrical Engineering and a Doctor of Laws (Hon.)
from the University of Western Ontario.
RICHARD S. LOVE is a former Vice President of Hewlett-Packard and a former
General Manager of the Computer Order Fulfillment and Manufacturing Group for
Hewlett-Packard's Computer Systems Organization. From 1962 until 1997, he held
positions of increasing responsibility with 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.
ANTHONY R. MELMAN is a Vice President of Onex. Dr. Melman joined Onex
Corporation in 1984. He serves on the boards of various Onex subsidiaries. From
1977 to 1984, Dr. Melman was Senior Vice President of Canadian
5
Imperial Bank of Commerce in charge of worldwide merchant banking, project
financing, acquisitions and other specialized financing activities. Prior to
emigrating to Canada in 1977, he had extensive merchant banking experience in
South Africa and the U.K. Dr. Melman is also a director of The Baycrest Centre
Foundation, The Baycrest Centre for Geriatric Care, the University of Toronto
Asset Management Corporation, and a member of the Board of Governors of Mount
Sinai Hospital. He is also Chair of Fundraising for the Pediatric Oncology Group
of Ontario (POGO). Dr. Melman holds a Bachelor of Science degree in Chemical
Engineering from the University of The Witwatersrand, a Master of Business
Administration (gold medalist) from the University of Cape Town and a Ph.D. in
Finance from the University of The Witwatersrand.
GERALD W. SCHWARTZ is the Chairman of the Board and Chief Executive Officer
of Onex Corporation. Prior to founding Onex in 1983, Mr. Schwartz was a
co-founder (in 1977) of what is now CanWest Global Communications Corp. He is a
director of Onex, The Bank of Nova Scotia, Phoenix Entertainment Corp. and
Vincor International Inc., and Chairman of Loews Cineplex Entertainment Corp.
Mr. Schwartz is also Vice Chairman and member of the Executive Committee of
Mount Sinai Hospital, and is a director, governor or trustee of a number of
other organizations, including Junior Achievement of Toronto, Canadian Council
of Christians and Jews, The Board of Associates of the Harvard Business School
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 and a Doctor of Laws (Hon.) from St. Francis Xavier University.
CHARLES W. SZULUK, formerly an officer of The Ford Motor Company, was
President of Visteon Automotive Systems, and a former Group Vice President. From
1988 until 1999, he held positions of increasing responsibility with Ford,
including General Manager, Electronics Division, and Vice President, Process
Leadership and Information Systems. He retired from Ford in 1999. Prior to
joining Ford, he spent 24 years with IBM Corporation in a variety of management
and executive management positions. Mr. Szuluk holds a Bachelor of Science
degree in Chemical Engineering from the University of Massachusetts and attended
Union College of New York in Advanced Graduate Studies.
DON TAPSCOTT is an internationally respected authority, consultant and
speaker on business strategy and organizational transformation. He is the author
of several widely read books on the application of technology in business.
Mr. Tapscott is President of New Paradigm Learning Corporation -- a business
strategy and education company he founded in 1992, and an adjunct Professor of
Management at the University of Toronto's Joseph L. Rotman School of Management.
He is also a founding member of the Business and Economic Roundtable on
Addiction and Mental Health, and a fellow of the World Economic Forum. He holds
a Bachelor of Science degree in Psychology and Statistics, and a Master of
Education degree, specializing in Research Methodology, as well as a Doctor of
Laws (Hon.) from the University of Alberta.
APPOINTMENT OF AUDITORS
It is proposed that KPMG LLP be appointed as the auditors of the Corporation
to hold office until the close of the next annual meeting of shareholders. The
Audit Committee of the Board of Directors negotiates with the auditors of the
Corporation on an arm's length basis in determining the fees to be paid to the
auditors. Such fees have been based upon the complexity of the matters dealt
with and the time expended by the auditors in providing services to the
Corporation. The Corporation believes that the fees negotiated in the past with
the auditors of the Corporation have been reasonable and would be comparable to
fees charged by other auditors providing similar services.
In 2002, KPMG LLP billed the Corporation $1.7 million for the audit of the
Corporation's annual financial statements, $0.4 million for audit-related
services and $1.5 million for tax and other services. KPMG LLP did not provide
any financial information systems design or implementation services to the
Corporation during 2002. The Corporation's Audit Committee has considered that
the provision of the non-audit services is compatible with maintaining
KPMG LLP's independence. The Corporation also used other public accounting firms
for consulting and other services for fees totalling $3.1 million.
It is intended that, on any ballot that may be called for relating to the
appointment of auditors, the shares represented by proxies in favour of
management nominees will be voted in favour of the appointment of KPMG LLP as
auditors of the Corporation to hold office until the next annual meeting of
shareholders, and authorizing the Board of Directors to fix the remuneration to
be paid to the auditors, unless authority to do so is withheld. KPMG LLP have
been auditors of the Corporation since October 14, 1997.
6
COMPENSATION OF NAMED EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer of Celestica and the four other most highly compensated executive
officers of Celestica and its subsidiaries (collectively, the "Named Executive
Officers") for the three most recently completed financial years of the
Corporation.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION(1) UNDER
------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED(2) COMPENSATION(3)
- --------------------------- -------- -------- --------- ------------ ---------------
(US$) (US$) (#) (US$)
Eugene V. Polistuk.......................... 2002 700,000 -- 150,000 645,161
CHAIRMAN OF THE BOARD AND 2001 700,000 -- 150,000 225,962
CHIEF EXECUTIVE OFFICER 2000 550,000 1,300,000 100,000 206,974
J. Marvin MaGee............................. 2002 525,000 -- 110,000 31,589
PRESIDENT AND CHIEF OPERATING OFFICER 2001 516,250 -- 135,000 61,947
2000 360,000 510,000 40,000 34,107
Anthony P. Puppi............................ 2002 400,000 -- 60,000 117,608
EXECUTIVE VICE-PRESIDENT, CHIEF FINANCIAL 2001 400,000 -- 59,000 55,565
OFFICER AND GENERAL MANAGER -- GLOBAL 2000 370,000 524,000 35,000 50,525
SERVICES
R. Thomas Tropea............................ 2002 400,000 -- 45,000 11,500
VICE-CHAIRMAN, GLOBAL CUSTOMER UNITS AND 2001 400,000 -- 59,000 10,200
WORLDWIDE MARKETING AND BUSINESS 2000 350,000 495,000 35,000 5,100
DEVELOPMENT
Stephen Delaney............................. 2002 333,750 -- 75,000(5) 7,000
PRESIDENT, AMERICAS 2001 204,694(4) 150,000(6) 140,000(7) 154,500(8)
- ------------
(1) Excludes perquisites and other benefits because such compensation did not
exceed 10% of the total annual salary and bonus for any of the Named
Executive Officers.
(2) See table under "Options Granted During Year Ended December 31, 2002".
(3) Represents amounts set aside to provide benefits under Celestica's pension
plans (see "Pension Plans").
(4) Mr. Delaney joined Celestica Corporation in May 2001. The amount specified
represents Mr. Delaney's salary from his date of hire to the end of the
year.
(5) Includes 25,000 options granted to Mr. Delaney on October 1, 2002 when he
assumed responsibility for the Americas.
(6) Represents the amount the Corporation agreed to pay to Mr. Delaney at his
date of hire as a bonus for the year ended December 31, 2001.
(7) Includes 100,000 options granted to Mr. Delaney upon joining Celestica
Corporation.
(8) Includes $150,000 paid to Mr. Delaney upon joining Celestica Corporation.
7
OPTIONS GRANTED DURING YEAR ENDED DECEMBER 31, 2002
The following table sets out options to purchase Subordinate Voting Shares
granted by the Corporation to the Named Executive Officers during the year ended
December 31, 2002.
MARKET VALUE OF
SUBORDINATE % OF TOTAL EXERCISE OR SUBORDINATE
VOTING SHARES OPTIONS BASE PRICE VOTING SHARES
UNDER OPTIONS GRANTED TO PER SUBORDINATE ON THE DATE OF
GRANTED(1) EMPLOYEES IN VOTING SHARE(1) GRANT(1)
NAME (#) 2002 ($/SECURITY) ($/SECURITY) EXPIRATION DATE
- ---- ------------- ------------- ---------------- --------------- ----------------
Eugene V. Polistuk........ 150,000 3.9% C$29.11 C$29.11 December 3, 2012
J. Marvin MaGee........... 110,000 2.8% C$29.11 C$29.11 December 3, 2012
Anthony P. Puppi.......... 60,000 1.5% C$29.11 C$29.11 December 3, 2012
R. Thomas Tropea.......... 45,000 1.2% US$18.66 US$18.66 December 3, 2012
Stephen Delaney........... 25,000 0.6% US$13.10 US$13.10 October 1, 2012
50,000 1.3% US$18.66 US$18.66 December 3, 2012
- ------------
(1) Options vest in four equal annual instalments.
OPTIONS EXERCISED DURING MOST RECENTLY COMPLETED FINANCIAL YEAR AND VALUE OF
OPTIONS AT DECEMBER 31, 2002
The following table sets out certain information with respect to options to
purchase Subordinate Voting Shares that were exercised by Named Executive
Officers during the year ended December 31, 2002 and Subordinate Voting Shares
under option to the Named Executive Officers as at December 31, 2002.
VALUE OF UNEXERCISED
SUBORDINATE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
VOTING SHARES AGGREGATE DECEMBER 31, 2002 DECEMBER 31, 2002(2)
ACQUIRED ON VALUE --------------------------------- ---------------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE(3) UNEXERCISABLE(3) EXERCISABLE(3) UNEXERCISABLE(3)
- ---- -------------- ----------- -------------- ---------------- -------------- ----------------
Eugene V. Polistuk..... -- -- 598,333 347,500 $2,738,230 --
J. Marvin MaGee........ -- -- 252,382 248,750 $ 962,551 --
Anthony P. Puppi....... 14,869 $139,769 193,446 139,250 $ 483,210 --
R. Thomas Tropea....... -- -- 271,302 170,888 $ 998,053 $249,513
Stephen Delaney........ -- -- 35,000 180,000 -- $ 25,000
- ------------
(1) Based on the closing price of the underlying shares on the New York Stock
Exchange on the date of exercise of the options.
(2) Based on the closing price of the Subordinate Voting Shares on the New York
Stock Exchange on December 31, 2002 of $14.10.
(3) Options granted under the ESPO Plans and the LTIP. Exercisable options
include options that vested on January 1, 2003.
PENSION PLANS
Messrs. Polistuk, Puppi and MaGee each participate in Celestica's
non-contributory pension plan (the "Canadian Pension Plan"). The Canadian
Pension Plan has a defined benefit and a defined contribution portion and
provides for a maximum of 30 years' service and retirement eligibility at the
earlier of 30 years' service or age 55. They also participate in an unregistered
supplementary pension plan (the "Supplementary Plan") that provides benefits
equal to the difference between the benefits determined in accordance with the
formula set out in the Canadian Pension Plan and Canada Customs and Revenue
Agency maximum pension benefits.
Mr. MaGee participates only in the defined contribution portion of the
Canadian Pension Plan. The defined contribution portion of the Canadian Pension
Plan allows employees to choose how Celestica contributions are invested on
their behalf within a range of investment options provided by third party fund
managers. Celestica's contributions to this plan on behalf of an employee range
from 3% of earnings to a
8
maximum of 6.75% of earnings based on the number of years of service. Retirement
benefits depend upon the performance of the investment options chosen. Celestica
currently contributes 6% of earnings annually on behalf of Mr. MaGee.
Messrs. Polistuk and Puppi participate only in the defined benefit portion
of the Canadian Pension Plan. The benefit provided under this plan is equal to
the benefit entitlement accrued under the relevant IBM plan prior to
October 22, 1996, the date Celestica was divested from IBM, plus the benefits
earned under the Canadian Pension Plan since that date. The terms of the
Canadian Pension Plan, which were accepted by certain employees when they
transferred to Celestica, mirrored those of the IBM pension plan in place at the
time of divestiture. The Plan is of a modified career average design with
benefits based on a three-year earnings average to December 31 of a designated
base year (the "Base Year"). In 2002, the Base Year was updated to December 31,
2001 and may be updated from time to time until December 31, 2009. The formula
for calculating benefits for the period after October 22, 1996 is the greater of
1.2% of earnings (salary and bonus) or 0.9% of earnings up to the yearly maximum
pensionable earnings ("YMPE") level, plus 1.45% of earnings above the YMPE. The
defined benefit portion of the Canadian Pension Plan also provides for
supplementary early retirement benefits from the date of early retirement to age
65.
The following table sets forth the estimated aggregate annual benefits
payable under the defined benefit portion of the Canadian Pension Plan and the
Supplementary Plan based on average earnings and years of service.
CANADIAN PENSION PLAN TABLE(1),(2)
YEARS OF SERVICE
-----------------------------------------------------
EARNINGS AVERAGE 20 25 30 35
- ---------------- -------- -------- -------- --------
$400,000...................... $113,000 $142,000 $170,000 $170,000
$600,000...................... $171,000 $214,000 $257,000 $257,000
$800,000...................... $229,000 $287,000 $344,000 $344,000
$1,000,000.................... $287,000 $359,000 $431,000 $431,000
$1,200,000.................... $345,000 $432,000 $518,000 $518,000
$1,400,000.................... $403,000 $504,000 $605,000 $605,000
$1,600,000.................... $461,000 $577,000 $692,000 $692,000
$1,800,000.................... $519,000 $649,000 $779,000 $779,000
- ------------
(1) This table assumes total of retirement age and years of service is greater
than or equal to 80.
(2) All amounts are shown converted into U.S. dollars from Canadian dollars at
an exchange rate of US$1.00 = C$1.4880.
As at December 31, 2002, Messrs. Polistuk and Puppi had completed 34 and
23 years of service, respectively.
During the year ended December 31, 2002, Celestica accrued an aggregate of
$749,574 to provide pension benefits for Messrs. Polistuk, Puppi and MaGee
pursuant to the Canadian Pension Plan. No other amounts were set aside or
accrued by Celestica during the year ended December 31, 2002 for the purpose of
providing pension, retirement or similar benefits for Messrs. Polistuk, Puppi
and MaGee pursuant to any other plans.
Messrs. Tropea and Delaney participate in the "U.S. Plan". The U.S. Plan
qualifies as a deferred salary arrangement under section 401 of the Internal
Revenue Code (United States). Under the U.S. Plan, participating employees may
defer a portion of their pre-tax earnings not to exceed 20% of their total
compensation. Celestica may make contributions for the benefit of eligible
employees.
During the year ended December 31, 2002, Celestica contributed $18,500 to
the U.S. Plan for the benefit of Messrs. Tropea and Delaney. Except as described
above, no other amounts were set aside or accrued by Celestica during the year
ended December 31, 2002 for the purpose of providing pension, retirement or
similar benefits for Messrs. Tropea and Delaney.
9
EMPLOYMENT AGREEMENTS
Messrs. Polistuk and Puppi each entered into an employment agreement with
Celestica as of October 22, 1996. Mr. Tropea entered into an employment
agreement with Celestica as of June 30, 1998. Each agreement provides for the
executive's base salary and for benefits in accordance with Celestica's
established benefit plans for employees from time to time. Each agreement
provides for the executive to receive an amount equivalent to 36 months' salary
if Celestica terminates the executive's employment, other than for cause,
subject to reduction if the executive earns replacement earnings during such
period from other sources.
REPORT ON EXECUTIVE COMPENSATION
It is the responsibility of the Compensation Committee to define and
communicate compensation policy and principles that reflect and support the
Corporation's strategic direction, business goals and desired culture. The
mandate of the Compensation Committee includes the following:
- Review and recommend to the Board of Directors the Corporation's
compensation strategy, including plan design, performance targets and
program administration;
- Recommend to the Board of Directors the compensation of the Chief
Executive Officer based on the Board of Directors' assessment of the
annual performance of the Chief Executive Officer;
- Review and recommend to the Board of Directors the compensation of the
Named Executive Officers and other senior managers whose compensation is
subject to review by the Board of Directors;
- Review the Corporation's succession plans for key executive positions; and
- Review and approve material changes to the Corporation's organizational
structure and human resource policies.
COMPENSATION PHILOSOPHY AND OBJECTIVES
Celestica's goal is to be the premier full service electronics manufacturing
services provider through leadership in technology, quality and supply chain
management. Celestica believes that its highly skilled workforce and unique
culture represent a distinct competitive advantage and are fundamental to
achieving Celestica's strategic objectives. Celestica has developed a unique
entrepreneurial, participative and team-based culture, which is driven by the
desire to continually exceed customer expectations. The knowledge, skill,
experience and commitment of all employees, and especially that of senior
management, is of critical importance to the achievement of Celestica's
strategic objectives and successful operation of its business. The compensation
of the Corporation's executives is designed to attract, motivate and retain
executives who have the experience, ability and flexibility to achieve the
Corporation's goals.
The Corporation's executive compensation policies and practices are designed
to: (1) align the interests of the executive officers with the interests of the
Corporation's shareholders; (2) link executive compensation to the performance
of the Corporation relative to its competitors and the contribution of the
individual to such performance; and (3) compensate executive officers at a level
and in a manner that ensures the Corporation is capable of attracting,
motivating and retaining individuals with exceptional executive skills and
abilities.
The compensation of Celestica's executive officers is comprised of three
components: base salary, annual incentives and long-term incentives. The
Corporation does not have a target weighting for each component within the total
compensation mix but targets a median level of compensation for each component
as well as for total compensation with reference to a comparator group of
companies. The comparator group is comprised of similarly-sized companies in the
electronics manufacturing sector and closely related industries in the
U.S. Additional information on each of these components is detailed in the
individual sections below.
The Corporation's executive officers participate in health, dental, life
insurance and long-term disability insurance programs on the same basis as
offered to other employees in the country in which they are employed.
10
BASE SALARY
Base salaries are established taking into account individual performance and
experience, level of responsibility and competitive pay practices. Celestica
references the median level of base salaries at similarly sized companies in the
electronics manufacturing services industry and closely related industries in
the U.S.
To ensure that Celestica will continue to attract and retain qualified and
experienced executive officers, base salaries are reviewed annually and adjusted
as appropriate. Base salaries are not directly linked to specific corporate
performance; however the Corporation considers the level of corporate
performance achieved in the prior year as well as the expected level of
performance for the current year in establishing base salaries for a given year.
For example, the difficult business environment in 2001 was a factor in the
Corporation implementing a general salary freeze for executives in 2002 as
compared to 2001.
ANNUAL INCENTIVES
The Corporation's executives participate in the Celestica Executive Team
Incentive Plan. In 2002, awards under this plan were based on pre-determined
targets for financial performance, customer satisfaction ratings and employee
satisfaction ratings as well as the performance of the Corporation relative to
its direct competitors on key financial metrics. The Chief Executive Officer and
the President evaluate each executive's performance in accordance with the
Corporation's stated values and principles, teamwork and the executive's special
accomplishments. Based on this individual assessment, the amount of the
executive's earned award may increase or decrease by as much as 50%.
All of Celestica's employees in eligible geographies, other than executives,
participate in the Celestica Team Incentive Plan. In 2002, awards under this
plan were based on financial performance, customer satisfaction ratings and
individual performance. Under Celestica's Performance and Development Plan, each
participant establishes personal objectives at the beginning of each year that
are aligned with the Corporation's annual business objectives. At the end of the
year, each participant's accomplishments and results with respect to his or her
objectives are reviewed and assessed by his or her manager. The participant's
rating is then used in the determination of the actual award to be paid.
As stated, payment of awards under both plans is contingent on the
achievement of certain targets related to financial and operational performance.
In 2002, no awards were paid under the Celestica Team Incentive Plan or the
Celestica Executive Team Incentive Plan since the Corporation did not meet the
targets for payout under the plans.
LONG-TERM INCENTIVES
Celestica currently has two active long-term incentive plans for its
employees: the Long-Term Incentive Plan and the Employee Share Ownership Plan.
LONG-TERM INCENTIVE PLAN (THE "LTIP")
The objectives of Celestica's LTIP are: (i) to align employee interests with
those of shareholders; (ii) to reward employees for their contribution to
Celestica's success; and (iii) to allow the Corporation to attract and retain
the qualified and experienced personnel who are critical to the Corporation's
success. Under the terms of this plan, the Board of Directors may in its
discretion grant from time to time stock options, performance shares,
performance share units and stock appreciation rights to directors, permanent
employees and consultants of Celestica, its subsidiaries and other companies or
partnerships in which Celestica has a significant investment. Since the
objectives of the LTIP are to incent appropriate behaviours over the longer
term, the current financial performance of the Corporation does not have a
direct impact on awards under the LTIP.
Stock options are currently granted annually to eligible employees, under
Celestica's LTIP, based on the recommendation of the management of each business
unit and are subject to the approval of the CEO. The Compensation Committee
recommends option grants for the Named Executive Officers to the Board of
Directors for approval. The total number of stock options to be granted in a
given year is established after taking into account the number of options to be
granted in that year relative to the total number of shares outstanding (burn
rate) as well as the total number of stock options outstanding relative to the
total number of shares
11
outstanding (overhang). The Corporation targets a maximum level for both burn
rate and overhang after taking into account competitive practice with reference
to the comparator group referenced above as well as its direct competitors. The
Compensation Committee approves the total number of stock options to be granted
in a given year.
EMPLOYEE SHARE OWNERSHIP PLAN (THE "CESOP")
The CESOP enables eligible employees, including executive officers, to
acquire Subordinate Voting Shares, so as to encourage continued employee
interest in Celestica'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 Corporation will contribute 25% of the amount of
the employee contributions, 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 Corporation on the open market.
EMPLOYEE SHARE OWNERSHIP AND OPTION PLANS (THE "ESPO PLANS")
Celestica has issued Subordinate Voting Shares and has granted options to
acquire Subordinate Voting Shares for the benefit of certain of its employees
and executives pursuant to the ESPO Plans which were in effect prior to
Celestica's initial public offering. No further options or Subordinate Voting
Shares (other than pursuant to outstanding options) may be issued under these
ESPO Plans.
Pursuant to the ESPO Plans, employees and executives of Celestica were
offered the opportunity to purchase Subordinate Voting Shares and, in connection
with such purchase, receive options to acquire an additional number of
Subordinate Voting Shares based on the number of Subordinate Voting Shares
acquired by them under the ESPO Plans (on average, approximately 1.435 options
for each Subordinate Voting Share acquired under the ESPO Plans). In each case,
the exercise price for the options is equal to the price per share paid for the
corresponding Subordinate Voting Shares acquired under the ESPO Plans.
Upon the completion of Celestica's initial public offering, certain options
became exercisable. The balance of the options issued under the ESPO Plans vest
over a period of five years beginning December 31, 1998. All options granted
under the ESPO Plan were fully vested as of December 31, 2002. All Subordinate
Voting Shares acquired by employees under the ESPO Plans are held either by the
employee, or by Towers Perrin Share Plan Services in trust for Celestica
Employee Nominee Corporation as agent for and on behalf of such employees.
CHIEF EXECUTIVE OFFICER
The compensation package of the Chief Executive Officer is approved by the
Board of Directors, based upon the recommendations of the Compensation
Committee, which are in turn based on a performance assessment led by the
Nominating and Corporate Governance Committee.
The Chief Executive Officer's compensation package consists of base salary,
annual incentives, long-term incentives and benefits as described above. As
described under "Compensation Philosophy", the Corporation targets a median
level of compensation for each component as well as for total compensation with
reference to the same comparator group of companies in closely related
industries in the U.S.
In establishing the Chief Executive Officer's base salary for a given year,
the Compensation Committee takes into account Mr. Polistuk's contribution in
terms of leadership in the management of the Corporation as well as the global
scope and size of the Corporation's operations. The Corporation also considers
the level of corporate performance achieved in the prior year as well as the
expected level of performance for the current year in establishing the Chief
Executive Officer's base salary for a given year. As stated previously, in light
of the difficult business environment in 2001 and the general salary freeze
implemented for executives, there was no increase in the Chief Executive
Officer's salary in 2002 over 2001.
Mr. Polistuk participates in the Celestica Executive Team Incentive Plan on
the same basis as other executives. Consistent with all other employees of the
Corporation, Mr. Polistuk did not receive an award under this plan for 2002 as
the Corporation did not meet the targets for payout under the plan.
12
Mr. Polistuk did receive an award under the Celestica's LTIP. Details of
this award are provided in the table outlining compensation of the Named
Executive Officers.
In summary, in 2002, Mr. Polistuk received a salary of $700,000, no award
under the Celestica Executive Team Incentive Plan and a LTIP award. In addition,
the Corporation incurred an expense of $608,789 with respect to Mr. Polistuk's
participation in the defined benefit portion of the Canadian Pension Plan.
Report presented by the Compensation Committee:
William Etherington (Chairman)
Robert Crandall
Dick Love
Anthony Melman
Don Tapscott
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of Celestica or Onex receive
compensation for their services as directors. These directors receive an annual
retainer fee of $25,000 and a fee of $2,500 for each meeting of the Board of
Directors attended and each meeting attended of a Committee of the Board of
Directors of which the director is a member. Meetings of directors are expected
to occur at least quarterly. In lieu of receiving such retainer and attendance
fees in cash, these directors may elect, at the time they are first elected or
appointed to Celestica's Board of Directors, to receive their fees in
Subordinate Voting Shares. Directors who joined the Board of Directors at or
about the time of the Corporation's Initial Public Offering receive an annual
retainer and per meeting fee of 2,860 and 286 Subordinate Voting Shares
respectively. Under the Directors' Compensation Plan adopted in July 2001, the
number of shares to be paid to other eligible directors in lieu of cash is
calculated, in the case of meeting fees, by dividing the cash fee that would
otherwise be payable by the closing price of Subordinate Voting Shares on the
New York Stock Exchange (the "NYSE") on the date of the meeting, and, in the
case of annual retainer fees, 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 day of the quarter. Each director has the right to elect to
defer payment of his fees. Grants of Subordinate Voting Shares for such purposes
may not exceed an aggregate of 500,000 Subordinate Voting Shares. The aggregate
compensation paid in 2002 by the Corporation to its directors in their capacity
as directors was $60,000 and the right to receive, in the aggregate, 77,830
Subordinate Voting Shares. The delivery of these shares was deferred until the
respective directors cease to be directors of Celestica. Mr. Crandall also
receives an annual grant of 10,000 Performance Units, convertible into
Subordinate Voting Shares upon his retirement from the Board of Directors, in
his capacity as Chairman of the Executive Committee.
In 2002, eligible directors were issued, in aggregate, options to acquire
10,000 Subordinate Voting Shares, pursuant to the LTIP, at an exercise price
of US$32.40.
13
INDEBTEDNESS OF DIRECTORS AND OFFICERS
As at February 28, 2003, Celestica had guaranteed $1,930,999 aggregate
indebtedness of certain officers of Celestica incurred in connection with the
purchase of Subordinate Voting Shares. The following table sets forth details of
such guarantees by Celestica of indebtedness of the directors and officers of
Celestica.
INDEBTEDNESS OF SENIOR OFFICERS UNDER SECURITIES PURCHASE PROGRAMS(1)
LARGEST AMOUNT AMOUNT OUTSTANDING
OUTSTANDING AS AT
NAME AND PRINCIPAL POSITION DURING 2002(1) FEBRUARY 28, 2003(1),(2)
- --------------------------- --------------- --------------------------
J. Marvin MaGee............................................. $ 166,618 $ 166,618
PRESIDENT AND CHIEF OPERATING OFFICER
Toronto, Ontario
R. Thomas Tropea............................................ $ 436,828 $ 436,828
VICE-CHAIRMAN, GLOBAL CUSTOMER UNITS AND WORLDWIDE MARKETING
AND BUSINESS DEVELOPMENT
Raleigh, North Carolina
Daniel P. Shea.............................................. $ 301,299 $ 301,299
SENIOR VICE-PRESIDENT AND CHIEF TECHNOLOGY OFFICER
Toronto, Ontario
Rahul Suri.................................................. $1,026,254 $1,026,254
SENIOR VICE-PRESIDENT, CORPORATE DEVELOPMENT
Toronto, Ontario
- ------------
(1) All amounts are shown in U.S. dollars converted, where necessary, from
Canadian dollars at an exchange rate of US$1.00 = C$1.4880.
(2) All guaranteed amounts incur interest at a rate equal to certain commercial
banks' prime lending rates. The security for each of the guaranteed amounts
is the purchased Subordinate Voting Shares.
No securities were purchased by any director or officer during 2002 with the
financial assistance of Celestica. No director, officer or employee was indebted
to Celestica other than in connection with securities purchase programs during
the fiscal year ended December 31, 2002.
DIRECTORS AND OFFICERS INDEMNIFICATION AND LIABILITY INSURANCE
Celestica and certain of its subsidiaries have entered into indemnification
agreements with certain of the directors and officers of Celestica and its
subsidiaries. These agreements generally provide that Celestica or the
subsidiary of Celestica which is a party to the agreement, as applicable, will
indemnify the director or officer in question (including his or her heirs and
legal representatives) against all costs, charges and expenses incurred by him
or her in respect of any civil, criminal or administrative action or proceeding
to which he or she is made a party by reason of being or having been a director
or officer of such corporation or a subsidiary thereof, provided that (a) he or
she has acted honestly and in good faith with a view to the best interests of
the corporation, and (b) in the case of a criminal or administrative proceeding
that is enforced by a monetary penalty, he or she had reasonable grounds for
believing that his or her conduct was lawful.
Celestica participates in an umbrella insurance coverage program which
benefits all Onex group companies. This policy, which was renewed on
November 29, 2002 for a 12-month period, provides for aggregate coverage of
$115,000,000. The policy protects directors and officers against liability
incurred by them while acting in their capacities as directors and officers of
Celestica and its subsidiaries. Coverage under this policy is available to all
Onex group companies on a first come basis to the aggregate amount of coverage.
Celestica's prorated cost for this coverage is approximately $2,000,000. Limits
available under the policy are in excess of a self-retention or deductible of
$25,000,000 for each loss or claim.
14
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
Good corporate governance is extremely important to the Corporation, its
employees and shareholders.
The Board of Directors and management have been following closely the
developments in corporate governance requirements and best practices standards
in both Canada and the United States. As these requirements and practices have
evolved, the Corporation has responded in a positive and proactive way. For
example, in addition to other actions that have been taken, the Corporation has
elected to comply on a voluntary basis with the CEO and CFO certification
requirements applicable to quarterly financial reporting by U.S. companies under
the SARBANES-OXLEY ACT OF 2002 ("SOX"). Under SOX rules, non-U.S. companies such
as the Corporation are required to provide such certifications only in
connection with annual filings.
Although the introduction by the Toronto Stock Exchange ("TSX") of certain
corporate governance listing standards (the "Proposed TSX Listing Standards")
and certain amendments to its corporate governance guidelines (the "Proposed TSX
Amendments") have not yet advanced past the proposal stage, the Corporation has
begun the process of conforming its governance standards to those being
proposed.
Similarly, although changes in the corporate governance requirements
proposed by the NYSE (the "Proposed NYSE Amendments") have not yet been
finalized and may not be applicable to non-U.S. companies, the Corporation is
proceeding to conform its governance practices to the proposed amendments and
intends to comply with the final standards.
The Corporation's statement of corporate governance practices is set out in
Schedule A. In addition to describing the Corporation's governance practices
with reference to the TSX Corporate Governance Guidelines, Schedule A indicates
how those governance practices align with the requirements and U.S. Securities
and Exchange Commission proposed regulations under SOX, the Proposed NYSE
Amendments, the Proposed TSX Listing Standards and the Proposed TSX Amendments.
15
PERFORMANCE GRAPH
The Subordinate Voting Shares of the Corporation have been listed and posted
for trading under the symbol "CLS" on the TSX and the NYSE since June 30, 1998.
