Celestica Announces Third Quarter 2023 Financial Results

ORONTO (GLOBE NEWSWIRE) — Celestica Inc. (TSX: CLS) (NYSE: CLS), a leader in design, manufacturing, hardware platform and supply chain solutions for the world’s most innovative companies, today announced financial results for the quarter ended September 30, 2023 (Q3 2023)^†.

“Our solid Q3 2023 results and year-to-date performance have positioned us to exceed our previously-issued 2023 annual financial outlook and deliver new company highs for non-IFRS adjusted EPS* and non-IFRS operating margin*,” said Rob Mionis, President and CEO, Celestica.

“We are confident in our long-term strategy and our ability to deliver strong and consistent financial results. We are also pleased to reiterate our 2024 outlook for non-IFRS adjusted EPS* growth of 10%, or more, compared to our increased 2023 annual outlook.”

Q3 2023 Highlights

• Key measures:
  • Revenue: $2.04 billion, increased 6% compared to $1.92 billion for the third quarter of 2022 (Q3 2022).
  • Non-IFRS operating margin*: 5.7%, compared to 5.1% for Q3 2022.
  • ATS segment revenue increased 12% compared to Q3 2022; ATS segment margin was 4.9%, compared to 5.0% for Q3 2022.
  • CCS segment revenue increased 2% compared to Q3 2022; CCS segment margin was 6.2%, compared to 5.2% for Q3 2022.
  • Adjusted earnings per share (EPS) (non-IFRS)*: $0.65, compared to $0.52 for Q3 2022.
  • Adjusted return on invested capital (adjusted ROIC) (non-IFRS)*: 21.5%, compared to 19.2% for Q3 2022.
  • Adjusted free cash flow (non-IFRS)*: $34.1 million, compared to $7.4 million for Q3 2022.

• Most directly comparable IFRS financial measures to non-IFRS measures above:
  • Earnings from operations as a percentage of revenue: 5.7%, compared to 4.1% for Q3 2022.
  • EPS: $0.67, compared to $0.37 for Q3 2022.
  • Return on invested capital (IFRS ROIC): 21.8%, compared to 15.3% for Q3 2022.
  • Cash provided by operations: $88.4 million, compared to $74.4 million for Q3 2022.

^{† Celestica has two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS segment consists of our ATS end market and is comprised of our Aerospace and Defense (A&D), Industrial, HealthTech and Capital Equipment businesses. Our CCS segment consists of our Communications and Enterprise (servers and storage) end markets. Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 3 to our September 30, 2023 unaudited interim condensed consolidated financial statements (Q3 2023 Interim Financial Statements) for further detail.}

^{* Non-International Financial Reporting Standards (IFRS) financial measures (including ratios based on non-IFRS financial measures) do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar financial measures presented by other public companies that report under IFRS or U.S. generally accepted accounting principles (GAAP). See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS financial measures. See Schedule 1 for, among other items, non-IFRS financial measures included in this press release, their definitions, uses, and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures. Schedule 1 also includes a description of modifications to the calculation of certain non-IFRS financial measures resulting from: (x) a recently-applicable exclusion related to our total return swap; and (y) the recent addition of certain costs to other charges, substantially all of which consist of additional Transition Costs and Secondary Offering Costs (each as defined therein). The most directly comparable IFRS financial measures to non-IFRS operating margin, non-IFRS adjusted EPS, non-IFRS adjusted ROIC and non-IFRS adjusted free cash flow are earnings from operations as a percentage of revenue, EPS, IFRS ROIC, and cash provided by operations, respectively.}

Fourth Quarter of 2023 (Q4 2023) Guidance^‡

For Q4 2023, 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 (SBC) expense, amortization of intangible assets (excluding computer software), and restructuring charges; and a non-IFRS adjusted effective tax rate* of approximately 20% (which does not account for foreign exchange impacts or unanticipated tax settlements).

2023 Outlook Update^‡

Assuming the achievement of the mid-point of the above revenue and non-IFRS adjusted EPS* guidance for Q4 2023, our updated 2023 outlook consists of:

• revenue of $7.90 billion (our previous outlook was at least $7.85 billion);
• non-IFRS adjusted EPS* of $2.36 (our previous outlook was $2.25); and
• non-IFRS adjusted free cash flow* of $150 million (our previous outlook was $125 million).

