TORONTO — Celestica Inc. (TSX: CLS)(NYSE: CLS), a leader in design, manufacturing and supply chain solutions for the world’s most innovative companies, today announced 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.”
*Non-IFRS measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other public companies that use IFRS or other generally accepted accounting principles (GAAP). See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS measures to the most directly comparable IFRS measures. As described in footnotes (3) and (4) to the reconciliation table in Schedule 1, our calculation of each of non-IFRS free cash flow and non-IFRS adjusted ROIC has been modified commencing Q1 2019.
** Our ATS segment consists of our ATS end market, and is comprised of our aerospace and defense (A&D), industrial, smart energy, healthtech, and capital equipment businesses (consisting of semiconductor, display, and power & signal distribution equipment). Our CCS segment consists of our Communications and Enterprise end markets, and is comprised of our enterprise communications, telecommunications, servers and storage businesses. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 25 to our 2018 audited consolidated financial statements for further detail.
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.
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.
Adoption of IFRS 16
Celestica adopted International Financial Reporting Standards (IFRS) 16 (Leases), effective January 1, 2019. A description of the impact of our transition to IFRS 16 is included in note 2 to our Q1 2019 Interim Financial Statements.
Guidance Summary and Q2 2019 Outlook
|Q1 2019 Guidance (1)||Q1 2019 Actual (1)||Q2 2019 Guidance (2)|
|IFRS revenue (in billions)||$1.45 to $1.55||$||1.43||$1.4 to $1.5|
|Non-IFRS operating margin||2.6% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges||2.4||%||2.4% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges|
|Non-IFRS adjusted SG&A (in millions)||$51.0 to $53.0||$||50.9||$53.0 to $55.0|
|Non-IFRS adjusted EPS||$0.12 to $0.18||$||0.12||$0.09 to $0.15|
(1) For Q1 2019, our revenue was below our guidance range as a result of weaker than expected demand in our CCS segment, primarily late quarter demand softness from certain Communications customers. Non-IFRS operating margin for Q1 2019 was below the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges as a result of the lower revenue, unfavorable changes in mix, and higher than expected costs associated with ramping multiple new programs, in particular within our ATS segment. Non-IFRS adjusted SG&A was just below our guidance range and non-IFRS adjusted EPS was at the low end of our guidance range. Our non-IFRS adjusted effective tax rate for Q1 2019 was 27%, higher than our annual estimated range of between 19% to 21%, driven primarily by unfavorable profit mix in different geographies, offset in part by taxable foreign exchange benefits.
IFRS earnings per share (EPS) of $0.66 for Q1 2019 included an aggregate charge of $0.21 (pre-tax) per share for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs, and restructuring charges (see the tables in Schedule 1 and note 10 to the Q1 2019 Interim Financial Statements for per-item charges). This aggregate charge is within the range we provided on January 31, 2019of between $0.18 to $0.24 per share for these items. This range did not address potential gains in connection with the then-anticipated consummation of our Toronto real property sale.
IFRS EPS for Q1 2019 included an aggregate $0.67 per share net benefit attributable to other charges (recoveries), resulting from a $0.75 per share gain on the sale of our Toronto property sale, offset in part by related Toronto transition costs ($0.02 per share negative impact) and restructuring charges ($0.05 per share negative impact). IFRS EPS for Q1 2018 included an aggregate $0.07 per share negative impact attributable to other charges (recoveries), primarily due to restructuring charges ($0.05 per share negative impact). See Schedule 1 for the exclusions used to determine non-IFRS adjusted EPS for each of Q1 2019 and Q1 2018.
(2) For the second quarter of 2019 (Q2 2019), we expect a negative $0.15 to $0.21 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described on Schedule 1 hereto), and restructuring charges. Based on the projected geographical mix of our profits, we anticipate that our non-IFRS adjusted effective tax rate for Q2 2019 will be similar to Q1 2019. As a result of the higher tax rate we are experiencing in the first half of 2019, we currently expect our full year non-IFRS adjusted effective tax rate to be in the mid-twenty percent range, excluding foreign exchange impacts and one-time tax settlements. As we exit the year, we are targeting to return to our previously guided annual range of 19% to 21%. We cannot predict changes in currency exchange rates, the impact of such changes on our operating results, or the degree to which we will be able to manage such impacts.
See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS measures to the most directly comparable IFRS measures.
We do not provide reconciliations for forward-looking non-IFRS financial measures, as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various events that have not yet occurred, are out of our control and/or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking IFRS financial measure. For these same reasons, we are unable to address the probable significance of the unavailable information. Forward-looking non-IFRS financial measures may vary materially from the corresponding IFRS financial measures.
Q12019 Webcast and Annual Shareholders Meeting Webcast
Management will host its Q1 2019 results conference call today at 8:00 a.m. Eastern Daylight Time. The Company’s Annual General Shareholders’ Meeting will be held today at 9:30 a.m. Eastern Daylight Time at the TMX Broadcast Centre, The Exchange Tower, 130 King Street West, Toronto, Ontario. The webcasts of each event can be accessed at www.celestica.com.