The following chart compares the cumulative total shareholder return of $100
invested in Subordinate Voting Shares of the Corporation on June 30, 1998 with
the cumulative total shareholder return of the S&P/TSX Composite Index(1) for
the period June 30, 1998 to December 31, 2002.
[GRAPHIC]
- ------------
(1) The TSE 300 Index was replaced by the S&P/TSX Composite Index on May 1,
2002. The historical values of the TSE 300 Index and the S&P/TSX Composite
Index are identical for the period in question.
PARTICULARS OF OTHER MATTERS
Management knows of no matters to come before the Meeting other than the
matters referred to in the Notice of Meeting. However, if any other matters
which are not now known to management should properly come before the Meeting,
the proxy will be voted upon such matters in accordance with the best judgment
of the person voting the proxy.
AVAILABILITY OF DOCUMENTS
The Corporation will provide to any person, upon request to the Secretary of
the Corporation, the following documents:
(a) one copy of the latest annual information form, together with one copy
of any document, or the pertinent pages of any document, incorporated
therein by reference;
(b) one copy of the comparative financial statements of the Corporation for
the year ended December 31, 2002, together with the accompanying report
of the auditor, and one copy of any interim financial statements of the
Corporation subsequent thereto; and
(c) the Corporation's management proxy circular for its last annual meeting
of shareholders.
16
CERTIFICATE
The contents of this Circular and the sending thereof to the shareholders of
the Corporation have been approved by the Board of Directors.
Toronto, Ontario, March 18, 2003.
By Order of the Board of Directors
[SIG]
Elizabeth L. DelBianco
Vice-President, General Counsel
and Secretary
17
SCHEDULE A
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Corporation's statement of corporate governance practices is set out
below. In addition to describing the Corporation's governance practices with
reference to the TSX Corporate Governance Guidelines ("TSX Guidelines"), the
statement indicates how those governance practices align with the requirements
and proposed regulations under the Sarbanes-Oxley Act of 2002 ("SOX"), the
Proposed NYSE Amendments, the Proposed TSX Listing Standards and the Proposed
TSX Amendments, as defined in the body of the Circular.
REQUIREMENT COMMENTS
1. MANDATE OF THE BOARD
The Board of Directors should explicitly The Board of Directors has assumed
assume responsibility for stewardship of responsibility for the stewardship of
the Corporation. (TSX Guidelines) (The the Corporation and is in the process of
Proposed TSX Amendments state that the adopting a formal mandate.
Board should adopt a formal mandate
setting out its stewardship
responsibilities.)
As part of the overall stewardship The Board has assumed responsibility
responsibility, the Board should assume specifically for the matters set out
responsibility specifically for: below.
(i) adoption of a strategic planning (i) The adoption of a strategic
process planning process and the review
and approval on an annual basis
of a strategic plan which takes
into account the opportunities
and risks of the business and
long-term corporate objectives
and industry positioning.
(ii) identification of principal risks (ii) Regular review of the
and implementation of Corporation's overall business
risk-managing systems risks and systems to address and
manage such risks.
(iii) succession planning, including (iii) Succession planning for key
appointing, training and senior management positions, and
monitoring management the CEO in particular, and skills
assessments of individuals
identified to fill key roles.
(iv) communications policy (iv) Review and approval of the
Corporation's Fair Disclosure
Policy -- which addresses
interaction with analysts and
investors, timely disclosure and
avoidance of selective
disclosure -- and contents of all
major disclosure documents such
as the Annual Information Form,
the Management Information
Circular and all Prospectuses.
(v) the integrity of internal control (v) The integrity of the
and management information Corporation's internal business
systems. controls and management
information systems, which the
Board and the Audit Committee
monitor and assess regularly with
management and with the external
auditors.
A-1
REQUIREMENT COMMENTS
2. COMPOSITION OF THE BOARD
At least two directors must be A majority of the directors of the
unrelated. (Proposed TSX Listing Corporation are unrelated.
Standards)
At the date of this Circular, eight of
Majority of directors should be the nine members of the Board of
"unrelated" (free from conflicting Directors are "unrelated", both as that
interest). (TSX Guidelines) term is defined in the existing TSX
Guidelines and as it is defined in the
Proposed TSX Amendments. Roger Martin
and Michio Naruto are not standing for
re-election as directors. Charles Szuluk
is being proposed for election as a
director. If the shareholders elect the
individuals being proposed for election
in this Circular, seven of the eight
members of the Board of Directors will
be unrelated.
Onex Corporation is a significant
Board should include a number of shareholder of the Corporation. At the
directors unrelated to the corporation date of this Circular, seven directors
or the significant shareholder that (78% of the Board) are unrelated to Onex
fairly reflects the investment in the and six directors (67% of the Board) are
corporation by shareholders other than unrelated to both Onex and to
the significant shareholder. (TSX management. Following the upcoming
Guidelines) annual meeting, if the shareholders
elect the individuals being proposed for
election in this Circular,
six directors (75% of the Board) will be
unrelated to Onex and five directors
(63% of the Board) will be unrelated to
both Onex and to management. This is the
case both as "unrelated" is defined in
the existing TSX Guidelines and as
"unrelated" is defined in the Proposed
TSX Amendments.
Majority of the directors should be At the date of this Circular, eight of
independent. (Proposed NYSE Amendments)* the directors (89% of the Board) are
"independent" for purposes of the
Proposed NYSE Amendments.
* This provision does not apply to If the shareholders elect the
companies with a controlling individuals being proposed for election,
shareholder, such as the Corporation; seven directors (88% of the Board) will
however the Corporation is adopting this be independent for purposes of the
standard on a voluntary basis. Proposed NYSE Amendments.
A-2
REQUIREMENT COMMENTS
3. DETERMINATION OF STATUS OF DIRECTORS
Disclose for each director whether he or The Board of Directors has considered
she is related, and how that conclusion the relationship of each of its
was reached. directors to the Corporation.
- Mr. Polistuk is a related
director because he is the CEO of
the Corporation.
- Mr. Schwartz and Mr. Melman are
shareholders, officers and/or
directors of Onex. The TSX
Guidelines and Proposed TSX
Amendments are clear that
interests and relationships that
arise solely from shareholdings
do not preclude a director from
being considered unrelated. This
is consistent with the
determination of "independence"
under the Proposed NYSE
Amendments which state that, as
the concern is independence from
management, ownership of even a
significant amount of stock is
not a bar to a finding of
independence.
The Board has considered the
relationship arising from a
services agreement that is in
place between the Corporation and
Onex. The agreement does not
involve the delegation to Onex of
any aspect of the management of
the business and affairs of
Celestica, provides for payment
obligations which are not
material to either Celestica or
Onex, and does not, in the view
of the Board, interfere with the
ability of Messrs. Schwartz or
Melman to act independently of
management. The Board has
accordingly determined that
Messrs. Schwartz and Melman are
unrelated directors.
A-3
REQUIREMENT COMMENTS
3. DETERMINATION OF STATUS OF DIRECTORS (CONTINUED)
- The definition of "unrelated
director" in the Proposed TSX
Amendments suggests that an
employee of an affiliate cannot
be considered unrelated. The
Corporation has received advice
that the TSX agrees that this
provision was included in the
Proposed TSX Amendments in error
and that it will be removed
before the Proposed TSX
Amendments are released for
public comment. Relying on this
advice and on the analysis above,
the Board considers
Messrs. Schwartz and Melman
unrelated for purposes of the
Proposed TSX Amendments.
- Messrs. Crandall, Etherington,
Love, Martin, Naruto and Tapscott
have no material business or
other relationship with the
Corporation or members of the
Corporation's management, other
than their positions as
directors, optionees and
shareholders, and, as a result,
the Board of Directors has
determined that each of these
directors is an unrelated
director.
- Mr. Szuluk has been proposed for
election as a director at the
upcoming meeting of shareholders.
He does not have any material
business relationship with the
Corporation or members of the
Corporation's management, other
than his proposed position as a
director of the Corporation.
Board must affirmatively determine The Board has affirmatively determined
independence, subject to certain tests that Messrs. Crandall, Etherington,
set out in the Proposed NYSE Amendments. Love, Martin, Melman, Schwartz, Naruto
and Tapscott (as well as Mr. Szuluk, who
has been proposed for election as a
director at the upcoming meeting of
shareholders) are independent. (See
discussion above regarding determination
that these directors are unrelated.)
A-4
REQUIREMENT COMMENTS
4. NOMINATING/CORPORATE GOVERNANCE COMMITTEE
Appoint a Committee composed of The Board has a Nominating and Corporate
non-management directors, a majority of Governance Committee. The mandate of
whom are unrelated directors, this committee is posted on the
responsible for the Corporation's web site. The members of
appointment/assessment of directors. the Nominating and Corporate Governance
(TSX Guidelines) Committee are Messrs. Crandall,
Etherington, Love, Melman and Tapscott,
each of whom is an unrelated director.
Have a nominating/corporate governance The Nominating and Governance Committee
committee composed entirely of has a written mandate that addresses all
independent directors, with a written of the matters in the Proposed NYSE
charter that addresses certain matters Amendments. This mandate is posted on
set out in the Proposed NYSE the Corporation's web site. Each of the
Amendments.* members of the Nominating and Corporate
Governance Committee (named above) is an
independent director.
* This provision does not apply to
companies with a controlling
shareholder, such as the Corporation;
however the Corporation is adopting this
standard on a voluntary basis.
5. BOARD ASSESSMENT
The Nominating and Corporate Governance
Implement a process for assessing the Committee is charged with the
effectiveness of the Board, its responsibility for developing and
Committees and individual directors. recommending to the Board a process for
assessing the effectiveness of the Board
as a whole, the committees of the Board
and the contribution of individual
directors. It is also responsible for
overseeing the execution of the
assessment process approved by the
Board. The Nominating and Corporate
Governance Committee is currently
overseeing the design of an assessment
program appropriate for the Board and
its Committees.
As part of its written mandate, each of
the Nominating and Corporate Governance
Committee, the Compensation Committee
and the Audit Committee is required to
assess its performance on an annual
basis.
A-5
REQUIREMENT COMMENTS
6. ORIENTATION AND EDUCATION
Provide orientation and education New directors are oriented to the
programs for new directors. (TSX business and affairs of the Corporation
Guidelines) through discussions with management and
other directors and by periodic
presentations from senior management on
major business, industry and competitive
issues.
Provide ongoing education for all Management and outside advisors provide
directors. (Proposed TSX Amendments) information and education sessions to
the Board and its Committees as
necessary to keep the directors
up-to-date with the Corporation, its
business and the environment in which it
operates as well as with developments in
the responsibilities of directors.
7. SIZE AND COMPOSITION OF THE BOARD
Examine the size of the Board with a The Board of Directors believes that its
view to determining the impact of the size is appropriate given the size and
number on effectiveness of complexity of the Corporation's business
decision-making. (TSX Guidelines) and that it facilitates effective
decision-making.
Examine the size and composition of the The directors of the Corporation are
Board and undertake a program to satisfied with the size of the Board and
establish a Board comprised of members believe that the current Board
who facilitate effective decision composition results in a balanced
making. (Proposed TSX Amendments) representation on the Board of Directors
among management, the significant
shareholder and unrelated directors.
Directors bring a balance of skills and
experience necessary for the Board to
discharge its oversight function
effectively.
8. COMPENSATION
Review the adequacy and form of The Board of Directors has considered
compensation of directors in light of the remuneration paid to directors and
risks and responsibilities. (TSX considers it appropriate in light of the
Guidelines) time commitment and risks and
responsibilities involved.
A-6
REQUIREMENT COMMENTS
8. COMPENSATION (CONTINUED)
Committee of the Board comprised solely The Board has a Compensation Committee.
of unrelated directors should review the The Compensation Committee has a written
adequacy and form of the compensation of mandate which includes reviewing the
senior management and directors, with adequacy and form of compensation of
such compensation realistically senior management and the directors,
reflecting the responsibilities and with such compensation realistically
risks of such positions. (Proposed TSX reflecting the responsibilities and
Amendments) risks of such positions. The mandate has
been posted on the Corporation's web
site. The members of the Compensation
Committee are Messrs. Etherington,
Crandall, Love, Melman and Tapscott,
each of whom is an unrelated director.
Have a compensation committee composed The Board has a Compensation Committee.
entirely of independent directors, with The mandate of this committee includes
a written charter that addresses certain responsibility for all of the matters
matters set out in the Proposed NYSE contemplated under the Proposed NYSE
Amendments.* Amendments. The mandate has been posted
on the Corporation's web site. Each of
the members of the Compensation
Committee (named above) is an
independent director.
* This provision does not apply to
companies with a controlling
shareholder, such as the Corporation;
however, the Corporation is adopting
this standard on a voluntary basis.
9. COMPOSITION OF COMMITTEES
Committees should generally be composed The Board of Directors has established
of non-management directors, the three standing committees of directors
majority of whom are unrelated. (TSX (the Audit Committee, the Compensation
Guidelines) Committee and the Nominating and
Corporate Governance Committee), each
with a specific mandate and each of
which is comprised entirely of unrelated
directors.
The Board also has an Executive
Committee which meets on an AD HOC
basis. Consistent with the TSX
Guidelines, the Executive Committee is
comprised of a majority of unrelated
directors. The members of the Executive
Committee are Messrs. Polistuk,
Crandall and Melman.
10. GOVERNANCE COMMITTEE
The Board should assume responsibility The Nominating and Corporate Governance
for, or appoint a Committee responsible Committee is responsible for making
for, approach to corporate governance recommendations to the Board relating to
issues. This committee would, among the Corporation's approach to corporate
other things, be responsible for the governance and is responsible for the
Corporation's response to the TSX Corporation's Statement of Corporate
Guidelines. (TSX Guidelines) Governance.
A-7
REQUIREMENT COMMENTS
11. POSITION DESCRIPTIONS
The Board of Directors has developed a
Develop position descriptions for the position description for the CEO and, as
Board and for the CEO, including the stated in Item 1, will adopt a formal
definition of limits for management's mandate for the Board. The Board of
responsibilities. Directors requires management to obtain
the Board of Directors' approval for all
significant decisions, including major
financings, acquisitions, dispositions,
budgets and capital expenditures. The
Board of Directors expects management to
keep it aware of the Corporation's
performance and events affecting the
Corporation's business, including
opportunities in the marketplace and
adverse or positive developments. The
Board of Directors retains
responsibility for any matter that has
not been delegated to senior management
or to a committee of directors.
The Board should develop the corporate The Board of Directors approves specific
objectives, which the CEO is responsible financial and business objectives, which
for meeting. will be used as a basis for measuring
the performance of the CEO.
12. PROCEDURES TO ENSURE INDEPENDENCE
Establish appropriate procedures to If the shareholders elect the
enable the Board to function individuals being proposed for election
independently of management. in this Circular, the Board of Directors
will include only one director who is a
member of the Corporation's management,
while seven directors are not part of
the Corporation's management.
An appropriate structure would be to Mr. Polistuk, who is the CEO, currently
(i) appoint a Chairman of the Board who serves as Chairman of the Board of
is not a member of management with Directors. The Board of Directors is of
responsibility to ensure that the Board the view that appropriate structures and
discharges its responsibilities or procedures are in place to allow the
(ii) adopt alternate means such as Board to function independently of
assigning this responsibility to a management while continuing to provide
committee of the Board or to a director, the Corporation with the benefit of
sometimes referred to as the "lead having a Chairman of the Board with
director". (TSX Guidelines) extensive experience and knowledge of
the Corporation's business.
A-8
REQUIREMENT COMMENTS
12. PROCEDURES TO ENSURE INDEPENDENCE (CONTINUED)
The Board has created the position of
lead director and has appointed
Mr. Crandall to that position.
Mr. Crandall is also chair of the
Nominating and Corporate Governance
Committee.
The non-management members of the Board
meet without management present as part
of every Board of Directors meeting.
Mr. Crandall presides at these meetings.
The Board of Directors also has access
to information independent of management
through the Corporation's external
auditors and outside advisors.
Appropriate procedures may involve the See disclosure above.
Board meeting on a regular basis without
management present or may involve
expressly assigning responsibility for
administering the Board's relationship
to management to a committee of the
Board. (TSX Guidelines and Proposed NYSE
Amendments)
13. COMPOSITION OF THE AUDIT COMMITTEE
The members of the Audit Committee are
The Audit Committee should be composed Messrs. Martin, Crandall, Love,
only of outside directors. (TSX Etherington and Tapscott. The
Guidelines). composition of the Audit Committee meets
the requirements under the TSX
Guidelines (outside directors only), the
Proposed TSX Amendments (unrelated
directors only), SOX (independent
directors only) and the Proposed NYSE
Amendments (independent directors only).
The Audit Committee must be composed of See above.
a majority of unrelated directors and
should be composed only of unrelated
directors. (Proposed TSX Listing
Standards)
The Audit Committee should be composed See above.
only of independent directors, defined
with respect to the Audit Committee in
accordance with the Proposed NYSE
Amendments. (Proposed NYSE Amendments)
The Audit Committee must be composed See above.
only of independent directors. (SOX)
A-9
REQUIREMENT COMMENTS
13. COMPOSITION OF THE AUDIT COMMITTEE (CONTINUED)
QUALIFICATIONS
All members of the Audit Committee The Board has determined that all
should be financially literate. members of the Audit Committee are
(Proposed TSX Amendments) financially literate, since each member
has the ability to read and understand a
balance sheet, an income statement, a
cash flow statement and the notes
attached thereto.
At least one member of the Audit The Board has determined that
Committee should have accounting or Messrs. Crandall and Etherington have
related financial expertise. (Proposed accounting or financial expertise, since
TSX Amendments) they each have the ability to analyse
and interpret a full set of financial
statements, including the notes thereto,
in accordance with generally accepted
accounting principles.
At least one member of the Audit The Board has considered the extensive
Committee should be an Audit Committee financial experience of each of
financial expert. (SOX) Mr. Crandall and Mr. Etherington,
including their respective experience
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
SOX.
The roles and responsibilities of the See item 14 below.
Audit Committee should be specifically
defined so as to provide appropriate
guidance to Audit Committee members as
to their duties. (TSX Guidelines)
INTERNAL CONTROLS
Audit Committee duties should include The Audit Committee oversees management
oversight responsibility for management reporting on the Corporation's internal
reporting on internal control. While it controls. The Committee annually reviews
is management's responsibility to design and approves the mandate and plan of the
and implement an effective system of internal audit department. The internal
internal control, it is the auditor is required to report regularly
responsibility of the Audit Committee to to the Committee and the Committee has
ensure that management has done so. (TSX direct communication channels with the
Guidelines) internal auditors to discuss and review
specific issues as appropriate.
RESOURCES
The Audit Committee must have the As part of the written mandate of the
authority and resources to engage and Audit Committee, the Audit Committee has
pay outside advisors. (SOX) the authority to retain such outside
legal, accounting or other advisors as
it may consider appropriate. The Audit
Committee is not required to obtain the
approval of the Board in order to retain
or compensate such advisors.
A-10
REQUIREMENT COMMENTS
13. COMPOSITION OF THE AUDIT COMMITTEE (CONTINUED)
INTERNAL AUDIT FUNCTION
Have an internal audit function. The Corporation has a well-developed
(Proposed NYSE Amendments) internal audit function, which it
complements through the use of external
advisors for specific projects and in
jurisdictions where specialized
expertise is required.
HIRING AND FIRING EXTERNAL AUDITOR
The Audit Committee is to have sole The Audit Committee has sole authority
authority to hire and fire independent for recommending the person to be
auditors and approve any significant proposed to the Corporation's
non-audit relationship with the shareholders for appointment as external
independent auditors. (Proposed NYSE auditor and whether, at any time, the
Amendments) incumbent external auditor should be
removed from office. The Audit Committee
must pre-approve any non-audit services
by the independent auditors.
COMMUNICATIONS WITH EXTERNAL AUDITOR
The Audit Committee should have direct The Audit Committee has direct
communication channels with the internal communication channels with the internal
and the external auditors to discuss and and external auditors to discuss and
review specific issues as appropriate. review specific issues as appropriate.
(TSX Guidelines) The Audit Committee meets with each of
the internal auditor and the external
auditor in the absence of management as
part of every Audit Committee meeting.
14. AUDIT COMMITTEE MANDATE
The Audit Committee must have a charter The Audit Committee has a well-defined
that sets out explicitly the role and mandate which sets out its relationship
oversight responsibility with respect to with, and expectations of, the external
certain matters. (Proposed TSX Listing auditors, including the establishment of
Standards) the independence of the external auditor
and the 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 must have a written The Audit Committee has a written
charter that addresses certain matters mandate that addresses all of the
set out in the Proposed NYSE Amendments. matters in the Proposed NYSE Amendments.
This mandate is posted on the
Corporation's web site.
The Audit Committee must establish The Audit Committee's mandate includes
procedures to deal with complaints responsibility for establishing such
relating to the Corporation's procedures.
accounting, internal accounting controls
and auditing matters. (SOX)
A-11
REQUIREMENT COMMENTS
15. EXTERNAL ADVISORS
Implement a system to enable individual Each committee is empowered to engage
directors to engage outside advisors, at external advisors as it sees fit. Any
the corporation's expense. The individual director is entitled to
engagement of the outside advisor should engage an outside advisor at the expense
be subject to the approval of an of the Corporation provided that such
appropriate committee of the Board. (TSX director has obtained the approval of
Guidelines) the Nominating and Corporate Governance
Committee to do so.
OTHER MATTERS
16. EQUITY COMPENSATION PLANS
Shareholders must be given the
opportunity to vote on all The Corporation has stock option and
equity-compensation plans (except share purchase plans which were reviewed
inducement options, plans relating to by the TSX at the time of the
mergers or acquisitions, and tax Corporation's initial public offering.
qualified and excess benefit plans). The TSX requires that any material
(Proposed NYSE Amendments) amendments to those plans be approved by
shareholders.
17. CORPORATE GOVERNANCE DISCLOSURE
Adopt and disclose corporate governance The Corporate Governance Committee is
guidelines. (Proposed NYSE Amendments) overseeing the development of corporate
governance guidelines as contemplated by
the Proposed NYSE Amendments. Many of
the governance practices contemplated by
the Proposed NYSE Amendments have been
part of the Corporation's governance
practices for some time and are
described in this Statement of Corporate
Governance Practices.
18. CODE OF CONDUCT
Adopt and disclose a code of business The Corporation has had a Code of
conduct and ethics for directors, Business Conduct in place since its
officers and employees and promptly inception. The Nominating and Corporate
disclose any waivers of the code for Governance Committee is in the process
directors and executive officers. of reviewing that Code to confirm that
(Proposed NYSE Amendments and Proposed it encompasses all of the areas
TSX Listing Standards) contemplated by the Proposed NYSE
Amendments. When this review has been
completed and any changes to the Code
have been approved by the Board of
Directors, the Corporation's Code of
Business Conduct will be posted on the
Corporation's web site.
A-12
[LOGO]
EXHIBIT 99.2
[LOGO] [LOGO]
Computershare Trust Company of Canada
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
www.computershare.com
Multiple Voting Shares
HOLDER ACCOUNT NUMBER
Please print in ink.
Print in CAPITAL letters
inside the grey areas as
shown in this example.
|ABC| |123| |X| X
- -------------------------------------------------------------------------------
FORM OF PROXY -- ANNUAL MEETING TO BE HELD ON APRIL 15, 2003
- -------------------------------------------------------------------------------
NOTES TO PROXY
1. EVERY HOLDER HAS THE RIGHT TO APPOINT SOME OTHER PERSON OF THEIR CHOICE,
WHO NEED NOT BE A HOLDER, TO ATTEND AND ACT ON THEIR BEHALF AT THE
MEETING. IF YOU WISH TO APPOINT A PERSON OTHER THAN THE PERSONS WHOSE
NAMES ARE PRINTED HEREIN, PLEASE INSERT THE NAME OF YOUR CHOSEN
PROXYHOLDER IN THE SPACE PROVIDED (SEE REVERSE).
2. If the securities are registered in the name of more than one owner (for
example, joint ownership, trustees, executors, etc.), then all those
registered should sign this proxy. If you are voting on behalf of a
corporation or another individual you may be required to provide
documentation evidencing your power to sign this proxy with signing
capacity stated.
3. This proxy should be signed in the exact manner as the name appears on the
proxy.
4. If this proxy is not dated, it will be deemed to bear the date on which it
is mailed by Management to the holder.
5. THE SECURITIES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
HOLDER, HOWEVER, IF SUCH A DIRECTION IS NOT MADE IN RESPECT OF ANY
MATTER, THIS PROXY WILL BE VOTED AS RECOMMENDED BY MANAGEMENT.
Proxies submitted must be received by 5:00 p.m., Toronto Time, on April 14,
2003.
THANK YOU
- -------------------------------------------------------------------------------
THIS FORM OF PROXY IS SOLICITED BY AND ON BEHALF OF MANAGEMENT.
- -------------------------------------------------------------------------------
APPOINTMENT OF PROXYHOLDER
I/WE BEING HOLDER(S) OF CELESTICA INC.
HEREBY APPOINT(S):
Eugene V. Polistuk, or failing him/her PRINT THE NAME OF THE PERSON YOU ARE --------------------------
J. Marvin MaGee OR APPOINTING IF THIS PERSON IS SOMEONE
OTHER THAN THE CHAIRMAN OF THE MEETING. --------------------------
as my/our proxyholder with full power of substitution and to vote in accordance with the following direction (or if no directions
have been given, as the proxyholder sees fit) and all other matters that may properly come before the Annual Meeting of Celestica
Inc. to be held at the Fairmont Royal York Hotel, 100 Front Street West, Toronto, Ontario on April 15, 2003 at 10:00 a.m. and at
any adjournment thereof.
1. ELECTION OF DIRECTORS
2. APPOINTMENT OF AUDITORS
FOR WITHHOLD
Appointment of KPMG LLP as Auditors and authorization of the Board of
Directors of Celestica Inc. to fix the remuneration of the Auditors.
AUTHORIZED SIGNATURE(S) -- SIGN HERE -- THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
I/We authorize you to act in accordance with my/our instructions set out
above. I/We hereby revoke any proxy previously given with respect to the
Meeting. IF NO VOTING INSTRUCTIONS ARE INDICATED ABOVE, THIS PROXY WILL BE
VOTED AS RECOMMENDED BY MANAGEMENT.
SIGNATURE(S) DATE -- DAY MONTH YEAR
- ----------------------------- ------------------------------------
/ /
- ----------------------------- ------------------------------------
QUARTERLY FINANCIAL STATEMENTS REQUEST
/ / Mark this box if you would like to
receive Quarterly Financial Statements.
If you do not mark the box, or do not return this proxy, then it will be
assumed you do NOT want to receive Quarterly Financial Statements.
EXHIBIT 99.3
[LOGO] [LOGO]
Computershare Trust Company of Canada
9th Floor, 100 University Avenue
Toronto, Ontario M5J 2Y1
www.computershare.com
Subordinate Voting Shares
HOLDER ACCOUNT NUMBER
Please print in ink.
Print in CAPITAL letters
inside the grey areas as
shown in this example.
|ABC| |123| |X| X
- -------------------------------------------------------------------------------
FORM OF PROXY -- ANNUAL MEETING TO BE HELD ON APRIL 15, 2003
- -------------------------------------------------------------------------------
NOTES TO PROXY
1. EVERY HOLDER HAS THE RIGHT TO APPOINT SOME OTHER PERSON OF THEIR CHOICE,
WHO NEED NOT BE A HOLDER, TO ATTEND AND ACT ON THEIR BEHALF AT THE
MEETING. IF YOU WISH TO APPOINT A PERSON OTHER THAN THE PERSONS WHOSE
NAMES ARE PRINTED HEREIN, PLEASE INSERT THE NAME OF YOUR CHOSEN
PROXYHOLDER IN THE SPACE PROVIDED (SEE REVERSE).
2. If the securities are registered in the name of more than one owner (for
example, joint ownership, trustees, executors, etc.), then all those
registered should sign this proxy. If you are voting on behalf of a
corporation or another individual you may be required to provide
documentation evidencing your power to sign this proxy with signing
capacity stated.
3. This proxy should be signed in the exact manner as the name appears on the
proxy.
4. If this proxy is not dated, it will be deemed to bear the date on which it
is mailed by Management to the holder.
5. THE SECURITIES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
HOLDER, HOWEVER, IF SUCH A DIRECTION IS NOT MADE IN RESPECT OF ANY
MATTER, THIS PROXY WILL BE VOTED AS RECOMMENDED BY MANAGEMENT.
VOTE USING THE TELEPHONE OR INTERNET 24 HOURS A DAY 7 DAYS A WEEK!
Voting by mail is the only method for holdings held in the name of a
corporation or holdings being voted on behalf of another individual.
Voting by mail or by Internet are the only methods by which a holder may
appoint a person as proxyholder other than the Management nominees named on
the reverse of this proxy. Instead of mailing this proxy, you may choose one
of the two voting methods outlined below to vote this proxy. Have this proxy
in hand when you call.
TO VOTE USING THE TELEPHONE TO VOTE USING THE INTERNET
(WITHIN CANADA AND U.S.)
* Call the toll free number listed BELOW from a * Go to the following web site;
touch tone telephone. There is NO CHARGE www.computershare.com/ca/proxy
for this call.
1 866 871-7160
You will need to provide your HOLDER ACCOUNT NUMBER and PROXY ACCESS NUMBER
listed below.
HOLDER ACCOUNT NUMBER PROXY ACCESS NUMBER
If you vote by telephone or the Internet, DO NOT mail back this proxy.
Proxies submitted must be received by 5:00 p.m., Toronto Time, on April 14,
2003.
THANK YOU
- -------------------------------------------------------------------------------
THIS FORM OF PROXY IS SOLICITED BY AND ON BEHALF OF MANAGEMENT.
- -------------------------------------------------------------------------------
APPOINTMENT OF PROXYHOLDER
I/WE BEING HOLDER(S) OF CELESTICA INC.
HEREBY APPOINT(S):
Eugene V. Polistuk, or failing him/her PRINT THE NAME OF THE PERSON YOU ARE --------------------------
J. Marvin MaGee OR APPOINTING IF THIS PERSON IS SOMEONE
OTHER THAN THE CHAIRMAN OF THE MEETING. --------------------------
as my/our proxyholder with full power of substitution and to vote in accordance with the following direction (or if no directions
have been given, as the proxyholder sees fit) and all other matters that may properly come before the Annual Meeting of Celestica
Inc. to be held at the Fairmont Royal York Hotel, 100 Front Street West, Toronto, Ontario on April 15, 2003 at 10:00 a.m. and at
any adjournment thereof.
1. ELECTION OF DIRECTORS
2. APPOINTMENT OF AUDITORS
FOR WITHHOLD
Appointment of KPMG LLP as Auditors and authorization of the Board of
Directors of Celestica Inc. to fix the remuneration of the Auditors.
AUTHORIZED SIGNATURE(S) -- SIGN HERE -- THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
I/We authorize you to act in accordance with my/our instructions set out
above. I/We hereby revoke any proxy previously given with respect to the
Meeting. IF NO VOTING INSTRUCTIONS ARE INDICATED ABOVE, THIS PROXY WILL BE
VOTED AS RECOMMENDED BY MANAGEMENT.
SIGNATURE(S) DATE -- DAY MONTH YEAR
- ----------------------------- ------------------------------------
/ /
- ----------------------------- ------------------------------------
QUARTERLY FINANCIAL STATEMENTS REQUEST
/ / Mark this box if you would like to
receive Quarterly Financial Statements.
If you do not mark the box, or do not return this proxy, then it will be
assumed you do NOT want to receive Quarterly Financial Statements.
