Celestica Inc. — FY 2017 Form 20-F
Reporting period: Year ended December 31, 2017; the filing also reports unaudited fourth-quarter results. Amounts are U.S. dollars unless stated otherwise. Financial statements are prepared under IFRS.
Business context
Celestica provides global electronics manufacturing and supply-chain services, including design, engineering, manufacturing, fulfillment and after-market support. Its end markets were Advanced Technology Solutions (ATS), Communications and Enterprise. Communications and Enterprise together represented 68% of FY 2017 revenue; ATS represented 32%.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $6,110.5 million | $6,016.5 million |
| Gross profit / margin | $417.8 million / 6.8% | $427.6 million / 7.1% |
| Earnings from operations | $142.5 million | $156.7 million |
| Earnings before tax | $132.4 million | $161.0 million |
| Net earnings | $105.0 million | $136.3 million |
| Diluted EPS | $0.72 | $0.95 |
| Cash provided by operating activities | $127.0 million | $173.3 million |
| Capital expenditures | $102.6 million | $64.1 million |
| Non-IFRS free cash flow | $21.0 million | $110.2 million |
| Cash and cash equivalents at year-end | $515.2 million | $557.2 million |
| Credit-facility borrowings at year-end | $187.5 million | $227.5 million |
| Working capital at year-end | $1,188.7 million | $1,100.8 million |
Operating cash flow fell primarily because FY 2016 included a $52 million tax refund and FY 2017 earnings were lower. Inventory increased to $1,061.8 million from $890.6 million, reflecting new-program ramps, demand volatility and supplier constraints. Non-IFRS free cash flow is a company-defined measure and is not equivalent to residual cash available for discretionary spending.
At December 31, 2017, no amount was drawn on the $300 million revolving facility; $276.8 million remained available after letters of credit. The facility and term loan mature in May 2020. Celestica reported compliance with its debt covenants and a BB credit rating with stable outlook. The filing reports no dividends declared.
Fourth-quarter results and changes
Q4 2017 revenue was $1,553.9 million, down 4% year over year. Net earnings were $14.4 million, compared with $20.9 million; diluted EPS was $0.10 versus $0.15. Gross margin fell to 6.6% from 6.9%. Communications revenue declined 12% year over year and Enterprise declined 4%, partly offset by 6% growth in ATS.
Q4 non-IFRS operating margin was 3.3%, below the company’s stated 3.6% midpoint expectation; non-IFRS adjusted diluted EPS was $0.27, at the bottom of its $0.27–$0.33 guidance range. Management cited late customer demand changes that limited its ability to reduce variable production costs, unfavorable program mix and ramp costs.
For the full year, revenue rose 2%, but gross profit fell 2% and net earnings fell 23%. Management attributed margin pressure to pricing, a greater share of lower-margin fulfillment services and costs to ramp new programs. Q4 net earnings also compared against a prior-year quarter benefiting from $8.3 million of tax-refund interest income.
Outlook, management commentary and material risks
- Management expected challenging pricing, demand shifts and materials constraints in Communications and Enterprise to continue into 2018. It anticipated ATS growth over time, while noting execution and acquisition outcomes were uncertain.
- A cost-efficiency initiative was expected to incur $50–$75 million of aggregate restructuring charges, primarily cash, through mid-2019. Management expected this initiative, together with a greater ATS contribution, to improve non-IFRS operating margins in the second half of 2018; this is forward-looking and not assured.
- Celestica agreed to acquire Atrenne for approximately $139 million, to be funded with cash and revolving-credit availability; closing was expected in Q2 2018, subject to approvals and other conditions.
- The Toronto property sale, for approximately C$137 million (about $109 million at year-end exchange rates), remained subject to approvals and was expected to close during 2018. Manufacturing relocation and site preparation were expected to involve significant costs; approximately $16 million in manufacturing-site building improvements and capital spending was anticipated in 2018.
- Following its exit from solar panel manufacturing, the company had $6.7 million of solar receivables outstanding from a former supplier and expected collection in Q1 2018; it also held $2.6 million of solar equipment for sale. Failure to recover these amounts could lead to further write-downs.
- A Brazilian tax assessment, including interest and penalties, was approximately $12 million. Celestica disputed the assessment and stated it believed its position was supportable.
- Customer and market concentration remain significant: two customers represented 31% of FY 2017 revenue, and the top ten represented 71%. Other material risks include supplier shortages, working-capital volatility, customer program losses or insourcing, foreign-exchange exposure, restructuring execution, and acquisition integration.
- IFRS 15, adopted January 1, 2018, was expected to materially change revenue timing and affect inventory and receivables; the company planned retrospective restatement. IFRS 16 was scheduled to take effect in 2019 and would bring most leases onto the balance sheet.
Important facts for investors to verify
- Whether the restructuring program achieves the targeted margin improvement, and whether total charges remain within the stated $50–$75 million range.
- Actual Q1 2018 collection of the $6.7 million solar receivable and completion and proceeds of the solar equipment sale.
- Closing, final price and financing of the Atrenne acquisition, including resulting debt and integration performance.
- Completion and economics of the Toronto property sale and relocation, including total transition costs and any sale proceeds or lease commitments.
- Inventory levels, cash conversion and customer/supplier financing availability, given the year-end inventory increase and longer Q4 cash-cycle days.
- The quantified effects of IFRS 15 on FY 2017 comparatives and the balance sheet, and subsequent reporting under IFRS 16.
- Resolution of the Brazilian tax assessment and continued customer concentration, especially exposure to Cisco Systems and Juniper Networks.