Q4 2023 non-IFRS adjusted EPS* above high end of guidance range
Q4 2023 non-IFRS operating margin* reaches 6.0%
(All amounts in U.S. dollars. Per share information based on diluted
shares outstanding unless otherwise noted.)
TORONTO, Jan. 29, 2024 (GLOBE NEWSWIRE) -- Celestica Inc. (TSX: CLS) (NYSE: CLS), a leader in design, manufacturing, hardware platform and supply chain solutions for the world's most innovative companies, today announced financial results for the quarter ended December 31, 2023 (Q4 2023)†.
“We are pleased with our solid fourth quarter results, delivering non-IFRS operating margin* of 6.0%, and non-IFRS adjusted EPS* of $0.76. We had a strong finish to 2023 and achieved 10% revenue growth for the full year compared to 2022, while our non-IFRS adjusted EPS* of $2.43 and non-IFRS operating margin* of 5.6% were each the highest in our company’s history” said Rob Mionis, President and CEO, Celestica. “The strong momentum we had in 2023 is continuing into 2024 and we remain confident in our long term strategy”.
Q4 2023 Highlights
• Key measures:
- Revenue: $2.14 billion, increased 5% compared to $2.04 billion for the fourth quarter of 2022 (Q4 2022).
- Non-IFRS operating margin*: 6.0%, compared to 5.3% for Q4 2022.
- ATS segment revenue decreased 2% compared to Q4 2022; ATS segment margin was 4.7% compared to 4.4% for Q4 2022.
- CCS segment revenue increased 10% compared to Q4 2022; CCS segment margin was 6.7% compared to 5.9% for Q4 2022.
- Adjusted earnings per share (EPS) (non-IFRS)*: $0.76, compared to $0.56 for Q4 2022.
- Adjusted return on invested capital (adjusted ROIC) (non-IFRS)*: 23.3%, compared to 20.7% for Q4 2022.
- Adjusted free cash flow (non-IFRS)*: $83.8 million, compared to $42.6 million for Q4 2022.
• Most directly comparable IFRS financial measures to non-IFRS measures above:
- Earnings from operations as a percentage of revenue: 5.5% compared to 4.0% for Q4 2022.
- EPS: $0.70 compared to $0.35 for Q4 2022.
- Return on invested capital (IFRS ROIC): 21.6% compared to 15.7% for Q4 2022.
- Cash provided by operations: $138.8 million compared to $101.3 million for Q4 2022.
• Repurchased 0.4 million subordinate voting shares (SVS) for cancellation for $10.0 million.
† Celestica has two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS segment consists of our ATS end market and is comprised of our Aerospace and Defense (A&D), Industrial, HealthTech and Capital Equipment businesses. Our CCS segment consists of our Communications and Enterprise (servers and storage) end markets. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 3 to our December 31, 2023 unaudited interim condensed consolidated financial statements (Q4 2023 Interim Financial Statements) for further detail.
* Non-International Financial Reporting Standards (IFRS) financial measures (including ratios based on non-IFRS financial measures) do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar financial measures presented by other public companies that report under IFRS or U.S. generally accepted accounting principles (GAAP). See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS financial measures. See Schedule 1 for, among other items, non-IFRS financial measures included in this press release, their definitions, uses, and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures. Schedule 1 also includes a description of modifications to the calculation of certain non-IFRS financial measures resulting from: (x) a recently-applicable exclusion related to our total return swap (TRS); and (y) the recent addition of certain costs to Other Charges, substantially all of which consist of additional Transition Costs and Secondary Offering Costs (each as defined therein). The most directly comparable IFRS financial measures to non-IFRS operating margin, non-IFRS adjusted EPS, non-IFRS adjusted ROIC and non-IFRS adjusted free cash flow are earnings from operations as a percentage of revenue, EPS, IFRS ROIC, and cash provided by operations, respectively.
First Quarter of 2024 (Q1 2024) Guidance‡
| Q1 2024 Guidance | |
| Revenue (in billions) | $2.025 to $2.175 |
| Non-IFRS operating margin* | 6.0% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges |
| Adjusted SG&A (non-IFRS)* (in millions) | $62 to $64 |
| Adjusted EPS (non-IFRS)* | $0.67 to $0.77 |
For Q1 2024, we expect a negative $0.26 to $0.32 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation (SBC) expense, amortization of intangible assets (excluding computer software), and restructuring charges.
For Q1 2024, we also expect a non-IFRS adjusted effective tax rate* of approximately 20% (which does not account for foreign exchange impacts or unanticipated tax settlements), assuming that our income will be subject to Pillar Two global minimum tax, as legislation that has been introduced in Canada may become applicable before the end of Q1 2024 with retroactive impact to January 1, 2024‡. If this legislation is not substantively enacted in Q1 2024, we expect that our non-IFRS adjusted effective tax rate* for the quarter would be approximately 15%.
2024 Annual Outlook Update‡
We are updating the 2024 annual non-IFRS adjusted free cash flow* outlook provided in our November 29, 2023 press release from $175 million, or more, to $200 million, or more; other 2024 annual outlook items provided therein remain unchanged.
* See Schedule 1 for the definitions of, and recent modifications to certain of, these non-IFRS financial measures. We do not provide reconciliations for forward-looking non-IFRS financial measures, as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various events that have not yet occurred, are out of our control and/or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking IFRS financial measure. For these same reasons, we are unable to address the probable significance of the unavailable information. Forward-looking non-IFRS financial measures may vary materially from the corresponding IFRS financial measures.
‡ Our Q1 2024 guidance and 2024 annual outlook each assume: (i) accelerated applicability of Pillar Two global minimum tax legislation to reporting periods in 2024 instead of 2025 (see note 2 to the Q4 2023 Interim Financial Statements); and (ii) anticipated operational adjustments, including tax efficiencies. However, the timing of global minimum tax legislation effectiveness and its impact on our tax expense cannot currently be estimated with certainty, and may differ materially from our expectations. In addition, although we have incorporated the anticipated impact of demand softness in our Capital Equipment business into our Q1 2024 financial guidance and 2024 annual outlook to the best of our ability, its adverse impact (in terms of duration and severity) cannot be estimated with certainty, and may be materially in excess of our expectations.
Summary of Selected Q4 2023 Results
| Q4 2023 Actual | Q4 2023 Guidance (2) | ||||
| Key measures: | |||||
| Revenue (in billions) | $2.14 | $2.00 to $2.15 | |||
| Non-IFRS operating margin* | 6.0% | 5.7% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges | |||
| Adjusted SG&A (non-IFRS)* (in millions) | $76.7 | $67 to $69 | |||
| Adjusted EPS (non-IFRS)* | $0.76 | $0.65 to $0.71 | |||
| Most directly comparable IFRS financial measures: | |||||
| Earnings from operations as a % of revenue | 5.5% | N/A | |||
| SG&A (in millions) | $75.7 | N/A | |||
| EPS (1) | $0.70 | N/A | |||
*See Schedule 1 for, among other things, the definitions of, and recent modifications to, these non-IFRS financial measures, as well as a reconciliation of these non-IFRS financial measures to the most directly comparable IFRS financial measures for Q4 2023.
(1) IFRS EPS of $0.70 for Q4 2023 included an aggregate charge of $0.17 (pre-tax) per share for employee SBC expense, amortization of intangible assets (excluding computer software), and restructuring charges (excluding restructuring recoveries). See the tables in Schedule 1 and note 9 to the Q4 2023 Interim Financial Statements for per-item charges. This aggregate charge was within our Q4 2023 guidance range of between $0.15 to $0.21 per share for these items.
IFRS EPS for Q4 2023 included: a $0.10 per share positive impact attributable to a fair value gain on our TRS (TRS Gain), substantially all of which was offset by: (i) a $0.04 per share negative tax impact arising from the repatriation of undistributed earnings, net of the reversal of previously-recorded tax expense from then-anticipated repatriations, from certain of our Asian subsidiaries; (ii) a $0.04 per share negative impact arising from tax uncertainties relating to one of our Asian subsidiaries (Tax Uncertainties); and (iii) a $0.01 per share negative impact attributable to restructuring charges. See notes 8, 9 and 10 to the Q4 2023 Interim Financial Statements.
IFRS EPS of $0.35 for Q4 2022 included a $0.03 per share negative impact arising from taxable temporary differences associated with the anticipated repatriation of undistributed earnings from certain of our Chinese subsidiaries (Repatriation Expense), a $0.02 per share negative impact attributable to restructuring charges, and a $0.01 per share negative taxable foreign exchange impact arising from the fluctuation of the Chinese renminbi relative to the U.S. dollar (Currency Impact). See notes 9 and 10 to the Q4 2023 Interim Financial Statements.
(2) For Q4 2023, our revenue was towards the high end of our guidance range; our non-IFRS adjusted EPS exceeded the high end of our guidance range, and our non-IFRS operating margin exceeded the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, driven by unanticipated volume leverage and production efficiencies in our CCS segment. Our non-IFRS adjusted SG&A for Q4 2023 exceeded the high end of our guidance range as a result of an audit settlement of certain historical value-added tax filings for one of our subsidiaries in Asia. Our IFRS effective tax rate for Q4 2023 was 19%. As anticipated, our non-IFRS adjusted effective tax rate for Q4 2023 was 20%.
Summary of Selected Full Year 2023 Results
2023 was another successful year for Celestica, in which we continued to demonstrate solid performance, including the following achievements:
| 2022 Actual | 2023 Actual | 2023 Outlook | |||
| (previously provided in November 29, 2023 press release) | |||||
| Key measures: | |||||
| Revenue (in billions) | $7.25 | $7.96 | $7.90 | ||
| Non-IFRS operating margin* | 4.9% | 5.6% | 5.5% | ||
| Adjusted EPS (non-IFRS)* | $1.90 | $2.43 | $2.36 | ||
| Adjusted ROIC (non-IFRS)* | 17.5% | 20.7% | N/A | ||
| Adjusted free cash flow (non-IFRS)* (in millions) | $93.8 | $193.9 | $150.0 | ||
| Most directly comparable IFRS financial measures: | |||||
| Earnings from operations as a % of revenue | 3.6% | 4.8% | N/A | ||
| EPS (1) | $1.18 | $2.03 | N/A | ||
| IFRS ROIC | 12.9% | 17.8% | N/A | ||
| Cash provided by operations (in millions) | $297.9 | $429.7 | N/A | ||
* See Schedule 1 for, among other things, the definitions of, and exclusions used to determine, these non-IFRS financial measures, and a reconciliation of such non-IFRS financial measures to the most directly comparable IFRS financial measures for 2023 and 2022. Schedule 1 also includes a description of modifications to the calculation of certain non-IFRS financial measures as a result of: (x) a recently-applicable exclusion related to our TRS; and (y) the recent addition of certain costs to Other Charges, substantially all of which consist of additional Transition Costs and Secondary Offering Costs (each as defined therein).
(1) IFRS EPS of $2.03 for 2023 included: (i) a $0.38 per share TRS Gain and (ii) a $0.05 favorable tax impact attributable to the reversals of previously-recorded tax uncertainties in one of our Asian subsidiaries; partially offset by: (x) a $0.12 per share negative impact attributable to net other charges (consisting primarily of a $0.10 per share negative impact attributable to restructuring charges, a $0.03 per share negative impact attributable to Transition Costs, a $0.01 per share negative impact attributable to Acquisition Costs, and a $0.01 per share negative impact, substantially of which was attributable to Secondary Offering Costs (each defined in Schedule 1), offset in part by a $0.02 per share positive impact attributable to legal recoveries and a $0.01 per share positive impact attributable to restructuring recoveries); and (y) a $0.09 per share negative tax impact from both the repatriation of undistributed earnings and taxable temporary differences associated with the then-anticipated repatriation of undistributed earnings from certain of our Asian subsidiaries, and a $0.04 per share negative impact from Tax Uncertainties. See notes 8, 9 and 10 to the Q4 2023 Interim Financial Statements.
IFRS EPS of $1.18 for 2022 included: (i) a $0.05 per share negative impact attributable to net other charges (consisting most significantly of a $0.07 per share negative impact attributable to restructuring charges and a $0.01 per share negative impact attributable to Transition Costs, partially offset by a $0.03 per share positive impact attributable to Transition Recoveries (each defined in Schedule 1)); (ii) a $0.03 per share negative impact attributable to estimated Constraint Costs (defined as both direct and indirect costs, including manufacturing inefficiencies related to lost revenue due to our inability to secure materials, idled labor costs and incremental costs for labor, expedite fees and freight premiums, cleaning supplies, personal protective equipment, and/or IT-related services to support our work-from-home arrangements as a result of supply chain constraints, or COVID-19-related periodic lockdowns or workforce constraints); (iii) a $0.03 per share negative Currency Impact; and (iv) a $0.03 per share negative Repatriation Expense, all offset in part by a $0.04 per share favorable tax impact attributable to the reversal of previously-recorded tax uncertainties in one of our Asian subsidiaries. See notes 9 and 10 to the Q4 2023 Interim Financial Statements.
Acceptance of Normal Course Issuer Bid (NCIB)
On December 12, 2023, the Toronto Stock Exchange accepted our notice to launch a new NCIB (2023 NCIB). The 2023 NCIB allows us to repurchase, at our discretion, from December 14, 2023 until the earlier of December 13, 2024 or the completion of purchases thereunder, up to approximately 11.8 million SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. See note 8 to the Q4 2023 Interim Financial Statements.
Q4 2023 Webcast
Management will host its Q4 2023 results conference call on January 30, 2024 at 8:00 a.m. Eastern Standard Time (EST). The webcast can be accessed at www.celestica.com.
Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS, Celestica provides supplementary non-IFRS financial measures to consider in evaluating the company’s operating performance. Management uses adjusted net earnings and other non-IFRS financial measures to assess operating performance and the effective use and allocation of resources; to provide more meaningful period-to-period comparisons of operating results; to enhance investors’ understanding of the core operating results of Celestica’s business; and to set management incentive targets. We believe investors use both IFRS and non-IFRS financial measures to assess management's past, current and future decisions associated with our priorities and our allocation of capital, as well as to analyze how our business operates in, or responds to, swings in economic cycles or to other events that impact our core operations. See Schedule 1 below.