EXHIBIT 99.3
Celestica
2002 annual report and investor highlights
2002 Investor Summary
Strong balance sheet with $1.85 billion in cash and debt to capitalization of
19%
See pages 35 and 38
Continued strong cash flow from operations with significant improvements in cash
cycle and inventory turns
See pages 6 and 7
Challenging end markets, company restructures to drive lower cost manufacturing
footprint
See pages 9 and 51
About this report
The intent of this report is to highlight key elements of Celestica's 2002
financial results and operational performance. Annual reports are
highly-detailed documents and this report has been designed to provide a basic
overview of our results, as well as a more comprehensive analysis. The front
section of this report provides highlights from 2002, while offering historical
references to 1998 results (the year the company went public) in order to show
longer-term trends. Detailed information is provided in the MD&A and the
consolidated financial statements, and is referenced throughout the report.
Celestica continues to provide extensive disclosure, and hopes this approach
will help guide you through the report and better understand the company's
results. All amounts are in U.S. dollars.
About Celestica
Celestica is a world leader in the delivery of innovative electronics
manufacturing services (EMS). Celestica operates a highly sophisticated global
manufacturing network with operations in Asia, Europe and the Americas,
providing a broad range of services to leading OEMs (original equipment
manufacturers). A recognized leader in quality, technology and supply chain
management, Celestica provides competitive advantage to its customers by
improving time-to-market, scalability and manufacturing efficiency.
For further information on Celestica, visit its Web site at www.celestica.com.
The company's securities law filings can also be accessed at www.sedar.com and
www.sec.gov.
Contents
Financial Highlights 6
Selected Operational Highlights 8
Unaudited Quarterly Financial Highlights 12
Five Year Profile 14
Share Information 16
Corporate Information 17
Directors and Officers 18
Corporate Governance 20
Company Values 26
Environmental Policy 27
Management's Discussion and Analysis (MD&A) 28
Auditor's Report 37
Consolidated Financial Statements 38
Notes to Consolidated Financial Statements 41
Global Locations IBC
Chairman's Message
Dear fellow shareholder,
Challenging end markets. Rebalancing global footprint. Implementing major
restructuring initiatives. Exceptional working capital management. These are the
key factors influencing Celestica's operating results in 2002.
It was a difficult year for our customers. In fact, it was the second straight
year of broadly-based reductions in corporate spending for information
technology and communications infrastructure products. This hurt demand for the
manufacturing services we provide. Although the year began with relatively
stable demand, the second half proved more difficult as our customers saw
increased weakness from the key end markets they serve. This resulted in an
accelerated move to lower cost manufacturing locations and restructuring in the
American and European regions.
Offsetting these impacts was Celestica's exceptional performance in all areas of
working capital management, a key area of focus for the company. We achieved
significant improvements in this area, and ended the year with an all-time
company best in cash cycle and our highest cash position.
We took advantage of this and used our strong financial position to retire debt
obligations and repurchase shares, making Celestica the only tier-one EMS
company executing on both fronts in 2002.
Financial Summary
For the fiscal year ended December 31, 2002, revenue was $8,272 million, down
17 % compared to $10,004 million for the same period last year.
Net loss was $445 million or $1.98 per share, compared to a net loss of $40
million or $0.26 per share last year. Included in the full-year net loss were
restructuring charges of $384 million and $294 million of charges primarily for
non-cash impairment of goodwill and intangible assets.
Adjusted net earnings - defined as net earnings (loss) before amortization of
goodwill and intangible assets, integration costs related to acquisitions and
other charges, net of tax - were $222 million or $0.87 per share, compared to
$321 million or $1.38 per share last year. (A reconciliation to GAAP net
earnings (loss) is provided on pages 14 and 15.)
To respond to this difficult environment, we continued to prioritize our
activities and resources in areas that would reduce costs for customers, improve
operating efficiency, increase utilization and maintain the company's very
strong financial position. In these areas, I am pleased to say that Celestica
had exceptionally strong results:
- - cash flow from operations for the year was $983 million;
- - cash cycle was significantly reduced throughout the year, hitting an all-time
company best of five days in the fourth quarter; and,
- - inventory was reduced to $776 million, down 43% from 2001, with inventory
turns improving steadily all year and achieving 8.4 turns in the fourth quarter.
With this excellent working capital execution, we enhanced our already strong
balance sheet and ended the year with cash and short-term investments of $1,851
million, an increase of more than $500 million from 2001. This improved
financial position is even more significant given that throughout the year, we
spent $270 million to reduce debt and buy back shares.
Highlights: End Markets, Acquisitions, Geographic Strength
Our mix of business with customers in higher complexity communications and
information technology products had a major adverse impact on our results in
2002, as spending in these areas was particularly hard hit. We saw the biggest
declines in revenues from our top 10 customers, which represent over 80% of our
business.
Conversely, we experienced continued strength in our non-top 10 customers. We
continued to focus on diversifying our customer base in 2002 and added over 40
new customers with more than one-third of these names being in areas outside of
our traditional communications and information technology markets, including
military and aerospace, automotive, industrial, consumer and medical.
Additional Information:
Corporate governance -- page 20
Analyst and banking relationships -- page 17
Director biographies -- page 18
Auditor fees -- page 17
Credit ratings -- page 17
Share information -- page 16
We continued to evaluate strategic acquisition opportunities. Our most
significant acquisition in 2002 was an outsourcing agreement with NEC,
increasing our presence in the Japanese market. We reviewed numerous other
acquisition and divestiture opportunities but continued to be very selective to
ensure that any
transaction we considered had the appropriate terms and operational flexibility
to ensure satisfactory returns, while providing meaningful and sustainable
cost-reduction solutions for our customers.
On a geographic basis, our European operations were the most negatively impacted
by the weakness in end-market demand, while our Asian operations continued to
grow as the trend to lower cost manufacturing was accelerated by the current
economic environment.
Performance versus Key Financial Goals
In 2000, the company established some key financial goals for 2003: 5% operating
margins, 30% pre-tax operating return on net invested capital (ROIC), and a 25
day cash cycle.
Operating margins for 2002 were 3.1% compared to 3.7% in 2001, and ROIC for 2002
was 14.5% versus 14.8% last year. Although parts of the company have already
achieved our 2003 targets, these two goals have been impacted the most by the
economic downturn. On a company-wide basis, we do not expect to achieve these
goals in 2003 given the significantly lower business volumes, but they remain a
company-wide priority. We believe that as end markets improve and our
restructuring is completed, we will make the necessary progress towards these
goals.
For cash cycle, we exceeded our goal and achieved our objective one year ahead
of plan. Cash cycle for the full year was 18 days and we remain focused on
continuing to improve in this area.
Outlook
Demand in our key end markets continues to remain uncertain and our customer
visibility is limited. Although this poses challenges, I am very encouraged by
the accelerating trend for companies to outsource more of their manufacturing
requirements and by our ability to compete for this business.
Faced with a highly competitive environment, OEMs are looking deeper into all
aspects of their manufacturing operations in order to change fixed costs into
variable costs and optimize processes across their entire supply chain. Given
Celestica's manufacturing and supply chain capabilities, financial strength and
global presence, I believe we are very well positioned to benefit from both
organic and divestiture outsourcing opportunities.
While we were the least acquisitive among our peers in 2002, we will continue to
look for opportunities that can expand our major relationships, diversify our
customer base, broaden our end-market exposure and add key service offerings. We
will actively consider value generating opportunities, but will remain highly
disciplined in what we choose to pursue.
I believe our restructuring plans will improve utilization in 2003, and reduce
overall costs as we continue to rebalance our global footprint and expand in
lower cost geographies. In an environment of weak demand, there currently is
excess capacity in the EMS industry which is contributing to overall pricing
pressure. However, we believe that our restructuring activities will help offset
some of this impact.
From a financial perspective, Celestica is very strong and can readily navigate
these difficult markets. In addition, this strength gives us the most
flexibility in terms of how the company can grow, and ultimately improve
earnings and drive growth.
While it is unclear what 2003 will bring in terms of end-market demand, we are
certain that we will continue to use our balanced, long-term approach to pursue
growth and create shareholder value. At the end of the day, profitable,
sustainable growth with the ability to generate solid returns is the only type
of growth that matters and our behaviour going forward will continue to be
consistent with that approach.
Eugene V. Polistuk
Chairman and
Chief Executive Officer
Additional Information on Key Trends:
Historical performance by geography -- page 9
Share buy back and debt repurchases -- page 8
Working capital efficiency -- page 8
Revenue diversification by end market -- page 11
Trend to low cost footprint -- page 9
Customer concentration -- page 11
2002 Quarterly Highlights
Weak end markets in communications and information technology infrastructure
products, particularly in the second half of the year, impacted the company's
revenue growth and operating margins. See pages 31 and 32 in the MD&A for
additional information.
With weak demand and low manufacturing utilization rates, the company underwent
restructuring to lower its cost base. Layoffs and facility shutdowns, as well as
impairment of intangible assets and goodwill resulted in net losses. Details on
the restructuring can be found on page 33 in the MD&A and page 51 in the notes
to the consolidated financial statements.
(BAR GRAPHS)
revenue
(U.S.$ billions)
Q1 $ 2.2
Q2 $ 2.2
Q3 $ 2.0
Q4 $ 1.9
operating margins(1)
(percentage of revenue)
earnings (loss) per share
(U.S.$ diluted)
Q1 $ 0.15
Q2 $ 0.15
Q3 $ (0.40)
Q4 $ (1.90)
adjusted earnings per share(2)
(U.S.$ diluted)
Q1 $ 0.26
Q2 $ 0.28
Q3 $ 0.20
Q4 $ 0.15
cash flow from operations
(U.S.$ millions)
Q1 $ 274
Q2 $ 237
Q3 $ 371
Q4 $ 101
(1) Net earnings (loss) before interest, amortization of goodwill and
intangible assets, income taxes, integration costs related to acquisitions and
other charges (also referred to as EBIAT).
EBIAT is not a GAAP measure. A reconciliation to GAAP net earnings (loss) is
provided on pages 14 and 15.
(2) Based on adjusted net earnings defined as net earnings (loss) adjusted
for amortization of goodwill and intangible assets, integration costs related to
acquisitions and other charges, net of related income taxes. Adjusted net
earnings is not a GAAP measure. A reconciliation to GAAP net earnings (loss) is
provided on pages 14 and 15.
(3) Restated to reflect the treasury stock method, retroactively applied.
Annual Highlights
While the company's operating margins were relatively stable for the past two
years, margins fell 0.6% in 2002 as a result of revenue declines and weaker
utilization rates. See pages 30 to 32 in the MD&A for additional detail on
results of operations.
Despite the challenging environment for revenue and earnings, the company
continued to produce significant cash flow from operations giving the company
one of the strongest cash positions in the EMS industry. The company used this
financial strength to repurchase stock and eliminate debt. See details on page
34 in the MD&A.
(BAR GRAPHS)
Revenue
(U.S. $ billions)
1998 $ 3.2
1999 $ 5.3
2000 $ 9.8
2001 $ 10.0
2002 $ 8.3
operating margins(1)
(percentage of revenue)
1998 3.1%
1999 3.4%
2000 3.7%
2001 3.7%
2002 3.1%
earnings (loss) per share(3)
(U.S. $ diluted)
1998 $ (0.47)
1999 $ 0.40
2000 $ 0.98
2001 $ (0.26)
2002 $ (1.98)
adjusted earnings per share(2)(3)
(U.S. $ diluted)
1998 $ 0.42
1999 $ 0.72
2000 $ 1.44
2001 $ 1.38
2002 $ 0.87
cash flow from operations
(U.S. $ millions)
1998 $ 82
1999 $ (94)
2000 $ (85)
2001 $ 1291
2002 $ 983
Selected Operational Highlights
(BAR GRAPHS)
driving cash cycle efficiency
(cash cycle days)
2002
Q1 28
Q2 21
Q3 15
Q4 5
inventory turns drive value
(two point calculation)
2002
Q1 6.1
Q2 7.1
Q3 7.1
Q4 8.4
The company's major push for improved operating efficiency drove exceptional
results in the areas of cash cycle reduction and increased inventory turns.
These improvements generated significant cash flow from operations. See the
company's cash flow statement on page 40.
2002 redemption and repurchases
(U.S. $)
Action $ Spent
10 1/2% Notes Full redemption $137 million
LYONs Repurchase $223 million face value $100 million
Share Repurchase 2 million shares $33 million
With the strong cash flow, robust balance sheet and limited availability of
acquisitions that met the company's financial criteria, the company put its
resources to work by reducing debt and buying back shares. Celestica was the
only top-tier EMS company in the industry repurchasing shares in 2002. For
details on these activities, see pages 48 and 49 in the notes to the
consolidated financial statements.
Selected Operational Highlights
segmented EBIAT(1) margin profile
(U.S. $ millions)
2000 2001 2002
Revenue EBIAT Revenue EBIAT Revenue EBIAT
Americas $ 6,543 3.1% $ 6,335 3.0% $ 4,641 3.4%
Europe $ 2,823 4.3% $ 3,001 4.3% $ 1,787 -0.6%
Asia $ 872 4.7% $ 991 5.0% $ 2,110 5.3%
(1) Net earnings (loss) before interest, amortization of goodwill and
intangible assets, income taxes, integration costs related to acquisitions
and other charges (also referred to as operating margin). EBIAT is not a
GAAP measure. A reconciliation to GAAP net earnings (loss) is provided on
pages 14 and 15.
After two years of stable margins across all three of our major regions, we saw
our first operating losses in Europe as a result of low utilization stemming
from a major decline in revenue. As a result, the company announced further
restructuring plans to reduce capacity in the region. See pages 30 to 32 in the
MD&A.
(PIE GRAPHS)
restructuring to a low cost footprint
(percentage of total sites)
2000
81%
19%
2003 Estimate
30%
70%
higher cost sites
lower cost sites
As a company whose primary service is to generate manufacturing cost reductions
for its customer, Celestica continued to rebalance its global footprint towards
lower cost geographies. The company ended 2002 with approximately 50% of its
facilities in lower cost geographies and anticipates that approximately 70% of
its facilities will be in low cost regions by the end of 2003. See page 31 in
the MD&A for revenue trends.
Selected Operational Highlights
(PIE GRAPHS)
revenue diversification by geography
(revenue % by geography)
1998
23%
77%
Revenue: $3.2 billion
2002
21%
56%
23%
Revenue: $8.3 billion
Europe
Americas
Asia
While revenues in the Americas and Europe were most impacted by weakness in end
markets, Asia grew 113% year over year.
See pages 57 and 58 in the notes to the consolidated financial statements for
additional segmented financial information by region.
(PIE GRAPHS)
revenue mix by service
1998
21%
79%
Revenue: $3.2 billion
2002
33%
67%
Revenue: $8.3 billion
system assembly
PCBA and other
While the largest portion of the company's revenue is derived from printed
circuit board assembly (PCBA), OEM customers continue to embrace outsourcing by
entrusting EMS providers with more of their final system assembly, configuration
and order fulfillment. See page 28 in the MD&A for an overview of services.
Selected Operational Highlights
(PIE GRAPHS)
revenue diversification by end market
(percentage of revenue)
1998
33%
16%
11%
40%
Revenue: $3.2 billion
2002
26%
45%
22%
7%
Revenue: $8.3 billion
servers
communications*
storage and other
workstations and PCs
* includes: wireless, wireline, optical, networking, handheld, enterprise, etc.
The largest segments of Celestica's revenue are generated from high-end IT and
communications infrastructure products. These segments have seen the most
dramatic downturn in terms of demand, which significantly impacted Celestica's
revenue in 2002. See page 31 in the MD&A for further end-market trends.
customer concentration
(percentage of revenue)
1998 2002
Top 5 Customers 72% 66%
Top 10 Customers 91% 85%
Number of Customers 50 100+
Revenue $ 3.2 billion $ 8.3 billion
Celestica's revenue was also impacted by customer concentration in 2002.
Although the company's top 10 customers represent among the most elite and
established hardware providers in the world, our product mix with those
customers was impacted by the challenging economic environment. For additional
information on our top customers, see page 32 in the MD&A and page 57 in the
notes to the consolidated financial statements.
Unaudited Quarterly Financial Highlights
(in millions of U.S. dollars, except per share amounts)
2002 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
Revenue $ 2,151.5 $ 2,249.2 $ 1,958.9 $ 1,911.9 $ 8,271.6
EBIAT (1) $ 75.4 $ 82.0 $ 58.1 $ 41.8 $ 257.3
EBIAT % (1) 3.5% 3.6% 3.0% 2.2% 3.1%
Net earnings (loss) $ 39.7 $ 40.4 $ (90.6) $ (434.7) $ (445.2)
Adjusted net earnings (2) $ 63.4 $ 69.4 $ 50.9 $ 38.6 $ 222.3
Adjusted net earnings % (2) 2.9% 3.1% 2.6% 2.0% 2.7%
Average net invested capital (3) $ 2,056.6 $ 1,950.0 $ 1,700.9 $ 1,427.2 $ 1,772.7
Weighted average # of
shares outstanding (in millions)
- - basic 229.8 230.2 230.1 229.0 229.8
- - diluted (4) 236.8 236.0 230.1 229.0 229.8
Basic earnings (loss) per share $ 0.15 $ 0.16 $ (0.40) $ (1.90) $ (1.98)
Diluted earnings (loss)
per share (4) $ 0.15 $ 0.15 $ (0.40) $ (1.90) $ (1.98)
Diluted adjusted net
earnings per share (5) $ 0.26 $ 0.28 $ 0.20 $ 0.15 $ 0.87
ROIC (3) 14.7% 16.8% 13.6% 11.7% 14.5%
(in millions of U.S. dollars, except per share amounts)
2001 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
Revenue $ 2,692.6 $ 2,660.7 $ 2,203.0 $ 2,448.2 $ 10,004.4
EBIAT (1) $ 104.3 $ 105.8 $ 70.1 $ 90.9 $ 371.1
EBIAT % (1) 3.9% 4.0% 3.2% 3.7% 3.7%
Net earnings (loss) $ 54.8 $ 15.8 $ (38.7) $ (71.8) $ (39.8)
Adjusted net earnings (2) $ 87.3 $ 93.1 $ 64.7 $ 75.5 $ 320.6
Adjusted net earnings % (2) 3.2% 3.5% 2.9% 3.1% 3.2%
Average net invested capital (3) $ 2,471.3 $ 2,674.8 $ 2,740.1 $ 2,479.1 $ 2,506.3
Weighted average # of
shares outstanding (in millions)
- - basic 203.6 207.0 218.1 227.1 213.9
- - diluted (4) 223.1 225.5 218.1 227.1 213.9
Basic earnings (loss) per share $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ (0.26)
Diluted earnings (loss)
per share (4) $ 0.25 $ 0.06 $ (0.20) $ (0.33) $ (0.26)
Diluted adjusted net earnings
per share (5) $ 0.39 $ 0.41 $ 0.27 $ 0.31 $ 1.38
ROIC (3) 16.9% 15.8% 10.2% 14.7% 14.8%
(1) Net earnings (loss) before interest, amortization of goodwill and
intangible assets, integration costs related to acquisitions, other charges and
income taxes, (also referred to as operating margin). EBIAT is not a GAAP
measure. A reconciliation to GAAP net earnings (loss) is provided on pages 14
and 15.
(2) Net earnings (loss) adjusted for amortization of goodwill and intangible
assets, integration costs related to acquisitions and other charges, net of
related income taxes. Adjusted net earnings is not a GAAP measure. A
reconciliation to GAAP net earnings (loss) is provided on pages 14 and 15.
(3) ROIC is calculated as EBIAT/average net invested capital. Net invested
capital includes tangible assets less cash, accounts payable, accrued
liabilities and income taxes payable.
(4) For the third and fourth quarters and total years 2001 and 2002, excludes
the effect of options and convertible debt as they are anti-dilutive due to the
loss.
(5) For purposes of calculating diluted adjusted net earnings per share for
the third and fourth quarters and total year 2001, the weighted average number
of shares outstanding in millions was 235.7, 244.5 and 232.9, respectively. For
the first, second, third and fourth quarters and total year 2002, the weighted
average number of shares outstanding in millions was 247.1, 236.0, 234.9, 232.8
and 236.2, respectively.
Five Year Profile
Financial Highlights
(in millions of U.S. dollars, except per share amounts)
2002
Operations
Revenue $ 8,271.6
Gross profit % 6.7%
Selling, general and administrative expenses % 3.6%
EBIAT (1) $ 257.3
EBIAT % (1) 3.1%
Effective tax rate % 17.0%
Net earnings (loss) $ (445.2)
Earnings (loss) per share - diluted (2) $ (1.98)
Adjusted net earnings (3) $ 222.3
Adjusted net earnings % (3) 2.7%
Adjusted net earnings per share - diluted (2) (3) $ 0.87
Balance sheet data
Cash $ 1,851.0
Total current assets $ 3,564.5
Total current liabilities $ 1,471.3
Working capital, net of cash (4) $ 138.9
Long-term debt $ 6.9
Shareholders' equity $ 4,203.6
Key ratios
Days sales outstanding 44
Inventory turns 7x
Cash cycle days 18
ROIC (5) 14.5%
Debt to capital (6) 19.3%
Weighted average shares outstanding
Basic (in millions) 229.8
Diluted (in millions) (2) 229.8
EBIAT calculation (1)
Net earnings (loss) $ (445.2)
Add (deduct): interest expense (income) (1.1)
Add: amortization of goodwill and intangible assets 95.9
Add: Integration costs related to acquisitions 21.1
Add: other charges 677.8
Add (deduct): Income taxes expense (recovery) (91.2)
EBIAT $ 257.3
Adjusted net earnings calculation (3)
Net earnings (loss) $ (445.2)
Add: amortization of goodwill and intangible assets 95.9
Add: integration costs related to acquisitions 21.1
Add: other charges 677.8
Deduct: tax impact of above (127.3)
Adjusted net earnings $ 222.3
2001 2000 1999 1998
Operations
Revenue $ 10,004.4 $ 9,752.1 $ 5,297.2 $ 3,249.2
Gross profit % 7.1% 7.1% 7.2% 7.1%
Selling, general and administrative expenses % 3.4% 3.3% 3.8% 4.0%
EBIAT (1) $ 371.1 $ 361.9 $ 180.3 $ 100.0
EBIAT % (1) 3.7% 3.7% 3.4% 3.1%
Effective tax rate % 5.0% 25.1% 34.5% 4.1%
Net earnings (loss) $ (39.8) $ 206.7 $ 68.4 $ (48.5)
Earnings (loss) per share - diluted (2) $ (0.26) $ 0.98 $ 0.40 $ (0.47)
Adjusted net earnings (3) $ 320.6 $ 304.1 $ 123.0 $ 45.3
Adjusted net earnings % (3) 3.2% 3.1% 2.3% 1.4%
Adjusted net earnings per share - diluted (2) (3) $ 1.38 $ 1.44 $ 0.72 $ 0.42
Balance sheet data
Cash $ 1,342.8 $ 883.8 $ 371.5 $ 31.7
Total current assets $ 3,996.6 $ 4,521.0 $ 1,851.3 $ 982.9
Total current liabilities $ 1,656.8 $ 2,258.4 $ 851.1 $ 626.7
Working capital, net of cash (4) $ 822.8 $ 1,253.3 $ 604.9 $ 290.5
Long-term debt $ 147.4 $ 132.0 $ 134.2 $ 135.8
Shareholders' equity $ 4,745.6 $ 3,469.3 $ 1,658.2 $ 859.3
Key ratios
Days sales outstanding 53 44 39 43
Inventory turns 6x 7x 8x 8x
Cash cycle days 49 35 27 24
ROIC (5) 14.8% 21.6% 21.7% 20.4%
Debt to capital (6) 21.1% 27.6% 7.5% 13.6%
Weighted average shares outstanding
Basic (in millions) 213.9 199.8 167.2 103.0
Diluted (in millions) (2) 213.9 211.8 171.2 103.0
EBIAT calculation (1)
Net earnings (loss) $ (39.8) $ 206.7 $ 68.4 $ (48.5)
Add (deduct): interest expense (income) (7.9) (19.0) 10.7 32.3
Add: amortization of goodwill and intangible assets 125.0 88.9 55.6 45.4
Add: integration costs related to acquisitions 22.8 16.1 9.6 8.1
Add: other charges 273.1 - - 64.7
Add (deduct): income taxes expense (recovery) (2.1) 69.2 36.0 (2.0)
EBIAT $ 371.1 $ 361.9 $ 180.3 $ 100.0
Adjusted net earnings calculation (3)
Net earnings (loss) $ (39.8) $ 206.7 $ 68.4 $ (48.5)
Add: amortization of goodwill and intangible assets 125.0 88.9 55.6 45.4
Add: integration costs related to acquisitions 22.8 16.1 9.6 8.1
Add: other charges 273.1 - - 64.7
Deduct: tax impact of above (60.5) (7.6) (10.6) (24.4)
Adjusted net earnings $ 320.6 $ 304.1 $ 123.0 $ 45.3
(1) The Company manages its operations on a geographic basis and uses EBIAT,
also referred to as operating margin, as its measure to assess operating
performance by geographic segment. EBIAT is calculated as net earnings (loss)
before interest, amortization of goodwill and intangible assets, integration
costs related to acquisitions, other charges (most significantly restructuring
costs and the write-down of goodwill and intangible assets) and income taxes.
Management believes that EBIAT is the appropriate measure to compare each
segment's operating performance from period-to-period and against other
segments. Because EBIAT isolates operating activities before interest and taxes,
management also believes that investors might consider EBIAT a useful measure to
compare the Company's operating performance from period-to-period. EBIAT does
not have any standardized meaning prescribed by GAAP and is not necessarily
comparable to similar measures presented by other companies. EBIAT is 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. The Company has provided a reconciliation of EBIAT
to GAAP net earnings (loss) above.
(2) Shares outstanding and per share amounts have been restated for 1998, 1999
and 2000 to reflect the treasury stock method, retroactively applied, and for
1998 to reflect the two-for-one stock split, retroactively applied. For purposes
of calculating diluted adjusted net earnings per share for 2001 and 2002, the
weighted average number of shares outstanding, in millions, was 232.9 and 236.2,
respectively.
(3) Management uses adjusted net earnings as a measure of enterprise-wide
performance. As a result of the significant number of acquisitions made by the
Company over the past few years, management believes adjusted net earnings is a
useful measure that facilitates period-to-period comparisons. Adjusted net
earnings exclude the effects of acquisition-related charges (most significantly,
amortization of goodwill and intangible assets, and integration costs related to
acquisitions), other charges (most significantly, restructuring costs and the
write-down of goodwill and intangible assets), and the related income tax effect
of these adjustments. Adjusted net earnings does not have any standarized
meaning prescribed by GAAP and is not necessarily comparable to similar measures
presented by other companies. Adjusted net earnings is 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. The Company has provided a reconciliation of adjusted net
earnings to GAAP net earnings (loss) above.
(4) Working capital, net of cash, is calculated as accounts receivable and
inventory less accounts payable and accrued liabilities.
(5) ROIC is calculated as EBIAT/average net invested capital. Net invested
capital includes tangible assets less cash, accounts payable, accrued
liabilities and income taxes payable.
(6) Calculated as debt/capital. Debt includes long-term debt and convertible
debt. Capital includes total shareholders' equity and long-term debt.
With a major focus on working capital management, the company has established
one of the strongest balance sheets in its industry.
Despite recent challenges in its primary end markets, the company has had a
compound annual revenue growth rate of 26% since 1998.
Share Information
shares and options outstanding at December 31, 2002 (in millions)
Subordinate Voting Shares (NYSE, TSX) 189.5
Multiple Voting Shares 39.1
Shares issued and outstanding 228.6
Shares reserved for Convertible Debt 9.0
Employee Stock Options 26.1
(PIE GRAPHS)
institutional/retail split
84% institutional
16% retail
Source: Celestica estimates, Thomson Financial
global ownership
75% US / International
25% Canada
Source: Celestica estimates, Thomson Financial
(BAR GRAPHS)
average daily trading volumes
(in millions)
NYSE
1998 0.3
1999 0.4
2000 1.1
2001 2.4
2002 2.2
TSX
1998 0.5
1999 0.6
2000 0.8
2001 1.3
2002 1.3
Source: Bloomberg
total volumes traded
(in millions)
NYSE
1998 22
1999 116
2000 315
2001 702
2002 545
TSX
1998 34
1999 143
2000 202
2001 408
2002 329
Source: Bloomberg
top 20 CLS broker volumes - 2002
(volume millions)
1) Merrill Lynch 137.7
2) Salomon Smith Barney 116.8
3) Banc of America Securities 91.2
4) UBS Warburg 76.8
5) Morgan Stanley 75.3
6) Credit Suisse First Boston 69.0
7) Lehman Brothers 65.5
8) CIBC World Markets 47.2
9) TD Securities 41.0
10) Thomas Weisel Partners 40.3
11) National Bank Financial 35.5
12) RBC Capital Markets 34.8
13) Goldman Sachs 28.4
14) BMO Nesbitt Burns 26.3
15) Knight/Trimark Group 24.4
16) JP Morgan 21.4
17) ABN-AMRO 18.1
18) Yorkton Securities 16.3
19) Bear Stearns 13.2
20) Hampton Securities 11.2
Source: AutEx/BlockDATA, Toronto Stock Exchange, NYSE and TSX combined totals.
Research Banking*
Coverage Relationships
A.G. Edwards -
Banc of America Securities -
Bank of Tokyo-Mitsubishi -
Bear Stearns -
BMO Nesbitt Burns - -
Canaccord Capital -
CIBC World Markets - -
Credit Suisse First Boston - -
Desjardins Securities -
Deutsche Bank Securities - -
Goldman Sachs -
Griffiths McBurney -
Investec Inc. -
JP Morgan - -
Kaufman Brothers -
Lehman Brothers - -
McDonald Inc. - -
Merrill Lynch - -
Morgan Stanley - -
National Bank of Canada - -
Needham & Co. -
Paradigm Capital -
Prudential Securities -
RBC Capital Markets - -
Raymond James Canada -
Royal Bank of Scotland -
Salomon Smith Barney - -
Scotia Capital - -
SoundView Technology Group -
Sprott Securities -
TD Securities - -
Thomas Weisel Partners -
UBS Warburg -
* Currently earns fees or has earned fees in the past for financial services
provided to Celestica.
public credit ratings
Standard & Poor's
Corporate credit rating BB+
Subordinated notes rating BB-
Bank loan rating BB+
Outlook Stable
Moody's Investor Service
Senior implied rating Ba1
Subordinated notes rating Ba2
Bank loan rating Ba1
Outlook Stable
audit and non-audit fees
The Company's auditors are KPMG LLP. In 2002, KPMG LLP billed the Company $1.7
million (2001 - $1.5 million) for the audit of the Company's annual financial
statements, $0.4 million (2001 - $1.1 million) for audit-related services and
$1.5 million (2001 - $1.8 million) for tax and other services. KPMG LLP did not
provide any financial information systems design or implementation services to
the Company during 2001 or 2002.
The audit committee of the Company's board of directors has determined that the
provision of the non-audit services by KPMG does not compromise KPMG's
independence.
The Company also used other public accounting firms for consulting and other
services totaling $3.1 million (2001 - $3.1 million).
Corporate Information
ANNUAL MEETING
The 2002 annual meeting of Celestica shareholders will be held at 10:00 a.m.
Eastern Standard Time, April 15, 2003 at:
Imperial Room
Fairmont Royal York Hotel
100 Front Street
Toronto, Ontario
Canada M5J 1E3
HEAD OFFICE
Celestica Inc.
1150 Eglinton Avenue East
Toronto, Ontario
Canada M3C 1H7
www.celestica.com
E-mail: corpinfo@celestica.com
AUDITORS
KPMG LLP
Yonge Corporate Centre
4100 Yonge Street, Suite 200
Toronto, Ontario
Canada M2P 2H3
TRANSFER AGENTS AND REGISTRAR
Subordinate Voting Shares
Canada:
Computershare Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel: 1-800-564-6253
Fax: 1-888-453-0330
U.S.:
Computershare Trust Company, Inc.
