Celestica Releases Q2 2018 Financial Results

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Celestica Inc. announced financial results for the quarter ended June 30, 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, and prior period comparatives have been restated. 

Second Quarter 2018 Highlights

• Revenue: $1.70 billion, compared to our previously provided guidance range of $1.575 to $1.675 billion, increased 9% compared to the second quarter of 2017; Operating margin (non-IFRS): 3.1%, compared to 3.2% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter, and 3.7% for the second quarter of 2017
• Revenue dollars from our ATS segment increased 16% compared to the second quarter of 2017, and represented 33% of total revenue, compared to 31% of total revenue for the second quarter of 2017; ATS segment margin was 5.1% compared to 4.7% for the second quarter of 2017
• Revenue dollars from our CCS segment increased 6% compared to the second quarter of 2017, and represented 67% of total revenue, compared to 69% of total revenue for the second quarter of 2017; CCS segment margin was 2.2% compared to 3.3% for the second quarter of 2017
• IFRS EPS: $0.11 per share, compared to $0.24 per share for the second quarter of 2017
• Adjusted EPS (non-IFRS): $0.29 per share, compared to our previously provided guidance range of $0.25 to $0.31 per share, and $0.32 per share for the second quarter of 2017
• Adjusted ROIC (non-IFRS): 16.0%, compared to 20.8% for the second quarter of 2017
• Free cash flow (non-IFRS): ($53.0 million), compared to $32.8 million for the second quarter of 2017
• Entered into a new $800 million credit facility in June 2018

“Celestica’s second quarter results reflect strong year over year and sequential revenue growth in both our ATS and CCS segments, as well as improvements in our CCS segment margin from the prior quarter, said Rob Mionis, President and CEO, Celestica. “We are pleased with the ongoing successful execution of our ATS growth strategy, which continues to demonstrate our ability to diversify our revenue base and achieve consistent ATS segment margin performance.”

“As the broad-based proliferation of semiconductor usage continues to grow, our industry and customers are operating in a constrained materials environment. While this backdrop is driving near-term working capital and other operational inefficiencies across our businesses, we anticipate that our diversification strategy and ongoing cost reduction initiatives should still enable us to further improve our revenue mix and margins as we progress into the second half of 2018.”

International Financial Reporting Standards (IFRS) earnings per share (EPS) for the second quarter of 2018 included an aggregate charge of $0.16 (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 and note 13 to the Q2 2018 Interim Financial Statements for per-item charges). This aggregate charge is within the range we provided on April 27, 2018 of between $0.13 to $0.19 per share for these items.

IFRS EPS for the second quarter and first half of 2018 included an aggregate $0.11 per share and $0.19 per share negative impact, respectively, attributable to other charges, most significantly restructuring charges incurred in connection with our cost efficiency initiative discussed under “Restructuring Update” below, and a $0.01 per share negative impact for each period resulting from the recognition of a $1.6 million fair value adjustment in cost of sales due to the write-up in the value of the inventory of Atrenne Integrated Solutions, Inc. (Atrenne) on the date of acquisition (Atrenne FVA), offset in part by an aggregate $0.03 per share and $0.06 per share net benefit pertaining to taxes, respectively (consisting of $0.03 per share tax benefit in each period resulting from the recognition of deferred tax assets attributable to our acquisition of Atrenne (Atrenne DTA) and a $0.04 per share tax benefit in each period arising from the reversal of previously-accrued Mexican taxes (Mexican Tax Reversal), offset in part by negative foreign currency tax impacts in each period). See notes 5, 13 and 14 to our Q2 2018 Interim Financial Statements for further detail. Non-IFRS adjusted EPS for the second quarter and first half of 2018 each excluded the impact of other charges, the Atrenne FVA and the Atrenne DTA, as these items are not reflective of our ongoing operational performance (see Schedule 1 for further detail).