About Celestica
Celestica enables the world's best brands. Through our recognized customer-centric approach, we partner with leading companies in Aerospace and Defense, Communications, Enterprise, HealthTech, Industrial, and Capital Equipment to deliver solutions for their most complex challenges. As a leader in design, manufacturing, hardware platform and supply chain solutions, Celestica brings global expertise and insight at every stage of product development - from the drawing board to full-scale production and after-market services. With talented teams across North America, Europe and Asia, we imagine, develop and deliver a better future with our customers. For more information on Celestica, visit www.celestica.com. Our securities filings can be accessed at www.sedarplus.com and www.sec.gov.
Cautionary Note Regarding Forward-looking Statements
This press release contains forward-looking statements, including, without limitation, those related to: our anticipated financial and/or operational results, guidance and outlook, including statements under the headings "First Quarter of 2024 (Q1 2024) Guidance", and "2024 Annual Outlook Update"; our credit risk; our liquidity; anticipated charges and expenses, including restructuring charges; the potential impact of tax and litigation outcomes; mandatory prepayments under our credit facility; anticipated sublease recoveries; and expected insurance recoveries for tangible losses in connection with the June 2022 fire at our Batam facility in Indonesia (Batam Fire). Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “continues,” “project,” "target," "outlook," "goal," "guidance", “potential,” “possible,” “contemplate,” “seek,” or similar expressions, or may employ such future or conditional verbs as “may,” “might,” “will,” “could,” “should,” or “would,” or may otherwise be indicated as forward-looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, where applicable, and for forward-looking information under applicable Canadian securities laws.
Forward-looking statements are provided to assist readers in understanding management’s current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. Forward-looking statements are not guarantees of future performance and are subject to risks that could cause actual results to differ materially from those expressed or implied in such forward-looking statements, including, among others, risks related to: customer and segment concentration; challenges of replacing revenue from completed, lost or non-renewed programs or customer disengagements; managing our business during uncertain market, political and economic conditions, including among others, global inflation and/or recession, and geopolitical and other risks associated with our international operations, including military actions/wars, protectionism and reactive countermeasures, economic or other sanctions or trade barriers, including in relation to the Russia/Ukraine conflict and/or conflicts in the Middle East, including the Israel/Hamas conflict and those related to Houthi attacks in the Red Sea; shipping delays and increased shipping costs (including as a result of shipping disruptions in the Red Sea); managing changes in customer demand; our customers' ability to compete and succeed using our products and services; delays in the delivery and availability of components, services and/or materials, as well as their costs and quality; our inventory levels and practices; the cyclical and volatile nature of our semiconductor business; changes in our mix of customers and/or the types of products or services we provide, including negative impacts of higher concentrations of lower margin programs; price, margin pressures, and other competitive factors and adverse market conditions affecting, and the highly competitive nature of, the electronic manufacturing services (EMS) and original design manufacturer (ODM) industries in general and our segments in particular (including the risk that anticipated market conditions do not materialize); challenges associated with new customers or programs, or the provision of new services; interest rate fluctuations; rising commodity, materials and component costs as well as rising labor costs and changing labor conditions; changes in U.S. policies or legislation; customer relationships with emerging companies; recruiting or retaining skilled talent; our ability to adequately protect intellectual property and confidential information; the variability of revenue and operating results; unanticipated disruptions to our cash flows; deterioration in financial markets or the macro-economic environment, including as a result of global inflation and/or recession; maintaining sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities; the expansion or consolidation of our operations; the inability to maintain adequate utilization of our workforce; integrating and achieving the anticipated benefits from acquisitions and "operate-in-place" arrangements; execution and/or quality issues (including our ability to successfully resolve these challenges); non-performance by counterparties; negative impacts on our business resulting from any significant uses of cash, securities issuances, and/or additional increases in third-party indebtedness (including as a result of an inability to sell desired amounts under our uncommitted accounts receivable sales program or supplier financing programs); disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of events outside of our control (including those described in "External factors that may impact our business" in our most recent Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)); defects or deficiencies in our products, services or designs; volatility in the commercial aerospace industry; compliance with customer-driven policies and standards, and third-party certification requirements; negative impacts on our business resulting from our third-party indebtedness; the scope, duration and impact of materials constraints; coronavirus disease 2019 (COVID-19) mutations or resurgences; declines in U.S. and other government budgets, changes in government spending or budgetary priorities, or delays in contract awards; changes to our operating model; foreign currency volatility; our global operations and supply chain; competitive bid selection processes; our dependence on industries affected by rapid technological change; rapidly evolving and changing technologies, and changes in our customers' business or outsourcing strategies; increasing taxes (including as a result of global tax reform) and potential ineffectiveness of related operational adjustments; tax audits, and challenges of defending our tax positions; obtaining, renewing or meeting the conditions of tax incentives and credits; the management of our information technology systems, and the fact that while we have not been materially impacted by computer viruses, malware, ransomware, hacking incidents or outages, we have been (and may in the future be) the target of such events; the impact of our restructuring actions and/or productivity initiatives, including a failure to achieve anticipated benefits therefrom; the incurrence of future restructuring charges, impairment charges, other unrecovered write-downs of assets (including inventory) or operating losses; the inability to prevent or detect all errors or fraud; compliance with applicable laws and regulations; our pension and other benefit plan obligations; changes in accounting judgments, estimates and assumptions; our ability to maintain compliance with applicable credit facility covenants; our total return swap agreement; our ability to refinance our indebtedness from time to time; our credit rating; our eligibility for foreign private issuer status; activist shareholders; current or future litigation, governmental actions, and/or changes in legislation or accounting standards; volatility in our SVS price; the impermissibility of SVS repurchases, or a determination not to repurchase SVS, under any NCIB; potential unenforceability of judgments; negative publicity; the impact of climate change; our ability to achieve our environmental, social and governance targets and goals, including with respect to climate change and greenhouse gas emissions reduction; and our potential vulnerability to take-over or tender offer. The foregoing and other material risks and uncertainties are discussed in our public filings at www.sedarplus.com and www.sec.gov, including in our most recent MD&A, our 2022 Annual Report on Form 20-F filed with, and subsequent reports on Form 6-K furnished to, the U.S. Securities and Exchange Commission, and as applicable, the Canadian Securities Administrators.
The forward-looking statements contained in this press release are based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions include: no significant decline in the global economy or in economic activity in our end markets due to a major recession or otherwise; growth in manufacturing outsourcing from customers in diversified markets; continued growth in the advancement and commercialization of artificial intelligence technologies and cloud computing, supporting sustained high levels of capital expenditure investments by leading hyperscaler customers; no unforeseen disruptions due to geopolitical factors (including war) causing significant negative impacts to economic activity, global or regional supply chains or normal business operations; no unexpected transfers, losses or disengagements; no unforeseen adverse changes in our mix of businesses; no unforeseen adverse changes in the regulatory environment; no undue negative impact on our customers' ability to compete and succeed using our products and services; continued growth in our end markets; no significant unforeseen negative impacts to our operations (including from mutations or resurgences of COVID-19); no unforeseen materials price increases, margin pressures, or other competitive factors affecting the EMS or ODM industries in general or our segments in particular, as well as those related to the following: the scope and duration of materials constraints (i.e., that they do not materially worsen), and their impact on our sites, customers and suppliers; our ability to fully recover our tangible losses caused by the Batam Fire through insurance claims; fluctuation of production schedules from our customers in terms of volume and mix of products or services; the timing and execution of, and investments associated with, ramping new business; our ability to retain programs and customers; the stability of currency exchange rates; supplier performance and quality, pricing and terms; compliance by third parties with their contractual obligations; the costs and availability of components, materials, services, equipment, labor, energy and transportation; that our customers will retain liability for product/component tariffs and countermeasures; global tax legislation changes (including accelerated applicability of Pillar Two legislation) and anticipated related operational adjustments; our ability to keep pace with rapidly changing technological developments; the timing, execution and effect of restructuring actions; the successful resolution of quality issues that arise from time to time; the components of our leverage ratio (as defined in our credit facility); our ability to successfully diversify our customer base and develop new capabilities; the availability of capital resources for, and the permissibility under our credit facility of, repurchases of outstanding SVS under NCIBs, and compliance with applicable laws and regulations pertaining to NCIBs; compliance with applicable credit facility covenants; anticipated demand levels across our businesses; the impact of anticipated market conditions on our businesses; that global inflation will not have a material impact on our revenues or expenses; and our maintenance of sufficient financial resources to fund currently anticipated financial actions and obligations and to pursue desirable business opportunities. Although management believes its assumptions to be reasonable under the current circumstances, they may prove to be inaccurate, which could cause actual results to differ materially (and adversely) from those that would have been achieved had such assumptions been accurate. Forward-looking statements speak only as of the date on which they are made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
| Contacts: | |
| Celestica Global Communications | Celestica Investor Relations |
| (416) 448-2200 | (416) 448-2211 |
| media@celestica.com | clsir@celestica.com |
Schedule 1
Supplementary Non-IFRS Financial Measures
The non-IFRS financial measures (including ratios based on non-IFRS financial measures) included in this press release are: adjusted gross profit, adjusted gross margin (adjusted gross profit as a percentage of revenue), adjusted selling, general and administrative expenses (SG&A), adjusted SG&A as a percentage of revenue, non-IFRS operating earnings (or adjusted EBIAT), non-IFRS operating margin (non-IFRS operating earnings or adjusted EBIAT as a percentage of revenue), adjusted net earnings, adjusted EPS, adjusted return on invested capital (adjusted ROIC), adjusted free cash flow, adjusted tax expense and adjusted effective tax rate. Adjusted EBIAT, adjusted ROIC, adjusted free cash flow, adjusted tax expense and adjusted effective tax rate are further described in the tables below. As used herein, "Q1," "Q2," "Q3," and "Q4" followed by a year refers to the first quarter, second quarter, third quarter and fourth quarter of such year, respectively.
In Q4 2022, we entered into a total return swap (TRS) agreement (TRS Agreement). Similar to employee stock-based compensation (SBC) expense, quarterly fair value adjustments of our TRS (TRS FVAs) are classified in cost of sales and SG&A expenses in our consolidated statement of operations. Commencing in Q1 2023, TRS FVAs are excluded in our determination of the following non-IFRS financial measures included herein: adjusted gross profit, adjusted gross margin, adjusted SG&A, adjusted SG&A as a percentage of revenue, non-IFRS operating earnings, non-IFRS operating margin, adjusted net earnings and adjusted EPS (for the reasons described below). TRS FVAs also impact the determination of our non-IFRS adjusted tax expense and non-IFRS adjusted effective tax rate. However, as the impact of TRS FVAs on our Q4 2022 Interim Financial Statements was de minimis, no such exclusion was applicable to such non-IFRS financial measures in either Q4 2022 or the full year 2022.
We believe the non-IFRS financial measures we present herein are useful to investors, as they enable investors to evaluate and compare our results from operations in a more consistent manner (by excluding specific items that we do not consider to be reflective of our core operations), to evaluate cash resources that we generate from our business each period, and to provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of a non-IFRS adjusted tax expense and a non-IFRS adjusted effective tax rate provide improved insight into the tax effects of our core operations, and are useful to management and investors for historical comparisons and forecasting. These non-IFRS financial measures result largely from management’s determination that the facts and circumstances surrounding the excluded charges or recoveries are not indicative of our core operations.
Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other companies that report under IFRS, or who report under U.S. GAAP and use non-GAAP financial measures to describe similar financial metrics. Non-IFRS financial measures are not measures of performance under IFRS and should not be considered in isolation or as a substitute for any IFRS financial measure.
The most significant limitation to management’s use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS financial measures are nonetheless recognized under IFRS and have an economic impact on us. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of our performance, and reconciling non-IFRS financial measures back to the most directly comparable financial measures determined under IFRS.
In calculating the following non-IFRS financial measures: adjusted gross profit, adjusted gross margin, adjusted SG&A, adjusted SG&A as a percentage of revenue, non-IFRS operating earnings, non-IFRS operating margin, adjusted net earnings, adjusted EPS, and adjusted tax expense, management excludes the following items (where indicated): employee SBC expense, TRS FVAs, amortization of intangible assets (excluding computer software), and Other Charges (Recoveries) (defined below), all net of the associated tax adjustments (quantified in the table below), and any non-core tax impacts (tax adjustments related to acquisitions, and certain other tax costs or recoveries related to restructuring actions or restructured sites).The economic substance of these exclusions (where applicable to the periods presented) and management’s rationale for excluding them from non-IFRS financial measures is provided below. The determination of our non-IFRS adjusted effective tax rate, adjusted free cash flow, and adjusted ROIC is described in footnote 2, 3 and 4 to the table below, respectively.
Employee SBC expense, which represents the estimated fair value of stock options, restricted share units and performance share units granted to employees, is excluded because grant activities vary significantly from quarter-to-quarter in both quantity and fair value. In addition, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude employee SBC expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do.
TRS FVAs represent mark-to-market adjustments to our TRS, as the TRS is recorded at fair value at each quarter end. We exclude the impact of these non-cash fair value adjustments (both positive and negative), as they reflect fluctuations in the market price of our SVS from period to period, and not our ongoing operating performance. In addition, we believe that excluding these non-cash adjustments permits a better comparison of our core operating results to those of our competitors.
Amortization charges (excluding computer software) consist of non-cash charges against intangible assets that are impacted by the timing and magnitude of acquired businesses. Amortization of intangible assets varies among our competitors, and we believe that excluding these charges permits a better comparison of core operating results with those of our competitors who also generally exclude amortization charges in assessing operating performance.
Other Charges (Recoveries) consist of, when applicable: Restructuring Charges, net of recoveries (defined below); Transition Costs (Recoveries) (defined below); net Impairment charges (defined below); consulting, transaction and integration costs related to potential and completed acquisitions, and charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with acquisitions; legal settlements (recoveries); specified credit facility-related charges; post-employment benefit plan losses; in Q2 2023 and Q3 2023, Secondary Offering Costs (defined below) and, commencing in Q2 2023, related costs pertaining to certain accounting considerations. We exclude these charges and recoveries because we believe that they are not directly related to ongoing operating results and do not reflect expected future operating expenses after completion of these activities or incurrence of the relevant costs or recoveries. Our competitors may record similar charges and recoveries at different times, and we believe these exclusions permit a better comparison of our core operating results with those of our competitors who also generally exclude these types of charges and recoveries in assessing operating performance. In addition, Other Charges (Recoveries) for Q4 2022 and full year 2022 included nil and approximately $95 million, respectively, in charges and equivalent recoveries resulting from the Batam Fire. See note 13 to the Q4 2023 Interim Financial Statements.
Restructuring Charges, net of recoveries, consist of costs relating to: employee severance, lease terminations, site closings and consolidations, accelerated depreciation of owned property and equipment which are no longer used and are available for sale and reductions in infrastructure.