350 Indiana Street
Suite 800
Golden, Colorado 80401
USA
Tel: 303-262-9600
Fax: 303-262-0700
INVESTOR RELATIONS
Celestica Investor Relations
1150 Eglinton Avenue East
Toronto, Ontario
Canada M3C 1H7
Tel: 416-448-2211
Fax: 416-448-2280
E-mail: clsir@celestica.com
Directors and Officers
The following individuals have been proposed for election as directors of
Celestica at the Company's Annual General Meeting taking place on April 15,
2003.
Directors
EUGENE V. POLISTUK
Eugene V. Polistuk is the founder, Chairman of the Board of Directors and Chief
Executive Officer of Celestica. He has been the Chief Executive Officer of
Celestica since its establishment in 1994, and was the company's President until
February 2001.
Since 1986, Mr. Polistuk has been instrumental in charting Celestica's
transformation and executing the company's successful evolution from its early
history as an operating unit with IBM, to a standalone public company and leader
in the electronics manufacturing services industry. Previously, Mr. Polistuk
spent 25 years with IBM Canada where, over the course of his career, he managed
all key functional areas of the business. In 1994, he was presented with the
'2T5 Meritorious Service Medal' in recognition of his meritorious service in and
for the profession, by his peers in the University of Toronto Engineering Alumni
Association. And more recently, in 2002, Mr. Polistuk was inducted by the
University of Toronto into its Engineering Hall of Distinction for his
contributions to engineering and society. Mr. Polistuk holds a Bachelor of
Applied Science degree in Electrical Engineering from the University of Toronto
and a Doctor of Engineering (Hon.) from Ryerson University.
ROBERT L. CRANDALL
Robert L. Crandall is the retired Chairman of the Board and Chief Executive
Officer of AMR Corporation/American Airlines Inc. Mr. Crandall has been a
director of Celestica since July 1998, and was appointed Lead Director in
December 2002. He is also a director of Anixter International Inc., the
Halliburton Company, and i2 Technologies Inc. He also serves on the
International Advisory Board of American International Group, Inc. Mr. Crandall
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
William A. Etherington is a corporate director serving on the boards of
Celestica Inc. (since October 2001), Canadian Imperial Bank of Commerce, Dofasco
Inc., MDS Inc. and AT&T Canada. He is the former Senior Vice President and Group
Executive, Sales and Distribution, IBM Corporation, and Chairman, President and
Chief Executive Officer of IBM World Trade Corporation. After joining IBM Canada
in 1964, Mr. Etherington ran successively larger portions of the company's
business in Canada, Latin America, Europe and from the corporate office in
Armonk, New York. He retired from IBM after a 37-year career. Mr. Etherington
holds a Bachelor of Science degree in Electrical Engineering and a Doctor of
Laws (Hon.) from the University of Western Ontario.
RICHARD S. LOVE
Richard S. Love is a former Vice President of Hewlett-Packard and a former
General Manager of the Computer Order Fulfillment and Manufacturing Group for
Hewlett-Packard's Computer Systems Organization. Mr. Love has been a director of
Celestica since July 1998. From 1962 until 1997, he held positions of increasing
responsibility with 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.
ANTHONY R. MELMAN
Anthony R. Melman is a Vice President of Onex and has been a director of
Celestica since 1996. Dr. Melman joined Onex Corporation in 1984. He serves on
the boards of various Onex subsidiaries. From 1977 to 1984, Dr. Melman was
Senior Vice President of Canadian Imperial Bank of Commerce in charge of
worldwide merchant banking, project financing, acquisitions and other
specialized financing activities. Prior to emigrating to Canada in 1977, he had
extensive merchant banking experience in South Africa and the U.K. Dr. Melman is
also a director of The Baycrest Centre Foundation, The Baycrest Centre for
Geriatric Care, the University of Toronto Asset Management Corporation, and a
member of the Board of Governors of Mount Sinai Hospital. He is also Chair of
Fundraising for the Pediatric Oncology Group of Ontario (POGO). Dr. Melman holds
a Bachelor of Science degree in Chemical Engineering from the University of The
Witwatersrand, a Master of Business Administration (gold medalist) from the
University of Cape Town and a Ph.D. in Finance from the University of The
Witwatersrand.
GERALD W. SCHWARTZ
Gerald W. Schwartz is the Chairman of the Board and Chief Executive Officer of
Onex Corporation, and has been a director of Celestica since July 1998. Prior to
founding Onex in 1983, Mr. Schwartz was a co-founder (in 1977) of what is now
CanWest Global Communications Corp. He is a director of Onex, The Bank of Nova
Scotia, Phoenix Entertainment Corp. and Vincor International Inc., and Chairman
of Loews Cineplex Entertainment Corp. Mr. Schwartz is also Vice Chairman and
member of the Executive Committee of Mount Sinai Hospital, and is a director,
governor or trustee of a number of other organizations, including Junior
Achievement of Toronto, Canadian Council of Christians and Jews, The Board of
Associates of the Harvard Business School, 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, and a Doctor of
Laws (Hon.) from St. Francis Xavier University.
CHARLES W. SZULUK
Charles W. Szuluk, formerly an officer of The Ford Motor Company, was President
of Visteon Automotive Systems, and a Group Vice President. From 1988 until 1999,
he held positions of increasing responsibility with Ford, including General
Manager, Electronics Division, and Vice President, Process Leadership and
Information Systems. He retired from Ford in 1999. Prior to joining Ford, he
spent 24 years with IBM Corporation in a variety of management and executive
management positions. Mr. Szuluk holds a Bachelor of Science degree in Chemical
Engineering from the University of Massachusetts and attended Union College of
New York in Advanced Graduate Studies.
DON TAPSCOTT
Don Tapscott is an internationally respected authority, consultant and speaker
on business strategy and organizational transformation. He is the author of
several widely read books on the application of technology in business. Mr.
Tapscott is President of New Paradigm Learning Corporation - a business strategy
and education company he founded in 1992, and an adjunct Professor of Management
at the University of Toronto's Joseph L. Rotman School of Management. He is also
a founding member of the Business and Economic Roundtable on Addiction and
Mental Health, and a fellow of the World Economic Forum. Mr. Tapscott has been a
director of Celestica since September 1998. He holds a Bachelor of Science
degree in Psychology and Statistics, and a Master of Education degree,
specializing in Research Methodology, as well as a Doctor of Laws (Hon.) from
the University of Alberta.
Officers of the Company
Eugene V. Polistuk
Chairman, Chief Executive Officer
J. Marvin MaGee
President, Chief Operating Officer
Anthony P. Puppi
Executive Vice President, Chief Financial Officer and General Manager, Global
Services
R. Thomas Tropea
Vice Chair, Global Customer Units and Worldwide Marketing and Business
Development
Stephen W. Delaney
President, Americas
N.K. Quek
President, Asia
Peter J. Bar
Vice President and Corporate Controller
Arthur P. Cimento
Senior Vice President, Corporate Strategies
Elizabeth L. DelBianco
Vice President,
General Counsel and Secretary
Iain S. Kennedy
Group Executive, Global Supply Chain and Information Technology
Donald S. McCreesh
Senior Vice President, Human Resources
Paul Nicoletti
Vice President and Corporate Treasurer
Daniel P. Shea
Group Executive and Chief Technology Officer
Rahul Suri
Senior Vice President, Corporate Development
F. Graham Thouret
Senior Vice President, Finance
Corporate Governance
Good corporate governance is extremely important to Celestica, its employees and
shareholders.
The Board and management have been following closely the developments in
corporate governance requirements and best practices standards in both Canada
and the United States. As these requirements and practices have evolved,
Celestica has responded in a positive and proactive way. For example, in
addition to other actions that have been taken, Celestica has elected to comply
on a voluntary basis with the CEO and CFO certification requirements applicable
to quarterly financial reporting by U.S. companies under the Sarbanes-Oxley Act
of 2002 ("SOX"). Under SOX rules, non-U.S. companies such as Celestica are
required to provide such certifications only in connection with annual filings.
Although the introduction by the Toronto Stock Exchange ("TSX") of certain
corporate governance listing standards (the "Proposed TSX Listing Standards")
and certain amendments to its corporate governance guidelines (the "Proposed TSX
Amendments") have not yet advanced past the proposal stage, the
company has begun the process of conforming its governance standards to those
being proposed.
Similarly, although changes in the corporate governance requirements proposed by
The New York Stock Exchange (the "Proposed NYSE Amendments") have not yet been
finalized and may not be applicable to non-U.S. companies, Celestica is
proceeding to conform its governance practices to the proposed amendments and
intends to comply with the final standards.
Celestica's statement of corporate governance practices is reproduced below.
This statement is included in the Management Information Circular ("Circular")
distributed in connection with Celestica's Annual Shareholders Meeting. In
addition to describing Celestica's governance practices with reference to the
TSX Corporate Governance Guidelines, the statement indicates how those
governance practices align with the requirements and SEC proposed regulations
under SOX, the Proposed NYSE Amendments, the Proposed TSX Listing Standards and
the Proposed TSX Amendments.
Requirement
1. Mandate of the Board
The Board of Directors should explicitly assume responsibility for stewardship
of the Corporation. (TSX Guidelines) (The Proposed TSX Amendments state that the
Board should adopt a formal mandate setting out its stewardship
responsibilities.)
As part of the overall stewardship responsibility, the Board should assume
responsibility specifically for:
(i) adoption of a strategic planning process
(ii) identification of principal risks and implementation of risk-managing
systems
(iii) succession planning, including appointing, training and monitoring
management
(iv) communications policy
(v) the integrity of internal control and management information systems.
2. Composition of the Board
At least two directors must be unrelated. (Proposed TSX Listing Standards)
Majority of directors should be "unrelated" (free from conflicting interest).
(TSX Guidelines)
Board should include a number of directors unrelated to the corporation or the
significant shareholder that fairly reflects the investment in the corporation
by shareholders other than the significant shareholder. (TSX Guidelines)
Majority of the directors should be independent. (Proposed NYSE Amendments)*
* This provision does not apply to companies with a controlling shareholder,
such as the Corporation; however the Corporation is adopting this standard on a
voluntary basis.
3. Determination of Status of Directors
Disclose for each director whether he or she is related, and how that conclusion
was reached.
Board must affirmatively determine independence, subject to certain tests set
out in the Proposed NYSE Amendments.
4. Nominating/Corporate Governance Committee
Appoint a Committee composed of non-management directors, a majority of whom are
unrelated directors, responsible for the appointment/assessment of directors.
(TSX Guidelines)
Have a nominating/corporate governance committee composed entirely of
independent directors, with a written charter that addresses certain matters set
out in the Proposed NYSE Amendments.*
5. Board Assessment
Implement a process for assessing the effectiveness of the Board, its Committees
and individual directors.
6. Orientation and Education
Provide orientation and education programs for new directors. (TSX Guidelines)
Provide ongoing education for all directors. (Proposed TSX Amendments)
7. Size and Composition of the Board
Examine the size of the Board with a view to determining the impact of the
number on effectiveness of decision-making. (TSX Guidelines)
Examine the size and composition of the Board and undertake a program to
establish a Board comprised of members who facilitate effective decision making.
(Proposed TSX Amendments)
8. Compensation
Review the adequacy and form of compensation of directors in light of risks and
responsibilities. (TSX Guidelines)
Committee of the Board comprised solely of unrelated directors should review the
adequacy and form of the compensation of senior management and directors, with
such compensation realistically reflecting the responsibilities and risks of
such positions. (Proposed TSX Amendments)
Have a compensation committee composed entirely of independent directors, with a
written charter that addresses certain matters set out in the Proposed NYSE
Amendments.*
* This provision does not apply to companies with a controlling shareholder,
such as the Corporation; however, the Corporation is adopting this standard on a
voluntary basis.
9. Composition of Committees
Committees should generally be composed of non-management directors, the
majority of whom are unrelated. (TSX Guidelines)
10. Governance Committee
The Board should assume responsibility for, or appoint a Committee responsible
for, approach to corporate governance issues. This committee would, among other
things, be responsible for the Corporation's response to the TSX Guidelines.
(TSX Guidelines)
11. Position Descriptions
Develop position descriptions for the Board and for the CEO, including the
definition of limits for management's responsibilities.
The Board should develop the corporate objectives, which the CEO is responsible
for meeting.
12. Procedures to Ensure Independence
Establish appropriate procedures to enable the Board to function independently
of management.
An appropriate structure would be to (i) appoint a Chairman of the Board who is
not a member of management with responsibility to ensure that the Board
discharges its responsibilities or (ii) adopt alternate means such as assigning
this responsibility to a committee of the Board or to a director, sometimes
referred to as the "lead director". (TSX Guidelines)
Appropriate procedures may involve the Board meeting on a regular basis without
management present or may involve expressly assigning responsibility for
administering the Board's relationship to management to a committee of the
Board. (TSX Guidelines and Proposed NYSE Amendments)
13. Composition of the Audit Committee
The Audit Committee should be composed only of outside directors. (TSX
Guidelines)
The Audit Committee must be composed of a majority of unrelated directors and
should be composed only of unrelated directors. (Proposed TSX Listing Standards)
The Audit Committee should be composed only of independent directors, defined
with respect to the Audit Committee in accordance with the Proposed NYSE
Amendments. (Proposed NYSE Amendments)
The Audit Committee must be composed only of independent directors. (SOX)
Qualifications
All members of the Audit Committee should be financially literate. (Proposed TSX
Amendments)
At least one member of the Audit Committee should have accounting or related
financial expertise. (Proposed TSX Amendments)
At least one member of the Audit Committee should be an Audit Committee
financial expert. (SOX)
The roles and responsibilities of the Audit Committee should be specifically
defined so as to provide appropriate guidance to Audit Committee members as to
their duties. (TSX Guidelines)
Internal Controls
Audit Committee duties should include oversight responsibility for management
reporting on internal control. While it is management's responsibility to design
and implement an effective system of internal control, it is the responsibility
of the Audit Committee to ensure that management has done so. (TSX Guidelines)
Resources
The Audit Committee must have the authority and resources to engage and pay
outside advisors.(SOX)
Internal Audit Function
Have an internal audit function. (Proposed NYSE Amendments)
Hiring and Firing External Auditor
The Audit Committee is to have sole authority to hire and fire independent
auditors and approve any significant non-audit relationship with the independent
auditors. (Proposed NYSE Amendments)
Communications with External Auditor
The Audit Committee should have direct communication channels with the internal
and the external auditors to discuss and review specific issues as appropriate.
(TSX Guidelines)
14. Audit Committee Mandate
The Audit Committee must have a charter that sets out explicitly the role and
oversight responsibility with respect to certain matters. (Proposed TSX Listing
Standards)
The Audit Committee must have a written charter that addresses certain matters
set out in the Proposed NYSE Amendments.
The Audit Committee must establish procedures to deal with complaints relating
to the Corporation's accounting, internal accounting controls and auditing
matters. (SOX)
15. External Advisors
Implement a system to enable individual directors to engage outside advisors, at
the corporation's expense. The engagement of the outside advisor should be
subject to the approval of an appropriate committee of the Board. (TSX
Guidelines)
Other Matters
16. Equity Compensation Plans
Shareholders must be given the opportunity to vote on all equity-compensation
plans (except inducement options, plans relating to mergers or acquisitions, and
tax qualified and excess benefit plans). (Proposed NYSE Amendments)
17. Corporate Governance Disclosure
Adopt and disclose corporate governance guidelines. (Proposed NYSE Amendments)
18. Code of Conduct
Adopt and disclose a code of business conduct and ethics for directors, officers
and employees and promptly disclose any waivers of the code for directors and
executive officers. (Proposed NYSE Amendments and Proposed TSX Listing
Standards)
Comments
1. The Board of Directors has assumed responsibility for the stewardship of
the Corporation and is in the process of adopting a formal mandate.
The Board has assumed responsibility specifically for the matters set out below:
(i) The adoption of a strategic planning process and the review and approval
on an annual basis of a strategic plan which takes into account the
opportunities and risks of the business and long-term corporate objectives and
industry positioning.
(ii) Regular review of the Corporation's overall business risks and systems to
address and manage such risks.
(iii) Succession planning for key senior management positions, and the CEO in
particular, and skills assessments of individuals identified to fill key roles.
(iv) Review and approval of the Corporation's Fair Disclosure Policy - which
addresses interaction with analysts and investors, timely disclosure and
avoidance of selective disclosure - and contents of all major disclosure
documents such as the Annual Information Form, the Management Information
Circular and all Prospectuses.
(v) The integrity of the Corporation's internal business controls and
management information systems, which the Board and the Audit Committee monitor
and assess regularly with management and with the external auditors.
2. A majority of the directors of the Corporation are unrelated.
At the date of this Circular, [March 1, 2003] eight of the nine members of the
Board of Directors are "unrelated", both as that term is defined in the existing
TSX Guidelines and as it is defined in the Proposed TSX Amendments. Roger Martin
and Michio Naruto are not standing for re-election as directors. Charles Szuluk
is being proposed for election as a director. If the shareholders elect the
individuals being proposed for election in this Circular, seven of the eight
members of the Board of Directors will be unrelated.
Onex Corporation is a significant shareholder of the Corporation. At the date of
this Circular, seven directors (78% of the Board) are unrelated to Onex and six
directors (67% of the Board) are unrelated to both Onex and to management.
Following the upcoming annual meeting, if the shareholders elect the individuals
being proposed for election in this Circular, six directors (75% of the Board)
will be unrelated to Onex and five directors (63% of the Board) will be
unrelated to both Onex and to management. This is the case both as "unrelated"
is defined in the existing TSX Guidelines and as "unrelated" is defined in the
Proposed TSX Amendments.
At the date of this Circular, eight of the directors (89% of the Board) are
"independent" for purposes of the Proposed NYSE Amendments.
If the shareholders elect the individuals being proposed for election, seven
directors (88% of the Board) will be independent for purposes of the Proposed
NYSE Amendments.
3. The Board of Directors has considered the relationship of each of its
directors to the Corporation.
- - Mr. Polistuk is a related director because he is the CEO of the
Corporation.
- - Mr. Schwartz and Mr. Melman are shareholders, officers and/or directors of
Onex. The TSX Guidelines and Proposed TSX Amendments are clear that interests
and relationships that arise solely from shareholdings do not preclude a
director from being considered unrelated. This is consistent with the
determination of "independence" under the Proposed NYSE Amendments which state
that, as the concern is independence from management, ownership of even a
significant amount of stock is not a bar to a finding of independence.
The Board has considered the relationship arising from a services
agreement that is in place between the Corporation and Onex. The agreement does
not involve the delegation to Onex of any aspect of the management of the
business and affairs of Celestica, provides for payment obligations which are
not material to either Celestica or Onex, and does not, in the view of the
Board, interfere with the ability of Messrs. Schwartz or Melman to act
independently of management. The Board has accordingly determined that Messrs.
Schwartz and Melman are unrelated directors.
- - The definition of "unrelated director" in the Proposed TSX Amendments
suggests that an employee of an affiliate cannot be considered unrelated. The
Corporation has received advice that the TSX agrees that this provision was
included in the Proposed TSX Amendments in error and that it will be removed
before the Proposed TSX Amendments are released for public comment. Relying on
this advice and on the analysis above, the Board considers Messrs. Schwartz and
Melman unrelated for purposes of the Proposed TSX Amendments.
- - Messrs. Crandall, Etherington, Love, Martin, Naruto and Tapscott have no
material business or other relationship with the Corporation or members of the
Corporation's management, other than their positions as directors, optionees and
shareholders, and, as a result, the Board of Directors has determined that each
of these directors is an unrelated director.
- - Mr. Szuluk has been proposed for election as a director at the upcoming
meeting of shareholders. He does not have any material business relationship
with the Corporation or members of the Corporation's management, other than his
proposed position as a director of the Corporation.
The Board has affirmatively determined that Messrs. Crandall, Etherington, Love,
Martin, Melman, Schwartz, Naruto and Tapscott (as well as Mr. Szuluk, who has
been proposed for election as a director at the upcoming meeting of
shareholders) are independent. (See discussion above regarding determination
that these directors are unrelated.)
4. The Board has a Nominating and Corporate Governance Committee. The mandate
of this committee is posted on the Corporation's web site. The members of the
Nominating and Corporate Governance Committee are Messrs. Crandall, Etherington,
Love, Melman and Tapscott, each of whom is an unrelated director. The Nominating
and Governance Committee has a written mandate that addresses all of the matters
in the Proposed NYSE Amendments. This mandate is posted on the Corporation's web
site. Each of the members of the Nominating and Corporate Governance Committee
(named above) is an independent director.
5. The Nominating and Corporate Governance Committee is charged with the
responsibility for developing and recommending to the Board a process for
assessing the effectiveness of the Board as a whole, the committees of the Board
and the contribution of individual directors. It is also responsible for
overseeing the execution of the assessment process approved by the Board. The
Nominating and Corporate Governance Committee is currently overseeing the design
of an assessment program appropriate for the Board and its Committees. As part
of its written mandate, each of the Nominating and Corporate Governance
Committee, the Compensation Committee and the Audit Committee is required to
assess its performance on an annual basis.
6. New directors are oriented to the business and affairs of the Corporation
through discussions with management and other directors and by periodic
presentations from senior management on major business, industry and competitive
issues.
Management and outside advisors provide information and education sessions to
the Board and its Committees as necessary to keep the directors up-to-date with
the Corporation, its business and the environment in which it operates as well
as with developments in the responsibilities of directors.
7. The Board of Directors believes that its size is appropriate given the
size and complexity of the Corporation's business and that it facilitates
effective decision-making.
The directors of the Corporation are satisfied with the size of the Board and
believe that the current Board composition results in a balanced representation
on the Board of Directors among management, the significant shareholder and
unrelated directors. Directors bring a balance of skills and experience
necessary for the Board to discharge its oversight function effectively.
8. The Board of Directors has considered the remuneration paid to directors
and considers it appropriate in light of the time commitment and risks and
responsibilities involved.
The Board has a Compensation Committee. The Compensation Committee has a written
mandate which includes reviewing the adequacy and form of compensation of senior
management and the directors, with such compensation realistically reflecting
the responsibilities and risks of such positions. The
mandate has been posted on the Corporation's web site. The members of the
Compensation Committee are Messrs. Etherington, Crandall, Love, Melman and
Tapscott, each of whom is an unrelated director.
The Board has a Compensation Committee. The mandate of this committee includes
responsibility for all of the matters contemplated under the Proposed NYSE
Amendments. The mandate has been posted on the Corporation's web site. Each of
the members of the Compensation Committee (named above) is an independent
director.
9. The Board of Directors has established three standing committees of
directors (the Audit Committee, the Compensation Committee and the Nominating
and Corporate Governance Committee), each with a specific mandate and each of
which is comprised entirely of unrelated directors. The Board also has an
Executive Committee which meets on an ad hoc basis. Consistent with the TSX
Guidelines, the Executive Committee is comprised of a majority of unrelated
directors. The members of the Executive Committee are Messrs. Polistuk, Crandall
and Melman.
10. The Nominating and Corporate Governance Committee is responsible for
making recommendations to the Board relating to the Corporation's approach to
corporate governance and is responsible for the Corporation's Statement of
Corporate Governance.
11. The Board of Directors has developed a position description for the CEO
and, as stated in Item 1, will adopt a formal mandate for the Board. The Board
of Directors requires management to obtain the Board of Directors' approval for
all significant decisions, including major financings, acquisitions,
dispositions, budgets and capital expenditures. The Board of Directors expects
management to keep it aware of the Corporation's performance and events
affecting the Corporation's business, including opportunities in the marketplace
and adverse or positive developments. The Board of Directors retains
responsibility for any matter that has not been delegated to senior management
or to a committee of directors.
The Board of Directors approves specific financial and business objectives,
which will be used as a basis for measuring the performance of the CEO.
12. If the shareholders elect the individuals being proposed for election in
this Circular, [see commentary in section 2 above] the Board of Directors will
include only one director who is a member of the Corporation's management, while
seven directors are not part of the Corporation's management.
Mr. Polistuk, who is the CEO, currently serves as Chairman of the Board of
Directors. The Board of Directors is of the view that appropriate structures and
procedures are in place to allow the Board to function independently of
management while continuing to provide the Corporation with the benefit of
having a Chairman of the Board with extensive experience and knowledge of the
Corporation's business.
The Board has created the position of lead director and has appointed Mr.
Crandall to that position. Mr. Crandall is also chair of the Nominating and
Corporate Governance Committee.
The non-management members of the Board meet without management present as part
of every Board of Directors meeting. Mr. Crandall presides at these meetings.
The Board of Directors also has access to information independent of management
through the Corporation's external auditors and outside advisors. See disclosure
above.
13. The members of the Audit Committee are Messrs. Martin, Crandall, Love,
Etherington and Tapscott. The composition of the Audit Committee meets the
requirements under the TSX Guidelines (outside directors only), the Proposed TSX
Amendments (unrelated directors only), SOX (independent directors only) and the
Proposed NYSE Amendments (independent directors only).
See above.
See above.
See above.
The Board has determined that all members of the Audit Committee are financially
literate, since each member has the ability to read and understand a balance
sheet, an income statement, a cash flow statement and the notes attached
thereto.
The Board has determined that Messrs. Crandall and Etherington have accounting
or financial expertise, since they each have the ability to analyse and
interpret a full set of financial statements, including the notes thereto, in
accordance with generally accepted accounting principles.
The Board has considered the extensive financial experience of each of Mr.
Crandall and Mr. Etherington, including their respective experience 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 SOX.
See item 14 below.
The Audit Committee oversees management reporting on the Corporation's internal
controls. The Committee annually reviews and approves the mandate and plan of
the internal audit department. The internal auditor is required to report
regularly to the Committee and the Committee has direct communication channels
with the internal auditors to discuss and review specific issues as appropriate.
As part of the written mandate of the Audit Committee, the Audit Committee has
the authority to retain such outside legal, accounting or other advisors as it
may consider appropriate. The Audit Committee is not required to obtain the
approval of the Board in order to retain or compensate such advisors.
The Corporation has a well-developed internal audit function, which it
complements through the use of external advisors for specific projects and in
jurisdictions where specialized expertise is required.
The Audit Committee has sole authority for recommending the person to be
proposed to the Corporation's shareholders for appointment as external auditor
and whether, at any time, the incumbent external auditor should be removed from
office. The Audit Committee must pre-approve any non-audit services by the
independent auditors.
The Audit Committee has direct communication channels with the internal and
external auditors to discuss and review specific issues as appropriate. The
Audit Committee meets with each of the internal auditor and the external auditor
in the absence of management as part of every Audit Committee meeting.
14. The Audit Committee has a well-defined mandate which sets out its
relationship with, and expectations of, the external auditors, including the
establishment of the independence of the external auditor and the 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 a written mandate that addresses all of the matters in
the Proposed NYSE Amendments. This mandate is posted on the Corporation's web
site.
The Audit Committee's mandate includes responsibility for establishing such
procedures.
15. Each committee is empowered to engage external advisors as it sees fit.
Any individual director is entitled to engage an outside advisor at the expense
of the Corporation provided that such director has obtained the approval of the
Nominating and Corporate Governance Committee to do so.
16. The Corporation has stock option and share purchase plans which were
reviewed by the TSX at the time of the Corporation's initial public offering.
The TSX requires that any material amendments to those plans be approved by
shareholders.
17. The Corporate Governance Committee is overseeing the development of
corporate governance guidelines as contemplated by the Proposed NYSE Amendments.
Many of the governance practices contemplated by the Proposed NYSE Amendments
have been part of the Corporation's governance practices for some time and are
described in this Statement of Corporate Governance Practices.
18. The Corporation has had a Code of Business Conduct in place since its
inception. The Nominating and Corporate Governance Committee is in the process
of reviewing that code to confirm that it encompasses all of the areas
contemplated by the Proposed NYSE Amendments. When this review has been
completed and any changes to the Code have been approved by the Board, the
Corporation's Code of Business Conduct will be posted on the Corporation's web
site.
Company Values
At Celestica, we are proud of our history in the technology industry. We compete
to win in the global marketplace with products and services that delight our
customers. We are committed to providing superior value to our stakeholders. Our
key competitive advantage is our people - technology alone will not guarantee
our future. Creativity, commitment and our passion for responsiveness allow us
to thrive in a changing business environment. To ensure continued financial
success, pride in our workplace and high morale, we are committed to achieving
Celestica's goals through adherence to these stated values and principles:
People
We are responsible and trustworthy. We have a sense of ownership and perform
best when:
- - Respect for the individual is demonstrated and we treat each other with
dignity and fairness.
- - Diversity and equity are embraced in all our policies and practices.
- - Status differentials are based only on business requirements.
- - Conflict is resolved in a direct and timely manner.
- - Work is stimulating and challenging.
- - There is a balance between work and personal life.
- - The leadership team sets an example by demonstrating commitment to these
values and principles.
Partnerships
Mutually beneficial relationships with customers, suppliers, educational
institutions and the community are essential.
- - The highest standards of ethical behaviour are followed in all of our
dealings.
- - We understand and anticipate our partners' needs and capabilities, and
help them plan for future requirements.
- - Suppliers and other partners are recognized as an extension of our team.
- - We support and encourage community involvement.
Customers
Celestica's success is driven by our customers' success.
- - It is easy to do business with us.
- - We respond to our customers' needs with speed, agility and a 'can do'
attitude.
- - We are competitive with our commitments and we meet them.
Quality
Quality is defined by the customer.
- - Requirements are clearly defined, communicated and understood.
- - We strive for error-free work and defect prevention.
- - Variances are detected and permanently corrected at the source, ensuring
that defects do not escape to the customer.
- - Continuous improvement is designed into every aspect of our business.
- - Quality is everyone's responsibility.
- - We do not compromise quality.
Teamwork and Empowerment
We work together to achieve Celestica's goals.
- - We support Celestica's goals over a team's or individual's business goals.
- - Teams have the necessary skills, resources, information and authority to
self-manage both social and technical issues.
- - Roles and responsibilities are clearly defined and understood.
- - Adaptability, flexibility and initiative are expected from all.
- - We willingly undertake any task required for the effective operation of
our business.
- - Leadership roles and activities are shared.
- - Decisions are made:
- at the source;
- based on input from those affected;
- considering both business and individual needs.
- - We are accountable for our actions and responsibilities.
- - We challenge boundaries and practices to initiate improvement.
- - We encourage activities that build teamwork and high morale.
Technology and Processes
Our success is based on innovation and technology leadership.
- - We make optimal use of resources and adhere to defined processes.
- - We strive for simplicity and ease-of-use in the design of processes.
- - Processes and systems are understood and developed with input from those
responsible for execution.
- - We use tools, technology and processes best suited to sustain our
competitive advantage.
Communication
We take time to listen and ensure understanding.
- - Information is shared to maximize understanding, commitment and ownership.
- - Communication is clear, timely, honest, accurate and takes place directly
between concerned parties.
- - We constructively offer and accept feedback.
High-Calibre Workforce
We maintain a high-calibre workforce.
- - We attract and retain people with the best qualifications, skills,
aptitudes and attitudes that match our long-term requirements and work culture.
- - We are trained and qualified to be proficient in our jobs.
- - The development of appropriate technical, interpersonal and team skills is
a shared responsibility between Celestica and each employee.
- - We are responsible for effective knowledge transfer, skills development
and succession planning.
- - Developmental and job opportunities are known and accessible to all
employees.
- - We are committed to continuous learning.
- - We have a flexible workforce in which employment arrangements may differ.
We are committed to making employment a rewarding experience for both Celestica
and the individual.
Compensation and Recognition
Our compensation programs are competitive and influenced by overall company
success.
- - We know what is expected of us and how our contribution is measured.
- - Ongoing poor performance is not tolerated.
- - We encourage innovation and risk-taking, and treat errors as opportunities
to learn and grow.
- - Skills, knowledge and contributions to the achievement of goals are key
elements that influence compensation, recognition and opportunity.
