Celestica Inc. — 2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018; U.S. dollars unless noted. This is an annual report, not a standalone Q4 filing. Financial statements are prepared under IFRS; 2016 and 2017 comparatives were restated for IFRS 15. KPMG issued an unqualified audit opinion.
Business context and financial performance
Celestica provides electronics manufacturing and supply-chain services through Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). ATS includes aerospace and defense, industrial, smart energy, healthtech and capital equipment; CCS includes communications, servers and storage.
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $6,633.2 million | $6,142.7 million |
| Gross profit / margin | $430.5 million / 6.5% | $418.5 million / 6.8% |
| Earnings from operations | $106.3 million | $143.2 million |
| Net earnings | $98.9 million | $105.5 million |
| Diluted IFRS EPS | $0.70 | $0.73 |
| Cash from operating activities | $33.1 million | $127.0 million |
| Capital expenditures | $82.2 million | $102.6 million |
| Non-IFRS free cash flow | $(98.4) million | $21.0 million |
Revenue increased 8%, but operating earnings and net earnings declined. Gross margin contracted as lower-margin fulfillment work, pricing pressure, capital-equipment demand weakness and aged-inventory provisions offset sales growth. Annual net earnings included a $17.0 million income-tax recovery, substantially reflecting acquisition-related deferred tax benefits; reported earnings therefore benefited from a significant tax item.
Segments: ATS revenue was $2.21 billion, up 13%, with segment income of $102.5 million and a 4.6% margin, down from 4.9%. CCS revenue was $4.42 billion, up 6%, with segment income of $111.4 million and a 2.5% margin, down from 2.9%.
Q4 2018: Revenue was $1.727 billion, up 10% year over year; gross margin was 6.9%; net earnings were $60.1 million and diluted IFRS EPS was $0.44. The quarter’s earnings were substantially boosted by the Impakt-related tax benefit. Non-IFRS adjusted EPS was $0.29, within the company’s $0.27–$0.33 guidance range. Q4 operating cash flow was negative $1.9 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $422.0 million at year-end, down from $515.2 million. Working capital was $1.203 billion.
- Credit-facility borrowings totaled $757.3 million: $598.3 million in term loans and $159.0 million under the revolver. The company reported $269.7 million of remaining revolver availability and compliance with its covenants.
- Higher receivables and inventory contributed to weaker operating cash flow; year-end inventory was $1.090 billion and accounts receivable was $1.207 billion. Cash-cycle days increased to 58 from 53 a year earlier.
- Celestica spent $75.5 million to repurchase and cancel 6.8 million shares in 2018. It declared no dividends.
Material changes, outlook and risks
- Portfolio actions: The CCS review identified programs expected to reduce CCS revenue by approximately $500 million over 12–18 months. Management anticipated a single-digit percentage decline in total company revenue in 2019, subject to performance of programs outside the review.
- Capital equipment: Weaker semiconductor demand drove mid-single-digit-million-dollar operating losses in Q4 2018. Management expected a single-digit-million-dollar loss in Q1 2019 and continuing weakness through 2019.
- Restructuring: The cost efficiency initiative was expected to incur total charges of $50–$75 million, primarily cash charges, and continue through the end of 2019. Charges recorded were $35.4 million in 2018 and $43.4 million cumulatively through year-end; management reported $45 million cumulatively through February 13, 2019.
- Management objectives, not forecasts: Targets for the first half of 2020 included non-IFRS operating margin of 3.75%–4.5%, ATS margin of 5%–6%, CCS margin of 2%–3%, and more than half of segment income from ATS. Long-term goals included average annual ATS revenue growth of 10% and returning approximately 50% of non-IFRS free cash flow to shareholders on average.
- Acquisitions and property sale: Atrenne and Impakt were acquired in 2018 for $141.7 million and $325.4 million, respectively, increasing debt and intangible assets. Purchase-price allocations remained preliminary. The Toronto property sale closed March 7, 2019, after year-end, for approximately $110 million; the gain was expected to be recorded in 2019. The original purchaser had material interests connected to Onex chairman Gerald Schwartz; the sale was reviewed by an independent special committee.
- Key risks: Two customers represented over 10% of revenue; the top ten accounted for 70%, and CCS generated 67% of revenue. Other material exposures include aggressive pricing and market shifts, component shortages and inventory obsolescence, customer payment and demand volatility, tariffs and trade uncertainty, foreign exchange, rising interest costs, and execution of restructuring and acquisitions. Onex held approximately 80% of voting power.
- Accounting and controls: IFRS 16 adoption in 2019 was expected to add approximately $113 million of right-of-use assets and lease liabilities. Management and the auditor concluded internal controls were effective, but Impakt’s controls—representing 10% of assets and less than 1% of revenue—were excluded from the assessment.
Important facts for investors to verify
- Whether operating cash flow, inventory levels and cash-cycle performance improve after the 2018 working-capital deterioration.
- Whether CCS program exits improve margins enough to offset the expected revenue reduction, and whether customer concentration changes.
- Actual semiconductor-market losses and the timing and effectiveness of cost-efficiency actions.
- Final purchase-price allocations, integration results and performance of Atrenne and Impakt, including the substantial acquisition-related goodwill and tax effects.
- Debt service, covenant headroom, interest-rate exposure and the impact of IFRS 16 lease liabilities.
- Completion costs and proceeds from the Toronto relocation and property transaction, including the related-party disclosures.