Transition Costs consist of costs recorded in connection with: (i) the transfer of manufacturing lines from closed sites to other sites within our global network; (ii) the sale of real properties unrelated to restructuring actions (Property Dispositions); and (iii) with respect to full year 2023, the Purchaser Lease Charge (defined below). In connection with our March 2019 Toronto real property sale, we treated associated relocation and duplicate costs as Transition Costs. As part of such sale, we entered into a 10-year lease with the purchaser of such property for our then-anticipated headquarters, to be built by such purchaser on the site of our former location (Purchaser Lease). However, as previously disclosed, we were informed that due to construction issues, the commencement date of the Purchaser Lease would be delayed beyond the prior target of May 2023. As a result, in November 2022, we extended (on a long-term basis) the lease on our current corporate headquarters. Subsequently, we were informed that the Purchaser Lease would commence in June 2024. In Q3 2023, we executed a sublease for a portion of the space under the Purchaser Lease. Consistent with our prior treatment of duplicate costs incurred as a result of our 2019 Toronto real property sale, we recorded Transition Costs of $3.9 million (Purchaser Lease Charge) in full year 2023, representing the excess of rental expenses under the Purchaser Lease (with respect to the subleased space) over anticipated rental recoveries under the sublease. Transition Costs consist of direct relocation and duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition periods, as well as cease-use and other costs incurred in connection with idle or vacated portions of the relevant premises that we would not have incurred but for these relocations, transfers and dispositions. Transition Recoveries consist of any gains recorded in connection with Property Dispositions. We believe that excluding these costs and recoveries permits a better comparison of our core operating results from period-to-period, as these costs or recoveries do not reflect our ongoing operations once these specified events are complete.
Impairment charges, which consist of non-cash charges against goodwill, intangible assets, property, plant and equipment, and right-of-use (ROU) assets, result primarily when the carrying value of these assets exceeds their recoverable amount.
Secondary Offering Costs consist of costs associated with conversion and sale of our shares by Onex Corporation (Onex). Onex, our then-controlling shareholder, completed underwritten secondary public offerings in June 2023 and August 2023. Nil Secondary Offering Costs were incurred in Q4 2023 and an aggregate of approximately $1.6 million of such costs were incurred in the full year 2023. We believe that excluding Secondary Offering Costs permits a better comparison of our core operating results from period-to-period, as they do not reflect our ongoing operations, and are no longer applicable as such conversions and sales have been completed.
Non-core tax impacts are excluded, as we believe that these costs or recoveries do not reflect core operating performance and vary significantly among those of our competitors who also generally exclude these costs or recoveries in assessing operating performance.
The following table (which is unaudited) sets forth, for the periods indicated, the various non-IFRS financial measures discussed above, and a reconciliation of non-IFRS financial measures to the most directly comparable financial measures determined under IFRS (in millions, except percentages and per share amounts):
| Three months ended December 31 | Year ended December 31 | ||||||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||||||
| % of revenue | % of revenue | % of revenue | % of revenue | ||||||||||||||||||||||||
| IFRS revenue | $ | 2,042.6 | $ | 2,140.5 | $ | 7,250.0 | $ | 7,961.0 | |||||||||||||||||||
| IFRS gross profit | $ | 186.2 | 9.1 | % | $ | 223.2 | 10.4 | % | $ | 636.3 | 8.8 | % | $ | 778.5 | 9.8 | % | |||||||||||
| Employee SBC expense | 5.6 | 4.2 | 20.3 | 22.6 | |||||||||||||||||||||||
| TRS FVAs (gains) | — | (4.8 | ) | — | (18.6 | ) | |||||||||||||||||||||
| Non-IFRS adjusted gross profit | $ | 191.8 | 9.4 | % | $ | 222.6 | 10.4 | % | $ | 656.6 | 9.1 | % | $ | 782.5 | 9.8 | % | |||||||||||
| IFRS SG&A | $ | 77.1 | 3.8 | % | $ | 75.7 | 3.5 | % | $ | 279.9 | 3.9 | % | $ | 279.6 | 3.5 | % | |||||||||||
| Employee SBC expense | (8.6 | ) | (5.6 | ) | (30.7 | ) | (33.0 | ) | |||||||||||||||||||
| TRS FVAs (gains) | — | 6.6 | — | 27.0 | |||||||||||||||||||||||
| Non-IFRS adjusted SG&A | $ | 68.5 | 3.4 | % | $ | 76.7 | 3.6 | % | $ | 249.2 | 3.4 | % | $ | 273.6 | 3.4 | % | |||||||||||
| IFRS earnings from operations | $ | 81.6 | 4.0 | % | $ | 118.6 | 5.5 | % | $ | 263.3 | 3.6 | % | $ | 383.2 | 4.8 | % | |||||||||||
| Employee SBC expense | 14.2 | 9.8 | 51.0 | 55.6 | |||||||||||||||||||||||
| TRS FVAs (gains) | — | (11.4 | ) | — | (45.6 | ) | |||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 9.2 | 9.2 | 37.0 | 36.8 | |||||||||||||||||||||||
| Other Charges (Recoveries) | 2.8 | 1.5 | 6.7 | 15.2 | |||||||||||||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT)(1) | $ | 107.8 | 5.3 | % | $ | 127.7 | 6.0 | % | $ | 358.0 | 4.9 | % | $ | 445.2 | 5.6 | % | |||||||||||
| IFRS net earnings | $ | 42.4 | 2.1 | % | $ | 84.2 | 3.9 | % | $ | 145.5 | 2.0 | % | $ | 244.6 | 3.1 | % | |||||||||||
| Employee SBC expense | 14.2 | 9.8 | 51.0 | 55.6 | |||||||||||||||||||||||
| TRS FVAs (gains) | — | (11.4 | ) | — | (45.6 | ) | |||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 9.2 | 9.2 | 37.0 | 36.8 | |||||||||||||||||||||||
| Other Charges (Recoveries) | 2.8 | 1.5 | 6.7 | 15.2 | |||||||||||||||||||||||
| Adjustments for taxes(2) | (0.2 | ) | (3.0 | ) | (5.8 | ) | (14.3 | ) | |||||||||||||||||||
| Non-IFRS adjusted net earnings | $ | 68.4 | $ | 90.3 | $ | 234.4 | $ | 292.3 | |||||||||||||||||||
| Diluted EPS | |||||||||||||||||||||||||||
| Weighted average # of shares (in millions) | 122.4 | 119.5 | 123.6 | 120.3 | |||||||||||||||||||||||
| IFRS earnings per share | $ | 0.35 | $ | 0.70 | $ | 1.18 | $ | 2.03 | |||||||||||||||||||
| Non-IFRS adjusted earnings per share | $ | 0.56 | $ | 0.76 | $ | 1.90 | $ | 2.43 | |||||||||||||||||||
| # of shares outstanding at period end (in millions) | 121.6 | 119.0 | 121.6 | 119.0 | |||||||||||||||||||||||
| IFRS cash provided by operations | $ | 101.3 | $ | 138.8 | $ | 297.9 | $ | 429.7 | |||||||||||||||||||
| Purchase of property, plant and equipment, net of sales proceeds | (32.3 | ) | (31.9 | ) | (108.9 | ) | (122.4 | ) | |||||||||||||||||||
| Lease payments | (9.9 | ) | (11.4 | ) | (46.0 | ) | (48.3 | ) | |||||||||||||||||||
| Finance Costs paid (excluding debt issuance costs paid) | (16.5 | ) | (11.7 | ) | (49.2 | ) | (65.1 | ) | |||||||||||||||||||
| Non-IFRS adjusted free cash flow (3) | $ | 42.6 | $ | 83.8 | $ | 93.8 | $ | 193.9 | |||||||||||||||||||
| IFRS ROIC % (4) | 15.7 | % | 21.6 | % | 12.9 | % | 17.8 | % | |||||||||||||||||||
| Non-IFRS adjusted ROIC % (4) | 20.7 | % | 23.3 | % | 17.5 | % | 20.7 | % | |||||||||||||||||||
(1) Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess performance related to our core operations. Non-IFRS operating earnings is defined as earnings from operations before employee SBC expense, TRS FVAs (defined above), amortization of intangible assets (excluding computer software), and Other Charges (Recoveries) (defined above). See note 9 to our Q4 2023 Interim Financial Statements for separate quantification and discussion of the components of Other Charges (Recoveries). Non-IFRS operating margin is non-IFRS operating earnings as a percentage of revenue.
(2) The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments (see below).
The following table sets forth a reconciliation of our non-IFRS adjusted tax expense and our non-IFRS adjusted effective tax rate to our IFRS tax expense and IFRS effective tax rate, respectively, for the periods indicated, in each case determined by excluding the tax benefits or costs associated with the listed items (in millions, except percentages) from our IFRS tax expense for such periods. Our IFRS effective tax rate is determined by dividing (i) IFRS tax expense by (ii) earnings from operations minus Finance Costs (defined in footnote (3) below); our non-IFRS adjusted effective tax rate is determined by dividing (i) non-IFRS adjusted tax expense by (ii) non-IFRS operating earnings minus Finance Costs.
| Three months ended December 31 | Year ended December 31 | ||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||
| IFRS tax expense | $ | 19.9 | $ | 19.9 | $ | 58.1 | $ | 62.0 | |||||||
| Tax costs (benefits) of the following items excluded from IFRS tax expense: | |||||||||||||||
| Employee SBC expense | (1.0 | ) | 2.4 | 2.5 | 10.6 | ||||||||||
| TRS FVAs | — | — | — | (0.6 | ) | ||||||||||
| Amortization of intangible assets (excluding computer software) | 0.7 | 0.8 | 3.0 | 3.0 | |||||||||||
| Other Charges (Recoveries) | 0.5 | (0.2 | ) | 0.3 | 1.3 | ||||||||||
| Non-IFRS adjusted tax expense | $ | 20.1 | $ | 22.9 | $ | 63.9 | $ | 76.3 | |||||||
| IFRS tax expense | $ | 19.9 | $ | 19.9 | $ | 58.1 | $ | 62.0 | |||||||
| Earnings from operations | $ | 81.6 | $ | 118.6 | $ | 263.3 | $ | 383.2 | |||||||
| Finance Costs | (19.3 | ) | (14.5 | ) | (59.7 | ) | (76.6 | ) | |||||||
| $ | 62.3 | $ | 104.1 | $ | 203.6 | $ | 306.6 | ||||||||
| IFRS effective tax rate | 32 | % | 19 | % | 29 | % | 20 | % | |||||||
| Non-IFRS adjusted tax expense | $ | 20.1 | $ | 22.9 | $ | 63.9 | $ | 76.3 | |||||||
| Non-IFRS operating earnings | $ | 107.8 | $ | 127.7 | $ | 358.0 | $ | 445.2 | |||||||
| Finance Costs | (19.3 | ) | (14.5 | ) | (59.7 | ) | (76.6 | ) | |||||||
| $ | 88.5 | $ | 113.2 | $ | 298.3 | $ | 368.6 | ||||||||
| Non-IFRS adjusted effective tax rate | 23 | % | 20 | % | 21 | % | 21 | % | |||||||
(3) Management uses non-IFRS adjusted free cash flow as a measure, in addition to IFRS cash provided by (used in) operations, to assess our operational cash flow performance. We believe non-IFRS adjusted free cash flow provides another level of transparency to our liquidity. Non-IFRS adjusted free cash flow is defined as cash provided by (used in) operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), lease payments, and Finance Costs (defined below) paid (excluding any debt issuance costs and when applicable, credit facility waiver fees paid). Finance Costs consist of interest expense and fees related to our credit facility (including debt issuance and related amortization costs), our interest rate swap agreements, our TRS Agreement, our accounts receivable sales program and customers' supplier financing programs, and interest expense on our lease obligations, net of interest income earned. We do not consider debt issuance costs paid (nil and $0.4 million in Q4 2023 and full year 2023, respectively; nil and $0.8 million in Q4 2022 and full year 2022, respectively) or such waiver fees (when applicable) to be part of our ongoing financing expenses. As a result, these costs are excluded from total Finance Costs paid in our determination of non-IFRS adjusted free cash flow. We believe that excluding Finance Costs paid (other than debt issuance costs and credit-agreement-related waiver fees paid) from cash provided by operations in the determination of non-IFRS adjusted free cash flow provides useful insight for assessing the performance of our core operations. Note, however, that non-IFRS adjusted free cash flow does not represent residual cash flow available to Celestica for discretionary expenditures.
(4) Management uses non-IFRS adjusted ROIC as a measure to assess the effectiveness of the invested capital we use to build products or provide services to our customers, by quantifying how well we generate earnings relative to the capital we have invested in our business. Non-IFRS adjusted ROIC is calculated by dividing annualized non-IFRS adjusted EBIAT by average net invested capital for the period. Net invested capital (calculated in the tables below) is derived from IFRS financial measures, and is defined as total assets less: cash, ROU assets, accounts payable, accrued and other current liabilities, provisions, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter and a five-point average to calculate average net invested capital for the year. Average net invested capital for Q4 2023 is the average of net invested capital as at September 30, 2023 and December 31, 2023, and average net invested capital for the full year 2023 is the average of net invested capital at December 31, 2022, March 31, 2023, June 30, 2023, September 30 2023 and December 31, 2023. A comparable financial measure to non-IFRS adjusted ROIC determined using IFRS measures would be calculated by dividing annualized IFRS earnings from operations by average net invested capital for the period.
