Celestica Inc. — 2020 Form 20-F Summary
Business context and reporting period. This audited annual report covers the fiscal year ended December 31, 2020; the filing also provides fourth-quarter results. Celestica is an electronics manufacturing and supply-chain services provider, reporting in U.S. dollars under IFRS, through Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Key financial results
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $5,748.1 million | $5,888.3 million |
| Gross profit / margin | $437.6 million / 7.6% | $384.7 million / 6.5% |
| Earnings from operations | $127.9 million | $149.3 million |
| Net earnings | $60.6 million | $70.3 million |
| Diluted IFRS EPS | $0.47 | $0.53 |
| Cash from operating activities | $239.6 million | $345.0 million |
| Non-IFRS free cash flow | $126.0 million | $301.2 million |
At year-end, cash and cash equivalents were $463.8 million; working capital was $1,159.0 million. Credit-facility borrowings were $470.4 million, down from $592.3 million, after $121.9 million of repayments. The revolving facility was undrawn apart from letters of credit, with $428.7 million available. Lease obligations were $122.7 million. Capital expenditures were $52.8 million.
Fourth quarter
Q4 revenue was $1,386.6 million, down 7% from Q4 2019 and 11% sequentially. Net earnings were $20.1 million, compared with a $7.0 million loss a year earlier; diluted IFRS EPS was $0.16 versus a loss of $0.05. Gross margin rose to 8.2% from 6.8% year over year. Q4 non-IFRS adjusted EPS was $0.26, within management’s guidance range of $0.22–$0.28.
Material changes and operating performance
- Full-year revenue declined 2%. ATS revenue fell 9% to $2.09 billion, while CCS revenue increased 2% to $3.66 billion.
- Gross margin improved to 7.6%, supported by better business mix, productivity and volume leverage. ATS margin increased to 3.3% from 2.8%; CCS margin rose to 3.5% from 2.6%.
- Net earnings declined 14%, principally because 2019 included a $102 million gain on the Toronto property sale. Improved 2020 gross profit, lower restructuring charges and lower finance costs partly offset this comparison.
- Operating cash flow fell from $345.0 million to $239.6 million, mainly reflecting higher working-capital requirements. Inventory rose to $1,091.5 million from $992.2 million; cash-cycle days reached 73 in Q4 versus 62 in Q4 2019.
- HPS revenue increased 80% to $862 million, representing 15% of total revenue. The growth, including strong hyperscaler demand, helped offset CCS portfolio disengagements.
Outlook, commentary and risks
For 2021, management targeted ATS revenue growth of approximately 10%, HPS growth in the high single digits, and Lifecycle Solutions revenue growth in the high single digits. It expected non-HPS CCS revenue to decline, primarily due to the completed Cisco disengagement, and total CCS revenue to fall year over year. Management targeted ATS margin of 5%–6% by year-end, CCS margin of 2%–3% during 2021, and at least $100 million in non-IFRS free cash flow. These are forward-looking targets, not guarantees.
- COVID-19 and supply chain: The pandemic reduced demand in commercial aerospace and Industrial, disrupted component supply and freight, and contributed to approximately $37 million of 2020 costs. Approximately $34 million in government subsidies and $3 million in customer recoveries mitigated the impact. Management expected continuing pandemic-related effects in 2021 but could not quantify them.
- Portfolio transition: The Cisco disengagement was completed at the end of 2020. All current and completed CCS Review disengagements are expected to reduce annualized CCS revenue by approximately $1.25 billion; timely replacement and profitability of new business remain uncertain.
- Restructuring and inventory: 2020 restructuring charges were $25.8 million, mainly related to Cisco and cost-base adjustments. Net inventory provisions were $17.0 million, versus $4.1 million in 2019. Further planned restructuring charges were expected in Q1 2021.
- Concentration and market risks: The top ten customers accounted for 66% of revenue, and CCS contributed 64%. Risks include competitive pricing, changing customer demand, component shortages, commercial aerospace weakness, tariffs and geopolitical exposure, foreign exchange, and execution of new programs.
- Financing, tax and governance: Debt covenants, variable interest rates and the LIBOR transition pose risks. Approximately $300 million of foreign cash was expected to be repatriated, with related withholding taxes recorded. Onex held approximately 81% of voting power; the company had not declared dividends.
Other notable items include a Brazilian tax assessment under appeal of approximately $5 million at year-end exchange rates. Management stated that pending litigation was not expected to have a material adverse effect. No goodwill impairment was recorded, although the Capital Equipment goodwill valuation depended on forecasts and was identified by the auditor as a critical audit matter.
Important facts for investors to verify
- Whether 2021 ATS, HPS, segment-margin and free-cash-flow targets were achieved, and how much of reported adjusted performance translates into IFRS earnings and cash.
- Whether HPS growth and replacement programs offset the Cisco and other CCS disengagements without weakening margins or increasing working-capital needs.
- Progress in reducing inventory and cash-cycle days, collecting receivables, and sustaining operating cash flow and free cash flow.
- The continuing effects of COVID-19, aerospace demand, materials availability and freight costs, including whether subsidy support recurs.
- Debt repayment, revolver availability and covenant headroom, as well as exposure to interest-rate and LIBOR-transition costs.