Celestica Releases First Quarter 2019 Financial Results

Estimated reading time: 5 minutes

Celestica Inc. has announced its financial results for the quarter ended March 31, 2019 (Q1 2019).

Q1 2019 Highlights

• Revenue: $1.43 billion, compared to our Q1 2019 guidance range of $1.45 to $1.55 billion, decreased 4% compared to $1.50 billion for the first quarter of 2018 (Q1 2018); Operating margin (non-IFRS): 2.4%, compared to our guidance range of 2.6% at the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges, and 3.0% for Q1 2018
• Advanced Technology Solutions (ATS) segment revenue increased 9% compared to Q1 2018, and represented 40% of total revenue as compared to 36% for Q1 2018; ATS segment margin was 2.6% down from 5.2% for Q1 2018, driven primarily by losses in the current quarter within our capital equipment business (see segment updates below)
• Connectivity & Cloud Solutions (CCS) segment revenue decreased 12% compared to Q1 2018, and represented 60% of total revenue as compared to 64% for Q1 2018; CCS segment margin was 2.3% compared to 1.7% for Q1 2018
• IFRS EPS: $0.66 per share, compared to $0.10 per share for Q1 2018. IFRS EPS for Q1 2019 included a gain of $0.75 per share related to the sale of our Toronto real property (discussed below)
• Adjusted EPS (non-IFRS): $0.12 per share, compared to our Q1 2019 guidance range of $0.12 to $0.18 per share, and $0.24 per share for Q1 2018
• Adjusted ROIC (non-IFRS): 7.9%, compared to 14.4% for Q1 2018
• Free cash flow (non-IFRS): positive $144.7 million, compared to negative $34.1 million for Q1 2018. Non-IFRS free cash flow for Q1 2019 included $113 million in proceeds from the sale of our Toronto real property (see below)
• Repurchased and cancelled 5.1 million subordinate voting shares for $44.5 million under our normal course issuer bid

"Celestica's first quarter results reflect the near-term challenges we are seeing in some of our key end markets" said Rob Mionis, President and CEO. "Despite this, we improved cash generation and aggressively executed on our share repurchases. During this lower revenue period, we will continue to implement our productivity initiatives in order to more efficiently align cost to current volumes, and to improve the stability and profitability of our business.”

"We remain committed to our transformation strategy which we believe will drive more consistent, diversified and sustainable results in the future. Our CCS portfolio review is mostly complete and we are encouraged by the related benefits.  As we continue to drive improvement in both of our segments, we intend to maintain our balanced approach to capital allocation, supported by a strong balance sheet." 

Segment Updates

In the capital equipment component of our ATS segment, revenue from our semiconductor capital equipment customers has been adversely impacted by cyclical decreases in demand that started in the second half of 2018. As expected, our capital equipment business operated at a loss in Q1 2019, within our anticipated range. Additionally, within our display business, some programs that we had anticipated to ramp in the second half of 2019 have been delayed and are currently expected to ramp in 2020. We expect demand softness in our capital equipment business to continue throughout 2019. Our focus continues to be on aligning this business to the current demand environment and to improve its profitability. The industrial and healthtech businesses within our ATS segment were adversely impacted in Q1 2019 by costs associated with the ramping of multiple new programs. As the ramping of these programs progresses, we anticipate an increased level of profitability from these businesses. In addition, our A&D business was adversely impacted by materials shortages in Q1 2019, resulting in a backlog of orders and reduced profitability. We expect this backlog to gradually improve as we move through 2019.

In our CCS segment, we continue to progress with the comprehensive review of our CCS revenue portfolio (CCS Review). We commenced this review in the second half of 2018 to address under-performing programs that no longer align with our strategic objectives. The CCS Review is currently expected to result in a decline in our CCS segment revenue of approximately $500 million over the next 9 to 15 months (subject to change based on the growth or contraction of CCS programs not subject to the CCS Review). In Q1 2019, we completed planned program disengagements in our Enterprise end market, and expect to complete the majority of the remaining actions identified by the CCS Review in 2019, including intended restructuring actions (which have been built into our current cost efficiency initiative), and changes to our manufacturing network.

The decrease in CCS segment revenue in Q1 2019 as compared to the prior year period was primarily due to planned program disengagements in our Enterprise end market resulting from our CCS Review, as well as late quarter demand softness from certain Communications customers. We saw a reduction in orders from several Communications customers, as they consumed their inventory buffers previously built up to manage materials constraints. Additionally, reduced demand for some programs resulted from the impact of next generation program transitions. We expect these adverse market dynamics in our Communications end market to continue into the second quarter of 2019.

If demand softness in our Communications end market persists into the second half of 2019, total company revenue for 2019 could decrease year over year at the high end of the single digit percentage range previously anticipated to result from the CCS Review alone.

Restructuring Update

We have recorded approximately $51 million in restructuring charges from the commencement of our cost efficiency initiative through the end of Q1 2019, including $7.1 million of restructuring charges recorded in Q1 2019. Based on current plans, we estimate total restructuring charges for this initiative to be near the high end of our previously disclosed range of $50 - $75 million, and continue to expect the remainder of the charges to be recorded by the end of 2019.

Consummation of Toronto Real Property Sale

On March 7, 2019, we completed the sale of our Toronto real property and in connection therewith, received total proceeds of $113.0 million (in addition to an $11.2 million deposit we received in July 2015). These proceeds were included in our determination of non-IFRS free cash flow for Q1 2019. We used substantially all of the proceeds to repay a portion of our outstanding revolving loans. We recorded a gain of $102.0 million on the sale in other charges (recoveries). See note 10(b) to our March 31, 2019 unaudited interim condensed consolidated financial statements (Q1 2019 Interim Financial Statements) for further details.

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, 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.