The following table sets forth, for the periods indicated, our calculation of IFRS ROIC % and non-IFRS adjusted ROIC % (in millions, except IFRS ROIC % and non-IFRS adjusted ROIC %).
| Three months ended | Year ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2022 | 2023 | 2022 | 2023 | |||||||||||||
| IFRS earnings from operations | $ | 81.6 | $ | 118.6 | $ | 263.3 | $ | 383.2 | ||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | ||||||||||||
| Annualized IFRS earnings from operations | $ | 326.4 | $ | 474.4 | $ | 263.3 | $ | 383.2 | ||||||||
| Average net invested capital for the period | $ | 2,085.4 | $ | 2,193.7 | $ | 2,040.3 | $ | 2,152.8 | ||||||||
| IFRS ROIC % (1) | 15.7 | % | 21.6 | % | 12.9 | % | 17.8 | % | ||||||||
| Three months ended | Year ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| 2022 | 2023 | 2022 | 2023 | |||||||||||||
| Non-IFRS operating earnings (adjusted EBIAT) | $ | 107.8 | $ | 127.7 | $ | 358.0 | $ | 445.2 | ||||||||
| Multiplier to annualize earnings | 4 | 4 | 1 | 1 | ||||||||||||
| Annualized non-IFRS adjusted EBIAT | $ | 431.2 | $ | 510.8 | $ | 358.0 | $ | 445.2 | ||||||||
| Average net invested capital for the period | $ | 2,085.4 | $ | 2,193.7 | $ | 2,040.3 | $ | 2,152.8 | ||||||||
| Non-IFRS adjusted ROIC % (1) | 20.7 | % | 23.3 | % | 17.5 | % | 20.7 | % | ||||||||
| December 31 2022 | March 31 2023 | June 30 2023 | September 30 2023 | December 31 2023 | |||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||
| Total assets | $ | 5,628.0 | $ | 5,468.1 | $ | 5,500.5 | $ | 5,745.3 | $ | 5,890.7 | |||||||||
| Less: cash | 374.5 | 318.7 | 360.7 | 353.1 | 370.4 | ||||||||||||||
| Less: ROU assets | 138.8 | 133.1 | 146.5 | 157.8 | 154.0 | ||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 3,003.0 | 2,873.9 | 2,870.6 | 3,045.4 | 3,167.9 | ||||||||||||||
| Net invested capital at period end (1) | $ | 2,111.7 | $ | 2,142.4 | $ | 2,122.7 | $ | 2,189.0 | $ | 2,198.4 | |||||||||
| December 31 2021 | March 31 2022 | June 30 2022 | September 30 2022 | December 31 2022 | |||||||||||||||
| Net invested capital consists of: | |||||||||||||||||||
| Total assets | $ | 4,666.9 | $ | 4,848.0 | $ | 5,140.5 | $ | 5,347.9 | $ | 5,628.0 | |||||||||
| Less: cash | 394.0 | 346.6 | 365.5 | 363.3 | 374.5 | ||||||||||||||
| Less: ROU assets | 113.8 | 109.8 | 133.6 | 128.0 | 138.8 | ||||||||||||||
| Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable | 2,202.0 | 2,347.4 | 2,612.1 | 2,797.5 | 3,003.0 | ||||||||||||||
| Net invested capital at period end (1) | $ | 1,957.1 | $ | 2,044.2 | $ | 2,029.3 | $ | 2,059.1 | $ | 2,111.7 | |||||||||
(1) See footnote 4 on the previous page.
| CELESTICA INC. CONDENSED CONSOLIDATED BALANCE SHEET (in millions of U.S. dollars) (unaudited) | ||||||||
| Note | December 31 2022 | December 31 2023 | ||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 374.5 | $ | 370.4 | ||||
| Accounts receivable | 4 | 1,393.5 | 1,795.7 | |||||
| Inventories | 5&13 | 2,350.3 | 2,106.1 | |||||
| Income taxes receivable | 5.9 | 11.9 | ||||||
| Other current assets | 11&13 | 202.8 | 228.5 | |||||
| Total current assets | 4,327.0 | 4,512.6 | ||||||
| Property, plant and equipment | 371.5 | 472.7 | ||||||
| Right-of-use assets | 138.8 | 154.0 | ||||||
| Goodwill | 321.8 | 321.7 | ||||||
| Intangible assets | 346.5 | 318.3 | ||||||
| Deferred income taxes | 68.9 | 62.5 | ||||||
| Other non-current assets | 11 | 53.5 | 48.9 | |||||
| Total assets | $ | 5,628.0 | $ | 5,890.7 | ||||
| Liabilities and Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of borrowings under credit facility and lease obligations | 7 | $ | 52.2 | $ | 51.6 | |||
| Accounts payable | 1,440.8 | 1,298.2 | ||||||
| Accrued and other current liabilities | 5&11 | 1,462.2 | 1,781.3 | |||||
| Income taxes payable | 82.1 | 64.8 | ||||||
| Current portion of provisions | 17.9 | 23.6 | ||||||
| Total current liabilities | 3,055.2 | 3,219.5 | ||||||
| Long-term portion of borrowings under credit facility and lease obligations | 7 | 733.9 | 731.2 | |||||
| Pension and non-pension post-employment benefit obligations | 77.0 | 88.1 | ||||||
| Provisions and other non-current liabilities | 32.5 | 41.2 | ||||||
| Deferred income taxes | 51.7 | 42.2 | ||||||
| Total liabilities | 3,950.3 | 4,122.2 | ||||||
| Equity: | ||||||||
| Capital stock | 8 | 1,714.9 | 1,672.5 | |||||
| Treasury stock | 8 | (18.5 | ) | (80.1 | ) | |||
| Contributed surplus | 1,063.6 | 1,030.6 | ||||||
| Deficit | (1,076.6 | ) | (839.6 | ) | ||||
| Accumulated other comprehensive loss | (5.7 | ) | (14.9 | ) | ||||
| Total equity | 1,677.7 | 1,768.5 | ||||||
| Total liabilities and equity | $ | 5,628.0 | $ | 5,890.7 | ||||
Commitments and Contingencies (note 12). Subsequent event (note 11).
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in millions of U.S. dollars, except per share amounts) (unaudited) | ||||||||||||||||
| Three months ended | Year ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| Note | 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Revenue | 3 | $ | 2,042.6 | $ | 2,140.5 | $ | 7,250.0 | $ | 7,961.0 | |||||||
| Cost of sales | 5 | 1,856.4 | 1,917.3 | 6,613.7 | 7,182.5 | |||||||||||
| Gross profit | 186.2 | 223.2 | 636.3 | 778.5 | ||||||||||||
| Selling, general and administrative expenses | 77.1 | 75.7 | 279.9 | 279.6 | ||||||||||||
| Research and development | 14.5 | 17.6 | 46.3 | 60.9 | ||||||||||||
| Amortization of intangible assets | 10.2 | 9.8 | 40.1 | 39.6 | ||||||||||||
| Other charges, net of recoveries | 9 | 2.8 | 1.5 | 6.7 | 15.2 | |||||||||||
| Earnings from operations | 81.6 | 118.6 | 263.3 | 383.2 | ||||||||||||
| Finance costs | 7 | 19.3 | 14.5 | 59.7 | 76.6 | |||||||||||
| Earnings before income taxes | 62.3 | 104.1 | 203.6 | 306.6 | ||||||||||||
| Income tax expense (recovery) | 10 | |||||||||||||||
| Current | 22.8 | 17.2 | 88.7 | 63.9 | ||||||||||||
| Deferred | (2.9 | ) | 2.7 | (30.6 | ) | (1.9 | ) | |||||||||
| 19.9 | 19.9 | 58.1 | 62.0 | |||||||||||||
| Net earnings for the period | $ | 42.4 | $ | 84.2 | $ | 145.5 | $ | 244.6 | ||||||||
| Basic earnings per share | $ | 0.35 | $ | 0.71 | $ | 1.18 | $ | 2.04 | ||||||||
| Diluted earnings per share | $ | 0.35 | $ | 0.70 | $ | 1.18 | $ | 2.03 | ||||||||
| Shares used in computing per share amounts (in millions): | ||||||||||||||||
| Basic | 122.3 | 119.3 | 123.5 | 120.1 | ||||||||||||
| Diluted | 122.4 | 119.5 | 123.6 | 120.3 | ||||||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions of U.S. dollars) (unaudited) | ||||||||||||||||
| Three months ended | Year ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| Note | 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Net earnings for the period | $ | 42.4 | $ | 84.2 | $ | 145.5 | $ | 244.6 | ||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Items that will not be reclassified to net earnings: | ||||||||||||||||
| Gains (losses) on pension and non-pension post-employment benefit plans | 6 | 33.5 | (7.6 | ) | 33.5 | (7.6 | ) | |||||||||
| Items that may be reclassified to net earnings: | ||||||||||||||||
| Currency translation differences for foreign operations | 6.8 | 2.8 | (6.7 | ) | (3.4 | ) | ||||||||||
| Changes from currency forward derivative hedges | 23.4 | 13.4 | 7.2 | (1.8 | ) | |||||||||||
| Changes from interest rate swap derivative hedges | (5.9 | ) | (5.1 | ) | 20.6 | (4.0 | ) | |||||||||
| Total comprehensive income for the period | $ | 100.2 | $ | 87.7 | $ | 200.1 | $ | 227.8 | ||||||||
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in millions of U.S. dollars) (unaudited) | ||||||||||||||||||||||||
| Note | Capital stock (note 8) | Treasury stock (note 8) | Contributed surplus | Deficit | Accumulated other comprehensive loss (a) | Total equity | ||||||||||||||||||
| Balance -- January 1, 2022 | $ | 1,764.5 | $ | (48.9 | ) | $ | 1,029.8 | $ | (1,255.6 | ) | $ | (26.8 | ) | $ | 1,463.0 | |||||||||
| Capital transactions: | 8 | |||||||||||||||||||||||
| Issuance of capital stock | 0.7 | — | (0.5 | ) | — | — | 0.2 | |||||||||||||||||
| Repurchase of capital stock for cancellation(b) | (50.3 | ) | (1.8 | ) | 25.0 | — | — | (27.1 | ) | |||||||||||||||
| Purchase of treasury stock for stock-based compensation (SBC) plans (c) | — | (11.1 | ) | — | — | — | (11.1 | ) | ||||||||||||||||
| Equity-settled SBC | — | 43.3 | 9.3 | — | — | 52.6 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 145.5 | — | 145.5 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Gains on pension and non-pension post-employment benefit plans | 6 | — | — | — | 33.5 | — | 33.5 | |||||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (6.7 | ) | (6.7 | ) | ||||||||||||||||
| Changes from currency forward derivative hedges | — | — | — | — | 7.2 | 7.2 | ||||||||||||||||||
| Changes from interest rate swap derivative hedges | — | — | — | — | 20.6 | 20.6 | ||||||||||||||||||
| Balance -- December 31, 2022 | $ | 1,714.9 | $ | (18.5 | ) | $ | 1,063.6 | $ | (1,076.6 | ) | $ | (5.7 | ) | $ | 1,677.7 | |||||||||
| Balance -- January 1, 2023 | $ | 1,714.9 | $ | (18.5 | ) | $ | 1,063.6 | $ | (1,076.6 | ) | $ | (5.7 | ) | $ | 1,677.7 | |||||||||
| Capital transactions: | 8 | |||||||||||||||||||||||
| Issuance of capital stock (d) | 0.6 | — | (0.3 | ) | — | — | 0.3 | |||||||||||||||||
| Repurchase of capital stock for cancellation(e) | 8 | (43.0 | ) | 1.8 | 2.9 | — | — | (38.3 | ) | |||||||||||||||
| Purchase of treasury stock for SBC plans (f) | — | (89.8 | ) | — | — | — | (89.8 | ) | ||||||||||||||||
| SBC cash settlement | 8 | — | — | (66.7 | ) | — | — | (66.7 | ) | |||||||||||||||
| Equity-settled SBC | — | 26.4 | 31.1 | — | — | 57.5 | ||||||||||||||||||
| Total comprehensive income (loss): | ||||||||||||||||||||||||
| Net earnings for the period | — | — | — | 244.6 | — | 244.6 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
| Losses on pension and non-pension post-employment benefit plans | 6 | — | — | — | (7.6 | ) | — | (7.6 | ) | |||||||||||||||
| Currency translation differences for foreign operations | — | — | — | — | (3.4 | ) | (3.4 | ) | ||||||||||||||||
| Changes from currency forward derivative hedges | — | — | — | — | (1.8 | ) | (1.8 | ) | ||||||||||||||||
| Changes from interest rate swap derivative hedges | — | — | — | — | (4.0 | ) | (4.0 | ) | ||||||||||||||||
| Balance -- December 31, 2023 | $ | 1,672.5 | $ | (80.1 | ) | $ | 1,030.6 | $ | (839.6 | ) | $ | (14.9 | ) | $ | 1,768.5 | |||||||||
(a) Accumulated other comprehensive loss is net of tax.
(b) Consists of $34.6 paid to repurchase subordinate voting shares (SVS) for cancellation during 2022, offset in part by the reversal of $7.5 accrued at December 31, 2021 for the estimated contractual maximum quantity of permitted SVS repurchases (Contractual Maximum Quantity) under an automatic share purchase plan (ASPP) executed in December 2021 for such purpose (see note 8).
(c) Consists of $44.9 paid to repurchase SVS for delivery obligations under our SBC plans during 2022, offset in part by the reversal of $33.8 accrued at December 31, 2021 for the estimated Contractual Maximum Quantity under an ASPP executed in December 2021 for such purpose (see note 8).
(d) In 2023, we issued 18.6 million SVS upon conversion of an equivalent number of our multiple voting shares, with nil impact on our aggregate capital stock amount (see note 8).
(e) Consists of $35.6 paid to repurchase SVS for cancellation during 2023, and $2.7 accrued at December 31, 2023 for the estimated Contractual Maximum Quantity under an ASPP executed in December 2023 for such purpose (see note 8).
(f) Consists of $82.3 paid to repurchase SVS for delivery obligations under our SBC plans during 2023, and an accrual of $7.5 at December 31, 2023 for the estimated Contractual Maximum Quantity under an ASPP executed in September 2023 for such purpose (see note 8).