Our outlook for 2023 non-IFRS operating margin* of 5.5% remains unchanged.

2024 Outlook Update^‡

As we look forward to 2024, we expect revenue growth across each of our businesses, supported by anticipated strong secular tailwinds and new program wins. Combined with strong margins, we expect our 2024 non-IFRS adjusted EPS* to grow by 10%, or more, relative to our increased 2023 outlook.

^{* See Schedule 1 for the definitions of, and recent modifications to, certain of these non-IFRS financial 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.}

^{‡ Although we have incorporated the anticipated impact of demand softness in our Capital Equipment business into our financial guidance and outlook to the best of our ability, its adverse impact (in terms of duration and severity) cannot be estimated with certainty, and may be materially in excess of our expectations.}

Summary of Selected Q3 2023 Results

^{* See Schedule 1 for, among other things, the definitions of, and exclusions used to determine, these non-IFRS financial measures, and a reconciliation of such non-IFRS financial measures to the most directly comparable IFRS financial measures for Q3 2023. Schedule 1 also includes a description of modifications to the calculation of certain non-IFRS financial measures as a result of: (x) a recently-applicable exclusion related to our total return swap; and (y) the recent addition of certain costs to other charges, substantially all of which consist of additional Transition Costs and Secondary Offering Costs (each as defined therein).}

(1) IFRS EPS of $0.67 for Q3 2023 included an aggregate charge of $0.20 (pre-tax) per share for employee SBC expense, amortization of intangible assets (excluding computer software), and restructuring charges (excluding restructuring recoveries). See the tables in Schedule 1 and note 8 to the Q3 2023 Interim Financial Statements for per-item charges. This aggregate charge was within our Q3 2023 guidance range of between $0.17 to $0.23 per share for these items.

IFRS EPS for Q3 2023 included: a $0.25 per share positive impact attributable to a fair value gain on our total return swap agreement (TRS Gain), partially offset by: (i) a $0.05 per share negative impact attributable to net other charges (consisting most significantly of: a $0.03 per share negative impact attributable to Transition Costs (defined in Schedule 1), a $0.01 per share negative impact, substantially all of which was attributable to Secondary Offering Costs (defined in Schedule 1), and a $0.01 per share negative impact attributable to restructuring charges, offset in part by a $0.01 per share positive impact attributable to restructuring recoveries); and (ii) a $0.03 per share negative impact arising from taxable temporary differences associated with the anticipated repatriation of undistributed earnings from certain of our Asian subsidiaries (Repatriation Expense). See notes 7, 8 and 9 to the Q3 2023 Interim Financial Statements.

IFRS EPS for the first nine months of 2023 (YTD 2023) included: (i) a $0.28 per share TRS Gain and (ii) a $0.05 favorable tax impact attributable to the reversals of tax uncertainties in one of our Asian subsidiaries; partially offset by: (x) a $0.11 per share negative impact attributable to net other charges (consisting primarily of a $0.09 per share negative impact attributable to restructuring charges, a $0.03 per share negative impact attributable to Transition Costs (defined in Schedule 1), and a $0.01 per share negative impact, substantially of which was attributable to Secondary Offering Costs (defined in Schedule 1), offset in part by a $0.02 per share positive impact attributable to legal recoveries and a $0.01 per share positive impact attributable to restructuring recoveries); and (y) a $0.06 per share negative Repatriation Expense. See notes 7, 8 and 9 to the Q3 2023 Interim Financial Statements.

IFRS EPS of $0.37 for Q3 2022 included a $0.02 per share negative taxable foreign exchange impact arising from the weakening of the Chinese renminbi relative to the U.S. dollar (Currency Impact) and a $0.01 per share negative impact attributable to restructuring charges. See notes 8 and 9 to the Q3 2023 Interim Financial Statements.