IFRS EPS for the second quarter and first half of 2017 included a $0.05 and $0.11 per share negative impact, respectively, attributable to other charges, primarily restructuring charges incurred in connection with our organizational design and global business services initiatives, and the write-down of then-remaining solar panel manufacturing equipment in the second quarter of 2017, and was favorably impacted by a $0.03 per share deferred income tax benefit related to the write-downs and impairments we recorded for our solar assets in the then-current and prior quarters (Solar Benefit). See notes 13 and 14 to our Q2 2018 Interim Financial Statements for further detail. Non-IFRS adjusted EPS for the second quarter and first half of 2017 each excluded the impact of the Solar Benefit.

Non-IFRS operating margin for the second quarter and first half of 2018 were negatively impacted primarily by changes in overall mix, pricing pressures primarily in our CCS segment, and the additional inventory provisions we recorded in the second quarter of 2018 compared to the prior year periods.

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: ATS and 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). Our prior period financial information has been reclassified to reflect the reorganized segment structure. Additional information regarding our reportable segments is included in note 4 to our Q2 2018 Interim Financial Statements.

As part of our strategy to continue to diversify our business and improve overall shareholder returns, we are undertaking a comprehensive review of our CCS business, with the intention of addressing under-performing programs. This review could ultimately result in our disengagement from certain customer programs if we determine that financial returns from such programs are not anticipated to contribute to improved consistency in our revenues and operating margins for such segment. This could in turn result in corresponding declines in our CCS segment revenue. We intend to continue to invest in areas we believe are key to the long-term success of our CCS segment, including our JDM offering, to help drive improved CCS financial performance in future periods.

New $800 Million Credit Facility

In June 2018, we entered into a new $800 million credit facility, which consists of a $350 million term loan (New Term Loan) that matures in June 2025, and a $450 million revolving credit facility (New Revolver) that matures in June 2023. The New Term Loan, which was fully drawn at closing, was used primarily to repay all amounts outstanding under our previous credit facility (Prior Facility) that was scheduled to mature in May 2020. Our Prior Facility was terminated on such repayment. Other than ordinary course letters of credit, there were no amounts outstanding under the New Revolver as of June 30, 2018. See Note 11 to our Q2 2018 Interim Financial Statements.

Atrenne Acquisition

In April 2018, we completed the acquisition of U.S.-based 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. The purchase price for Atrenne was $141.7 million, net of cash acquired, including a net working capital adjustment of $3.8 million (which is subject to finalization). The purchase was funded with borrowings under the revolving portion of our Prior Facility. We also recorded a $1.6 million fair value adjustment to write-up Atrenne's inventory on the date of acquisition, representing the difference between the inventory's cost and its fair value. This fair value adjustment was fully recognized in cost of sales in the second quarter of 2018, with a resulting negative impact on gross profit and net earnings for the quarter. See note 5 to our Q2 2018 Interim Financial Statements.

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 $23.7 million in restructuring charges from the commencement of this initiative through the end of the second quarter of 2018, including the $8.8 million of restructuring charges recorded in the second 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.

Toronto Real Property and Related Transactions Update

We currently anticipate that the sale of our Toronto real property, which includes the site of 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. Should the sale be consummated, the sale price will be approximately $137 million Canadian dollars, including a cash deposit of $15 million Canadian dollars which we have already received.

The cash proceeds from the sale of this property (if consummated) are expected to more than offset the building improvements and other capitalized costs, as well as transition costs, associated with the relocation activities resulting from the anticipated property sale. We have incurred aggregate capitalized costs of approximately $11 million, as well as transition costs of approximately $7 million (since October 2017) in connection with our relocations and the preparation of our new facilities. We expect to incur total capitalized costs of $17 million, and total transition costs of up to $15 million, in each case through 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 Q2 2018 Interim Financial Statements. A description of the impact of our transition to IFRS 15 is included in notes 2 and 3 to our Q2 2018 Interim Financial Statements.

Third Quarter 2018 Outlook

For the quarter ending September 30, 2018, we anticipate revenue to be in the range of $1.65 billion to $1.75 billion, non-IFRS selling, general and administrative expenses (SG&A) to be in the range of $49.0 million to $51.0 million, non-IFRS operating margin to be 3.3% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter, and non-IFRS adjusted EPS to be in the range of $0.26 to $0.32. We expect a negative $0.17 to $0.23 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.

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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