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
| CELESTICA INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (in millions of U.S. dollars) (unaudited) | ||||||||||||||||
| Three months ended | Year ended | |||||||||||||||
| December 31 | December 31 | |||||||||||||||
| Note | 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Cash provided by (used in): | ||||||||||||||||
| Operating activities: | ||||||||||||||||
| Net earnings for the period | $ | 42.4 | $ | 84.2 | $ | 145.5 | $ | 244.6 | ||||||||
| Adjustments to net earnings for items not affecting cash: | ||||||||||||||||
| Depreciation and amortization | 37.5 | 43.3 | 144.8 | 160.4 | ||||||||||||
| Equity-settled employee SBC expense | 8 | 14.2 | 9.8 | 51.0 | 55.6 | |||||||||||
| Total return swap fair value adjustments | — | (11.4 | ) | — | (45.6 | ) | ||||||||||
| Other charges (recoveries) | 9 | — | (0.3 | ) | 0.9 | 5.5 | ||||||||||
| Finance costs | 19.3 | 14.5 | 59.7 | 76.6 | ||||||||||||
| Income tax expense | 19.9 | 19.9 | 58.1 | 62.0 | ||||||||||||
| Other | (12.3 | ) | (12.5 | ) | (8.2 | ) | (8.3 | ) | ||||||||
| Changes in non-cash working capital items: | ||||||||||||||||
| Accounts receivable | (231.9 | ) | (196.7 | ) | (133.3 | ) | (402.2 | ) | ||||||||
| Inventories | 6.7 | 155.0 | (717.3 | ) | 244.2 | |||||||||||
| Other current assets | (9.3 | ) | (13.9 | ) | (51.6 | ) | 8.8 | |||||||||
| Accounts payable, accrued and other current liabilities and provisions | 221.8 | 53.5 | 813.4 | 106.5 | ||||||||||||
| Non-cash working capital changes | (12.7 | ) | (2.1 | ) | (88.8 | ) | (42.7 | ) | ||||||||
| Net income tax paid | (7.0 | ) | (6.6 | ) | (65.1 | ) | (78.4 | ) | ||||||||
| Net cash provided by operating activities | 101.3 | 138.8 | 297.9 | 429.7 | ||||||||||||
| Investing activities: | ||||||||||||||||
| Purchase of computer software and property, plant and equipment | (32.3 | ) | (32.9 | ) | (109.0 | ) | (125.1 | ) | ||||||||
| Proceeds related to the sale of assets | — | 1.0 | 0.1 | 2.7 | ||||||||||||
| Net cash used in investing activities | (32.3 | ) | (31.9 | ) | (108.9 | ) | (122.4 | ) | ||||||||
| Financing activities: | ||||||||||||||||
| Repayments under term loans | 7 | (19.5 | ) | (4.5 | ) | (33.2 | ) | (18.3 | ) | |||||||
| Lease payments | (9.9 | ) | (11.4 | ) | (46.0 | ) | (48.3 | ) | ||||||||
| Issuance of capital stock | 0.1 | — | 0.2 | 0.3 | ||||||||||||
| Repurchase of capital stock for cancellation | 8 | (12.0 | ) | (10.0 | ) | (34.6 | ) | (35.6 | ) | |||||||
| Purchase of treasury stock for stock-based plans | 8 | — | (35.1 | ) | (44.9 | ) | (82.3 | ) | ||||||||
| Proceeds from partial TRS settlement | 11 | — | — | — | 5.0 | |||||||||||
| SBC cash settlement | 8 | — | (16.9 | ) | — | (66.7 | ) | |||||||||
| Finance costs paid(a) | 7 | (16.5 | ) | (11.7 | ) | (50.0 | ) | (65.5 | ) | |||||||
| Net cash used in financing activities | (57.8 | ) | (89.6 | ) | (208.5 | ) | (311.4 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | 11.2 | 17.3 | (19.5 | ) | (4.1 | ) | ||||||||||
| Cash and cash equivalents, beginning of period | 363.3 | 353.1 | 394.0 | 374.5 | ||||||||||||
| Cash and cash equivalents, end of period | $ | 374.5 | $ | 370.4 | $ | 374.5 | $ | 370.4 | ||||||||
(a) Finance costs paid in the fourth quarter and year ended December 31, 2023 include nil and $0.4 in debt issuance costs, respectively (the fourth quarter and year ended December 31, 2022 — nil and $0.8, respectively).
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
1. REPORTING ENTITY
Celestica Inc. (referred to herein as Celestica, the Company, we, us, or our) is incorporated in Ontario with its corporate headquarters located in Toronto, Ontario, Canada. Celestica’s subordinate voting shares (SVS) are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).
2. BASIS OF PREPARATION AND MATERIAL ACCOUNTING POLICIES
Statement of compliance:
These unaudited interim condensed consolidated financial statements for the period ended December 31, 2023 (Q4 2023 Interim Financial Statements) have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, and the accounting policies we have adopted in accordance with International Financial Reporting Standards (IFRS), in each case as issued by the International Accounting Standards Board (IASB), and reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as of December 31, 2023 and our financial performance, comprehensive income and cash flows for the three months and year ended December 31, 2023 (referred to herein as Q4 2023 and FY 2023, respectively). The Q4 2023 Interim Financial Statements should be read in conjunction with our 2022 audited consolidated financial statements (2022 AFS), which are included in our Annual Report on Form 20-F for the year ended December 31, 2022. The Q4 2023 Interim Financial Statements are presented in United States (U.S.) dollars, which is also Celestica's functional currency. Unless otherwise noted, all financial information is presented in millions of U.S. dollars (except percentages and per share amounts).
The Q4 2023 Interim Financial Statements were authorized for issuance by our board of directors (Board) on January 29, 2024, and our independent auditors have not performed an audit or a review of these Q4 2023 Interim Financial Statements.
Use of estimates and judgments:
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets, liabilities, revenue and expenses, and related disclosures with respect to contingent assets and liabilities. We base our judgments, estimates and assumptions on current facts (including, in recent periods, the prolonged impact of global supply chain constraints), historical experience and various other factors that we believe are reasonable under the circumstances. The economic environment also impacts certain estimates and discount rates necessary to prepare our consolidated financial statements, including significant estimates and discount rates applicable to the determination of the recoverable amounts used in the impairment testing of our non-financial assets. Our assessment of these factors forms the basis for our judgments on the carrying values of our assets and liabilities, and the accrual of our costs and expenses. Actual results could differ materially from our estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. Revisions are recognized in the period in which the estimates are revised and may also impact future periods.
Our review of the estimates, judgments and assumptions used in the preparation of the Q4 2023 Interim Financial Statements included those relating to, among others: our determination of the timing of revenue recognition, the determination of whether indicators of impairment existed for our assets and cash generating units (CGUs1), our measurement of deferred tax assets and liabilities, our estimated inventory write-downs and expected credit losses, and customer creditworthiness. Any revisions to estimates, judgments or assumptions may result in, among other things, write-downs, accelerated depreciation or amortization, or impairments to our assets or CGUs, and/or adjustments to the carrying amount of our accounts receivable and/or inventories, or to the valuation of our deferred tax assets, any of which could have a material impact on our financial performance and financial condition.
1 CGUs are the smallest identifiable group of assets that cannot be tested individually and generate cash inflows that are largely independent of those of other assets or groups of assets, and can be comprised of a single site, a group of sites, or a line of business.
Accounting policies:
Except for: (i) Amendments to IAS 1 and IFRS Practice Statement 2, IAS 8, and IAS 12, adopted at January 1, 2023; and (ii) IFRS 17, adopted at January 1, 2023, as described below, the Q4 2023 Interim Financial Statements are based on accounting policies consistent with those described in note 2 to our 2022 AFS. In addition, we adopted Amendments to IAS 1 at January 1, 2024, as described below.
Recently adopted accounting standards and amendments:
Making Materiality Judgements (Amendments to IAS 1 and IFRS Practice Statement 2)
In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 “Making Materiality Judgements,” which provide guidance and examples to help entities apply materiality judgements to accounting policy disclosures. The amendments aim to help entities provide accounting policy disclosures that are more useful by replacing the requirement for entities to disclose their “significant” accounting policies with a requirement to disclose their material accounting policies and adding guidance on how entities are to apply the concept of materiality in making decisions about accounting policy disclosures. These amendments are applicable for annual periods beginning on or after January 1, 2023. These amendments, which we adopted as of such date, had no material impact on, and will be reflected in, our 2023 annual consolidated financial statements.
Definition of accounting estimates (Amendments to IAS 8)
In February 2021, the IASB issued Definition of accounting estimates (Amendments to IAS 8) to clarify the distinction between accounting policies and accounting estimates. The amendments are effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2023. The adoption of this standard had no material impact on our consolidated financial statements.
Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes)
In May 2021, the IASB issued Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12 Income Taxes) to clarify how to account for deferred tax on transactions such as leases and decommissioning obligations. The amendments are effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2023. The adoption of this standard had no material impact on our consolidated financial statements.
International Tax Reform — Pillar Two Model Rules (Amendments to IAS 12 Income Taxes)
In May 2023, the IASB issued amendments to IAS 12 to give entities temporary mandatory relief from accounting for deferred taxes arising from the Organization for Economic Co-operation and Development’s international tax reform. The amendments became effective upon issuance, except for certain disclosure requirements which are effective for annual reporting periods beginning on or after January 1, 2023. We adopted the required amendments in May 2023, and have applied the mandatory temporary exception to recognizing and disclosing information related to Pillar Two income taxes.
Pillar Two legislation has been enacted or substantively enacted in certain jurisdictions where we have operations, while legislation in other relevant jurisdictions has yet to be finalized. Based on currently enacted legislation, we anticipate that Pillar Two legislation will impact our reporting periods commencing January 1, 2025, however, enactment of Pillar Two legislation in other relevant jurisdictions may result in applicability for our reporting periods commencing January 1, 2024. We currently estimate that once such legislation becomes applicable, we will have incremental income taxes of approximately $6 in the first quarter of 2024.
We will continue to monitor the impact of Pillar Two income taxes as the Pillar Two Model Rules become enacted in the jurisdictions where we have operations.
IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts. IFRS 17 replaces IFRS 4 and sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts within the scope of IFRS 17. This standard is effective for reporting periods beginning on or after January 1, 2023. We adopted this standard as of January 1, 2023. The adoption of this standard had no material impact on our consolidated financial statements.
Classification of liabilities as current or non-current (Amendments to IAS 1)
In January 2020, the IASB issued Classification of liabilities as current or non-current (Amendments to IAS 1) to clarify how to classify debt and other liabilities as current or non-current. The amendments are effective for reporting periods beginning on or after January 1, 2024. We adopted this standard as of January 1, 2024. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.
3. SEGMENT AND CUSTOMER REPORTING
Segments:
Celestica delivers innovative supply chain solutions globally to customers in two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS segment consists of our ATS end market, and is comprised of our Aerospace and Defense (A&D), Industrial, HealthTech and Capital Equipment businesses. Our CCS segment consists of our Communications and Enterprise (servers and storage) end markets. See note 25 to our 2022 AFS for a description of the businesses that comprise our segments. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). Segment income is defined as a segment’s net revenue less its cost of sales and its allocable portion of selling, general and administrative expenses and research and development expenses (collectively, Segment Costs). Identifiable Segment Costs are allocated directly to the applicable segment while other Segment Costs, including indirect costs and certain corporate charges, are allocated to our segments based on an analysis of the relative usage or benefit derived by each segment from such costs. Segment income excludes finance costs (defined in note 7), employee stock-based compensation (SBC) expense, fair value adjustments (TRS FVAs) related to our total return swap agreement (TRS Agreement) executed in December 2022 (commencing in the first quarter of 2023 (Q1 2023)), amortization of intangible assets (excluding computer software), and other charges, net of recoveries (the components of which are described in note 9), as these costs and charges are managed and reviewed by our Chief Executive Officer at the company level. Although segment income and segment margin are used to evaluate the performance of our segments, we may incur operating costs in one segment that may also benefit the other segment. Our accounting policies for segment reporting are the same as those applied to Celestica as a whole.
Information regarding the performance of our reportable segments is set forth below:
| Revenue by segment: | Three months ended December 31 | Year ended December 31 | |||||||||||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||||||
| % of total | % of total | % of total | % of total | ||||||||||||||||||||||||
| ATS | $ | 821.5 | 40 | % | $ | 802.9 | 38 | % | $ | 2,979.0 | 41 | % | $ | 3,319.8 | 42 | % | |||||||||||
| CCS | 1,221.1 | 60 | % | 1,337.6 | 62 | % | 4,271.0 | 59 | % | 4,641.2 | 58 | % | |||||||||||||||
| Communications end market revenue as a % of total revenue | 39 | % | 33 | % | 40 | % | 33 | % | |||||||||||||||||||
| Enterprise end market revenue as a % of total revenue | 21 | % | 29 | % | 19 | % | 25 | % | |||||||||||||||||||
| Total | $ | 2,042.6 | $ | 2,140.5 | $ | 7,250.0 | $ | 7,961.0 | |||||||||||||||||||
| Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes: | Three months ended December 31 | Year ended December 31 | ||||||||||||||||||||||||||
| Note | 2022 | 2023 | 2022 | 2023 | ||||||||||||||||||||||||
| Segment Margin | Segment Margin | Segment Margin | Segment Margin | |||||||||||||||||||||||||
| ATS segment income and margin | $ | 36.2 | 4.4 | % | $ | 37.5 | 4.7 | % | $ | 140.9 | 4.7 | % | $ | 156.1 | 4.7 | % | ||||||||||||
| CCS segment income and margin | 71.6 | 5.9 | % | 90.2 | 6.7 | % | 217.1 | 5.1 | % | 289.1 | 6.2 | % | ||||||||||||||||
| Total segment income | 107.8 | 127.7 | 358.0 | 445.2 | ||||||||||||||||||||||||
| Reconciling items: | ||||||||||||||||||||||||||||
| Finance costs | 7 | 19.3 | 14.5 | 59.7 | 76.6 | |||||||||||||||||||||||
| Employee SBC expense | 14.2 | 9.8 | 51.0 | 55.6 | ||||||||||||||||||||||||
| TRS FVAs (gains) | 8 | — | (11.4 | ) | — | (45.6 | ) | |||||||||||||||||||||
| Amortization of intangible assets (excluding computer software) | 9.2 | 9.2 | 37.0 | 36.8 | ||||||||||||||||||||||||
| Other charges, net of recoveries | 9 | 2.8 | 1.5 | 6.7 | 15.2 | |||||||||||||||||||||||
| IFRS earnings before income taxes | $ | 62.3 | $ | 104.1 | $ | 203.6 | $ | 306.6 | ||||||||||||||||||||
Customers:
One customer (in our CCS segment) individually represented 10% or more of total revenue in Q4 2023 (29%) and FY 2023 (22%). Two customers (each in our CCS segment) individually represented 10% or more of total revenue in the fourth quarter of 2022 (Q4 2022) (13% and 11%) and in the year ended December 31, 2022 (FY 2022) (11% for each customer).
4. ACCOUNTS RECEIVABLE
Accounts receivable (A/R) sales program and supplier financing programs (SFPs):
We are party to an A/R sales program agreement with a third-party bank to sell up to $450.0 (increased in March 2023 from the prior limit of $405.0) in A/R on an uncommitted, revolving basis, subject to pre-determined limits by customer. This agreement provides for automatic annual one-year extensions, and may be terminated at any time by the bank or by us upon 3 months’ prior notice, or by the bank upon specified defaults. Under our A/R sales program, we continue to collect cash from our customers and remit amounts collected to the bank weekly.