IFRS EPS of $0.83 for the first nine months of 2022 (YTD 2022) included: (i) a $0.03 per share negative impact attributable to net other charges (consisting most significantly of a $0.05 per share negative impact attributable to restructuring charges and a $0.01 per share negative impact attributable to Transition Costs, partially offset by a $0.03 per share positive impact attributable to Transition Recoveries (each defined in Schedule 1)); (ii) as a result of supply chain constraints and COVID-19-related workforce expenses and constraints, a $0.03 per share negative impact attributable to estimated Constraint Costs (defined as both direct and indirect costs, including manufacturing inefficiencies related to lost revenue due to our inability to secure materials, idled labor costs and incremental costs for labor, expedite fees and freight premiums, cleaning supplies, personal protective equipment, and/or IT-related services to support our work-from-home arrangements); (iii) a $0.04 favorable tax impact attributable to the reversal of tax uncertainties in one of our Asian subsidiaries and (iv) a $0.02 per share negative Currency Impact. See notes 8 and 9 to the Q3 2023 Interim Financial Statements.

(2) For Q3 2023, our revenue was towards the high end of our guidance range; our non-IFRS adjusted EPS exceeded the high end of our guidance range, and our non-IFRS operating margin exceeded the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges, driven by unanticipated strong market demand and better than expected mix. Our non-IFRS adjusted SG&A for Q3 2023 was within our guidance range. Our IFRS effective tax rate for Q3 2023 was 19%. Our non-IFRS adjusted effective tax rate for Q3 2023 was 20%, higher than our anticipated estimate of approximately 19%, mainly due to an increase in the amount of undistributed earnings that we anticipate repatriating from certain of our Asian subsidiaries.

Secondary Offerings

As previously reported, on June 8, 2023, Onex Corporation (Onex), our then-controlling shareholder, completed an underwritten secondary public offering (June Secondary Offering) of 12 million of our subordinate voting shares (SVS). We did not sell any shares in the June Secondary Offering and did not receive any proceeds therefrom.

On August 1, 2023, the Company and Onex entered into an underwriting agreement (Underwriting Agreement) with BofA Securities, Inc. and Merrill Lynch Canada Inc. (Underwriters), relating to an additional underwritten secondary public offering by Onex of approximately 6.8 million SVS (August Secondary Offering), which closed on August 4, 2023. We did not sell any SVS in, and did not receive any proceeds from, the August Secondary Offering. The Underwriting Agreement contains customary representations, warranties, covenants, and other customary provisions for agreements of this type. In connection with the August Secondary Offering, we agreed to indemnify the Underwriters and Onex against certain claims, including claims under the U.S. Securities Act and applicable Canadian securities laws, based on the related U.S. registration statement and related U.S. and Canadian prospectuses. The Company agreed to pay approximately $0.65 million of the aggregate fees and expenses of the August Secondary Offering.

In connection with the June Secondary Offering and August Secondary Offering, we issued approximately 11.8 million SVS and approximately 6.8 million SVS, respectively, in each case upon conversion of an equivalent number of our multiple voting shares (MVS). Subsequent to the August Secondary Offering, we have no MVS outstanding and Onex is no longer our controlling shareholder.

Termination of Services Agreement and Board Member Resignation

Our Services Agreement with Onex for the services of Mr. Tawfiq Popatia (an officer of Onex) as a director of our Board of Directors (Board) terminated automatically as of September 3, 2023. In accordance with the provisions of such agreement, we paid Onex approximately $9.2 million in cash on October 18, 2023 to settle Onex’ outstanding deferred share units. Mr. Popatia resigned from our Board on September 3, 2023.

Intention to Launch New Normal Course Issuer Bid (NCIB)

We intend to file a notice of intention with the Toronto Stock Exchange (TSX) to commence a new NCIB in Q4 2023, after our current NCIB expires in December 2023. If this notice is accepted by the TSX, we expect to be permitted to repurchase for cancellation, at our discretion during the 12 months following such acceptance, up to 10% of the “public float” (calculated in accordance with the rules of the TSX) of our issued and outstanding SVS. Purchases under the new NCIB, if accepted, will be conducted in the open market or as otherwise permitted, subject to applicable terms and limitations, and will be made through the facilities of the TSX and the New York Stock Exchange. We believe that a new NCIB is in the best interests of the Company.

Q3 2023 Webcast

Management will host its Q3 2023 results conference call on October 26, 2023 at 8:00 a.m. Eastern Daylight Time (EDT). The webcast can be accessed at www.celestica.com.