- - Individual, team and company achievements are recognized in a fair and
consistent manner.
- - We celebrate our successes.
Environment
We take pride in our workplace and are a responsible corporate citizen.
- - Each of us is obligated to maintain a safe, clean, healthy and secure work
environment.
- - Our workplace is a showcase of our capabilities.
- - We promote a healthy lifestyle.
- - We protect the environment.
Environmental Policy
Celestica has adopted the following Environmental Policy - to protect the
environment and to conduct its operations in the electronics manufacturing
services industry using sound management practices. This policy is the
foundation for our environmental objectives listed below.
- - Be an environmentally responsible neighbour in the communities where we
operate. We will act responsibly to correct conditions that impact health,
safety or the environment.
- - Commit to a 'prevention of pollution' program and achieve continual
improvement in our environmental objectives.
- - Environmental objectives and targets will be set each year based on the
previous year's results and trends.
- - Practice conservation in all areas of our business.
- - Develop safe, energy efficient and environmentally conscious products and
manufacturing processes.
- - Assist in the development of technological solutions to environmental
problems.
- - Comply with or exceed all applicable and anticipated environmental
Legislation and Regulations. Where none exist, we will set and adhere to
stringent standards of our own.
- - Conduct rigorous self-assessments and audits to ensure our compliance with
this policy on an ongoing basis.
Management's Discussion and Analysis
of financial condition and results of operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the 2002 Consolidated Financial
Statements. All dollar amounts are expressed in U.S. dollars.
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, and elsewhere in this
Annual Report, including, without limitation, statements containing the words
believes, anticipates, estimates, expects, and words of similar import,
constitute forward-looking statements. Forward-looking statements are not
guarantees of future performance and involve risks and uncertainties which could
cause actual results to differ materially from those anticipated in these
forward-looking statements. These risks and uncertainties include, but are not
limited to: the challenges of effectively managing our operations during
uncertain economic conditions; the challenge of responding to
lower-than-expected customer demand; the effects of price competition and other
business and competitive factors generally affecting the EMS industry; our
dependence on the computer and communications industries; our dependence on a
limited number of customers and on industries affected by rapid technological
change; component constraints; variability of operating results among periods;
and the ability to manage expansion, consolidation and the integration of
acquired businesses. These and other risks and uncertainties and factors are
discussed in the Company's filings with the Canadian Securities Commission and
the U.S. Securities and Exchange Commission, including the Company's Annual
Report on Form 20-F and subsequent reports on Form 6-K with the Securities and
Exchange Commission.
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.
Overview
Celestica is a world leader in providing electronics manufacturing services to
OEMs in the information technology and communications industries. Celestica
provides a wide variety of products and services to its customers, including the
high-volume manufacture of complex printed circuit board assemblies and the full
system assembly of final products. In addition, the Company is a leading-edge
provider of design, repair and engineering services, supply chain management and
power products. Celestica operates facilities in the Americas, Europe and Asia.
2002 was a challenging year as the information technology and communications end
markets remained weak. Revenue for 2002 was $8.3 billion, down 17% from $10.0
billion for 2001. The reduced demand for Celestica's products and services
contributed to the decrease in revenue and margins for 2002. Revenue from
existing customers decreased for the second consecutive year.
Historically, acquisitions have contributed significantly to the Company's
growth, with 2001 being the most active year for acquisitions, in terms of the
number of acquisitions closed and the total purchase price. Growth from
acquisitions in 2002, however, was minimal. Celestica continues to evaluate
acquisition opportunities and anticipates that acquisitions will continue to
contribute to its future growth.
In 2001, the Company announced its first restructuring plan in response to the
weakened end markets. The continued downturn into 2002 resulted in the Company
announcing further restructuring actions, which it expects to complete by the
end of 2003. The restructurings were focused on consolidating facilities and
increasing capacity in lower cost geographies. The Company expects that it will
have a better-balanced manufacturing footprint when all of the planned
restructuring actions are completed.
In the fourth quarter of 2002, Celestica recorded impairment losses totaling
$285.4 million, in connection with its annual impairment tests of goodwill and
long-lived assets, based on factors and conditions at the time the assessments
were performed. Conditions in the marketplace deteriorated significantly from
January 1, 2002, when the Company completed its evaluation of the transitional
goodwill impairment, as required by the new goodwill standards. Future
impairment tests may result in additional impairment charges.
In 2002, management focused on reducing working capital, and increased its cash
balance to its highest level in the Company's history. Cash earned from
operations in 2002 fully funded the Company's 2002 acquisitions of $111.0
million, repayment of $130.0 million of subordinated debt, the repurchase of
$32.5 million in capital stock and the repurchase of convertible debt for an
aggregate purchase price of $100.3 million.
Critical Accounting Policies and Estimates
Celestica prepares its financial statements in accordance with generally
accepted accounting principles (GAAP) in Canada with a reconciliation to United
States GAAP, as disclosed in note 22 to the 2002 Consolidated Financial
Statements.
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 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 preparation of the financial
statements are described in note 2 to the 2002 Consolidated Financial
Statements. The Company evaluates its estimates and assumptions on a regular
basis, based on historical experience and other relevant factors. Significant
estimates are used in determining, but not limited to, the allowance for
doubtful accounts, inventory valuation, income tax valuation allowances, the
fair value of reporting units for purposes of goodwill impairment tests, the
useful lives and valuation of intangible assets, and restructuring charges.
Actual results could differ materially from those estimates and assumptions.
Revenue recognition:
Celestica derives most of its revenue from OEM customers. The contractual
agreements with its key customers generally provide a framework for its overall
relationship with the customer. Celestica recognizes product revenue upon
shipment to the customer as performance has occurred, all customer specified
acceptance criteria have been tested and met, and the earnings process is
considered complete. Actual production volumes are based on purchase orders for
the delivery of products. These orders typically do not commit to firm
production schedules for more than 30 to 90 days in advance. Celestica minimizes
its risk relative to its
inventory by ordering materials and components only to the extent necessary to
satisfy existing customer orders. Celestica is largely protected from the risk
of inventory cost fluctuations as these costs are generally passed through to
customers.
Allowance for doubtful accounts:
Celestica records an allowance for doubtful accounts related to accounts
receivable that are considered to be impaired. The allowance is based on the
Company's knowledge of the financial condition of its customers, the aging of
the receivables, current business environment, customer and industry
concentrations, and historical experience. A change to these factors could
impact the estimated allowance and the provision for bad debts recorded in
selling, general and administrative expenses.
Inventory valuation:
Celestica values its inventory on a first-in, first-out basis at the lower of
cost and replacement cost for production parts, and at the lower of cost and net
realizable value for work in progress and finished goods. Celestica regularly
adjusts its inventory valuation based on shrinkage and management's estimates of
net realizable value, taking into consideration factors such as inventory aging,
future demand for the inventory, and the nature of the contractual agreements
with customers and suppliers, including the ability to return inventory to them.
A change to these assumptions could impact the valuation of inventory and have a
resulting impact on margins.
Income tax valuation allowance:
Celestica records 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 and tax planning
strategies. A change to these factors could impact the estimated valuation
allowance and income tax expense.
Goodwill:
Celestica performs its annual goodwill impairment tests in the fourth quarter of
each year, and more frequently if events or changes in circumstances indicate
that an impairment loss may have been incurred. Impairment is tested at the
reporting unit level by comparing the reporting unit's carrying amount to its
fair value. The fair values of the reporting units are estimated using a
combination of a market 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 cash
flow projections at the reporting unit level, and discount rates. Celestica
recorded an impairment loss in the fourth quarter of 2002. Future goodwill
impairment tests may result in further impairment charges.
Intangible assets:
Celestica performs its annual impairment tests on long-lived assets in the
fourth quarter of each year, and more frequently if events or changes in
circumstances indicate that an impairment loss may have been incurred. Celestica
estimates the useful lives of intangible assets based on the nature of the
asset, historical experience and the terms of any related supply contracts. The
valuation of intangible assets is based on the amount of future net cash flows
these assets are estimated to generate. Revenue and expense projections are
based on management's estimates, including estimates of current and future
industry conditions. A
significant change to these assumptions could impact the estimated useful lives
or valuation of intangible assets resulting in a change to amortization expense
and impairment charges.
Restructuring charges:
Celestica recorded restructuring charges in 2001 and 2002, relating to facility
consolidations and workforce reductions. These charges are recorded based on
detailed plans approved and committed to by management. The restructuring
charges include employee severance and benefit costs, costs related to leased
facilities that will be abandoned or subleased, owned facilities which are no
longer used and will be held for disposition, cost of leased equipment that will
be abandoned, impairment of owned equipment that will be held for disposition,
and impairment of related intangible assets, primarily intellectual property.
The recognition of these charges requires management to make certain judgments
and estimates regarding the nature, timing and amount associated with these
plans. The estimates of future liability may change, requiring additional
restructuring charges or a reduction of the liabilities already recorded. At the
end of each reporting period, the Company evaluates the appropriateness of the
remaining accrued balances.
Recent Acquisitions
A significant portion of Celestica's growth in prior years was generated by
strengthening its customer relationships and increasing the breadth of its
service offerings through asset and business acquisitions. The Company focused
on investing strategically in acquisitions that better positioned the Company
for future outsourcing opportunities. Celestica's most active year for
acquisitions was 2001. The historical pace of Celestica's acquisitions did not
continue in 2002 and may not continue in the future.
As a result of the continued downturn in the economy, some of the sites acquired
in prior years have been impacted by the Company's latest round of
restructuring. Supply agreements entered into in connection with certain
acquisitions were also affected by order cancellations and reschedulings as
base-business volumes have decreased. See discussion below in "Results of
Operations."
2001 Asset Acquisitions:
In February 2001, Celestica acquired certain manufacturing assets in Dublin,
Ireland and Mt. Pleasant, Iowa from Motorola Inc. and signed supply agreements.
In March 2001, Celestica acquired certain assets relating to N.K. Techno Co.
Ltd's repair business, which expanded the Company's presence in Japan, and
established a greenfield operation in Shanghai. In May 2001, Celestica acquired
certain assets from Avaya Inc. in Little Rock, Arkansas and Denver, Colorado,
and, in August 2001, acquired certain assets in Saumur, France. The Company
signed a five-year supply agreement with Avaya. In August 2001, Celestica
acquired certain assets in Columbus, Ohio and Oklahoma City, Oklahoma from
Lucent Technologies Inc. and signed a five-year supply agreement. The aggregate
purchase price for these asset acquisitions in 2001 of $834.1 million was
financed with cash.
2001 Business Combinations:
In January 2001, Celestica acquired Excel Electronics, Inc. through a merger
with Celestica (U.S.) Inc., which enhanced the Company's prototype service
offering in the southern region of the United States. In June 2001, Celestica
acquired Sagem CR s.r.o., in the Czech Republic, from Sagem SA, of France, which
enhanced the Company's presence in central Europe. In August 2001, Celestica
acquired Primetech Electronics Inc. (Primetech), an EMS provider in
Canada. The purchase price for Primetech was financed primarily with the
issuance of 3.4 million subordinate voting shares and the issuance of options to
purchase 0.3 million subordinate voting shares of the Company.
In October 2001, Celestica acquired Omni Industries Limited (Omni). Omni is an
EMS provider, headquartered in Singapore, with locations in Singapore, Malaysia,
China, Indonesia and Thailand, and had approximately 9,000 employees at the date
of acquisition. Omni provides printed circuit board assembly and system assembly
services, as well as other related supply chain services including plastic
injection molding and distribution. Omni manufactures products for
industry-leading OEMs in the PC, storage and communications sectors. The
acquisition significantly enhanced Celestica's EMS presence in Asia. The
purchase price for Omni of $865.8 million was financed with the issuance of 9.2
million subordinate voting shares and the issuance of options to purchase 0.3
million subordinate voting shares of the Company, and $479.5 million in cash.
The aggregate purchase price for these business combinations in 2001 was
$1,093.3 million, of which $526.3 million was financed with cash.
2002 Asset Acquisitions:
In March 2002, the Company acquired certain assets located in Miyagi and
Yamanashi, Japan from NEC Corporation. The Company signed a five-year supply
agreement to provide a complete range of electronics manufacturing services for
a broad range of NEC's optical backbone and broadband access equipment. In
August 2002, the Company acquired certain assets from Corvis Corporation in the
United States. The Company signed a multi-year supply agreement with Corvis,
which positioned Celestica as the exclusive manufacturer of Corvis' terrestrial
optical networking products and sub-sea terminating equipment. The aggregate
purchase price for these acquisitions in 2002 of $111.0 million was financed
with cash and allocated to the net assets acquired, based on their relative fair
values at the date of acquisition.
Celestica may at any time be engaged in ongoing discussions with respect to
several possible acquisitions of widely-varying sizes, including small single
facility acquisitions, significant multiple facility acquisitions and corporate
acquisitions. Celestica has identified several possible acquisitions that would
enhance its global operations, increase its penetration in several industries
and establish strategic relationships with new customers. There can be no
assurance that any of these discussions will result in a definitive purchase
agreement and, if they do, what the terms or timing of any agreement would be.
Celestica expects to continue any current discussions and actively pursue other
acquisition opportunities.
Results of Operations
Celestica's 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 customers' orders will vary due to customers' attempts to
balance their inventory, changes in their manufacturing strategies, variation in
demand for their products and general economic conditions. Celestica's annual
and quarterly operating results are also affected by capacity utilization,
geographic manufacturing mix and other factors, including price competition,
manufacturing effectiveness and efficiency,
the degree of automation used in the assembly process, the ability to manage
labour, inventory and capital assets effectively, the timing of expenditures in
anticipation of forecasted sales levels, the timing of acquisitions and related
integration costs, customer product delivery requirements, shortages of
components or labour and other factors. Weak end-market conditions began to
emerge in early to mid-2001 and have continued to weaken for the communications
and information technology industries. This resulted in customers rescheduling
or cancelling orders which negatively impacted Celestica's results of
operations.
The table below sets forth certain operating data expressed as a percentage of
revenue for the years indicated:
Year ended December 31
2000 2001 2002
Revenue 100.0% 100.0% 100.0%
Cost of sales 92.9 92.9 93.3
Gross profit 7.1 7.1 6.7
Selling, general and administrative expenses 3.3 3.4 3.6
Amortization of goodwill and intangible assets 1.0 1.3 1.2
Integration costs related to acquisitions 0.2 0.2 0.2
Other charges 0.0 2.7 8.2
Operating income (loss) 2.6 (0.5) (6.5)
Interest income, net (0.2) (0.1) (0.0)
Earnings (loss) before income taxes 2.8 (0.4) (6.5)
Income taxes (recovery) 0.7 0.0 (1.1)
Net earnings (loss) 2.1% (0.4)% (5.4)%
(BAR GRAPH)
revenue
(in billions)
1998 $ 3.2
1999 $ 5.3
2000 $ 9.8
2001 $ 10.0
2002 $ 8.3
Revenue
Revenue decreased 17%, to $8,271.6 million in 2002 from $10,004.4 million in
2001, primarily due to a reduction in base-business volumes as a result of the
prolonged weakened end-market conditions. Excess capacity in the EMS industry
also put pressure on pricing for components and services, thereby reducing
revenue. The visibility of end-market conditions remains limited.
Celestica manages its operations on a geographic basis. The three reporting
segments are the Americas, Europe and Asia. Revenue from the Americas operations
decreased 27%, to $4,640.8 million in 2002 from $6,334.6 million in 2001.
Revenue from European operations decreased 40%, to $1,786.5 million in 2002 from
$3,001.3 million in 2001. The Americas and European operations have been hardest
hit by customer cancellations and delays of orders because of the downturn in
end-market demand for their products, as well as the customers' demands for
lower product manufacturing costs. As a result, the Company has initiated
restructuring actions to reduce the manufacturing capacity in these geographies,
which includes downsizing and closure of manufacturing facilities. The
restructuring actions also include transferring programs from higher cost
geographies to lower cost geographies. Revenue from Asian operations increased
113%, to $2,109.7 million in 2002 from $991.1 million in 2001. The increase in
revenue from Asian operations is primarily due to acquisitions and an increase
in base-business volumes. The effect of the 2002 acquisitions and the shifting
of program activities from other geographies are expected to increase revenue in
the Asian operations in 2003.
Revenue increased 3%, to $10,004.4 million in 2001 from $9,752.1 million in
2000. Acquisition revenue grew by 14%, offset by an 11% decline in base-business
volumes. The acquisition growth was a result of strategic acquisitions in the
communications industry, primarily in the U.S. and Asia. Base-business revenue
declined in 2001 due to the softening of end markets. Revenue from the Americas
operations decreased 3%, to $6,334.6 million in 2001 from $6,542.7 million in
2000, primarily due to continued end-market softening which was partially offset
by acquisitions. Revenue from European operations increased 6%, to $3,001.3
million in 2001 from $2,823.3 million in 2000, due to the flow through of the
IBM acquisition from 2000, and from the 2001 acquisitions, partially offset by
the general industry downturn. Revenue from Asian operations increased 14%, to
$991.1 million in 2001 from $871.6 million in 2000, primarily due to the Omni
acquisition offset in part by the general industry downturn. The following
represents the end-market industries as a percentage of revenue for the
indicated periods:
Year ended December 31
2000 2001 2002
Communications 31% 36% 45%
Servers 33% 31% 26%
Storage and other 14% 18% 22%
Workstations and PCs 22% 15% 7%
The following customers represented more than 10% of total revenue for each of
the indicated periods:
Year ended December 31
2000 2001 2002
Sun Microsystems y y y
IBM y y y
Lucent Technologies y y
Celestica's top five customers represented in the aggregate 66% of total revenue
in 2002, compared to 67% in 2001 and 69% in 2000. The Company is dependent upon
continued revenue from its top customers. There can be no assurance that revenue
from these or any other customers will not increase or decrease as a percentage
of total revenue either individually or as a group. Any material decrease in
revenue from these or other customers could have a material adverse effect on
the Company's results of operations. See notes 17 (concentration of risk) and 19
to the 2002 Consolidated Financial Statements.
Gross profit
Gross profit decreased 22%, to $555.8 million in 2002 from $712.5 million in
2001. Gross margin decreased to 6.7% in 2002 from 7.1% in 2001. Gross margins
decreased 0.4% from prior year, primarily due to the significant reduction in
business volumes and industry pricing pressures. The European operations were
most adversely affected as they were operating at lower levels of utilization
and higher fixed costs for the year. The volume reductions tended to impact
higher value-added products, disproportionately, further adversely affecting the
European margins. In addition, costs for the European operations were higher
than expected due to delays in transferring programs, the slower pace of
restructuring and some process scrap and related inventory issues, in the latter
part of the year. The margin declines in the European operations were offset
partially by improved margins in the Americas and Asian operations. The Americas
improved its operating efficiencies, had higher value-added product mix and
benefited from restructuring actions. Asian margins improved on higher volumes
and utilization rates.
Gross profit increased 4%, to $712.5 million in 2001 from $688.0 million in
2000. Gross margin was 7.1% in 2001, consistent with 2000. Margins were
maintained due to continued focus on costs and supply chain initiatives, and the
benefits of the 2001 restructuring actions. For the foreseeable future, the
Company's gross margin is expected to depend on product mix, production
efficiencies, utilization of manufacturing capacity, geographic manufacturing
mix, start-up activity, new product introductions, pricing within the
electronics industry, cost structure at individual sites and other factors. Over
time, gross margins at individual sites and for the Company as a whole are
expected to fluctuate. Also, the availability of labour and raw materials, which
are subject to lead time and other constraints, could possibly limit the
Company's revenue growth.
(BAR GRAPH)
SG & A percentage
(percentage of revenue)
1998 4.0%
1999 3.8%
2000 3.3%
2001 3.4%
2002 3.6%
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased 13%, to $298.5
million (3.6% of revenue) in 2002 from $341.4 million (3.4% of revenue) in 2001.
SG&A as a percentage of revenue increased as certain elements of expenses were
fixed over this period. The decrease in SG&A, on an absolute basis, reflects the
benefits from the Company's restructuring programs and a reduction in
discretionary spending, which more than offset the increase in expenses due to
operations acquired in the latter part of 2001 and in 2002.
SG&A increased 5%, to $341.4 million (3.4% of revenue) in 2001 from $326.1
million (3.3% of revenue) in 2000. The increase in expenses was primarily due to
operations acquired during 2000 and 2001.
Research and development costs increased to $18.2 million (0.2% of revenue) in
2002, compared to $17.1 million (0.2% of revenue) in 2001 and $19.5 million
(0.2% of revenue) in 2000.
Amortization of goodwill and intangible assets
Amortization of goodwill and intangible assets decreased 23%, to $95.9 million
in 2002 from $125.0 million in 2001. Effective January 1, 2002, the Company
fully adopted the new accounting standards for goodwill and discontinued
amortization of all goodwill effective that date. Amortization of goodwill for
2001 was $39.2 million. See "Recent Accounting Developments." The decrease in
amortization is the result of this change in accounting for goodwill, offset in
part by the amortization of intangible assets arising from the 2001 and 2002
acquisitions. See note 2(q)(ii) to the 2002 Consolidated Financial Statements
for the impact of the change in policy on net earnings (loss) and per share
calculations.
Amortization of goodwill and intangible assets increased 41%, to $125.0 million
in 2001 from $88.9 million in 2000. The increase is attributable to the goodwill
and intangible assets arising from 2000 and 2001 acquisitions.
Integration costs related to acquisitions
Integration costs related to acquisitions represent one-time costs incurred
within 12 months of the acquisition date, such as the costs of implementing
compatible information technology systems in newly acquired operations,
establishing new processes related to marketing and distribution processes to
accommodate new customers, and salaries of personnel directly involved with
integration activities. All of the integration costs incurred related to newly
acquired facilities, and not to the Company's existing operations.
Integration costs were $21.1 million in 2002, compared to $22.8 million in 2001
and $16.1 million in 2000. The integration costs incurred in 2002 primarily
relate to the Lucent, NEC Japan and Omni acquisitions.
Integration costs vary from period to period due to the timing of acquisitions
and related integration activities.
Other charges
In 2002, Celestica incurred $677.8 million in other charges, compared to $273.1
million in 2001.
Year ended December 31
2001 2002
(in millions)
2001 restructuring $ 237.0 $ 1.9
2002 restructuring -- 383.5
2002 goodwill impairment -- 203.7
Other impairment 36.1 81.7
Deferred financing costs and debt redemption fees -- 9.6
Gain on sale of surplus land -- (2.6)
$ 273.1 $ 677.8
Further details of the other charges are included in note 13 to the 2002
Consolidated Financial Statements.
To date, the Company has announced two restructuring plans in response to the
economic climate. These actions, which included reducing the workforce,
consolidating facilities and changing the strategic focus of the number and
geography of sites, was largely intended to align the Company's capacity and
infrastructure to anticipated customer demand, as well as to rationalize its
footprint worldwide. The 2001 restructuring plan amounted to $237.0 million. The
2002 restructuring plan amounted to $383.5 million. Cash outlays are funded from
cash on hand.
The Company has and expects to continue to benefit from the restructuring
measures taken in 2001 and 2002 through reduced operating costs. The Company has
completed the major components of the 2001 restructuring plan, except for
certain long-term lease and other contractual obligations. The Company expects
to complete the major components of the 2002 restructuring plan by the end of
2003, except for certain long-term lease and other contractual obligations. The
Company continues to evaluate its cost structure relative to its revenue levels
and may take additional restructuring charges in the future. See "Recent
Developments."
In the fourth quarter of 2002, the Company recorded a non-cash charge against
goodwill of $203.7 million, in connection with its annual impairment assessments
of goodwill. An independent third-party valuation confirmed the fair value of
the reporting units and the impairment assessment. In the fourth quarter of
2002, the Company also recorded a non-cash charge of $81.7 million, primarily
against intangible assets. In 2001, the Company recorded a non-cash charge of
$36.1 million, primarily against goodwill and intangible assets. See note 7 to
the 2002 Consolidated Financial Statements.
The Company may continue to experience goodwill and intangible asset impairment
charges in the future as a result of adverse changes in the electronics
industry, customer demand and other market conditions, which may have a material
adverse effect on the Company's financial condition.
Interest income, net
Interest income in 2002 amounted to $17.2 million, compared to $27.7 million in
2001, and $36.8 million in 2000. Interest income decreased for 2002 compared to
2001, primarily due to lower interest rates on cash balances. Interest income
was offset by interest expense on the Company's Senior Subordinated Notes and
debt facilities, which has decreased from $19.8 million in 2001 to $16.1 million
in 2002, due to the redemption of the Senior Subordinated Notes in August 2002.
Interest expense is expected to decrease for 2003 as a result of the full-year
effect of the redemption.
Income taxes
The income tax recovery in 2002 was $91.2 million, reflecting an effective tax
recovery rate of 17%. This is compared to an income tax recovery of $2.1 million
in 2001, reflecting an effective tax recovery rate of 5%.
The Company's effective tax rate is the result of the mix and volume of business
in lower tax jurisdictions within Europe and Asia. These lower tax rates include
tax holidays and tax incentives that Celestica has negotiated with the
respective tax authorities which expire between 2004 and 2012. The tax benefit
arising from these incentives is approximately $24.9 million, or $0.11 diluted
per share for 2002 and $9.6 million, or $0.04 diluted per share for 2001. The
Company expects the current tax rate of 17% to continue for the foreseeable
future based on the anticipated nature and conduct of its business and the tax
laws, administrative practices and judicial decisions now in effect in the
countries in which the Company has assets or conducts business, all of which are
subject to change or differing interpretation, possibly with retroactive
effects.
The net deferred income tax asset as at December 31, 2002 of $274.3 million
arises from available income tax losses and future income tax deductions. The
Company's ability to use these income tax losses and future income tax
deductions is dependent upon the operations of the Company in the tax
jurisdictions in which such losses or deductions arose. Management records 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. Based on the reversal of deferred income tax
liabilities, projected future taxable income, the character of the income tax
asset and tax planning strategies, management has determined that a valuation
allowance of $76.6 million is required in respect of its deferred income tax
assets as at December 31, 2002. No valuation allowance was required for the
deferred income tax assets as at December 31, 2001. In order to fully utilize
the net deferred income tax assets of $274.3 million, the Company will need to
generate future taxable income of approximately $741.0 million. Based on the
Company's current projection of taxable income for the periods in which the
deferred income tax assets are deductible, it is more likely than not that the
Company will realize the benefit of the net deferred income tax assets as at
December 31, 2002.
Liquidity and Capital Resources
In 2002, operating activities provided Celestica with $982.8 million in cash,
compared to $1,290.5 million in 2001. Cash was generated from earnings and a
reduction in working capital, primarily inventory, due to improved inventory
management, and the collection of accounts receivable. The Company will continue
to focus on improving working capital management. Cash generated from operations
was sufficient to fully fund the Company's investing and financing activities
for 2002.
Investing activities for 2002 included capital expenditures of $151.4 million,
and asset acquisitions of $111.0 million offset by proceeds from the sale of the
Company's Columbus, Ohio facility and from the sale-leaseback of machinery and
equipment.
In 2002, Celestica redeemed the entire $130.0 million of outstanding Senior
Subordinated Notes which were due in 2006 and paid the contractual premium of
5.25%, or $6.9 million, on redemption. The Company also reduced the leverage on
its balance sheet by repurchasing Liquid Yield Option(TM) Notes (LYONs) in the
open market. These LYONs, having a principal
amount at maturity of $222.9 million, were repurchased at an average price of
$450.10 per LYON, for a total of $100.3 million. A gain of $6.7 million, net of
taxes of $3.9 million, was recorded. See further details in note 10 to the 2002
Consolidated Financial Statements. The Company may, from time to time, purchase
additional LYONs in the open market. Subsequent to year-end, the board of
directors authorized the Company to spend up to an additional $100.0 million to
repurchase LYONs, at management's discretion. This is in addition to the amounts
authorized in October 2002, of which $48.0 million remains available for future
purchases. The amount and timing of future purchases cannot be determined at
this time.
In July 2002, Celestica filed a Normal Course Issuer Bid to repurchase up to 9.6
million subordinate voting shares, for cancellation, over a period from
August 1, 2002 to July 30, 2003. The shares will be purchased at the market
price at the time of purchase. The number of shares to be repurchased during any
30-day period may not exceed 2% of the outstanding subordinate voting shares. A
copy of our Notice relating to the Normal Course Issuer Bid may be obtained from
Celestica, without charge, by contacting the Company's Investor Relations
Department at clsir@celestica.com. In 2002, the Company repurchased 2.0 million
subordinate voting shares at a weighted average price of $16.23 per share. All
of these transactions were funded with cash on hand.
In 2001, operating activities provided Celestica with $1,290.5 million in cash
principally from earnings and a reduction in working capital. The primary
factors contributing to the positive cash flow for the year were the reduction
of inventory due to better inventory management, strong accounts receivable
collections and the sale of $400.0 million in accounts receivable under a
revolving facility, offset by a decrease in accounts payable and accrued
liabilities. Investing activities in 2001 included capital expenditures of
$199.3 million and $1,299.7 million for acquisitions. See "Recent Acquisitions."
The Company fully funded the 2001 acquisitions with cash from operations. The
Company's 2001 financing activities included the issuance in May of 12.0 million
subordinate voting shares for gross proceeds of $714.0 million and the repayment
of $56.0 million of debt acquired in connection with the acquisition of Omni.
(BAR GRAPH)
debt to capital improves (1)
(percentage)
1998 14%
1999 8%
2000 28%
2001 21%
2002 19%
(1) Calculated as debt/capital. Debt includes long-term debt and convertible
debt. Capital includes total shareholder's equity and long-term debt.
Capital Resources
During the year, Celestica amended its credit facilities. At December 31, 2002,
the Company had two credit facilities: a $500 million four-year revolving term
credit facility and a $350 million revolving term credit facility which expire
in 2005 and 2004, respectively. The Company elected to cancel its third credit
facility which was originally entered into in July 1998. The credit facilities
permit Celestica and certain designated subsidiaries to borrow funds directly
for general corporate purposes (including acquisitions) at floating rates. Under
the credit facilities: Celestica is required to maintain certain financial
ratios; its ability and that of certain of its subsidiaries to grant security
interests, dispose of assets, change the nature of its business or enter into
business combinations, is restricted; and, a change in control is an event of
default. No borrowings were outstanding under the revolving credit facilities at
December 31, 2002.
Celestica and certain subsidiaries have uncommitted bank facilities which total
$47.1 million that are available for operating requirements.
Celestica believes that cash flow from operating activities, together with cash
on hand and borrowings available under its credit facilities, will be sufficient
to fund currently anticipated working capital, planned capital spending and debt
service requirements for the next 12 months. The Company expects capital
spending for 2003 to be in the range of 1.5% to 2.0% of revenue. At December 31,
2002, Celestica had committed $30.3 million in capital expenditures. In
addition, Celestica regularly reviews acquisition opportunities, and therefore,
may require additional debt or equity financing.
The Company has an arrangement to sell up to $400.0 million in accounts
receivable under a revolving facility which is available until September 2004.
As of year-end, the Company generated cash from the sale of $320.5 million in
accounts receivable. The terms of the arrangement provide that the purchaser may
elect not to purchase receivables if Celestica's credit rating falls below a
specified threshold. Celestica's credit rating is significantly above that
threshold.
Celestica prices the majority of its products in U.S. dollars, and the majority
of its material costs are also denominated in U.S. dollars. However, a
significant portion of its non-material costs (including payroll, facilities
costs, and costs of locally sourced supplies and inventory) are denominated in
various currencies. As a result, Celestica may experience transaction and
translation gains or losses because of currency fluctuations. The Company has an
exchange risk management policy in place to control its hedging programs and
does not enter into speculative trades. At December 31, 2002, Celestica had
forward foreign exchange contracts covering various currencies in an aggregate
notional amount of $669.1 million with expiry dates up to March 2004, except for
one contract for $10.6 million that expires in January 2006. The fair value of
these contracts at December 31, 2002, was an unrealized gain of $18.9 million.