As of December 31, 2023, we participate in three customer SFPs, pursuant to which we sell A/R from the relevant customer to third-party banks on an uncommitted basis. The SFPs have an indefinite term and may be terminated at any time by the customer or by us upon specified prior notice. Under our SFPs, the third-party banks collect the relevant A/R directly from these customers.
At December 31, 2023, we sold nil A/R (December 31, 2022 — $245.6) under our A/R sales program, and $18.6 of A/R (December 31, 2022 — $105.6) under the SFPs. The A/R sold under each of these programs are de-recognized from our A/R balance at the time of sale, and the proceeds are reflected as cash provided by operating activities in our consolidated statement of cash flows. Upon sale, we assign the rights to the A/R to the banks. A/R are sold net of discount charges, which are recorded as finance costs in our consolidated statement of operations.
Contract assets:
At December 31, 2023, our A/R balance included $250.8 (December 31, 2022 — $292.9) of contract assets recognized as revenue in accordance with our revenue recognition accounting policy.
5. INVENTORIES
We record inventory write-downs, net of valuation recoveries, in cost of sales. Inventories are valued at the lower of cost and net realizable value. Inventory write-downs reflect the write-down of inventory to its net realizable value. Valuation recoveries primarily reflect gains on the disposition of previously written-down inventory and recoveries reflecting current and forecasted usage. We recorded net inventory write-downs of $17.2 and $57.6 for Q4 2023 and FY 2023, respectively (Q4 2022 — $13.9; FY 2022 — $30.5). The accounting treatment of inventories destroyed in a fire event in June 2022 is described in note 13.
We receive cash deposits from certain of our customers primarily to help mitigate the impact of high inventory levels carried due to the current constrained materials environment, and to reduce risks related to excess and/or obsolete inventory. Such deposits as of December 31, 2023 totaled $904.8 (December 31, 2022 — $825.6), and were recorded in accrued and other current liabilities on our consolidated balance sheet.
6. PENSION AND NON-PENSION POST-EMPLOYMENT BENEFIT PLANS
Our pension and post-employment defined benefit plan obligations are determined based on actuarial valuations. We recognize actuarial gains or losses arising from pension and non-pension post-employment defined benefit plans in other comprehensive income (loss) (OCI), and subsequently reclassify the amounts to deficit. During Q4 2023 and FY 2023, we recognized an actuarial loss of $7.6, net of a $0.1 income tax recovery (Q4 2022 and FY 2022 — actuarial gain of $33.5, including a $5.0 income tax recovery), relating to such benefit plans.
7. CREDIT FACILITIES AND LEASE OBLIGATIONS
We are party to a credit agreement (Credit Facility) with Bank of America, N.A., as Administrative Agent, and the other lenders party thereto, which includes a term loan in the original principal amount of $350.0 (Initial Term Loan), a term loan in the original principal amount of $365.0 (Incremental Term Loan), and a $600.0 revolving credit facility (Revolver). The Initial Term Loan and the Incremental Term Loan are collectively referred to as the Term Loans. In June 2023 (effective for all new interest periods for existing borrowings and all new subsequent borrowings), we amended our Credit Facility (June 2023 Amendments) to replace LIBOR with the term Secured Overnight Financing Rate (SOFR) plus 0.1% (Adjusted Term SOFR). The June 2023 Amendments did not have a significant impact on our Q4 2023 Interim Financial Statements.
The Initial Term Loan matures in June 2025. The Incremental Term Loan and the Revolver each mature in March 2025, unless either (i) the Initial Term Loan has been prepaid or refinanced or (ii) commitments under the Revolver are available and have been reserved to repay the Initial Term Loan in full, in which case the Incremental Term Loan and Revolver each mature in December 2026.
The Credit Facility has an accordion feature that allows us to increase the Term Loans and/or commitments under the Revolver by $150.0, plus an unlimited amount to the extent that a specified leverage ratio on a pro forma basis does not exceed specified limits, in each case on an uncommitted basis and subject to the satisfaction of certain terms and conditions.
Borrowings under the Revolver bear interest, depending on the currency of the borrowing and our election for such currency, at: (i) LIBOR for interest periods beginning prior to the June 2023 Amendments and Adjusted Term SOFR thereafter, (ii) Base Rate, (iii) Canadian Prime, (iv) an Alternative Currency Daily Rate, or (v) an Alternative Currency Term Rate (each as defined in the Credit Facility) plus a specified margin. The margin for borrowings under the Revolver and the Incremental Term Loan ranges from 1.50% — 2.25% for LIBOR and Adjusted Term SOFR borrowings (as applicable) and Alternative Currency borrowings, and between 0.50% — 1.25% for Base Rate and Canadian Prime borrowings, in each case depending on the rate we select and our consolidated leverage ratio (as defined in the Credit Facility). Commitment fees range between 0.30% and 0.45% depending on our consolidated leverage ratio. As of December 31, 2023, the Initial Term Loan bears interest at Adjusted Term SOFR plus 2.125%, and the Incremental Term Loan bears interest at Adjusted Term SOFR plus 1.75%.
The Incremental Term Loan requires quarterly principal repayments of $4.5625, and each of the Term Loans requires a lump sum repayment of the remainder outstanding at maturity. The Initial Term Loan required quarterly principal repayments of $0.875, all of which were paid in prior years. We are also required to make annual prepayments of outstanding obligations under the Credit Facility (applied first to the Term Loans, then to the Revolver, in the manner set forth in the Credit Facility) ranging from 0% — 50% (based on a defined leverage ratio) of specified excess cash flow for the prior fiscal year. No prepayments based on excess cash flow were required in 2023, or will be required in 2024. In addition, prepayments of outstanding obligations under the Credit Facility (applied as described above) may also be required in the amount of specified net cash proceeds received above a specified annual threshold (including proceeds from the disposal of certain assets). No Credit Facility prepayments based on net cash proceeds were required in 2023, or will be required in 2024. Any outstanding amounts under the Revolver are due at maturity.
Activity under our Credit Facility during FY 2022 and FY 2023 is set forth below:
| Revolver (1) | Term loans | ||||||
| Outstanding balances as of December 31, 2021 | $ | — | $ | 660.4 | |||
| Amount repaid in Q1 2022(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q2 2022(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q3 2022(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q4 2022(3) | — | (19.5625 | ) | ||||
| Outstanding balances as of December 31, 2022 | $ | — | $ | 627.2 | |||
| Amount repaid in Q1 2023(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q2 2023(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q3 2023(2) | — | (4.5625 | ) | ||||
| Amount repaid in Q4 2023(2) | — | (4.5625 | ) | ||||
| Outstanding balances as of December 31, 2023 | $ | — | $ | 608.9 | |||
(1) In addition to the activity described in this table, we have drawn on the Revolver for short term borrowings from time-to-time during the periods set forth above and repaid such borrowings in full within the quarter borrowed, with no impact to the amounts outstanding at the relevant quarter-end. Such intra-quarter borrowings and repayments are excluded from this table.
(2) Represents the scheduled quarterly principal repayment under the Incremental Term Loan.
(3) Represents the scheduled quarterly principal repayment under the Incremental Term Loan and a $15.0 voluntary prepayment under the Initial Term Loan.
At December 31, 2023 and December 31, 2022, we were in compliance with all restrictive and financial covenants under the Credit Facility.
The following tables set forth, at the dates shown: outstanding borrowings under the Credit Facility, excluding ordinary course letters of credit (L/Cs); notional amounts under our interest rate swap agreements; and outstanding lease obligations:
| Outstanding borrowings | Notional amounts under interest rate swaps (note 11) | ||||||||||||||
| December 31 2022 | December 31 2023 | December 31 2022 | December 31 2023 | ||||||||||||
| Borrowings under the Revolver | $ | — | $ | — | $ | — | $ | — | |||||||
| Borrowings under term loans: | |||||||||||||||
| Initial Term Loan | $ | 280.4 | $ | 280.4 | $ | 100.0 | $ | 100.0 | |||||||
| Incremental Term Loan | 346.8 | 328.5 | 230.0 | 230.0 | |||||||||||
| Total | $ | 627.2 | $ | 608.9 | $ | 330.0 | $ | 330.0 | |||||||
| Total borrowings under Credit Facility | $ | 627.2 | $ | 608.9 | |||||||||||
| Unamortized debt issuance costs related to our term loans (1) | (3.5 | ) | (2.6 | ) | |||||||||||
| Lease obligations(2) | 162.4 | 176.5 | |||||||||||||
| $ | 786.1 | $ | 782.8 | ||||||||||||
| Total Credit Facility and lease obligations: | |||||||||||||||
| Current portion | $ | 52.2 | $ | 51.6 | |||||||||||
| Long-term portion | 733.9 | 731.2 | |||||||||||||
| $ | 786.1 | $ | 782.8 | ||||||||||||
(1) We incur debt issuance costs upon execution of, subsequent security arrangements under, and amendments to the Credit Facility. Debt issuance costs incurred in Q4 2023 and FY 2023 in connection with our Revolver totaling nil and $0.2 respectively (Q4 2022 and FY 2022 — nil and $0.3 respectively) were deferred as other assets on our consolidated balance sheet and are amortized on a straight line basis over the remaining term of the Revolver. Debt issuance costs incurred in Q4 2023 and FY 2023 in connection with our Term Loans totaling nil and $0.2 respectively (Q4 2022 and FY 2022 — nil and $0.3 respectively) were deferred as long-term debt on our consolidated balance sheet and are amortized over their respective terms using the effective interest rate method.
(2) These lease obligations represent the present value of unpaid lease payment obligations recognized as liabilities as of December 31, 2022 and December 31, 2023, respectively, which have been discounted using our incremental borrowing rate on the lease commencement dates. In addition to these lease obligations, we have commitments under real property leases in Richardson, Texas and in Toronto, Canada not recognized as liabilities as of December 31, 2023 because such leases had not yet commenced as of such date. A description of these leases and minimum lease obligations thereunder are disclosed in note 24 to the 2022 AFS. In the third quarter of 2023 (Q3 2023), we subleased a portion of the space under the Toronto lease. See note 9(b) below.
The following table sets forth, at the dates shown, information regarding outstanding L/Cs, surety bonds and overdraft facilities:
| December 31 2022 | December 31 2023 | ||||||
| Outstanding L/Cs under the Revolver | $ | 18.0 | $ | 10.5 | |||
| Outstanding L/Cs and surety bonds outside the Revolver | 23.8 | 16.5 | |||||
| Total | $ | 41.8 | $ | 27.0 | |||
| Available uncommitted bank overdraft facilities | $ | 198.5 | $ | 198.5 | |||
| Amounts outstanding under available uncommitted bank overdraft facilities | $ | — | $ | — | |||
Finance costs consist of interest expense and fees related to our Credit Facility (including debt issuance and related amortization costs), our interest rate swap agreements, our TRS Agreement, our A/R sales program and the SFPs, and interest expense on our lease obligations, net of interest income earned.
8. CAPITAL STOCK AND RELATED PARTY TRANSACTIONS
Secondary Offerings by Onex Corporation (Onex):
In connection with two underwritten secondary public offerings by Onex, our then-controlling shareholder, completed in June 2023 (June Secondary Offering) and August 2023 (August Secondary Offering, and collectively with the June Secondary Offering, the Secondary Offerings), we issued an aggregate of approximately 18.6 million SVS, upon conversion of an equivalent number of our multiple voting shares (MVS). The Secondary Offerings had nil impact on our aggregate capital stock amount.
In connection with the June Secondary Offering and August Secondary Offering, we entered into underwriting agreements with Onex and certain underwriters. In addition, we agreed to indemnify Onex and each of the underwriters against certain claims, including claims under the U.S. Securities Act and applicable Canadian securities laws, based on the relevant U.S. registration statement and related U.S. and Canadian prospectuses.
Prior to the completion of the August Secondary Offering, Onex beneficially owned, controlled, or directed, directly or indirectly, all of our issued and outstanding MVS. Accordingly, Onex had the ability to exercise significant influence over our business and affairs and generally had the power to determine all matters submitted to a vote of our shareholders where the SVS and MVS vote together as a single class. Mr. Gerald Schwartz, the Chairman of the Board of Onex, indirectly owns shares representing the majority of the voting rights of the shares of Onex. However, upon completion of the August Secondary Offering, we have no MVS outstanding and Onex is no longer our controlling shareholder.
Prior to September 3, 2023, we were party to a services agreement (Services Agreement) with Onex for the services of Mr. Tawfiq Popatia, an officer of Onex, as a director of Celestica, pursuant to which Onex received an annual fee of $0.235 (payable in deferred share units (DSUs)) in equal quarterly installments in arrears, as compensation for such services. Mr. Popatia resigned from our Board, and the Services Agreement terminated automatically pursuant to its terms, on September 3, 2023. In accordance with the provisions of the Services Agreement, we paid Onex approximately $9.2 in cash in October 2023 to settle Onex’s outstanding DSUs.
SVS Repurchase Plans:
In recent years, we have repurchased SVS in the open market, or as otherwise permitted, for cancellation through normal course issuer bids (NCIBs), which allow us to repurchase a limited number of SVS during a specified period. The maximum number of SVS we are permitted to repurchase for cancellation under each NCIB is reduced by the number of SVS we arrange to be purchased by any non-independent broker in the open market during the term of such NCIB to satisfy delivery obligations under our SBC plans. We from time-to-time enter into automatic share purchase plans (ASPPs) with a broker, instructing the broker to purchase our SVS in the open market on our behalf, either for cancellation under an NCIB (NCIB ASPPs) or for delivery obligations under our SBC plans (SBC ASPPs), including during any applicable trading blackout periods, up to specified maximums (and subject to certain pricing and other conditions) through the term of each ASPP.
On December 2, 2021, the TSX accepted our notice to launch an NCIB (2021 NCIB), which allowed us to repurchase, at our discretion, from December 6, 2021 until the earlier of December 5, 2022 or the completion of purchases thereunder, up to approximately 9.0 million of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. We entered into several NCIB ASPPs and SBC ASPPs (each with independent brokers) during the term of the 2021 NCIB, all of which have expired. We accrued $7.5 (2021 NCIB Accrual) at December 31, 2021, representing the estimated contractual maximum number of permitted SVS repurchases (Contractual Maximum Quantity) under an NCIB ASPP that we entered into in December 2021 (0.7 million SVS), which was reversed in FY 2022. We accrued $33.8 (2021 SBC Accrual) at December 31, 2021, representing the estimated Contractual Maximum Quantity (3.0 million SVS) under an SBC ASPP that we entered into in December 2021, which was reversed in FY 2022.
