Celestica Releases Q1 2018 Financial Results

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Celestica Inc. announced financial results for the quarter ended March 31, 2018. During the first quarter of 2018, Celestica completed a reorganization of its business into two operating and reportable segments — Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Celestica also adopted new accounting standards effective January 1, 2018. See “Adoption of IFRS 15” below. Prior period comparatives have been restated.

First Quarter 2018 Highlights

• Revenue: $1.50 billion, compared to our previously provided guidance range of $1.425 to $1.525 billion, increased 1% compared to the first quarter of 2017; Operating margin (non-IFRS): 3.0%, compared to 3.6% for the first quarter of 2017
• Revenue dollars from our ATS segment increased 8% compared to the first quarter of 2017, and represented 36% of total revenue, compared to 33% of total revenue for the first quarter of 2017; ATS segment margin*** was 5.2% compared to 4.7% for the first quarter of 2017
• Revenue dollars from our CCS segment decreased 2% compared to the first quarter of 2017, and represented 64% of total revenue, compared to 67% of total revenue for the first quarter of 2017; CCS segment margin*** was 1.7% compared to 3.0% for the first quarter of 2017
• IFRS EPS: $0.10 per share, compared to $0.16 per share for the first quarter of 2017
• Adjusted EPS (non-IFRS): $0.24 per share, compared to our previously provided guidance range of $0.20 to $0.26 per share, and $0.29 per share for the first quarter of 2017
• Adjusted ROIC (non-IFRS): 14.4%, compared to 19.3% for the first quarter of 2017
• Free cash flow (non-IFRS): negative $34.1 million, compared to positive $13.5 million for the first quarter of 2017
• Recorded restructuring charges of $6.9 million, compared to $5.8 million for the first quarter of 2017
• Repurchased and cancelled 3.3 million subordinate voting shares for $35.1 million (including transaction fees) under our current normal course issuer bid (NCIB)

“Celestica's first quarter results highlight the steady operating and financial performance being achieved in our ATS segment, as well as pressure being experienced in our more volatile CCS segment,” said Rob Mionis, President and CEO, Celestica. “Despite the component constrained environment affecting our entire industry, we achieved results in line with our guidance for the first quarter, and anticipate additional revenue growth and improved operational efficiency in the second quarter of 2018.”

“We have made significant investments in our ATS segment over the past several years, and we are now starting to see the operational and financial improvements we anticipated in this segment when we first launched our transformational strategy two years ago. While our CCS segment continues to experience a volatile pricing and demand environment, Celestica has an extensive track record in helping customers manage through these conditions, and our teams are focused on implementing productivity and efficiency initiatives across our operations to improve performance in the second half of 2018.”

International Financial Reporting Standards (IFRS) earnings per share (EPS) for the first quarter of 2018 included an aggregate charge of $0.14 (pre-tax) per share for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described on Schedule 1 attached hereto), and restructuring charges (see the tables in Schedule 1 for per-item charges). This aggregate charge is within the range we provided on January 24, 2018 of between $0.14 to $0.20 per share for these items.

Non-IFRS measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other public companies that use IFRS or other generally accepted accounting principles (GAAP). See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures. 

Segment Reorganization

During the first quarter of 2018, we completed a reorganization of our reporting structure, including our sales, operations and management systems, into two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Prior to this reorganization, we operated in one reportable segment (Electronic Manufacturing Services), which was comprised of multiple end markets (ATS, Communications and Enterprise during 2017). The change in operating and reportable segments was a result of modifications to our organizational and internal management structure, which were initiated in 2017 to streamline business operations and improve profitability and competitiveness, and were completed in early 2018. As a result of these modifications, and commencing in the first quarter of 2018, our CEO, who is our chief operating decision maker, reviews segment revenue, segment income and segment margin (as described above) to assess performance and make decisions about resource allocation. Our prior period financial information has been reclassified to reflect the current segment structure and to conform to the current presentation.

Restructuring Update

In the fourth quarter of 2017, we commenced the implementation of additional restructuring actions under a new cost efficiency initiative.  We have recorded $14.9 million in restructuring charges from the commencement of this initiative through the end of the first quarter of 2018, including the $6.9 million of restructuring charges recorded in the first quarter of 2018. We currently estimate that we will incur aggregate restructuring charges of between $50 million and $75 million for this initiative and that most of the charges will be recorded in the second half of 2018 through mid-2019.

Completion of Atrenne Acquisition

In April 2018, we completed the acquisition of U.S. - based Atrenne Integrated Solutions, Inc. (Atrenne), a designer and manufacturer of ruggedized electromechanical solutions, primarily for military and commercial aerospace applications. This acquisition is intended to expand our capabilities, improve our diversification, and bolster our leadership position within the aerospace and defense market. In addition, Atrenne's capabilities in the design and manufacture of value-added mechanical solutions are expected to expand our service offerings for our industrial customers. We purchased Atrenne for approximately $143 million, including an estimated net working capital adjustment of $3.8 million (which is subject to finalization), which we funded with borrowings under the revolving portion of our credit facility.

Toronto Real Property Update

We anticipate that the sale of our Toronto real property, which includes our corporate headquarters and Toronto manufacturing operations, to close by the end of 2018, although further delays in the approval process could move the closing to early 2019. The property was sold for approximately $137 million Canadian dollars, of which we had previously received a cash deposit of $15 million Canadian dollars. Upon closing, the purchase price will be settled with $53.5 million Canadian dollars in cash and an interest free, first-ranking mortgage for $68.5 million Canadian dollars. The cash flow benefits from the sale of this property will more than offset the costs associated with our relocation activities as a result of the property sale. We have started to incur transition costs as we relocate to a new manufacturing facility and expect to incur further costs as we temporarily relocate our corporate headquarters.  We expect to incur total transition costs of up to US$15 million, through to the end of the first quarter of 2019.

Adoption of IFRS 15

We adopted IFRS 15, Revenue from Contracts with Customers, effective January 1, 2018.  We elected to apply the retrospective approach and as a result, have restated each of the required comparative reporting periods presented herein and in our Q1 2018 Interim Financial Statements. A description of the impact of our transition to IFRS 15 is included in notes 2 and 3 to our Q1 2018 Interim Financial Statements.

Second Quarter 2018 Outlook

For the quarter ending June 30, 2018, we anticipate revenue to be in the range of $1.575 billion to $1.675 billion, non-IFRS selling, general and administrative expenses (SG&A) to be in the range of $51.0 million to $53.0 million, non-IFRS operating margin to be 3.2% at the mid-point of our revenue range and non-IFRS adjusted EPS guidance range, and non-IFRS adjusted EPS to be in the range of $0.25 to $0.31. We expect a negative $0.13 to $0.19 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described on Schedule 1 hereto), and restructuring charges. We also anticipate our non-IFRS adjusted annual effective tax rate for 2018 to be between 17% and 19%. We cannot predict changes in currency exchange rates, the impact of such changes on our operating results, or the degree to which we will be able to manage such impacts. See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures. 

Non-IFRS Operating Margin Goal

Our goal is for non-IFRS operating margin to be back into the 3.5% range in the second half of 2018, as we anticipate the realization of cost efficiencies from our restructuring actions, and benefits from anticipated increases in ATS segment revenue.

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.

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, semiconductor capital equipment, and smart energy 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.

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