Celestica's current hedging activity is designed to reduce the variability of
its foreign currency costs and generally involves entering into contracts to
trade U.S. dollars for Canadian dollars, British pounds sterling, Mexican pesos,
euros, Thailand baht, Singapore dollars, Brazilian reais, Japanese yen and Czech
koruna at future dates. In general, these contracts extend for periods of less
than 19 months. Celestica may, from time to time, enter into additional hedging
transactions to minimize its exposure to foreign currency and interest rate
risks. There can be no assurance that such hedging transactions, if entered
into, will be successful. See note 2(n) to the 2002 Consolidated Financial
Statements.
As at December 31, 2002, the Company has contractual obligations that require
future payments as follows:
(in millions) Total 2003 2004 2005 2006 2007 Thereafter
Long-term debt $ 6.9 $ 2.7 $ 2.5 $ 1.5 $ 0.1 $ 0.1 $ -
Operating leases 338.3 106.5 59.5 38.9 23.0 18.9 91.5
As at December 31, 2002, the Company has convertible instruments, the LYONs,
with an outstanding principal amount at maturity of $1,590.6 million payable
August 1, 2020. Holders of the instruments have the option to require Celestica
to repurchase their LYONs on August 2, 2005, at a price of $572.82 per LYON, or
a total of $911.1 million. The Company may elect to settle in cash or shares or
any combination thereof. See further details in note 10 to the 2002 Consolidated
Financial Statements.
Under the terms of an existing real estate lease which expires in 2004,
Celestica has the right to acquire the real estate at a purchase price equal to
the lease balance which currently is approximately $37.3 million. In the event
that the lease is not renewed, subject to certain conditions, Celestica may
choose to market and complete the sale of the real estate on behalf of the
lessor. If the highest offer received is less than the lease balance, Celestica
would pay the lessor the lease balance less the gross sale proceeds, subject to
a maximum of $31.5 million. In the event that no acceptable offers are received,
Celestica would pay the lessor $31.5 million and return the property to the
lessor. Alternatively, Celestica may choose to acquire the real estate at the
expiration for a price equal to the then current lease balance. The future lease
payments under this lease are included in the total operating lease commitments.
As at December 31, 2002, the Company has commitments that expire as follows:
(in millions) Total 2003 2004 2005 2006 2007 Thereafter
Foreign currency contracts $ 669.1 $ 621.5 $ 39.6 $ 5.3 $ 2.7 $ - $ -
Letters of credit, letters of
guarantee and surety
and performance bonds 61.2 37.6 1.0 16.9 - 3.9 1.8
The Company has also provided routine indemnifications, whose terms range in
duration and often are not explicitly defined. These guarantees may include
indemnifications against adverse effects due to changes in tax laws and patent
infringements by third parties. The maximum amounts from these indemnifications
cannot be reasonably estimated. In some cases, the Company has recourse against
other parties to mitigate its risk of loss from these guarantees. Historically,
the Company has not made significant payments relating to these
indemnifications.
The Company expenses management related fees charged by its parent company.
Management believes that the fees charged are reasonable in relation to the
services provided. See note 15 to the 2002 Consolidated Financial Statements.
Recent Developments
In January 2003, the Company made the following announcements:
In response to the continued limited visibility in end markets, the Company
plans to further reduce its manufacturing capacity. The reduction in capacity
will result in a pre-tax
restructuring charge of between $50.0 million and $70.0 million, to be recorded
during 2003, of which approximately 80% will be cash costs.
The Company has, from time to time, purchased LYONs on the open market. The
Company has been authorized by the board of directors to spend up to an
additional $100.0 million to repurchase LYONs, at management's discretion. This
is in addition to the amounts authorized in October 2002, of which $48.0 million
remains available for future purchases.
Recent Accounting Developments
Business combinations, goodwill and other intangible assets:
In September 2001, the CICA issued Handbook Sections 1581, "Business
Combinations" and 3062, "Goodwill and Other Intangible Assets." The FASB issued
similar standards in July 2001. See notes 2(q)(ii) and 22(k) to the 2002
Consolidated Financial Statements.
Stock-based compensation and other stock-based payments:
Effective January 1, 2002, the Company adopted the new CICA Handbook
Section 3870. See note 2(q)(iii) to the 2002 Consolidated Financial Statements.
Foreign currency translation and hedging relationships:
In January 2002, the CICA issued Accounting Guideline AcG-13. See note 2(r) to
the 2002 Consolidated Financial Statements.
Impairment of long-lived assets:
In August 2001, FASB approved SFAS No. 143, "Accounting for Asset Retirement
Obligations" and in October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." In December 2002, the CICA issued
standards similar to SFAS No. 144. See notes 22(k) and 2(r) to the 2002
Consolidated Financial Statements.
Costs associated with exit or disposal activities:
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," effective for exit or disposal activities that are
initiated after December 31, 2002. See note 22(k) to the 2002 Consolidated
Financial Statements.
Guarantees:
In November 2002, FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements." In December 2002, the CICA approved AcG-14 which harmonizes
Canadian GAAP to the disclosure requirements of FIN 45. See notes 22(k) and 2(r)
to the 2002 Consolidated Financial Statements.
Consolidation of variable interest entities:
In January 2003, FASB issued FIN 46, "Consolidation of Variable Interest
Entities." See note 22(k) to the 2002 Consolidated Financial Statements.
Management's Responsibility
for financial statements
The accompanying Consolidated Financial Statements have been prepared by
management and approved by the Board of Directors of the Company. Management is
responsible for the information and representations contained in these financial
statements and in other sections of this Annual Report.
The Company maintains appropriate processes to ensure that relevant and reliable
financial information is produced. The Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in
Canada. The significant accounting policies, which management believes are
appropriate for the Company, are described in note 2 to the Consolidated
Financial Statements.
The Board of Directors is responsible for reviewing and approving the
Consolidated Financial Statements and overseeing management's performance of its
financial reporting responsibilities. An Audit Committee of five non-management
Directors is appointed by the Board.
The Audit Committee reviews the Consolidated Financial Statements, adequacy of
internal controls, audit process and financial reporting with management and
with the external auditors. The Audit Committee reports to the Directors prior
to the approval of the audited Consolidated Financial Statements for
publication.
KPMG LLP, the Company's external auditors, who are appointed by the
shareholders, audited the Consolidated Financial Statements in accordance with
Canadian generally accepted auditing standards and United States generally
accepted auditing standards to enable them to express to the shareholders their
opinion on the Consolidated Financial Statements. Their report is below.
Anthony P. Puppi
Executive Vice President,
Chief Financial Officer
January 21, 2003
Auditors' Report
To the Shareholders of Celestica Inc.
We have audited the consolidated balance sheets of Celestica Inc. as at
December 31, 2001 and 2002 and the consolidated statements of earnings (loss),
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2001
and 2002 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
January 21, 2003
Consolidated Balance Sheets
(in millions of U.S. dollars)
As at December 31
2001 2002
Assets
Current assets:
Cash and short-term investments $ 1,342.8 $ 1,851.0
Accounts receivable (note 4) 1,054.1 785.9
Inventories (note 5) 1,372.7 775.6
Prepaid and other assets 177.3 115.1
Deferred income taxes 49.7 36.9
3,996.6 3,564.5
Capital assets (note 6) 915.1 727.8
Goodwill from business combinations (note 7) 1,128.8 948.0
Intangible assets (note 7) 427.2 211.9
Other assets (note 8) 165.2 354.6
$ 6,632.9 $ 5,806.8
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,198.3 $ 947.2
Accrued liabilities 405.7 475.4
Income taxes payable 21.0 24.5
Deferred income taxes 21.8 21.5
Current portion of long-term debt (note 9) 10.0 2.7
1,656.8 1,471.3
Long-term debt (note 9) 137.4 4.2
Accrued pension and post-employment benefits (note 16) 47.3 77.2
Deferred income taxes 41.5 46.2
Other long-term liabilities 4.3 4.3
1,887.3 1,603.2
Shareholders' equity 4,745.6 4,203.6
$ 6,632.9 $ 5,806.8
Commitments, contingencies and guarantees (note 18)
Canadian and United States accounting policy differences (note 22)
Subsequent events (note 23)
On behalf of the Board:
Robert L. Crandall Eugene V. Polistuk
Director Director
See accompanying notes to consolidated financial statements.
Consolidated Statements of Earnings (Loss)
(in millions of U.S. dollars, except per share amounts)
Year ended December 31
2000 2001 2002
Revenue $ 9,752.1 $ 10,004.4 $ 8,271.6
Cost of sales 9,064.1 9,291.9 7,715.8
Gross profit 688.0 712.5 555.8
Selling, general and administrative expenses 326.1 341.4 298.5
Amortization of goodwill and intangible assets (note 7) 88.9 125.0 95.9
Integration costs related to acquisitions (note 3) 16.1 22.8 21.1
Other charges (note 13) -- 273.1 677.8
431.1 762.3 1,093.3
Operating income (loss) 256.9 (49.8) (537.5)
Interest on long-term debt 17.8 19.8 16.1
Interest income, net (36.8) (27.7) (17.2)
Earnings (loss) before income taxes 275.9 (41.9) (536.4)
Income taxes (note 14):
Current expense 80.1 25.8 16.6
Deferred (recovery) (10.9) (27.9) (107.8)
69.2 (2.1) (91.2)
Net earnings (loss) $ 206.7 $ (39.8) $ (445.2)
Basic earnings (loss) per share (note 12) $ 1.01 $ (0.26) $ (1.98)
Diluted earnings (loss) per share (notes 2, 12) $ 0.98 $ (0.26) $ (1.98)
Weighted average number of shares outstanding (note 12)
Basic (in millions) 199.8 213.9 229.8
Diluted (in millions) (note 2) 211.8 213.9 229.8
Net earnings (loss) in accordance with U.S. GAAP (note 22) $ 197.4 $ (51.3) $ (494.9)
Basic earnings (loss) per share, in accordance with
U.S. GAAP (note 22) $ 0.99 $ (0.24) $ (2.15)
Diluted earnings (loss) per share, in accordance
with U.S. GAAP (note 22) $ 0.96 $ (0.24) $ (2.15)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
(in millions of U.S. dollars)
Foreign
Convertible Capital Retained Currency Total
Debt Stock Contributed Earnings Translation Shareholders'
(note 10) (note 11) Surplus (Deficit) Adjustment Equity
Balance -- December 31, 1999 $ -- $ 1,646.1 $ -- $ 16.2 $ (4.1) $ 1,658.2
Convertible debt issued, net 850.4 -- -- -- -- 850.4
Convertible debt accretion, net of tax 10.1 -- -- (5.4) -- 4.7
Shares issued, net -- 749.3 -- -- -- 749.3
Net earnings for the year -- -- -- 206.7 -- 206.7
Balance -- December 31, 2000 860.5 2,395.4 -- 217.5 (4.1) 3,469.3
Convertible debt accretion, net of tax 26.3 -- -- (15.0) -- 11.3
Shares issued, net -- 1,303.6 -- -- -- 1,303.6
Currency translation -- -- -- -- 1.2 1.2
Net loss for the year -- -- -- (39.8) -- (39.8)
Balance -- December 31, 2001 886.8 3,699.0 -- 162.7 (2.9) 4,745.6
Convertible debt accretion, net of tax 28.7 -- -- (17.5) -- 11.2
Repurchase of convertible debt (note 10) (110.9) -- -- 6.7 -- (104.2)
Shares issued, net -- 8.5 -- -- -- 8.5
Repurchase of shares (note 11) -- (36.9) 5.8 (1.4) -- (32.5)
Currency translation -- -- -- -- 20.2 20.2
Net loss for the year -- -- -- (445.2) -- (445.2)
Balance -- December 31, 2002 $ 804.6 $ 3,670.6 $ 5.8 $ (294.7) $ 17.3 $ 4,203.6
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(in millions of U.S. dollars)
Year ended December 31
2000 2001 2002
Cash provided by (used in):
Operations:
Net earnings (loss) $ 206.7 $ (39.8) $ (445.2)
Items not affecting cash:
Depreciation and amortization 212.5 319.5 311.0
Deferred income taxes (10.9) (27.9) (107.8)
Restructuring charges (note 13) -- 98.6 194.5
Other charges (note 13) -- 36.1 292.1
Other (4.4) 1.7 (6.1)
Cash from earnings 403.9 388.2 238.5
Changes in non-cash working capital items:
Accounts receivable (995.3) 887.2 297.4
Inventories (656.7) 822.5 623.9
Other assets (94.7) 45.7 26.1
Accounts payable and accrued liabilities 1,230.4 (854.0) (202.7)
Income taxes payable 27.3 0.9 (0.4)
Non-cash working capital changes (489.0) 902.3 744.3
Cash provided by (used in) operations (85.1) 1,290.5 982.8
Investing:
Acquisitions, net of cash acquired (634.7) (1,299.7) (111.0)
Purchase of capital assets (282.8) (199.3) (151.4)
Proceeds on sale of capital assets -- -- 71.6
Other (59.5) 1.4 (0.7)
Cash used in investing activities (977.0) (1,497.6) (191.5)
Financing:
Bank indebtedness (8.6) (2.8) (1.6)
Repayments of long-term debt (2.2) (56.0) (146.5)
Debt redemption fees (note 9) -- -- (6.9)
Deferred financing costs (0.1) (3.9) (2.6)
Issuance of convertible debt 862.9 -- --
Convertible debt issue costs, pre-tax (19.4) -- --
Repurchase of convertible debt (note 10) -- -- (100.3)
Issuance of share capital 766.6 737.7 7.4
Share issue costs, pre-tax (26.8) (10.0) --
Repurchase of capital stock (note 11) -- -- (32.5)
Other 2.0 1.1 (0.1)
Cash provided by (used in) financing activities 1,574.4 666.1 (283.1)
Increase in cash 512.3 459.0 508.2
Cash, beginning of year 371.5 883.8 1,342.8
Cash, end of year $ 883.8 $ 1,342.8 $ 1,851.0
Cash is comprised of cash and short-term investments.
Supplemental cash flow information (note 21)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(in millions of U.S. dollars, except per share amounts)
1. Nature of business:
The primary operations of the Company include providing a full range of
electronics manufacturing services including design, prototyping, assembly,
testing, product assurance, supply chain management, worldwide distribution and
after-sales service to its customers primarily in the information technology and
communications industries. The Company has operations in the Americas, Europe
and Asia.
The Company's accounting policies are in accordance with accounting principles
generally accepted in Canada and, except as outlined in note 22, 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 the accounts of the Company and
its subsidiaries. The results of subsidiaries acquired during the year are
consolidated from their respective dates of acquisition. The Company's business
combinations are accounted for using the purchase method. 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 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 estimates are used in determining, but not limited to, the allowance
for doubtful accounts, inventory valuation, income tax valuation allowances,
restructuring charges, the useful lives and valuation of intangible assets and
the fair values of reporting units for purposes of goodwill impairment tests.
Actual results could differ materially from those estimates and assumptions.
(c) Revenue:
Revenue is comprised of product sales and service revenue earned from
engineering, design and repair services. Revenue from product sales is
recognized upon shipment of the goods. Service revenue is recognized as services
are performed.
(d) Cash and short-term investments:
Cash and short-term investments include cash on account, demand deposits and
short-term investments with original maturities of less than three months.
(e) Allowance for doubtful accounts:
The Company evaluates the collectibility of accounts receivable and records an
allowance for doubtful accounts, which reduces the receivables to the amount
management reasonably believes will be collected. A specific allowance is
recorded against customer receivables that are considered to be impaired based
on the Company's knowledge of the financial condition of
its customers. In determining the amount of the allowance, the following factors
are considered: the length of time the receivables have been outstanding,
customer and industry concentrations, current business environment, and
historical experience.
(f) Inventories:
Inventories are valued on a first-in, first-out basis at the lower of cost and
replacement cost for production parts, and at the lower of cost and net
realizable value for work in progress and finished goods. Cost includes
materials and an application of relevant manufacturing value-add. In determining
the net realizable value, the Company considers factors such as shrinkage, the
aging and future demand of the inventory, past experience with specific
customers, and the ability to redistribute inventory to other programs or return
inventory to suppliers.
(g) Capital assets:
Capital assets are carried at cost and amortized over their estimated useful
lives on a straight-line basis. Estimated useful lives for the principal asset
categories are as follows:
Buildings 25 years
Buildings/leasehold improvements Up to 25 years or term of lease
Office equipment 5 years
Machinery and equipment 5 years
Software 1 to 10 years
(h) Goodwill from business combinations:
Prior to July 1, 2001, all goodwill was amortized on a straight-line basis over
10 years. Goodwill acquired in business combinations subsequent to June 30,
2001, has not been amortized. Effective January 1, 2002, the Company
discontinued amortization of all existing goodwill. These changes are a result
of new accounting standards issued in 2001 which are summarized in note 2(q)(ii)
- - Changes in accounting policies.
Upon adopting these standards on January 1, 2002, the Company is required to
evaluate goodwill annually or whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Impairment is tested
at the reporting unit level by comparing the reporting unit's carrying amount to
its fair value. The fair values of the reporting units are estimated using a
combination of a market approach and discounted cash flows. To the extent a
reporting unit's carrying amount exceeds its fair value, an impairment of
goodwill exists. Impairment is measured by comparing the fair value of goodwill,
determined in a manner similar to a purchase price allocation, to its carrying
amount. The Company conducted its annual goodwill assessment in the fourth
quarter of 2002 and recorded an impairment charge. See notes 7 - Goodwill and
intangible assets and 13(c) - Other charges.
Prior to 2002, the Company assessed the recoverability of goodwill by comparing
its carrying amount to its projected future net cash flows as described under
note 2(j) - Impairment of long-lived assets.
(i) Intangible assets:
Intangible assets are comprised of intellectual property and other intangible
assets. Intellectual property assets consist primarily of certain non-patented
intellectual property and process technology, and are amortized on a
straight-line basis over their estimated useful lives, to a maximum of 5 years.
Other intangible assets consist primarily of customer relationships and contract
intangibles, and represent the excess of cost over the fair value of tangible
assets and
intellectual property acquired in asset acquisitions. Other
intangible assets are amortized on a straight-line basis over their estimated
useful lives, to a maximum of 10 years.
(j) Impairment of long-lived assets:
The Company reviews capital and intangible assets for impairment on a regular
basis or whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. Recoverability is assessed by comparing the
carrying amount to the projected future net cash flows the long-lived assets are
expected to generate. The Company has recorded impairment charges in 2001 and
2002. See note 13(d) - Other charges.
(k) Pension and non-pension, post-employment benefits:
The Company accrues its 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-rated on service, and management's best estimate of expected
plan investment performance, salary escalation, compensation levels at time of
retirement, retirement ages of employees and expected health care costs. Changes
in these assumptions could impact future pension expense. For the purpose of
calculating the expected return on plan assets, assets are valued at fair value.
Past service costs arising from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at the date
of amendment. 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 are amortized over the average remaining service period of active
employees. The average remaining service period of active employees covered by
the pension plans is 14 years for 2001 and 11 years for 2002. The average
remaining service period of active employees covered by the other
post-employment benefit plans is 21 years for 2001 and 23 years for 2002.
Curtailment gains or losses may arise from significant changes to a plan.
Curtailment gains are offset against unrecognized losses and any excess gains
and all curtailment losses are recorded in the period in which the curtailment
occurs. Pension assets are recorded as Other assets while pension liabilities
are recorded as Accrued pension and post-employment benefits.
(l) Deferred financing costs:
Costs relating to long-term debt are deferred in other assets and amortized over
the term of the related debt or debt facilities.
(m) Income taxes:
The Company uses the asset and liability method of accounting for income taxes.
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. A valuation allowance is recorded to reduce deferred income tax assets to
an amount that, in the opinion of management, is more likely than not to be
realized. The effect of changes in tax rates is recognized in the period in
which the rate change occurs.
(n) Foreign currency translation and hedging:
The functional currency of the majority of the Company's subsidiaries is the
United States dollar. For such subsidiaries, monetary assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
year-end rate of exchange. Non-monetary assets and liabilities denominated in
foreign currencies are translated at historic rates, and revenue and expenses
are translated at average exchange rates prevailing during the month of the
transaction. Exchange gains or losses are reflected in the consolidated
statements of earnings (loss).
The accounts of the Company's self-sustaining foreign operations for which the
functional currency is other than the U.S. dollar, are translated into U.S.
dollars using the current rate method. Assets and liabilities are translated at
the year-end exchange rate, and revenue and expenses are translated at average
exchange rates prevailing during the month of the transaction. Gains and losses
arising from the translation of financial statements of foreign operations are
deferred in the "foreign currency translation adjustment" account included as a
separate component of shareholders' equity.
The Company enters into forward exchange contracts to hedge the cash flow risk
associated with firm purchase commitments and forecasted transactions in foreign
currencies and foreign-currency denominated balances. The Company does not enter
into derivatives for speculative purposes.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and 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. The Company also formally
assesses, both at the hedge's inception and at the end of each quarter, whether
the derivatives that are used in hedged transactions are highly effective in
offsetting changes in cash flows of hedged items.
Gains and losses on hedges of firm commitments are included in the cost of the
hedged transaction when they occur. Gains and losses on hedges of forecasted
transactions are recognized in earnings in the same period and the same line
item as the underlying hedged transaction. Foreign exchange translation gains
and losses on forward contracts used to hedge foreign-currency denominated
amounts are accrued on the balance sheet as current assets or current
liabilities and are recognized currently in the income statement, offsetting the
respective translation gains or losses on the foreign-currency denominated
amounts. The forward premium or discount is amortized over the term of the
forward contract. Gains and losses on hedged forecasted transactions are
recognized in earnings immediately when the hedge is no longer effective or the
forecasted transactions are no longer expected.
(o) Research and development:
The Company incurs costs relating to research and development activities which
are expensed as incurred unless development costs meet certain criteria for
capitalization. Total research and development costs recorded in selling,
general and administrative expenses for 2002 were $18.2 (2001 - $17.1; 2000 -
$19.5). No amounts have been capitalized.
(p) Restructuring charges:
The Company records restructuring charges relating to employee terminations,
contractual lease obligations and other exit costs, based on detailed plans
approved and committed to by management. The recognition of these charges
requires management to make certain judgments regarding the nature, timing and
amount associated with the planned restructuring activities, including
estimating sublease income and the net recovery of equipment to be disposed of.
At the end of each reporting period, the Company evaluates the appropriateness
of the remaining accrued balances.
(q) Changes in accounting policies:
(i) Earnings per share:
Effective 2001, the Company retroactively applied the new Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3500, "Earnings per share," which
requires the use of the treasury stock method for calculating diluted earnings
per share. The diluted earnings per share calculation includes employee stock
options and the conversion of convertible debt instruments, if dilutive. The new
standard is consistent with U.S. GAAP. Previously reported diluted earnings per
share have been restated to reflect this change. See note 12 - Earnings (loss)
per share and weighted average shares outstanding.
(ii) Business combinations, goodwill and other intangible assets:
In September 2001, the CICA issued Handbook Sections 1581, "Business
Combinations" and 3062, "Goodwill and Other Intangible Assets." The new
standards mandate the purchase method of accounting for business combinations
and require that goodwill no longer be amortized, but instead be tested for
impairment at least annually. The standards also specify criteria that
intangible assets must meet to be recognized and reported apart from goodwill.
The standards require that the value of the shares issued in a business
combination be measured using the average share price for a reasonable period
before and after the date the terms of the acquisition are agreed to and
announced. Previously, the consummation date was used to value the shares issued
in a business combination. The new standards are substantially consistent with
U.S. GAAP.
Effective July 1, 2001, goodwill acquired in business combinations completed
after June 30, 2001, has not been amortized. In addition, the new criteria for
recognition of intangible assets apart from goodwill and the valuation of the
shares issued in a business combination have been applied to business
combinations completed after June 30, 2001.
The Company has fully adopted these new standards as of January 1, 2002, and
discontinued amortization of all existing goodwill. The Company also evaluated
existing intangible assets, including estimates of remaining lives, and has
reclassified $9.1 from intellectual property to goodwill, as of January 1, 2002,
to conform with the new criteria.
Section 3062 requires the completion of a transitional goodwill impairment
evaluation within six months of adoption. Impairment is identified by comparing
the carrying amounts of the Company's reporting units with their fair values. To
the extent a reporting unit's carrying amount exceeds its fair value, the
impairment of goodwill must be recorded by December 31, 2002. The impairment of
goodwill is measured by comparing the fair value of goodwill, determined in a
manner similar to a purchase price allocation, to its carrying amount. Any
transitional impairment would have been recognized as an effect of a change in
accounting principle and would have been charged to opening retained earnings as
of January 1, 2002. The Company completed the transitional goodwill impairment
assessment, and determined that no impairment existed as of the date of
adoption.
Effective January 1, 2002, the Company had unamortized goodwill of $1,137.9
which is no longer amortized. This change in accounting policy was not applied
retroactively and the amounts presented for prior years have not been restated
for this change. The following table shows the impact of this change as if the
policy had been applied retroactively to 2001 and 2000:
Year ended December 31
2000 2001 2002
Net earnings (loss) as reported $ 206.7 $ (39.8) $ (445.2)
Add back: goodwill amortization 39.1 39.2 --
Net earnings (loss) before goodwill amortization $ 245.8 $ (0.6) $ (445.2)
Basic earnings (loss) per share:
As reported $ 1.01 $ (0.26) $ (1.98)
Before goodwill amortization $ 1.20 $ (0.07) $ (1.98)
Diluted earnings (loss) per share:
As reported $ 0.98 $ (0.26) $ (1.98)
Before goodwill amortization $ 1.16 $ (0.07) $ (1.98)
(iii) Stock-based compensation and other stock-based payments:
Effective January 1, 2002, the Company adopted the new CICA Handbook
Section 3870, which requires that a fair value based method of accounting be
applied to all stock-based payments to non-employees and to direct awards of
stock to employees. However, the new standard permits the Company to continue
its existing policy of recording no compensation cost on the grant of stock
options to employees with the addition of pro forma information. The standard
requires the disclosure of pro forma net earnings and earnings per share
information as if the Company had accounted for employee stock options under the
fair value method. The Company has applied the pro forma disclosure provisions
of the new standard to awards granted on or after January 1, 2002. The pro forma
effect of awards granted prior to January 1, 2002, has not been included.
The fair value of the options issued by the Company during 2002 was determined
using the Black-Scholes option pricing model. The Company used the following
weighted average assumptions: risk-free rate of 5.14%; dividend yield of 0%; a
volatility factor of the expected market price of the Company's shares of 70%;
and, an expected option life of 5 years. The weighted-average grant date fair
value of options issued during the year was $12.02 per share. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
income over the vesting period, on a straight-line basis. For the year ended
December 31, 2002, the Company's pro forma net loss is $447.4, pro forma basic
loss per share is $1.99 and pro forma diluted loss per share is $1.99. See
note 11(c) for a description of the stock option plans.
(r) Recently issued accounting pronouncements:
(i) Foreign currency translation and hedging relationships:
Effective January 1, 2002, the CICA amended Section 1650 to eliminate the
deferral and amortization of foreign currency translation gains and losses on
long-lived monetary items, with retroactive restatement of prior periods. The
Company was not impacted by this change. The CICA issued Accounting Guideline
AcG-13 which establishes criteria for hedge accounting effective for the
Company's 2004 fiscal year. The Company has reviewed the requirements of AcG-13
and has determined that all of its current hedges will continue to qualify for
hedge accounting when the guideline becomes effective.
(ii) Impairment or disposal of long-lived assets:
In December 2002, the CICA issued Handbook Section 3063, "Impairment or Disposal
of Long-Lived Assets" and revised Section 3475, "Disposal of Long-Lived Assets
and Discontinued Operations." These sections supersede the write-down and
disposal provisions of Section 3061, "Property, Plant and Equipment" and
Section 3475, "Discontinued Operations." The new standards are consistent with
U.S. GAAP. Section 3063 establishes standards for recognizing, measuring and
disclosing impairment of long-lived assets held-for-use. An impairment is
recognized when the carrying amount of an asset to be held and used,
exceeds the projected future net cash flows expected from its use and disposal,
and is measured as the amount by which the carrying amount of the asset exceeds
its fair value. Section 3475 provides specific criteria for and requires
separate classification for assets held-for-sale and for these assets to be
measured at the lower of their carrying amounts or fair value, less costs to
sell. Section 3475 also broadens the definition of discontinued operations to
include all distinguishable components of an entity that will be eliminated from
operations. Section 3063 is effective for the Company's 2004 fiscal year,
however, early application is permitted. Revised Section 3475 is applicable to
disposal activities committed to by the Company after May 1, 2003, however,
early application is permitted. The Company expects that the adoption of these
standards will have no material impact on its financial position, results of
operations or cash flows.
(iii) Guarantees:
In December 2002, the CICA approved Accounting Guideline AcG-14 which requires
certain disclosures of obligations under guarantees, effective for the Company's
first quarter of 2003. The guideline is generally consistent with the disclosure
requirements for guarantees under U.S. GAAP. The guideline does not apply to
product warranties or the measurement requirements under U.S. GAAP. The Company
has disclosed its guarantees under U.S. GAAP in note 22(k). The Company expects
that the adoption of this guideline will have no material impact on its
financial position, results of operations or cash flows.
3. Acquisitions:
2001 Acquisitions:
(a) Asset Acquisitions:
In February 2001, the Company acquired certain assets located in Dublin, Ireland
and Mt. Pleasant, Iowa from Motorola Inc. In March 2001, the Company acquired
certain assets of a repair facility in Japan from N.K. Techno Co. Ltd. In May
2001, the Company acquired certain assets in Little Rock, Arkansas and Denver,
Colorado from Avaya Inc., and in August 2001, acquired certain assets in Saumur,
France. In August 2001, the Company acquired certain assets in Columbus, Ohio
and Oklahoma City, Oklahoma from Lucent Technologies Inc. The total purchase
price for these acquisitions of $834.1 was financed with cash and was allocated
to the net assets acquired, including intangible assets of $195.7, based on
their relative fair values at the date of acquisition.
(b) Business Combinations:
Omni:
In October 2001, the Company acquired Omni Industries Limited (Omni), an EMS
provider headquartered in Singapore. This acquisition significantly enhanced the
Company's presence in Asia. The purchase price of $865.8 was financed with the
issuance of 9.2 million subordinate voting shares and the issuance of options to
purchase 0.3 million subordinate voting shares of the Company, and $479.5 in
cash. The goodwill recorded for Omni is not tax deductible.
Other business combinations:
In January 2001, the Company acquired Excel Electronics, Inc. through a merger
with Celestica (US) Inc., a subsidiary of the Company. In June 2001, the Company
acquired Sagem CR s.r.o., in the Czech Republic, from Sagem SA, of France. In
August 2001, the Company acquired Primetech Electronics Inc. (Primetech), an EMS
provider in Canada. The purchase price of Primetech was financed primarily with
the issuance of 3.4 million subordinate voting shares and the issuance of
options to purchase 0.3 million subordinate voting shares of the Company.
The value of the shares issued in the Primetech and Omni acquisitions was
determined based on the average market price of the shares for a reasonable
period before, and after the date the terms of the acquisitions were agreed to
and announced.
In 2002, the Company completed the valuations of certain assets relating to its
2001 business combinations, resulting in changes to the fair-value allocations
of the purchase prices. Details of the final net assets acquired in these
business combinations, at fair value, are as follows:
Omni Other Business
Combinations
Current assets $ 260.7 $ 63.2
Capital assets 91.8 46.3
Other long-term assets 4.1 0.1
Goodwill 777.5 136.2
Intellectual property 34.5 10.0
Liabilities assumed (302.8) (28.3)
Net assets acquired $ 865.8 $ 227.5
Financed by:
Cash $ 479.5 $ 46.8
Issuance of shares and options 386.3 180.7
$ 865.8 $ 227.5
2002 Acquisitions:
(c) Asset Acquisitions:
In March 2002, the Company acquired certain assets located in Miyagi and
Yamanashi, Japan from NEC Corporation. In August 2002, the Company acquired
certain assets from Corvis Corporation in the United States. The aggregate
purchase price for these acquisitions of $111.0 was financed with cash and
allocated to the net assets acquired, including intangible assets of $49.4,
based on their relative fair values at the date of acquisition. The
weighted-average useful life of these intangible assets is approximately six
years.