On December 8, 2022, the TSX accepted our notice to launch another NCIB (2022 NCIB), which allowed us to repurchase, at our discretion, from December 13, 2022 until the earlier of December 12, 2023 or the completion of purchases thereunder, up to approximately 8.8 million of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. We entered into several NCIB ASPPs and SBC ASPPs (each with independent brokers) during the term of the 2022 NCIB, all but one of which expired prior to December 31, 2023 (see below for the ASPP accruals we recorded at December 31, 2023). There were no accruals at December 31, 2022 in connection with any NCIB ASPP or SBC ASPP.
On December 12, 2023, the TSX accepted our notice to launch a new NCIB (2023 NCIB), which allows us to repurchase, at our discretion, from December 14, 2023 until the earlier of December 13, 2024 or the completion of purchases thereunder, up to approximately 11.8 million of our SVS in the open market, or as otherwise permitted, subject to the normal terms and limitations of such bids. As of December 31, 2023, approximately 11.8 million SVS remained available for repurchase under the 2023 NCIB either for cancellation or SBC delivery purposes. At December 31, 2023, we recorded an accrual of: (i) $2.7, representing the estimated Contractual Maximum Quantity (0.1 million SVS) under an NCIB ASPP we entered into in December 2023 (2023 NCIB Accrual); and (ii) $7.5, representing the estimated Contractual Maximum Quantity (0.3 million SVS) under an SBC ASPP we entered into in September 2023 (2023 SBC Accrual).
SVS repurchased in Q4 2023, FY 2023 and the respective prior year periods for cancellation and for SBC plan delivery obligations (including under ASPPs) are set forth in the chart below.
SVS repurchases:
| Three months ended December 31 | Year ended December 31 | ||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Aggregate cost(1) of SVS repurchased for cancellation(2) | $ | 12.0 | $ | 10.0 | $ | 34.6 | $ | 35.6 | |||||||
| Number of SVS repurchased for cancellation (in millions)(3) | 1.2 | 0.4 | 3.4 | 2.6 | |||||||||||
| Weighted average price per share for repurchases | $ | 10.20 | $ | 24.56 | $ | 10.45 | $ | 13.83 | |||||||
| Aggregate cost(1) of SVS repurchased for delivery under SBC plans(4) (see below) | $ | — | $ | 35.1 | $ | 44.9 | $ | 82.3 | |||||||
| Number of SVS repurchased for delivery under SBC plans (in millions)(5) | — | 1.3 | 3.9 | 3.7 | |||||||||||
(1) Includes transaction fees.
(2) For Q4 2023 and FY 2023, excludes the $2.7 2023 NCIB Accrual.
(3) For Q4 2023 and FY 2023, includes nil and 0.9 million NCIB ASPP purchases of SVS for cancellation, respectively. For Q4 2022 and FY 2022, includes 0.8 million and 2.5 million NCIB ASPP purchases of SVS for cancellation, respectively.
(4) For Q4 2023 and FY 2023, excludes the $7.5 2023 SBC Accrual.
(5) For each period, consists entirely of SBC ASPP purchases through an independent broker.
SBC:
From time to time, we pay cash to a broker to purchase SVS in the open market to satisfy delivery requirements under our SBC plans. At December 31, 2023, the broker held 3.3 million SVS with a value of $72.6 (December 31, 2022 — 1.5 million SVS with a value of $16.7) for this purpose, which we report as treasury stock on our consolidated balance sheet. We used 1.9 million SVS held by the broker (including additional SVS purchased during FY 2023) to settle SBC awards during FY 2023.
We grant restricted share units (RSUs) and performance share units (PSUs), and occasionally, stock options, to employees under our SBC plans. The majority of RSUs vest one-third per year over a three-year period. Stock options generally vest 25% per year over a four-year period. The number of outstanding PSUs that will actually vest varies from 0% to 200% of a target amount granted. For PSUs granted in 2020, 2021 and 2022, the number of PSUs that vested (or will vest) are based on the level of achievement of a pre-determined non-market performance measurement in the final year of the relevant three-year performance period, subject to modification by each of a separate pre-determined non-market financial target, and our relative total shareholder return (TSR), a market performance condition, compared to a pre-defined group of companies, in each case over the relevant three-year performance period. For PSUs granted in 2023, the number of PSUs that will vest are based on the level of achievement of a different predetermined non-market performance measurement, subject to modification by our relative TSR compared to a pre-defined group of companies, in each case over the relevant three-year performance period. We also grant DSUs and RSUs (under specified circumstances) to directors as compensation under our Directors' Share Compensation Plan. See note 2(l) to the 2022 AFS for further detail.
Information regarding RSU, PSU and DSU grants to employees and directors, as applicable, for the periods indicated is set forth below (no stock options were granted in the periods below):
| Three months ended December 31 | Year ended December 31 | ||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||
| RSUs Granted: | |||||||||||||||
| Number of awards (in millions) | 0.1 | 0.03 | 2.1 | 2.0 | |||||||||||
| Weighted average grant date fair value per unit | $ | 10.67 | $ | 26.29 | $ | 12.14 | $ | 13.25 | |||||||
| PSUs Granted: | |||||||||||||||
| Number of awards (in millions, representing 100% of target) | — | — | 1.3 | 1.3 | |||||||||||
| Weighted average grant date fair value per unit | $ | — | $ | — | $ | 14.27 | $ | 15.06 | |||||||
| DSUs Granted: | |||||||||||||||
| Number of awards (in millions) | 0.03 | 0.01 | 0.12 | 0.08 | |||||||||||
| Weighted average grant date fair value per unit | $ | 11.27 | $ | 29.28 | $ | 10.18 | $ | 17.72 | |||||||
In Q1 2023, we settled a portion of RSUs and PSUs that vested during Q1 2023 with a cash payment of $49.8. In Q4 2023, we made a cash payment of $7.7 for withholding taxes in connection with the RSUs and PSUs that vested during Q4 2023. See "Secondary Offerings by Onex Corporation (Onex)" above for our cash settlement of Onex's DSUs in October 2023.
In December 2022, we entered into the TRS Agreement to manage cash flow requirements and our exposure to fluctuations in the share price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. In September 2023, we terminated a portion of the TRS Agreement by reducing the notional amount thereunder by 0.5 million SVS. See note 11 for further detail.
Information regarding employee and director SBC expense and TRS FVAs for the periods indicated is set forth below:
| Three months ended December 31 | Year ended December 31 | ||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Employee SBC expense in cost of sales | $ | 5.6 | $ | 4.2 | $ | 20.3 | $ | 22.6 | |||||||
| Employee SBC expense in SG&A | 8.6 | 5.6 | 30.7 | 33.0 | |||||||||||
| Total employee SBC expense | $ | 14.2 | $ | 9.8 | $ | 51.0 | $ | 55.6 | |||||||
| TRS FVAs (gains) in cost of sales | $ | — | $ | (4.8 | ) | $ | — | $ | (18.6 | ) | |||||
| TRS FVAs (gains) in SG&A | — | (6.6 | ) | — | (27.0 | ) | |||||||||
| Total TRS FVAs (gains) | $ | — | $ | (11.4 | ) | $ | — | $ | (45.6 | ) | |||||
| Combined effect of employee SBC expense and TRS FVAs | $ | 14.2 | $ | (1.6 | ) | $ | 51.0 | $ | 10.0 | ||||||
| Director SBC expense in SG&A(1) | $ | 0.6 | $ | 0.6 | $ | 2.2 | $ | 2.4 | |||||||
(1) Expense consists of director compensation to be settled with SVS, or SVS and cash, as elected by each director.
9. OTHER CHARGES, NET OF RECOVERIES
| Three months ended December 31 | Year ended December 31 | ||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||
| Restructuring charges, net of recoveries (a) | $ | 2.8 | $ | 1.4 | $ | 8.4 | $ | 11.2 | |||||||
| Transition Costs (Recoveries) (b) | — | — | (2.1 | ) | 3.9 | ||||||||||
| Acquisition Costs (c) | — | 0.1 | 0.4 | 1.0 | |||||||||||
| Other recoveries, net of costs (d) | — | — | — | (0.9 | ) | ||||||||||
| $ | 2.8 | $ | 1.5 | $ | 6.7 | $ | 15.2 | ||||||||
Annual Impairment Assessment:
We review the carrying amount of goodwill, intangible assets, property, plant and equipment, and right-of-use (ROU) assets for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of such assets, or the related CGU or CGUs, may not be recoverable. If any such indication exists, we test the carrying amount of such assets or CGUs for impairment. No triggering events occurred during FY 2023 or FY 2022 (however, refer to paragraph (a) below for a description of write-downs of specified assets during such periods in connection with our restructuring activities). Also see note 13. In addition to an assessment of triggering events during the year, we conduct an annual impairment assessment of CGUs with goodwill in the fourth quarter of each year to correspond with our annual planning cycle (Annual Impairment Assessment). During each of Q4 2023 and Q4 2022, we performed our Annual Impairment Assessment of CGUs with goodwill and determined that there was no impairment, as the recoverable amount of such CGUs exceeded their respective carrying values.
(a) Restructuring:
Our restructuring activities for Q4 2023 and FY 2023 consisted primarily of actions to adjust our cost base to address reduced levels of demand in certain of our businesses and geographies.
We recorded cash restructuring charges of $1.7 and $9.6 in Q4 2023 and FY 2023, respectively, primarily for employee termination costs. We recorded nil non-cash restructuring charges in Q4 2023 and $2.9 of non-cash restructuring charges in FY 2023, consisting primarily of accelerated depreciation of equipment, building improvements and ROU assets related to disengaging programs and vacated properties. In Q4 2023, we recorded non-cash restructuring recoveries of $0.3 related to gains on the sale of surplus equipment. In FY 2023, we recorded non-cash restructuring recoveries of $1.3, which resulted from gains on the sale of surplus equipment and certain sublet recoveries in excess of the carrying value of the related leases. At December 31, 2023, our restructuring provision was $3.6 (December 31, 2022 — $5.8), which we recorded in the current portion of provisions on our consolidated balance sheet.
We recorded cash restructuring charges of $2.8 and $7.5 in Q4 2022 and FY 2022, respectively, consisting primarily of employee termination costs. We recorded nil non-cash restructuring charges in Q4 2022, and $0.9 of such charges in FY 2022, consisting primarily of the accelerated depreciation of ROU assets in connection with vacated properties and assets related to disengaging programs.
(b) Transition Costs (Recoveries):
Transition Costs consist of costs recorded in connection with: (i) the transfer of manufacturing lines from closed sites to other sites within our global network; (ii) the sale of real properties unrelated to restructuring actions (Property Dispositions) and (iii) with respect to FY 2023, the Purchaser Lease Charge (defined below). Transition Costs consist of direct relocation and duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition periods, as well as cease-use and other costs incurred in connection with idle or vacated portions of the relevant premises that we would not have incurred but for these relocations, transfers and dispositions. Transition Recoveries consist of any gains recorded in connection with Property Dispositions.
In connection with our March 2019 Toronto real property sale, we treated associated relocation and duplicate costs as Transition Costs. As part of such sale, we entered into a 10-year lease with the purchaser of such property for our then-anticipated headquarters, to be built by such purchaser on the site of our former location (Purchaser Lease). However, as previously disclosed, we were informed that due to construction issues, the commencement date of the Purchaser Lease would be delayed beyond the prior target of May 2023. As a result, in November 2022, we extended (on a long-term basis) the lease on our current corporate headquarters. Subsequently, we were informed that the Purchaser Lease would commence in June 2024. In Q3 2023, we executed a sublease for a portion of the space under the Purchaser Lease. Consistent with our prior treatment of duplicate costs incurred as a result of our 2019 Toronto real property sale, we recorded Transition Costs of $3.9 (Purchaser Lease Charge) in FY 2023, representing the excess of rental expenses under the Purchaser Lease (with respect to the subleased space) over anticipated rental recoveries under the sublease. See note 24 to the 2022 AFS for a description of our lease obligations under the Purchaser Lease.
We incurred nil Transition Recoveries in Q4 2023 or FY 2023. We incurred no Transition Costs in Q4 2022 and $1.5 of Transition Costs in FY 2022, related primarily to the disposal of assets reclassified as held for sale in the first quarter of 2022. We recorded no Transition Recoveries in Q4 2022 and $3.6 of Transition Recoveries in FY 2022, reflecting the gain on the disposal of such assets held for sale.
(c) Acquisition Costs:
We incur consulting, transaction and integration costs relating to potential and completed acquisitions. We also incur charges or releases related to the subsequent re-measurement of indemnification assets or the release of indemnification or other liabilities recorded in connection with acquisitions, when applicable. Collectively, these costs, charges and releases are referred to as Acquisition Costs (Recoveries).
We recorded Acquisition Costs of $0.1 in Q4 2023 and $1.0 in FY 2023 related to potential acquisitions (Q4 2022 — nil; FY 2022 — $0.4, related to the acquisition of PCI Private Limited in November 2021). We recorded nil Acquisition Recoveries in any of the foregoing periods.
(d) Other recoveries, net of costs:
Other recoveries, net of costs in FY 2023 consisted of legal recoveries of $2.7 in connection with the settlement of class action lawsuits (for component parts purchased in prior periods) in which we were a plaintiff, offset in part by an aggregate of $1.8 of costs, substantially all of which consisted of fees and expenses of the Secondary Offerings (see note 8). We recorded nil other costs (recoveries) in Q4 2023, Q4 2022 or FY 2022.
10. INCOME TAXES
Our income tax expense or recovery for each quarter is determined by multiplying the earnings or losses before tax for such quarter by management’s best estimate of the weighted-average annual income tax rate expected for the full year, taking into account the tax effect of certain items recognized in the interim period. As a result, the effective income tax rates used in our interim financial statements may differ from management’s estimate of the annual effective tax rate for the annual financial statements. Our estimated annual effective income tax rate varies as the quarters progress, for various reasons, including as a result of the mix and volume of business in various tax jurisdictions within the Americas, Europe and Asia, in jurisdictions with tax holidays and tax incentives, and in jurisdictions for which no net deferred income tax assets have been recognized because management believes it is not probable that future taxable profit will be available against which tax losses and deductible temporary differences could be utilized. Our annual effective income tax rate can also vary due to the impact of restructuring charges, foreign exchange fluctuations, operating losses, cash repatriations, and changes in our provisions related to tax uncertainties.
