Celestica Inc. — FY2019 Form 20-F
Business context and reporting period. Annual report for the fiscal year ended December 31, 2019, with unaudited quarterly highlights, including Q4 2019. Celestica provides electronics manufacturing and supply-chain services through Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Financial statements are prepared under IFRS in U.S. dollars. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $5,888.3 million | $6,633.2 million |
| Gross profit / margin | $384.7 million / 6.5% | $430.5 million / 6.5% |
| Earnings from operations | $149.3 million | $106.3 million |
| Net earnings | $70.3 million | $98.9 million |
| Diluted EPS | $0.53 | $0.70 |
| Cash provided by operating activities | $345.0 million | $33.1 million |
| Capital expenditures | $80.5 million | $82.2 million |
| Cash and cash equivalents at year-end | $479.5 million | $422.0 million |
| Credit-facility borrowings at year-end | $592.3 million | $757.3 million |
Working capital was $1,110.7 million at year-end, down from $1,203.2 million. Lease obligations were $116.1 million, up from $10.4 million, primarily reflecting adoption of IFRS 16. Non-IFRS free cash flow was $301.2 million, versus negative $85.5 million; the 2019 measure includes $113.0 million of proceeds from the Toronto property sale. It is not equivalent to cash available for discretionary spending.
Material changes and Q4 performance
- Revenue fell 11% for the year. CCS revenue declined 19% to $3.60 billion, while ATS revenue grew 3% to $2.29 billion. ATS represented 39% of revenue, up from 33%.
- CCS segment income declined to $93.9 million from $111.4 million, but margin improved to 2.6% from 2.5%. ATS segment income fell to $64.2 million from $102.5 million, and margin to 2.8% from 4.6%, reflecting capital-equipment losses and A&D supply constraints.
- Q4 revenue was $1.492 billion, down 14% year over year and 2% sequentially. Gross margin was 6.8%. IFRS net loss was $7.0 million, or $0.05 per diluted share, compared with earnings of $60.1 million in Q4 2018. The prior-year quarter benefited from a $49.6 million deferred-tax benefit related to the Impakt acquisition.
- Annual cash from operations improved substantially, principally reflecting working-capital inflows and collection timing. Inventory fell to $992.2 million from $1,089.9 million, and accounts receivable to $1,052.7 million from $1,206.6 million.
Outlook, commentary, risks and unusual items
- Management did not provide formal 2020 guidance. It expected revenue to decline versus 2019, while non-IFRS operating margin and adjusted EPS were expected to increase, contingent on cost actions and business mix. These forward-looking non-IFRS measures were not reconciled to IFRS.
- CCS portfolio exits, including the phased Cisco disengagement beginning in 2020, were expected to reduce annualized CCS revenue by approximately $1.25 billion once complete. Management estimated a $400–$600 million revenue decline in 2020 versus 2019 from these disengagements, including Cisco; the transition was expected to be largely complete by year-end 2020. No Q1 2020 Cisco-related revenue impact was expected.
- Management expected $30 million of 2020 restructuring charges, primarily related to Cisco. The completed cost-efficiency initiative generated $81.3 million of cumulative restructuring charges, above its previously disclosed $50–$75 million range.
- ATS outlook was mixed: semiconductor capital-equipment demand showed some improvement late in 2019, with a single-digit-million-dollar Q1 2020 profit forecast for the business; A&D remained affected by constrained parts and the Boeing 737 MAX program halt. Industrial and healthtech growth and productivity actions were expected to support ATS margin improvement.
- COVID-19 disruption was an emerging risk at the report date: the company had seen some material constraints and reductions in orders, shipments and collections, and expected a negative Q1 2020 impact, but could not estimate the overall magnitude or duration. Tariffs, trade realignment, customer concentration, pricing pressure, program losses, and component availability also posed material risks.
- Unusual items included a $102.0 million gain on the Toronto property sale, recorded in other recoveries, and $37.9 million of 2019 restructuring charges. The property sale generated $113.0 million cash proceeds. The company reported no goodwill impairment, but the capital-equipment CGU goodwill valuation depended on recovery assumptions and was identified as a critical audit matter.
- Celestica had $592.3 million of term loans and no revolver borrowings at year-end, with $428.8 million of revolver availability. A $107.0 million mandatory term-loan prepayment was due in Q2 2020. A May 2019 breach related to approximately $17 million of share repurchases was waived in October; the share-repurchase restriction remained in effect.
Most important facts for investors to verify
- Whether CCS disengagements and the Cisco transition proceed on schedule, and how much revenue and margin can be replaced.
- Whether capital-equipment demand recovers and the business achieves the forecast Q1 2020 profit; assess the assumptions supporting $132.0 million of capital-equipment goodwill.
- Whether A&D parts constraints, COVID-19 disruption, and tariff-related production transfers affect deliveries, customer demand, cash collections, or inventory.
- Whether working-capital-driven operating cash flow is repeatable, given that 2019 free cash flow included Toronto sale proceeds and favorable working-capital movements.
- Ability to fund the $107.0 million mandatory debt prepayment while meeting covenants and maintaining liquidity; note that the 2020 outlook is directional, not formal guidance.