Integration costs related to acquisitions:
The Company incurred costs of $21.1 in 2002 (2001 - $22.8; 2000 - $16.1)
relating to the establishment of business processes, infrastructure and
information systems for acquired operations. None of the integration costs
incurred related to existing operations.
The Company's 2002 restructuring actions have impacted some of the sites
acquired in prior years. These actions have included workforce reductions and
facility consolidations and closures. See note 13(b) - Other charges.
4. Accounts receivable:
Accounts receivable are net of an allowance for doubtful accounts of $62.4 at
December 31, 2002 (2001 - $74.6).
5. Inventories:
2001 2002
Raw materials $ 903.6 $ 479.8
Work in progress 220.6 101.0
Finished goods 248.5 194.8
$ 1,372.7 $ 775.6
6. Capital assets:
2001
Accumulated Net Book
Cost Amortization Value
Land $ 53.3 $ -- $ 53.3
Buildings 258.8 17.4 241.4
Buildings/leasehold improvements 66.0 24.8 41.2
Office equipment 86.8 40.2 46.6
Machinery and equipment 727.2 291.2 436.0
Software 136.6 40.0 96.6
$ 1,328.7 $ 413.6 $ 915.1
2002
Accumulated Net Book
Cost Amortization Value
Land $ 66.0 $ -- $ 66.0
Buildings 192.3 24.6 167.7
Buildings/leasehold improvements 64.4 33.8 30.6
Office equipment 102.1 55.3 46.8
Machinery and equipment 618.2 319.2 299.0
Software 202.9 85.2 117.7
$ 1,245.9 $ 518.1 $ 727.8
The above amounts include $17.1 (2001 - $13.3) of assets under capital lease and
accumulated amortization of $4.0 (2001 - $6.8) related thereto.
Depreciation and rental expense for the year ended December 31, 2002 was $212.4
(2001 - $192.8; 2000 - $121.9) and $117.3 (2001 - $79.8; 2000 - $46.7),
respectively.
7. Goodwill from business combinations and intangible assets:
Goodwill from business combinations:
The following table details the changes in goodwill by reporting segment for the
year ended December 31, 2002:
December 31, 2001 Reclass (a) Post Closing (b) Impairment (c) December 31, 2002
Americas $ 243.2 $ 1.8 $ (2.1) $ (127.2) $ 115.7
Europe 68.3 6.2 2.0 (76.5) --
Asia 817.3 1.1 13.9 -- 832.3
$ 1,128.8 $ 9.1 $ 13.8 $ (203.7) $ 948.0
(a) The Company reclassed $9.1 from intellectual property to goodwill as of
January 1, 2002, to conform with the new goodwill standards. See note 2(q)(ii).
(b) The Company completed the valuations of certain assets relating to its
2001 business combinations. This resulted in changes to the fair-value
allocation of the purchase price, and thus goodwill.
(c) During the fourth quarter of 2002, the Company performed its annual
goodwill impairment test in accordance with the new goodwill standards,
Section 3062. See note 2(q)(ii). Prolonged declines in the information
technology and communications end markets contributed to an impairment of
goodwill in the fourth quarter as estimated fair values of the reporting units
fell below their respective carrying values. The Company obtained independent
valuations to support the fair values of its reporting units. The fair values of
the reporting units were estimated using a combination of a market approach and
discounted cash flows. Revenue and expense projections used in determining the
fair value of the reporting units were based on management's estimates,
including estimates of current and future industry conditions. Cash flows were
discounted using a weighted average cost of capital. The Company recorded a
goodwill impairment of $203.7. See note 13(c) - Other charges.
Intangible assets:
2001
Accumulated Net Book
Cost Amortization Value
Intellectual property $ 388.6 $ 143.9 $ 244.7
Other intangible assets 209.3 26.8 182.5
2002
Accumulated Net Book
Cost Amortization Value
Intellectual property $ 194.5 $ 118.9 $ 75.6
Other intangible assets 177.8 41.5 136.3
$ 372.3 $ 160.4 $ 211.9
The following table details the changes in intangible assets for the year ended
December 31, 2002:
December Acquisitions/ December
31, 2001 Amortization Reclass (a) Post Closing (b) Impairment (c) 31, 2002
Intellectual property $ 244.7 $ (72.0) $ (9.1) $ 8.5 $ (96.5) $ 75.6
Other intangible assets 182.5 (23.9) -- 25.4 (47.7) 136.3
$ 427.2 $ (95.9) $ (9.1) $ 33.9 $ (144.2) $ 211.9
(a) The Company reclassed $9.1 from intellectual property to goodwill as of
January 1, 2002, to conform with the new goodwill standards. See note 2(q)(ii).
(b) Intangible assets increased during the year due to acquisitions, offset
partially by post closing adjustments.
(c) In the fourth quarter of 2002, the Company recorded an impairment charge
totaling $144.2 to write-down intellectual property and other intangible assets,
primarily in the Americas and European segments. The Company recorded $75.2 as
restructuring charges primarily for intellectual property impaired due to the
closure or consolidation of the related manufacturing facilities. An additional
charge of $69.0 was recorded as "Other charges - other impairment" to write-down
certain intellectual property, and customer relationships and contracts that
were impaired, in connection with the regular recoverability review of
intangible assets. The impairment was measured as the excess of the carrying
amount over the projected future net cash flows that these assets were expected
to generate. See notes 13(b) and (d) - Other charges.
Amortization expense is as follows:
Year ended December 31
2000 2001 2002
Amortization of goodwill $ 39.1 $ 39.2 $ --
Amortization of intellectual property 39.1 68.8 72.0
Amortization of other intangible assets 10.7 17.0 23.9
$ 88.9 $ 125.0 $ 95.9
Effective January 1, 2002, the Company discontinued amortization of all
goodwill. See note 2(q)(ii) - Changes in accounting policies.
The Company estimates its future amortization expense as follows, based on
existing intangible asset balances:
2003 $ 46.8
2004 43.0
2005 35.1
2006 27.0
2007 16.3
Thereafter 43.7
8. Other assets:
2001 2002
Deferred pension (note 16) $ 28.4 $ 31.2
Deferred income taxes 116.4 305.1
Commodity taxes recoverable 10.7 10.9
Other 9.7 7.4
$ 165.2 $ 354.6
Amortization of deferred financing costs for the year ended December 31, 2002,
was $2.7 (2001 - $1.7; 2000 - $1.7).
9. Long-term debt:
2001 2002
Global, unsecured, revolving credit facility due 2003 (a) $ -- $ --
Unsecured, revolving credit facility due 2004 (b) -- --
Unsecured, revolving credit facility due 2005 (c) -- --
Senior Subordinated Notes due 2006 (d) 130.0 --
Other (e) 17.4 6.9
147.4 6.9
Less current portion 10.0 2.7
$ 137.4 $ 4.2
(a) Concurrently with the initial public offering on July 7, 1998, the Company
entered into a global, unsecured, revolving credit facility providing up to
$250.0 of borrowings. The credit facility permitted the Company and certain
designated subsidiaries to borrow funds for general corporate purposes
(including acquisitions). Borrowings under the facility bear interest at LIBOR
plus a margin and are repayable in July 2003. There were no borrowings on this
facility during 2001 or 2002. Commitment fees in 2002 were $0.6. The Company
elected to cancel this facility in December 2002.
(b) In December 2002, the Company extended its second unsecured, revolving
credit facility from April 2004 to December 2004. Concurrent with this
extension, the Company increased the facility from $250.0 to $350.0. The
facility includes a $25.0 swing-line facility that provides for short-term
borrowings up to a maximum of seven days. The credit facility permits the
Company and certain designated subsidiaries to borrow funds for general
corporate purposes (including acquisitions). 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. There were no borrowings on this facility
during 2001 or 2002. Commitment fees in 2002 were $2.6.
(c) In July 2001, the Company entered into an unsecured, revolving credit
facility providing up to $500.0 of borrowings including a $75.0 swing-line
facility that provides for short-term borrowings up to a maximum of seven days.
The credit facility permits the Company and certain designated subsidiaries to
borrow funds for general corporate purposes (including acquisitions). The
revolving facility is repayable in July 2005. 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. There were no borrowings on this facility
in 2001 or 2002. Commitment fees in 2002 were $1.5.
(d) In August 2002, the Company redeemed the entire $130.0 of outstanding
10.5% Senior Subordinated Notes at a premium of 5.25%. See note 13(e).
(e) Other long-term debt includes secured loan facilities of one of the
Company's subsidiaries of which $13.0 was outstanding at December 31, 2001, and
capital lease obligations. All secured loans were repaid during 2002. The
weighted average interest rate on these facilities in 2001 was 4.4%. The loans
were denominated in Singapore Dollars and repayable through quarterly payments.
There were no commitment fees for 2001 or 2002. The balance as at December 31,
2002, relates to capital lease obligations.
As at December 31, 2002, principal repayments due within each of the next five
years on all long-term debt are as follows:
2003 $ 2.7
2004 2.5
2005 1.5
2006 0.1
2007 0.1
The unsecured, revolving credit facilities have restrictive covenants relating
to debt incurrence and sale of assets and also contain financial covenants, that
require the Company to maintain certain financial ratios. A change of control is
an event of default.
10. Convertible debt:
In August 2000, Celestica issued Liquid Yield Option(TM) Notes (LYONs) with a
principal amount at maturity of $1,813.6, payable August 1, 2020. The Company
received gross proceeds of $862.9 and incurred $12.5 in underwriting
commissions, net of tax of $6.9. No interest is payable on the LYONs and the
issue price of the LYONs represents a yield to maturity of 3.75%. The LYONs are
subordinated in right of payment to all existing and future senior indebtedness
of the Company.
The LYONs are convertible at any time at the option of the holder, unless
previously redeemed or repurchased, into 5.6748 subordinate voting shares for
each one thousand dollars principal amount at maturity. Holders may require the
Company to repurchase all or a portion of their LYONs on August 2, 2005,
August 1, 2010, and August 1, 2015, and the Company may redeem the LYONs at
any time on or after August 1, 2005 (and, under certain circumstances, before
that date). The Company is required to offer to repurchase the LYONs if there is
a change in control or a delisting event. Generally, the redemption or
repurchase price is equal to the accreted value of the LYONs. The Company may
elect to pay the principal amount at maturity of the LYONs or the repurchase
price that is payable in certain circumstances, in cash or subordinate voting
shares, or any combination thereof.
Pursuant to Canadian generally accepted accounting principles, the LYONs are
recorded as an equity instrument and bifurcated into a principal equity
component (representing the present value of the notes) and an option component
(representing the value of the conversion features of the notes). The principal
equity component is accreted over the 20-year term through periodic charges to
retained earnings.
During 2002, the Company paid $100.3 to repurchase LYONs with a principal amount
at maturity of $222.9. The Company recognized a gain on the repurchase of these
LYONs. The gain of $6.7, net of tax of $3.9, is recorded in retained earnings
and apportioned between the
principal equity and option components, based on their relative fair values
compared to their carrying values. Consistent with the treatment of the periodic
accretion charges, the gain on the principal equity component has been included
in the calculation of basic and diluted earnings (loss) per share. See note 12.
11. Capital stock:
(a) Authorized:
An unlimited number of subordinate voting shares, which entitle the holder to
one vote per share, and an unlimited number of multiple voting shares, which
entitle the holder to twenty-five votes per share. Except as otherwise required
by law, the subordinate voting shares and multiple voting shares vote together
as a single class on all matters submitted to a vote of shareholders, including
the election of directors. The holders of the subordinate voting shares and
multiple voting shares 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 multiple voting
share is convertible at any time at the option of the holder thereof into one
subordinate voting share. The Company is also authorized to issue an unlimited
number of preferred shares, issuable in series.
(b) Issued and outstanding:
Total
Subordinate and
Multiple Voting
Subordinate Multiple Shares Shares to
Number of Shares (in millions) Voting Shares Voting Shares Outstanding be issued
Balance December 31, 2000 164.3 39.1 203.4 0.4
Equity offering (i) 12.0 -- 12.0 --
Other share issuances (ii) 1.1 -- 1.1 --
Issued as consideration for acquisitions (iii) 13.2 -- 13.2 0.1
Balance December 31, 2001 190.6 39.1 229.7 0.5
Repurchase of shares (iv) (2.0) -- (2.0) --
Other share issuances (v) 0.9 -- 0.9 --
Balance December 31, 2002 189.5 39.1 228.6 0.5
Subordinate Multiple Shares to Total
Amount Voting Shares Voting Shares be issued Amount
Balance December 31, 2000 $ 2,254.9 $ 138.8 $ 1.7 $ 2,395.4
Equity offering, net of issue costs (i) 707.4 -- -- 707.4
Other share issuances (ii) 29.2 -- -- 29.2
Issued as consideration for acquisitions (iii) 562.8 -- 4.2 567.0
Balance December 31, 2001 3,554.3 138.8 5.9 3,699.0
Repurchase of shares (iv) (36.9) -- -- (36.9)
Other share issuances (v) 8.5 -- -- 8.5
Balance December 31, 2002 $ 3,525.9 $ 138.8 $ 5.9 $ 3,670.6
2001 Capital Transactions:
(i) In May 2001, the Company issued 12.0 million subordinate voting shares for
gross cash proceeds of $714.0 and incurred $6.6 in share issuance costs, net of
tax of $3.4.
(ii) During 2001, the Company issued 1.1 million subordinate voting shares as a
result of the exercise of employee stock options for $23.7 and recorded a tax
benefit of $5.5.
(iii) In 2001, the Company issued 12.7 million subordinate voting shares, as
consideration for acquisitions, for an ascribed value of $558.5 and reserved 0.6
million shares at an ascribed value of $8.5. During 2001, the Company issued 0.5
million of reserved shares at an ascribed
value of $4.3. As at December 31, 2001, 0.5 million subordinate voting shares
remain reserved for issuance at an ascribed value of $5.9.
2002 Capital Transactions:
(iv) In July 2002, the Company filed a Normal Course Issuer Bid to repurchase
over the next 12 months, at its discretion, up to 5% of the total outstanding
shares, or 9.6 million subordinate voting shares, for cancellation. During 2002,
the Company repurchased 2.0 million subordinate voting shares at a weighted
average price of $16.23 per share.
(v) During 2002, the Company issued 0.9 million subordinate voting shares,
primarily as a result of the exercise of employee stock options, for $7.4 and
recorded a tax benefit of $1.1.
(c) Stock option plans:
(i) Long-Term Incentive Plan (LTIP):
The Company established the LTIP prior to its initial public offering. Under
this plan, the Company may grant stock options, performance shares, performance
share units and stock appreciation rights to directors, permanent employees and
consultants ("eligible participants") of the Company, its subsidiaries and other
companies or partnerships in which the Company has a significant investment.
Under the LTIP, up to 29.0 million subordinate voting shares may be issued from
treasury. Options are granted at prices equal to the market value of the day
prior to the date of the grant and are exercisable during a period not to exceed
ten years from such date.
(ii) Employee Share Purchase and Option Plans (ESPO):
The Company has ESPO plans that were available to certain of its employees and
executives. As a result of the establishment of the LTIP, no further options may
be issued under the ESPO plans. Pursuant to the ESPO plans, employees and
executives of the Company were offered the opportunity to purchase, at prices
equal to market value, subordinate voting shares and, in connection with such
purchase, receive options to acquire an additional number of subordinate voting
shares based on the number of subordinate voting shares acquired by them under
the ESPO plans. The exercise price for the options is equal to the price per
share paid for the corresponding subordinate voting shares acquired under the
ESPO plans.
Stock option transactions were as follows:
Weighted
Average
Number of Options (in millions) Shares Exercise Price
Outstanding at December 31, 1999 14.6 $ 14.84
Granted 4.2 $ 55.40
Exercised (1.4) $ 6.85
Cancelled (0.2) $ 7.33
Outstanding at December 31, 2000 17.2 $ 25.16
Granted/assumed 8.5 $ 42.54
Exercised (1.6) $ 14.89
Cancelled (0.2) $ 23.36
Outstanding at December 31, 2001 23.9 $ 31.67
Granted 3.9 $ 19.93
Exercised (0.9) $ 7.42
Cancelled (0.8) $ 41.49
Outstanding at December 31, 2002 26.1 $ 30.51
Shares reserved for issuance upon exercise of stock options or awards (in
millions) 33.9
The following options were outstanding as at December 31, 2002:
Outstanding Weighted Exercisable Weighted Remaining
Range of Options Average Options Average Life
Plan Exercise Prices (in millions) Exercise Price (in millions) Exercise Price (years)
ESPO $5.00 - $7.50 4.6 $ 5.34 4.6 $ 5.34 5
LTIP $8.75 - $13.69 1.6 $ 12.09 1.2 $ 12.02 6
$13.10 - $25.75 3.6 $ 18.58 -- -- 10
$24.18 - $24.18 0.8 $ 24.18 0.6 $ 24.18 7
$24.91 - $54.15 1.4 $ 41.16 0.4 $ 41.16 9
$32.22 - $44.38 0.3 $ 37.91 -- -- 10
$39.03 - $39.03 2.8 $ 39.03 2.1 $ 39.03 7
$41.89 - $41.89 6.1 $ 41.89 1.5 $ 41.89 9
$55.40 - $56.19 3.9 $ 55.96 2.0 $ 55.96 8
Other $0.93 - $13.31 0.8 $ 5.50 0.8 $ 5.50 4
Other $29.73 - $72.84 0.2 $ 46.28 0.2 $ 46.28 4
26.1 13.4
12. Earnings (loss) per share and weighted average shares outstanding:
The following table sets forth the calculation of basic and diluted earnings
(loss) per share:
Year ended December 31
2000 2001 2002
Numerator:
Net earnings (loss) $ 206.7 $ (39.8) $ (445.2)
Convertible debt accretion, net of tax (5.4) (15.0) (17.5)
Gain on repurchase of convertible debt, net of tax (1) -- -- 8.3
Earnings (loss) available to common shareholders $ 201.3 $ (54.8) $ (454.4)
Denominator:
Weighted average shares - basic (in millions) 199.8 213.9 229.8
Effect of dilutive securities (in millions):
Employee stock options (2) 7.8 -- --
Convertible debt 4.2 -- --
Weighted average shares - diluted (in millions) (3) 211.8 213.9 229.8
Earnings (loss) per share:
Basic $ 1.01 $ (0.26) $ (1.98)
Diluted $ 0.98 $ (0.26) $ (1.98)
(1) For 2002, the gain on the principal equity component of the convertible
debt repurchase of $8.3 is included in the calculation of basic and diluted loss
per share. See note 10.
(2) For 2000, excludes the effect of 3.3 million "out of the money" options as
they are anti-dilutive.
(3) For 2001 and 2002, excludes the effect of all options and convertible debt
as they are anti-dilutive due to the loss.
13. Other charges:
Year ended December 31
2000 2001 2002
2001 restructuring (a) $ -- $ 237.0 $ 1.9
2002 restructuring (b) -- -- 383.5
2002 goodwill impairment (c) -- -- 203.7
Other impairment (d) -- 36.1 81.7
Deferred financing costs and debt redemption fees (e) -- -- 9.6
Gain on sale of surplus land -- -- (2.6)
$ -- $ 273.1 $ 677.8
(a) 2001 restructuring:
The Company recorded a pre-tax restructuring charge of $237.0 in 2001, in
response to slowing end markets. The Company's restructuring plan focused on
facility consolidations and a workforce reduction. The following table details
the components of the 2001 restructuring charge and the adjustments in 2002, as
the Company executed its plan:
Year ended December 31
2000 2001 2002
Employee termination costs $ -- $ 90.7 $ (4.1)
Lease and other contractual obligations -- 35.3 11.4
Facility exit costs and other -- 12.4 (2.7)
Asset impairment (non-cash) -- 98.6 (2.7)
$ -- $ 237.0 $ 1.9
The following table details the activity through the accrued restructuring
liability:
Employee Lease and other Facility
termination contractual exit costs
costs obligations and other Total
Balance at January 1, 2002 $ 39.5 $ 33.7 $ 9.5 $ 82.7
Cash payments (35.4) (13.0) (6.8) (55.2)
Adjustments (4.1) 11.4 (2.7) 4.6
Balance at December 31, 2002 $ -- $ 32.1 $ -- $ 32.1
Employee terminations were made across all geographic regions of the Company
with the majority pertaining to manufacturing and plant employees. A total of
11,925 employees have been terminated relating to the 2001 restructuring plan.
The adjustment to lease and other contractual obligations relates primarily to
changes in estimates and revised timing of expected sublease recoveries.
The non-cash charges for asset impairment reflected the write-down of certain
long-lived assets across all geographic regions that have become impaired as a
result of the rationalization of facilities. The asset impairments relate to
goodwill and intangible assets, machinery and equipment, buildings and
improvements. The assets were written down to their recoverable amounts using
estimated cash flows.
The Company has completed the major components of the 2001 restructuring plan,
except for certain long-term lease and other contractual obligations.
(b) 2002 restructuring:
In response to the prolonged difficult end-market conditions, the Company
announced a new restructuring plan for the consolidation of facilities and a
workforce reduction. The Company recorded a pre-tax restructuring charge of
$383.5. The following table details the components of the 2002 restructuring
charge:
Year ended December 31
2000 2001 2002
Employee termination costs $ -- $ -- $ 128.8
Lease and other contractual obligations -- -- 51.7
Facility exit costs and other -- -- 8.5
Asset impairment (non-cash) -- -- 194.5
$ -- $ -- $ 383.5
The following table details the activity through the accrued restructuring
liability:
Lease and
Employee other Facility
termination contractual exit costs
costs obligations and other Total
Balance at January 1, 2002 $ -- $ -- $ -- $ --
Provision 128.8 51.7 8.5 189.0
Cash payments (41.7) (1.7) (0.7) (44.1)
Balance at December 31, 2002 $ 87.1 $ 50.0 $ 7.8 $ 144.9
Employee terminations were made primarily in the Americas with the majority
pertaining to manufacturing and plant employees. A total of 5,900 employees have
been identified to be terminated, of which 2,410 employees were terminated
during 2002. The remaining termination costs are expected to be paid out during
2003.
The non-cash charges for 2002 for asset impairment reflect the write-down of
certain long-lived assets primarily in the Americas that have become impaired as
a result of the rationalization of facilities. The asset impairments relate to
intangible assets, machinery and equipment, buildings and improvements. The
assets were written down to their recoverable amounts using estimated cash
flows.
The Company expects to complete the major components of the 2002 restructuring
plan by the end of 2003, except for certain long-term lease and other
contractual obligations.
(c) 2002 goodwill impairment:
In 2002, the Company recorded a non-cash charge against goodwill of $203.7, in
connection with its annual impairment assessment as described in notes 2(h)
and 7.
(d) Other impairment:
In 2002, the Company recorded a non-cash charge of $81.7, in connection with its
annual impairment assessment of long-lived assets, comprised primarily of a
write-down of intangible assets.
In 2001, the Company recorded a non-cash charge of $36.1, in connection with its
annual impairment assessment of long-lived assets comprised primarily of a
write-down of goodwill and intangible assets.
(e) Deferred financing costs and debt redemption fees:
In 2002, the Company paid a premium associated with the redemption of the Senior
Subordinated Notes and expensed related deferred financing costs. See note 9(d).
14. Income taxes:
Year ended December 31
2000 2001 2002
Earnings (loss) before income tax:
Canadian operations $ 179.4 $ 34.7 $ (190.1)
Foreign operations 96.5 (76.6) (346.3)
$ 275.9 $ (41.9) $ (536.4)
Current income tax expense (recovery):
Canadian operations $ 51.2 $ 17.2 $ (4.6)
Foreign operations 28.9 8.6 21.2
$ 80.1 $ 25.8 $ 16.6
Deferred income tax expense (recovery):
Canadian operations $ 33.0 $ (5.4) $ (15.2)
Foreign operations (43.9) (22.5) (92.6)
$ (10.9) $ (27.9) $ (107.8)
The overall income tax provision differs from the provision computed at the
statutory rate as follows:
Year ended December 31
2000 2001 2002
Combined Canadian federal and provincial
income tax rate 44.0% 42.1% 38.6%
Income taxes (recovery) based on earnings
(loss) before income taxes at statutory rates $ 121.4 $ (17.7) $ (207.1)
Increase (decrease) resulting from:
Manufacturing and processing deduction (17.7) (5.0) 5.8
Foreign income taxed at lower rates (43.9) (2.9) (19.2)
Amortization and write-down of non-deductible
goodwill and intangible assets 8.9 15.4 44.2
Other, including large corporations tax 0.5 8.1 8.5
Change in valuation allowance -- -- 76.6
Income tax expense (recovery) $ 69.2 $ (2.1) $ (91.2)
Deferred income taxes are recognized for future income tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their tax bases. Deferred income tax assets
and liabilities are comprised of the following as at December 31, 2001 and 2002:
2001 2002
Deferred income tax assets:
Income tax effect of operating losses carried forward $ 51.9 $ 162.9
Accounting provisions not currently deductible 34.4 43.9
Capital, intangible and other assets 17.0 143.9
Share issue and convertible debt issue costs 17.2 9.5
Restructuring accruals 29.1 53.2
Other 4.5 5.2
154.1 418.6
Valuation allowance -- (76.6)
Total deferred income tax assets 154.1 342.0
Deferred income tax liabilities:
Capital, intangible and other assets (37.7) (54.2)
Deferred pension asset (9.1) (10.0)
Other (4.5) (3.5)
Total deferred income tax liabilities (51.3) (67.7)
Deferred income tax asset, net $ 102.8 $ 274.3
The net deferred income tax asset arises from available income tax losses and
future income tax deductions. The Company's ability to use these income tax
losses and future income tax deductions is dependent upon the operations of the
Company in the tax jurisdictions in which such losses or deductions arose. The
Company records 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. Based on the reversal of
deferred income tax liabilities, projected future taxable income, the character
of the income tax asset and tax planning strategies, the Company has determined
that a valuation allowance of $76.6 is required in respect of its deferred
income tax assets as at December 31, 2002. No valuation allowance was required
for the deferred income tax assets as at December 31, 2001. In order to fully
utilize the net deferred income tax assets of $274.3, the Company will need to
generate future taxable income of approximately $741.0. Based on the Company's
current projection of taxable income for the periods in which the deferred
income tax assets are deductible, it is more likely than not that the Company
will realize the benefit of the net deferred income tax assets as at
December 31, 2002.
Celestica intends to indefinitely re-invest income from all of its foreign
subsidiaries. The aggregate amount of undistributed earnings of Celestica's
foreign subsidiaries for which no deferred income tax liability has been
recorded is approximately $283.4 as at December 31, 2002.
Celestica has been granted tax incentives, including tax holidays, for its Czech
Republic, China, Malaysia, Thailand and Singapore subsidiaries. The tax benefit
arising from these incentives is approximately $24.9, or $0.11 diluted per share
for 2002, $9.6, or $0.04 diluted per share for 2001, and $15.8, or $0.07 diluted
per share for 2000. These tax incentives expire
between 2004 and 2012, and are subject to certain conditions with which the
Company expects to comply.
As at December 31, 2002, the Company had operating losses of $589.9; a portion
of the income tax benefits of these losses has been recognized on the financial
statements. A summary of the operating loss carryforwards by year of expiry is
as follows:
Year of Expiry Amount
2005 $ 0.1
2006 1.7
2007 131.6
2008 3.2
2009 7.4
2010-2022 176.5
Indefinite 269.4
$ 589.9
15. Related party transactions:
In 2002, the Company expensed management related fees of $2.2 (2001 - $2.1; 2000
- - $2.1) and capitalized acquisition related fees of $Nil (2001 - $Nil; 2000 -
$0.5) charged by its parent company. Management believes that the fees charged
were reasonable in relation to the services provided.
16. Pension and non-pension post-employment benefit plans:
The Company provides pension and non-pension post-employment benefit plans for
its employees. Pension benefits include traditional pension plans, as well as
supplemental pension plans. Certain employees participate in defined benefit
plans; all other employees participate in defined contribution plans. Maximum
pension retirement benefits for employees participating in defined benefit plans
are based upon the employees' best three consecutive years' pensionable
earnings. Non-pension post-employment benefits are available to retired and
terminated employees. The benefits include termination benefits, medical,
surgical, hospitalization coverage, supplemental health, dental and group life
insurance.
The Company's pension funding policy is to contribute amounts sufficient to meet
minimum local statutory funding requirements that are based on actuarial
calculations. The Company may make additional discretionary contributions based
on actuarial assessments. The most recent statutory pension actuarial valuations
were completed as at March and April 2000. In 2002, actuarial reviews of all
defined benefit plans were completed. Contributions made by the Company to
support ongoing plan obligations have been included in the deferred asset or
liability accounts on the consolidated balance sheet. Contributions to pension
fund assets are invested primarily in fixed income and equity securities and
assets are valued at market value.
The Company's non-pension post-employment benefits are currently unfunded. The
most recent actuarial valuation for non-pension, post-employment benefits was
completed in January 2002. The Company accrues the expected costs of providing
non-pension, post-employment benefits during the periods in which the employees
render service.
The following table provides a summary of the estimated financial position of
the Company's pension and non-pension post-employment benefit plans:
Pension Plans Other Benefit Plans
Year ended December 31 Year ended December 31
2001 2002 2001 2002
Plan assets, beginning of year $ 188.6 $ 174.5 $ -- $ --
Employer contributions 10.1 13.5 3.8 6.1
Actual return on assets (13.1) (21.9) -- --
Voluntary employee contributions 2.1 4.6 -- 0.1
Effect of acquisitions -- 4.8 -- --
Benefits paid (5.2) (10.5) (3.8) (6.2)
Foreign currency exchange rate changes (8.0) 9.9 -- --
Plan assets, end of year $ 174.5 $ 174.9 $ -- $ --
Pension Plans Other Benefit Plans
Year ended December 31 Year ended December 31
2001 2002 2001 2002
Accrued benefit obligations (ABO),
beginning of year $ 170.3 $ 179.1 $ 47.7 $ 56.4
Reclassification of supplemental plan -- 4.9 -- (4.9)
Service cost 8.6 7.2 7.6 9.7
Interest cost 11.3 12.5 2.0 2.5
Voluntary employee contributions 2.1 4.6 -- 0.1
Actuarial (gains) / losses (1.9) 14.0 3.2 8.2
Plan amendments 1.9 -- -- (0.3)
Effect of acquisitions -- 22.8 1.1 0.9
Effect of curtailments -- 1.3 -- (1.1)
Benefits paid (5.2) (10.5) (3.8) (6.2)
Foreign currency exchange rate changes (8.0) 14.6 (1.4) 0.1
Accrued benefit obligations, end of year $ 179.1 $ 250.5 $ 56.4 $ 65.4
Deficit of plan assets over accrued benefit
obligations $ (4.6) $ (75.6) $ (56.4) $ (65.4)
Unrecognized actuarial losses 33.0 87.3 9.1 7.7
Deferred (accrued) pension cost $ 28.4 $ 11.7 $ (47.3) $ (57.7)
The following table reconciles the deferred (accrued) pension balances to that
reported as of December 31, 2002:
Pension Other
Plans Benefit Plans Total
Accrued pension and post-employment benefits $ (19.5) $ (57.7) $ (77.2)
Deferred pension assets (note 8) 31.2 -- 31.2
$ 11.7 $ (57.7) $ (46.0)
Pension Plans Other Benefit Plans
Year ended December 31 Year ended December 31
2000 2001 2002 2000 2001 2002
Net plan expense:
Service cost $ 7.5 $ 8.6 $ 7.2 $ 1.5 $ 7.6 $ 9.7
Interest cost 10.6 11.3 12.5 1.5 2.0 2.5
Expected return on assets (13.9) (14.0) (13.7) -- -- --
Net amortization of actuarial
(gains)/losses (0.2) (0.1) 1.6 0.3 0.8 0.5
4.0 5.8 7.6 3.3 10.4 12.7
Defined contribution pension
plan expense 12.8 18.9 21.9 -- -- --
Curtailment loss -- -- 2.9 -- -- 1.7
Total $ 16.8 $ 24.7 $ 32.4 $ 3.3 $ 10.4 $ 14.4
Pension Plans Other Benefit Plans
Year ended December 31 Year ended December 31
2000 2001 2002 2000 2001 2002
Actuarial assumptions (percentages):
Weighted average discount rate for
projected benefit obligations 6.5 6.2 5.5 7.5 7.3 6.9
Weighted average rate of
compensation increase 4.0 4.5 4.0 4.5 4.5 5.0
Weighted average expected
long-term rate of return on
plan assets 7.4 7.5 7.3 -- -- --
Healthcare cost trend rate -- -- -- 5.0 6.4 10.5
Other Benefit Plans
Year ended December 31
2001 2002
Sensitivity re: healthcare trend rate for non-pension,
post-employment benefits:
1% Increase
Effect on ABO $ 5.1 $ 5.3
Effect on service cost and interest cost 0.9 1.2
1% Decrease
Effect on ABO (4.0) (4.2)
Effect on service cost and interest cost (0.7) (1.0)
In 2002, the Company assumed net pension liabilities relating to an acquisition
in Japan from NEC Corporation. Regulatory funding restrictions preclude the
Company from fully funding the plan. The plan has an accumulated benefit
obligation of $31.3 in excess of its plan assets of $6.8. At the time of closing
the acquisition, the Company received amounts to cover the unfunded liabilities.