Our Q4 2023 net income tax expense of $19.9 included a $4.8 tax expense for tax uncertainties relating to one of our Asian subsidiaries (Tax Uncertainties) and a $4.5 tax expense arising from the repatriation of undistributed earnings, net of the reversal of previously-recorded tax expense from then-anticipated repatriations, from certain of our Asian subsidiaries. Our FY 2023 net income tax expense of $62.0 included a $11.3 tax expense arising from both the repatriation of undistributed earnings and taxable temporary differences associated with the anticipated repatriation of undistributed earnings from certain of our Asian subsidiaries, and the $4.8 in Tax Uncertainties, partially offset by the favorable impact of $5.5 in reversals of previously-recorded tax uncertainties in another of our Asian subsidiaries. Withholding tax of $5.8 associated with the repatriation of undistributed earnings from certain of our Asian subsidiaries in FY 2023 (realized as current tax) was fully offset by the reversal of previously accrued deferred taxes from the then-anticipated repatriation of such undistributed earnings. Taxable foreign exchange impacts were not significant in Q4 2023 or FY 2023.
Our Q4 2022 net income tax expense of $19.9 included an adverse $1.3 taxable foreign exchange impact arising from the fluctuation of the Chinese renminbi relative to the U.S. dollar, our functional currency (Currency Impact) and a $3.3 expense arising from taxable temporary differences associated with the anticipated repatriation of undistributed earnings from certain of our Chinese subsidiaries (Repatriation Expense). Our FY 2022 net income tax expense of $58.1 was favorably impacted by $4.9 in reversals of previously-recorded tax uncertainties in one of our Asian subsidiaries, which was more than offset by an adverse $3.5 Currency Impact and a $3.3 Repatriation Expense. The withholding tax of $10.3 associated with the repatriation of undistributed earnings from certain of our Chinese subsidiaries in FY 2022 (realized as current tax) was fully offset by the reversal of previously accrued deferred taxes from the then-anticipated repatriation of such undistributed earnings.
11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Our financial assets are comprised primarily of cash and cash equivalents, A/R, and derivatives used for hedging purposes. Our financial liabilities are comprised primarily of accounts payable, certain accrued and other liabilities, the Term Loans, borrowings under the Revolver, lease obligations, and derivatives used for hedging purposes.
Equity price risk:
In December 2022, we entered into the TRS Agreement with a third-party bank with respect to a notional amount of 3.0 million of our SVS (Notional Amount) to manage our cash flow requirements and exposure to fluctuations in the price of our SVS in connection with the settlement of certain outstanding equity awards under our SBC plans. The counterparty under the TRS Agreement is obligated to make a payment to us upon its termination (in whole or in part) or expiration (Settlement) based on the increase (if any) in the value of the TRS (as defined in the TRS Agreement) over the agreement’s term, in exchange for periodic payments made by us based on the counterparty’s SVS purchase costs and SOFR plus a specified margin. Similarly, if the value of the TRS (as defined in the TRS Agreement) decreases over the term of the TRS Agreement, we are obligated to pay the counterparty the amount of such decrease upon Settlement. The change in value of the TRS is determined by comparing the average amount realized by the counterparty upon the disposition of purchased SVS to the average amount paid for such SVS. By the end of Q1 2023, the counterparty had acquired the entire original Notional Amount at a weighted average price of $12.73 per share. The TRS Agreement provides for automatic annual one-year extensions (subject to specified conditions), and may be terminated (in whole or in part) by either party at any time. In September 2023, we terminated a portion of the TRS Agreement by reducing the Notional Amount by 0.5 million SVS. We received $5.0 from the counterparty in connection therewith, which was recorded in cash provided by financing activities in our consolidated statement of cash flows. The TRS does not qualify for hedge accounting. As of December 31, 2023, the fair value of the TRS Agreement was an unrealized gain of $40.6 (December 31, 2022 — de minimis), which we recorded in other current assets on our consolidated balance sheet. TRS FVAs (representing the change of fair value of TRS) are recognized in our consolidated statement of operations each quarter. See note 8 for TRS FVAs in Q4 2023 and FY 2023.
Interest rate risk:
Borrowings under the Credit Facility expose us to interest rate risk due to the potential variability of market interest rates (see note 7). In order to partially hedge against our exposure to interest rate variability on our Term Loans, we have entered into various agreements with third-party banks to swap the variable interest rate with a fixed rate of interest for a portion of the borrowings under our Term Loans. At December 31, 2023, we had: (i) interest rate swaps hedging the interest rate risk associated with $100.0 of our Initial Term Loan borrowings that expire in June 2024 (Initial Swaps); (ii) interest rate swaps hedging the interest rate risk associated with $100.0 of our Initial Term Loan borrowings (and any subsequent term loans replacing the Initial Term Loan), for which the cash flows commence upon the expiration of the Initial Swaps and continue through December 2025; (iii) interest rate swaps hedging the interest rate risk associated with $100.0 of outstanding borrowings under the Incremental Term Loan that expire in December 2025 (Incremental Swaps); and (iv) interest rate swaps hedging the interest rate risk associated with an additional $130.0 of our Incremental Term Loan borrowings that expire in December 2025 (Additional Incremental Swaps). The option to cancel up to $50.0 of the notional amount of the Additional Incremental Swaps from January 2024 through October 2025 was terminated in January 2024.
At December 31, 2023, the interest rate risk related to $278.9 of borrowings under the Credit Facility was unhedged, consisting of unhedged amounts outstanding under the Term Loans ($180.4 under the Initial Term Loan and $98.5 under the Incremental Term Loan), and no amounts outstanding (other than ordinary course L/Cs) under the Revolver. See note 7.
At December 31, 2023, the fair value of our interest rate swap agreements was an unrealized gain of $13.2 (December 31, 2022 — an unrealized gain of $18.7), which we recorded in other current assets and other non-current assets on our consolidated balance sheet. The unrealized portion of the change in fair value of the swaps is recorded in OCI. The realized portion of the change in fair value of the swaps is released from accumulated OCI and recognized under finance costs in our consolidated statement of operations when the hedged interest expense is recognized.
We amended our Credit Facility in June 2023 to replace LIBOR with Adjusted Term SOFR. See note 7. In June 2023, all of our interest rate swap agreements were similarly amended. None of these amendments (individually or in the aggregate) had a significant impact on our Q4 2023 Interim Financial Statements. We continue to apply hedge accounting to our interest rate swaps.
Currency risk:
The majority of our currency risk is driven by operational costs, including income tax expense, incurred in local currencies by our subsidiaries. We cannot predict changes in currency exchange rates, the impact of exchange rate changes on our operating results, nor the degree to which we will be able to manage the impact of currency exchange rate changes. Such changes could have a material effect on our business, financial performance and financial condition.
Our major currency exposures at December 31, 2023 are summarized in U.S. dollar equivalents in the following table. The local currency amounts have been converted to U.S. dollar equivalents using spot rates at December 31, 2023.
| Canadian dollar | Euro | Thai baht | Mexican peso | ||||||||||||
| Cash and cash equivalents | $ | (0.2 | ) | $ | 15.6 | $ | 6.3 | $ | 1.4 | ||||||
| Accounts receivable | 0.2 | 55.6 | 0.1 | — | |||||||||||
| Income taxes and value-added taxes receivable | — | 0.7 | 1.4 | 64.3 | |||||||||||
| Other financial assets | — | 5.6 | 1.2 | 0.9 | |||||||||||
| Pension and non-pension post-employment liabilities | (50.1 | ) | (0.9 | ) | (20.8 | ) | (5.3 | ) | |||||||
| Income taxes and value-added taxes payable | (2.5 | ) | (0.8 | ) | — | (12.7 | ) | ||||||||
| Accounts payable and certain accrued and other liabilities and provisions | (69.7 | ) | (46.9 | ) | (53.3 | ) | (22.1 | ) | |||||||
| Net financial assets (liabilities) | $ | (122.3 | ) | $ | 28.9 | $ | (65.1 | ) | $ | 26.5 | |||||
We enter into foreign currency forward contracts to hedge our cash flow exposures and foreign currency swaps to hedge the exposures of our monetary assets and liabilities denominated in foreign currencies. While these contracts are intended to reduce the effects of fluctuations in foreign currency exchange rates, our hedging strategy does not mitigate the longer-term impacts of changes to foreign exchange rates.
At December 31, 2023, we had foreign currency forwards and swaps to trade U.S. dollars in exchange for the following currencies:
| Currency | Contract amount in U.S. dollars | Weighted average exchange rate in U.S. dollars (1) | Maximum period in months | Fair value gain (loss) | |||||||||
| Canadian dollar | $ | 202.1 | $ | 0.75 | 12 | $ | 3.9 | ||||||
| Thai baht | 156.3 | 0.03 | 12 | 2.9 | |||||||||
| Malaysian ringgit | 93.6 | 0.22 | 12 | (1.5 | ) | ||||||||
| Mexican peso | 86.9 | 0.06 | 12 | 1.8 | |||||||||
| British pound | 2.7 | 1.26 | 4 | (0.1 | ) | ||||||||
| Chinese renminbi | 30.2 | 0.14 | 12 | 0.1 | |||||||||
| Euro | 48.3 | 1.09 | 12 | (1.4 | ) | ||||||||
| Romanian leu | 42.2 | 0.22 | 12 | 0.9 | |||||||||
| Singapore dollar | 29.4 | 0.75 | 12 | 0.3 | |||||||||
| Japanese yen | 5.1 | 0.0069 | 4 | (0.2 | ) | ||||||||
| Korean won | 3.6 | 0.0008 | 4 | (0.2 | ) | ||||||||
| Total | $ | 700.4 | $ | 6.5 | |||||||||
| Fair values of outstanding foreign currency forward and swap contracts related to effective cash flow hedges where we applied hedge accounting | 6.1 | ||||||||||||
| Fair values of outstanding foreign currency forward and swap contracts related to economic hedges where we record the changes in the fair values of such contracts through our consolidated statement of operations | 0.4 | ||||||||||||
| $ | 6.5 | ||||||||||||
(1) Represents the U.S. dollar equivalent (not in millions) of one unit of the foreign currency, weighted based on the notional amounts of the underlying foreign currency forward and swap contracts outstanding as at December 31, 2023.
At December 31, 2023, the aggregate fair value of our outstanding contracts was a net unrealized gain of $6.5 (December 31, 2022 — net unrealized gain of $5.2), resulting from fluctuations in foreign exchange rates between the contract execution and the period-end date. At December 31, 2023, we recorded $15.8 of derivative assets in other current assets and $9.3 of derivative liabilities in accrued and other current liabilities (December 31, 2022 — $18.9 of derivative assets in other current assets and $13.7 of derivative liabilities in accrued and other current liabilities).
Credit risk:
Credit risk refers to the risk that a counterparty may default on its contractual obligations resulting in a financial loss to us. We believe our credit risk of counterparty non-performance continues to be relatively low. We are in regular contact with our customers, suppliers and logistics providers, and have not experienced significant counterparty credit-related non-performance in 2022 or 2023. However, if a key supplier (or any company within such supplier's supply chain) or customer fails to comply with their contractual obligations, this could result in a significant financial loss to us. We would also suffer a significant financial loss if an institution from which we purchased foreign currency exchange contracts and swaps, interest rate swaps, or annuities for our pension plans, or the counterparty to our TRS Agreement, defaults on their contractual obligations. With respect to our financial market activities, we have adopted a policy of dealing only with counterparties we deem to be creditworthy. No significant adjustments were made to our allowance for doubtful accounts during Q4 2023 or FY 2023 in connection with our ongoing credit risk assessments.
Liquidity risk:
Liquidity risk is the risk that we may not have cash available to satisfy our financial obligations as they come due. The majority of our financial liabilities recorded in accounts payable, accrued and other current liabilities and provisions are due within 90 days. We manage liquidity risk through maintenance of cash on hand and access to the various financing arrangements described in notes 4 and 7. We believe that cash flow from operating activities, together with cash on hand, cash from accepted sales of A/R, and borrowings available under the Revolver and potentially available under uncommitted intraday and overnight bank overdraft facilities, are sufficient to fund our currently anticipated financial obligations, and will remain available in the current environment. As our A/R sales program and SFPs are each uncommitted, however, there can be no assurance that any participant bank will purchase any of the A/R that we wish to sell.
12. COMMITMENTS AND CONTINGENCIES
Litigation:
In the normal course of our operations, we may be subject to lawsuits, investigations and other claims, including environmental, labor, product, customer disputes, and other matters. Management believes that adequate provisions have been recorded where required. Although it is not always possible to estimate the extent of potential costs, if any, we believe that the ultimate resolution of all such pending matters will not have a material adverse impact on our financial performance, financial position or liquidity.
Taxes and Other Matters:
In 2021, the Romanian tax authorities issued a final assessment in the aggregate amount of approximately 31 million Romanian leu (approximately $7 at Q4 2023 period-end exchange rates), for additional income and value-added taxes for one of our Romanian subsidiaries for the 2014 to 2018 tax years. In order to advance our case to the appeals phase and reduce or eliminate potential interest and penalties, we paid the Romanian tax authorities the full amount assessed in 2021 (without agreement to all or any portion of such assessment). We believe that our originally-filed tax return positions are in compliance with applicable Romanian tax laws and regulations, and intend to vigorously defend our position through all necessary appeals or other judicial processes.
The successful pursuit of assertions made by any government authority, including tax authorities, could result in our owing significant amounts of tax or other reimbursements, interest and possibly penalties. We believe we adequately accrue for any probable potential adverse ruling. However, there can be no assurance as to the final resolution of any claims and any resulting proceedings. If any claims and any ensuing proceedings are determined adversely to us, the amounts we may be required to pay could be material, and in excess of amounts accrued.
13. FIRE EVENT
In June 2022, a fire occurred at our Batam, Indonesia facility. The fire destroyed inventories and damaged a building and equipment located at the site. Our manufacturing operations at the site were briefly paused, but resumed in June 2022. In 2022, we wrote down inventories destroyed (approximately $94) and a building and equipment damaged (approximately $1) by the fire. We expect to fully recover our tangible losses pursuant to the terms and conditions of our insurance policies. In 2022 and 2023, we recovered approximately $31 and $23 of our inventory losses through insurance proceeds, respectively. As of December 31, 2023, we recorded an estimated receivable of approximately $41 related to remaining anticipated insurance proceeds in other current assets on our consolidated balance sheet. The write-downs and the offsetting insurance receivable (in equivalent amounts) were each recorded in other charges in 2022, resulting in no net impact to 2022 net earnings. We determined that this event did not constitute an impairment review triggering event for the applicable CGU, and no impairments to our intangibles or goodwill were recorded in connection therewith in 2022 or 2023.