The Company has a pension plan with an accumulated benefit obligation of $123.2
that is in excess of plan assets of $83.7.
The Company has a supplemental retirement plan that has an accumulated benefit
obligation of $8.7 and no plan assets. In 2002, the plan was reclassified from
other benefit plans to pension plans.
In 2002, the Company incurred net curtailment losses due to the rationalization
of facilities. These losses are included as restructuring charges in note 13(b).
17. Financial instruments:
Fair values:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
(a) The carrying amounts of cash, short-term investments, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to the
short-term nature of these instruments.
(b) In 2001, the fair value of the Company's Senior Subordinated Notes was
estimated based on the current trading value, where available, or with reference
to similarly traded instruments with similar terms.
(c) The fair values of foreign currency contract obligations are estimated
based on the current trading value, as quoted by brokers active in these
markets.
The carrying amounts and fair values of the Company's financial
instruments, where there are differences at December 31, 2001, and 2002, are as
follows:
December 31, 2001 December 31, 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
Senior Subordinated Notes and other long-term debt $ 143.0 $ 149.5 $ 6.9 $ 6.9
Foreign currency contracts - asset (liability) -- (7.4) -- 18.9
Derivatives and hedging activities:
The Company has entered into foreign currency contracts to hedge foreign
currency risk relating to cash flow and cash position exposures. The Company's
forward exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains on
exposures being hedged. The counterparties to the contracts are multinational
commercial banks, and therefore, the credit risk of counterparty non-performance
is low. As at December 31, 2002, the Company had forward foreign exchange
contracts to trade $282.7 in U.S. dollars in exchange for Canadian dollars over
a period of 15 months at a weighted average exchange rate of U.S. $0.64. The
Company also had forward contracts to trade $10.6 in exchange for Canadian
dollars over a period of 37 months at a weighted average exchange rate of U.S.
$0.63. In addition, the Company had exchange contracts to trade $168.7 in
exchange for euros over a period of 15 months at a weighted average exchange
rate of U.S. $0.93, $36.4 in exchange for British pounds sterling over a period
of 13 months at a weighted average exchange rate of U.S. $1.45, $37.1 in
exchange for Mexican pesos over a period of 12 months at a weighted average
exchange rate of U.S. $0.10, $27.6 in exchange for Singapore dollars over a
period of 12 months at a weighted average exchange rate of U.S. $0.57, 64.5
Brazilian reais in exchange for U.S.
dollars over a period of 1 month at a weighted average exchange rate of U.S.
$0.30, $40.7 in exchange for Japanese yen over a period of 1 month at a weighted
average exchange rate of U.S. $0.01, and $11.9 in exchange for Czech koruna over
a period of 12 months at a weighted average exchange rate of U.S. $0.03. At
December 31, 2002, these contracts had a fair-value asset of $18.9 (2001 -
liability of $7.4).
Concentration of risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily inventory repurchase obligations of customers,
accounts receivable and cash equivalents. The Company performs ongoing credit
evaluations of its customers' financial conditions. In certain instances, the
Company obtains letters of credit from its customers. The Company considers its
concentrations of credit risk in determining its estimates of reserves for
potential credit losses. The Company maintains cash and cash equivalents in high
quality short-term investments or on deposit with major financial institutions.
18. Commitments, contingencies and guarantees:
The Company has operating leases that require future payments as follows:
Operating Leases
2003 $ 106.5
2004 59.5
2005 38.9
2006 23.0
2007 18.9
Thereafter 91.5
Contingent liabilities in the form of letters of credit, letters of guarantee,
and surety and performance bonds, are provided to various third parties. These
guarantees cover various payments including customs and excise taxes, utility
commitments and certain bank guarantees. At December 31, 2002, these
liabilities, including guarantees of employee share purchase loans, amounted to
$61.2 (2001 - $24.1).
In addition to the above guarantees, the Company has also provided routine
indemnifications, whose terms range in duration and often are not explicitly
defined. These guarantees may include indemnifications against adverse effects
due to changes in tax laws and patent infringements by third parties. The
maximum amounts from these indemnifications cannot be reasonably estimated. In
some cases, the Company has recourse against other parties to mitigate its risk
of loss from these guarantees. Historically, the Company has not made
significant payments relating to these indemnifications.
Under the terms of an existing real estate lease, which expires in 2004,
Celestica has the right to acquire the real estate at a purchase price equal to
the lease balance, which currently is approximately $37.3. In the event that the
lease is not renewed, subject to certain conditions, Celestica may choose to
market and complete the sale of the real estate on behalf of the lessor. If the
highest offer received is less than the lease balance, Celestica would pay the
lessor the lease balance less the gross sale proceeds, subject to a maximum of
$31.5. In the event that no acceptable offers are received, Celestica would pay
the lessor $31.5 and return the property to the lessor. Alternatively, Celestica
may choose to acquire the real estate at the
expiration for a price equal to the then current lease balance. The future lease
payments under this lease are included in the total operating lease commitments.
In the normal course of operations the Company may be subject to litigation and
claims from customers, suppliers and former employees. Management believes that
adequate provisions have been recorded in the accounts where required. Although
it is not possible to estimate the extent of potential costs, if any, management
believes that the ultimate resolution of such contingencies would not have a
material adverse effect on the financial position of the Company.
19. Significant customers:
During 2002, three customers individually comprised 17%, 16% and 15% of total
revenue across all geographic segments. At December 31, 2002, one customer
represented 28% of total accounts receivable.
During 2001, three customers individually comprised 23%, 21% and 11% of total
revenue across all geographic segments. At December 31, 2001, two customers
represented 14% and 26% of total accounts receivable.
During 2000, two customers individually comprised 25% and 21% of total revenue
across all geographic segments. At December 31, 2000, two customers represented
21% and 26% of total accounts receivable.
20. Segmented information:
The Company's operations fall into one dominant industry segment, the
electronics manufacturing services industry. The Company manages its operations,
and accordingly determines its operating segments, on a geographic basis. The
performance of geographic operating segments is monitored based on EBIAT
(earnings before interest, income taxes, amortization of goodwill and intangible
assets, integration costs related to acquisitions and other charges).
Inter-segment transactions are reflected at market value.
The following is a breakdown by reporting segment:
Year ended December 31
2000 2001 2002
Revenue
Americas $ 6,542.7 $ 6,334.6 $ 4,640.8
Europe 2,823.3 3,001.3 1,786.5
Asia 871.6 991.1 2,109.7
Elimination of inter-segment revenue (485.5) (322.6) (265.4)
$ 9,752.1 $ 10,004.4 $ 8,271.6
Year ended December 31
2000 2001 2002
EBIAT
Americas $ 200.1 $ 192.9 $ 157.7
Europe 121.1 128.5 (11.5)
Asia 40.7 49.7 111.1
361.9 371.1 257.3
Interest, net 19.0 7.9 1.1
Amortization of goodwill and intangible assets (88.9) (125.0) (95.9)
Integration costs related to acquisitions (16.1) (22.8) (21.1)
Other charges -- (273.1) (677.8)
Earnings (loss) before income taxes $ 275.9 $ (41.9) $ (536.4)
Year ended December 31
2000 2001 2002
Capital expenditures
Americas $ 154.0 $ 107.9 $ 90.0
Europe 86.9 55.4 28.0
Asia 41.9 36.0 33.4
$ 282.8 $ 199.3 $ 151.4
As at December 31
2001 2002
Total assets
Americas $ 3,408.2 $ 2,894.1
Europe 1,626.3 1,047.6
Asia 1,598.4 1,865.1
$ 6,632.9 $ 5,806.8
Capital assets
Americas $ 468.0 $ 281.1
Europe 279.1 231.9
Asia 168.0 214.8
$ 915.1 $ 727.8
The following table details the Company's external revenue allocated by
manufacturing location among foreign countries exceeding 10%:
Year ended December 31
2000 2001 2002
Revenue
Canada 28% 20% 15%
United States 30% 35% 37%
Italy 10% 13% 13%
United Kingdom 17% 11% --
21. Supplemental cash flow information:
Year ended December 31
2000 2001 2002
Paid during the year:
Interest $ 15.9 $ 20.7 $ 22.0
Taxes $ 55.0 $ 89.0 $ 25.5
Non-cash financing activities:
Convertible debt accretion, net of tax $ 5.4 $ 15.0 $ 17.5
Shares issued for acquisitions $ -- $ 567.0 $ --
22. Canadian and United States accounting policy differences:
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles (GAAP) as applied in
Canada. The significant
differences between Canadian and U.S. GAAP, and their
effect on the consolidated financial statements of the Company are described
below:
Consolidated statements of earnings (loss):
The following table reconciles net earnings (loss) as reported in the
accompanying consolidated statements of earnings (loss) to net earnings (loss)
that would have been reported had the consolidated financial statements been
prepared in accordance with U.S. GAAP:
Year ended December 31
2000 2001 2002
Net earnings (loss) in accordance with Canadian GAAP $ 206.7 $ (39.8) $ (445.2)
Compensation expense (a) (2.5) (3.2) (3.8)
Interest expense on convertible debt, net of tax (b) (6.8) (17.7) (27.8)
Gain on repurchase of convertible debt, net of tax (b) -- -- 8.4
Other charges, net of tax (c) -- (2.7) (26.5)
Gain on foreign exchange contract, net of tax (d) -- 12.1 --
Net earnings (loss) in accordance with U.S. GAAP $ 197.4 $ (51.3) $ (494.9)
Other comprehensive income (loss):
Cumulative effect of a change in accounting policy, net of tax (e) -- 5.6 --
Net gain (loss) on derivatives designated as hedges, net of tax (e) -- (11.7) 21.8
Minimum pension liability, net of tax (f) -- (14.9) (23.6)
Foreign currency translation adjustment -- 1.2 20.2
Comprehensive income (loss) in accordance with U.S. GAAP $ 197.4 $ (71.1) $ (476.5)
The following table details the computation of U.S. GAAP basic and diluted
earnings (loss) per share:
Year ended December 31
2000 2001 2002
Earnings (loss) available to shareholders - basic $ 197.4 $ (51.3) $ (494.9)
Add back: Interest expense on convertible debt,
net of tax (if dilutive) 6.8 -- --
Earnings (loss) available to shareholders - diluted $ 204.2 $ (51.3) $ (494.9)
Weighted average shares - basic (in millions) 199.8 213.9 229.8
Weighted average shares - diluted (in millions) (1) 211.8 213.9 229.8
Basic earnings (loss) per share $ 0.99 $ (0.24) $ (2.15)
Diluted earnings (loss) per share $ 0.96 $ (0.24) $ (2.15)
(1) For 2001 and 2002, excludes the effect of options and convertible debt as
they are anti-dilutive due to the loss.
The cumulative effect of these adjustments on shareholders' equity of the
Company is as follows:
As at December 31
2000 2001 2002
Shareholders' equity in accordance with Canadian GAAP $ 3,469.3 $ 4,745.6 $ 4,203.6
Compensation expense (a) (10.6) (13.8) (17.6)
Capital stock (a) 8.6 11.8 15.6
Interest expense on convertible debt, net of tax (b) (6.8) (24.5) (52.3)
Convertible debt (b) (860.5) (886.8) (804.6)
Convertible debt accretion, net of tax (b) 5.4 20.4 37.9
Gain on repurchase of convertible debt for Canadian GAAP (b) -- -- (6.7)
Gain on repurchase of convertible debt for U.S. GAAP (b) -- -- 8.4
Other charges (c) -- (2.7) (29.2)
Gain on foreign exchange contract, net of tax (d) -- 12.1 12.1
Net gain (loss) on cash flow hedges (e) -- (6.1) 15.7
Minimum pension liability, net of tax (f) -- (14.9) (38.5)
Shareholders' equity in accordance with U.S. GAAP $ 2,605.4 $ 3,841.1 $ 3,344.4
(a) In 1998, the Company amended the vesting provisions of 6.2 million
employee stock options issued in 1997 and 1998. Under the previous vesting
provisions, such options vested based on the achievement of earnings targets. A
portion of these options now vest over a specified time period and the balance
vested on completion of the initial public offering in 1998. Under U.S. GAAP,
this amendment required a new measurement date for purposes of accounting for
compensation expense, resulting in a charge equal to the aggregate difference
between the fair value of the underlying subordinate voting shares at the date
of the amendment and the exercise price for such options. As a result, under
U.S. GAAP the Company has recorded an aggregate $15.6 non-cash stock
compensation charge reflected in earnings and capital stock over the vesting
period as follows: 1998 - $4.2; 1999 - $1.9; 2000 -- $2.5; 2001 - $3.2; 2002 -
$3.8. No similar charge is required to be recorded by the Company under Canadian
GAAP.
(b) Under Canadian GAAP, the Company recorded the convertible debt as an
equity instrument and recorded accretion charges to retained earnings. Under
U.S. GAAP, the convertible debt was recorded as a long-term liability and,
accordingly, the Company recorded the accretion charges and amortization of debt
issue costs to interest expense of $27.8, net of tax of $13.9 (2001 - $17.7, net
of tax of $9.5; 2000 - $6.8, net of tax of $3.8). In 2002, the Company reported
a gain on the repurchase of a portion of convertible debt. Under Canadian GAAP,
the gain is recorded to retained earnings. Under U.S. GAAP, the Company records
the gain through income of $8.4, net of $4.2 in taxes.
(c) In 2002, the Company recorded impairment charges to write-down certain
assets, primarily intangible assets, which was measured using undiscounted cash
flows. U.S. GAAP requires the use of discounted cash flows, resulting in an
additional charge of $26.5, net of tax of $2.0 (2001 - $2.7).
(d) In 2001, the Company entered into a forward exchange contract to hedge the
cash portion of the purchase price for the Omni acquisition. The transaction
does not qualify for hedge accounting treatment under SFAS No. 133 which
specifically precludes hedges of
forecasted business combinations. As a result, the gain on the exchange contract
of $15.7, less tax of $3.6, is recognized in income for U.S. GAAP. For Canadian
GAAP, the gain on the contract was included in the cost of the acquisition,
resulting in a goodwill value that is $15.7 lower for Canadian GAAP than U.S.
GAAP.
(e) The Financial Accounting Standards Board (FASB) has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138
which amends SFAS No. 133. SFAS No. 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. The standard requires that all
derivatives be recorded on the balance sheet at fair value. The Company has
implemented SFAS No. 133 effective for 2001 for purposes of the U.S. GAAP
reconciliation. The Company enters into forward exchange contracts to hedge
certain forecasted cash flows. The contracts are for periods consistent with the
forecasted transactions. All relationships between hedging instruments and
hedged items, as well as risk management objectives and strategies, are
documented. Changes in the spot value of the foreign currency contracts that are
designated, effective and qualify as cash flow hedges of forecasted transactions
are reported in accumulated other comprehensive income and are reclassified into
the same component of earnings and in the same period as the hedged transaction
is recognized. Accordingly, on January 1, 2001, the Company recorded an asset in
the amount of $7.5 (less $1.9 in taxes) and a corresponding credit to other
comprehensive income as a cumulative effect, type adjustment to reflect the
initial mark-to-market on the foreign currency contracts pursuant to U.S. GAAP.
At December 31, 2001, the Company recorded a liability of $7.4 and a
corresponding gross adjustment of $14.9 (less $3.2 in taxes) to other
comprehensive income and earnings. At December 31, 2002, the Company has
recorded an asset of $18.9 (less $3.2 in taxes) and a corresponding gain of
$26.3 (less $4.5 in taxes) to other comprehensive income and earnings. It is
expected that $18.8 of net gains reported in accumulated other comprehensive
income will be reclassified into earnings during 2003. Under Canadian GAAP, the
derivative instruments are not marked to market and the related, off-balance
sheet gains and losses are recognized in earnings in the same period as the
hedged transactions.
(f) Under U.S. GAAP, the Company is required to record an additional minimum
pension liability for three of its plans to reflect the excess of the
accumulated benefit obligations over the fair value of the plan assets. Other
comprehensive income has been charged with $23.6, net of tax of $12.0 (2001 -
one plan for $14.9, net of tax of $6.4). No such adjustments are required under
Canadian GAAP.
Other disclosures required under U.S. GAAP:
(g) Stock-based compensation:
Under U.S. GAAP, the Company measures compensation costs related to stock
options granted to employees using the intrinsic value method as prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" as permitted by
SFAS No. 123. However, SFAS No. 123 does require the disclosure of pro forma net
earnings (loss) and earnings (loss) per share information as if the Company had
accounted for its employee stock options under the fair-value method prescribed
by SFAS No. 123. The estimated fair value of the options is amortized to income
over the vesting period, on a straight-line basis, and was determined using the
Black-Scholes option pricing model with the following weighted average
assumptions:
Year ended December 31
2000 2001 2002
Risk-free rate 5.4% 5.4% 5.1%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor of the expected market price of the
Company's shares 70.0% 70.0% 70.0%
Expected option life (in years) 7.5 7.5 5.0
Weighted-average grant date fair values of options issued $ 40.49 $ 34.31 $ 12.02
The pro forma disclosure for U.S. GAAP is as follows:
Year ended December 31
2000 2001 2002
Net earnings (loss) in accordance with U.S. GAAP, as reported $ 197.4 $ (51.3) $ (494.9)
Deduct: Stock-based compensation costs using
fair-value method, net of tax (21.2) (45.8) (87.7)
Pro forma net earnings (loss) in accordance with U.S. GAAP $ 176.2 $ (97.1) $ (582.6)
Earnings (loss) per share:
Basic - as reported $ 0.99 $ (0.24) $ (2.15)
Basic - pro forma $ 0.88 $ (0.45) $ (2.54)
Diluted - as reported $ 0.96 $ (0.24) $ (2.15)
Diluted - pro forma $ 0.86 $ (0.45) $ (2.54)
(h) Accumulated other comprehensive loss:
Year ended December 31
2000 2001 2002
Opening balance of accumulated net gain on cash flow hedges $ -- $ -- $ (6.1)
Cumulative effect of a change in accounting policy, net of tax (e) -- 5.6 --
Net gain (loss) on derivatives designated as hedges (e) -- (11.7) 21.8
Closing balance -- (6.1) 15.7
Opening balance of foreign currency translation account (4.1) (4.1) (2.9)
Foreign currency translation gain -- 1.2 20.2
Closing balance (4.1) (2.9) 17.3
Opening balance of minimum pension liability -- -- (14.9)
Minimum pension liability, net of tax (f) -- (14.9) (23.6)
Closing balance -- (14.9) (38.5)
Accumulated other comprehensive loss $ (4.1) $ (23.9) $ (5.5)
(i) Under U.S. GAAP, the subtotal "cash from earnings" would be excluded from
the consolidated statements of cash flows.
(j) Warranty liability:
The Company records a liability for future warranty costs based on management's
best estimate of probable claims under its product warranties. The accrual is
based on the terms of the warranty, which vary by customer and product, and
historical experience. The Company regularly evaluates the appropriateness of
the remaining accrual.
The following table details the changes in the warranty liability:
Balance at January 1, 2002 $ 18.1
Accrual in excess of claims incurred 5.6
Balance at December 31, 2002 $ 23.7
(k) New United States accounting pronouncements:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Intangible Assets" which the Company fully adopted
effective January 1, 2002. These statements are substantially consistent with
CICA Sections 1581 and 3062 (refer to note 2(q)) except that, under U.S. GAAP,
any transitional impairment charge would have been recognized in earnings as a
cumulative effect of a change in accounting principle. Under Canadian GAAP, the
cumulative adjustment would have been recognized in opening retained earnings.
There was no impact to the Company as no transitional impairment charges were
recognized.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" was
approved and requires that the fair value of an asset retirement obligation be
recorded as a liability, at fair value, in the period in which the Company
incurs the obligation. SFAS No. 143 is effective for the Company's fiscal year
commencing January 1, 2003. The Company expects the adoption of this standard
will have no material impact on its financial position, results of operations or
cash flows.
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which retains the fundamental provisions of SFAS
No. 121 for recognizing and measuring impairment losses of long-lived assets
other than goodwill. SFAS No. 144 also broadens the definition of discontinued
operations to include all distinguishable components of an entity that will be
eliminated from ongoing operations. The Company prospectively adopted SFAS No.
144 effective January 1, 2002.
In May 2002, FASB issued SFAS No. 145, "Rescission of FASB Nos. 4, 44 and 64,
Amendment of FASB No. 13 and Technical Corrections." SFAS No. 145 requires that
certain gains and losses from extinguishment of debt no longer qualify as
extraordinary. The Company has early adopted SFAS No. 145 commencing January 1,
2002.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 recognizes the liability for an exit
or disposal activity only when the costs are incurred and can be measured at
fair value. Currently, a commitment to an exit or disposal plan is sufficient to
record the majority of the costs. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. The Company expects the adoption
of this standard will not have a material impact on its existing restructuring
plans as these plans were initiated under an exit plan that meets the criteria
of Emerging Issues Task Force No. 94-3.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), which requires certain disclosures of
obligations under guarantees. The disclosure requirements of FIN 45 are
effective for the Company's year ended December 31, 2002. Effective for 2003,
FIN 45 also requires the recognition of a liability by a guarantor at the
inception of certain guarantees entered into or modified after December 31,
2002, based on the fair value of the guarantee. The Company has adopted the
disclosure requirements in its 2002 consolidated financial statements. See
notes 18 and 22(j). The Company has not determined the impact of the measurement
requirements of FIN 45.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" (FIN 46). The consolidation provisions of FIN 46 are
effective for all newly created entities created after January 31, 2003, and are
applicable to existing entities as of the Company's third quarter beginning July
1, 2003. It is possible that the Company's variable interests in the real estate
assets subject to the lease arrangement disclosed in note 18 will be subject to
the consolidation provisions of FIN 46. The Company has not determined the
impact, however, any difference between the asset and liability on initial
measurement would be accounted for as a cumulative effect of change in
accounting policy in the 2003 statement of earnings. Refer to note 18.
23. Subsequent events:
In January 2003, the Company made the following announcements:
In response to the continued limited visibility in end markets, the Company
plans to further reduce its manufacturing capacity. The reduction in capacity
will result in a pre-tax restructuring charge of between $50.0 and $70.0, to be
recorded during 2003.
The Company has, from time to time, purchased LYONs on the open market. The
Company has been authorized by the board of directors to spend up to an
additional $100.0 to repurchase LYONs, at management's discretion. This is in
addition to the amounts authorized in October 2002, of which $48.0 remains
available for future purchases.
24. Comparative information:
The Company has reclassified certain prior year information to conform to the
current year's presentation.
Celestica Global Locations
CORPORATE HEAD OFFICE
1150 Eglinton Avenue East
Toronto, Ontario
Canada M3C 1H7
OPERATIONS
THE AMERICAS
Canada
844 Don Mills Road
Toronto, Ontario
Canada M3C 1V7
18107 Trans-Canada Highway
Kirkland, Quebec
Canada H9J 3K1
U.S.A.
7400 Scott Hamilton Drive
Little Rock, Arkansas
U.S.A. 72209
5325 Hellyer Avenue
San Jose, California
U.S.A. 95138
1200 West 120th Avenue
Westminster, Colorado
U.S.A. 80234
4701 Technology Parkway
Fort Collins, Colorado
U.S.A. 80525
1615 East Washington Street
Mt. Pleasant, Iowa
U.S.A. 52641
9 Northeastern Boulevard
Salem, New Hampshire
U.S.A. 03079
3600 Tarheel Drive
Raleigh, North Carolina
U.S.A. 27609
7725 West Reno Avenue, 4th Floor
P.O. Box 26060
Oklahoma City, Oklahoma
U.S.A. 73126
4607 SE International Parkway
Milwaukie, Oregon
U.S.A. 97222
4616 West Howard Lane
Building 1, Suite 100
Austin, Texas
U.S.A. 78728
1050 Venture Court
Carrollton, Texas
U.S.A. 75006
925 First Avenue
Chippewa Falls, Wisconsin
U.S.A. 54729
Mexico
Octava #102
Parque Industrial Monterrey
Apodaca, Nuevo Leon
Mexico CP 66600
Av. De la Noria
No. 125 Parque Industrial Queretaro
Santa Rosa Jauregui, Queretaro
Mexico
Brazil
Rod. SP 340 S/N Km 128, 7B
Jaguariuna, Sao Paolo
Brazil CEP 13820-000
EUROPE
Czech Republic
Billundska 3111
Kladno, Czech Republic
CZ 272 01
Ulice Osvobezni 363
Rajecko, Czech Republic
CZ 679 02
France
ZI de Saint Lambert
49412 Saumur Cedex
France
Ireland
Holybanks
Swords
Co. Dublin
Ireland
Italy
Via Ardeatina 2491
00040 Santa Palomba (Roma)
Italia
Via Lecco 61
20059 Vimercate (Milano)
Italia
United Kingdom
Westfields House
West Avenue
Kidsgrove, Stoke-on-Trent
Staffordshire
U.K. ST7 1TL
Castle Farm
Priorslee
Telford
Shropshire
U.K. TF2 9SA
ASIA
China
Mai Yuan Guan Li Qu
Changping, Dongguan
Guangdong, China
523576
2005 Yang Gao Bei Road
318 Fa Sai Road, Wai Gao Qiao
Free Trade Zone
Pudong, Shanghai
P.R.C. 200131
No. 158-58 Hua Shan Road
Suzhou New District, Jiangsu Province
P.R.C. 215219
4th Floor, Block B, No. 5, Xinghan Street
Suzhou Industrial Park, Jiangsu Province
P.R.C. 215021
No. 448, Suhong Road
Suzhou Industrial Park, Jiangsu Province
P.R.C. 215021
No. 33 Xiangxing Road 1st
Xiangyu Free Trade Zone
Huli District, Xiamen
P.R.C. 361006
Hong Kong
4/F, Goldlion Holdings Centre
13-15 Yuen Shun Circuit
Siu Lek Yuen, Shatin
Hong Kong
Indonesia
Lot 509, Jalan Delima
Batamindo Industrial Park
Mukakuning, Batam
Indonesia 29433
Japan
450-3 Higashishinmachi, Ota-shi
Gunma, Japan 373-0015
2, Aza-Raijin, Yoshioka
Taiwa-cho Kurokawa-gun
Miyagi, Japan 981-3681
843, Kobaranishi Yamanashi
Yamanashi, Japan 405-0006
Malaysia
No. 7, Jalan Hasil
Kawasan Perindustrian Jalan Hasil
81200 Johor Bahru, Malaysia
No. 10, 10A, Jalan Bayu
Kawasan Perindustrian Jalan Hasil
81200 Johor Bahru, Malaysia
No. 1, 2, 3, 8, Jalan Tara
Kawasan Perindustrian Tampoi
80350 Johor Bahru, Malaysia
Plot 15, Jalan Hi-Tech
2/3 Phase 1
Kulim Hi-Tech Park
0900 Kulim, Kedah
Malaysia
Lot 7294 Jalan Perusahaan 2
Parit Buntar Industrial Estate
34200 Parit Buntar
Perak, Malaysia
Singapore
2 Ang Mo Kio Street 64, Level 2
Ang Mo Kio Industrial Park 3
Singapore, Singapore
569084
39 Tuas Basin Link
Singapore, Singapore
638772
Blk 33 Marsiling Industrial Estate Road 3
Woodlands Avenue 5 #07-01
Singapore, Singapore
739256
Taiwan
4f, 113, Sec. 1, Chung Chen Road
Taipei, Taiwan
R.O.C.
Thailand
49/18 Moo 5
Laem Chabang
Industrial Estate
Tungsukhla
Sriracha District
Chonburi Province
Thailand 20230
64/65 Eastern Seaboard Industrial Estate
Moo 4, Highway 331, T. Pluakdaeng
A. Pluakdaeng, Rayong
Thailand 21140
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EXHIBIT
99.5
AUDITORS' REPORT
To the Board of Directors of
Celestica Inc.
We have audited the consolidated balance sheets of Celestica Inc. as at
December 31, 2001 and 2002 and the consolidated statements of earnings (loss),
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and United States generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2001 and 2002 and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
Toronto, Canada /s/ KPMG LLP
January 21, 2003 Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Company's financial statements, such as the changes described in note
2(q) to the financial statements relating to the adoption by the Company of CICA
Handbook Section 1581 - Business Combinations, CICA Handbook Section 3062 -
Goodwill and Other Intangible Assets, and CICA Handbook Section 3870 -
Stock-based Compensation and Other Stock-based Payments. Our report to the Board
of Directors of Celestica Inc. dated January 21, 2003 is expressed in accordance
with Canadian reporting standards which do not require a reference to such
changes in accounting principles in the auditors' report when the change is
properly accounted for and adequately disclosed in the financial statements.
Toronto, Canada /s/ KPMG LLP
January 21, 2003 Chartered Accountants
Exhibit 99.6
CONSENT OF AUDITORS
The Board of Directors
Celestica Inc.
We consent to the incorporation by reference in the registration statements
on Forms S-8 (Nos. 333-9500, 333-9822, 333-9780, 333-71126, 333-66726,
333-63112 and 333-88210) and on Forms F-3 (Nos. 333-12272, 333-50240 and
333-69278) of Celestica Inc. of our report to the Board of Directors and
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Differences
(relating to the adoption by the Company of CICA Handbook Section 1581 -
Business Combinations, CICA Handbook Section 3062 - Goodwill and Other
Intangible Assets, and CICA Handbook Section 3870 - Stock-based Compensation
and Other Stock-based Payments) dated January 21, 2003, with respect to the
consolidated balances sheets of Celestica Inc. as of December 31, 2001 and
2002 and the related consolidated statements of earnings (loss),
shareholders' equity and cash flows for each of the years in the three year
period ended December 31, 2002, which report and Comments for U.S. Readers on
Canada-U.S. Reporting Difference are filed as an exhibit on the Current
Report on Form 6K of Celestica Inc. dated March 2003.
Toronto, Canada /s/ KPMG LLP
January 21, 2003 Chartered Accountants
