Celestica: 3Q Revenue Leaning on Semiconductors, Health Tech Products

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Celestica Inc., a leader in design, manufacturing and supply chain solutions for the world's most innovative companies, announced financial results for the quarter ended September 30, 2020 (Q3 2020).

“In the third quarter, Celestica delivered sequential and year-over year revenue growth, as well as non-IFRS operating margin expansion,” said Rob Mionis, President and CEO, Celestica.

“Our strong operating performance while managing a dynamic market environment reflects the strength of our portfolio and the progress we have made in executing our strategy. Our global team will continue to adapt to the evolving needs of our customers across the markets we serve, and we remain committed to generating sustainable long-term value for our customers and shareholders.”

ATS Segment
ATS segment revenue decreased in Q3 2020 compared to Q3 2019, as growth in our HealthTech and capital equipment businesses, driven by new program ramps and continued demand strength in the semiconductor market, were more than offset by adverse COVID-19-related demand impacts, specifically in our commercial aerospace and industrial businesses, and in addition with respect to our A&D business, the impact of the Boeing 737 Max program halt. The increase in ATS segment margin in Q3 2020 compared to Q3 2019 was primarily due to improvements in our capital equipment business, driven by higher productivity and volume leverage, partly offset by reduced profit contribution from our A&D business.

Demand from our semiconductor and display capital equipment customers improved in Q3 2020 from Q3 2019, but is expected to level off as we end 2020 and enter 2021.

While demand in our defense business remained stable in Q3 2020, we continued to experience demand reductions in our commercial aerospace business, which adversely impacted our A&D business in Q3 2020. We expect adverse market conditions in the aviation industry related to COVID-19 to persist throughout 2021 and likely beyond. We will continue to take appropriate cost productivity actions to improve the overall performance of this business in response to the lower levels of revenue.

Adverse COVID-19-related demand impacts on our industrial business moderated in Q3 2020 compared to the second quarter of 2020 (Q2 2020), resulting in a gradual recovery of demand across our industrial customer base. Notwithstanding COVID-19 demand impacts, the performance of this business improved from Q3 2019 as a result of our cost reduction initiatives and the ramp of new programs.

Our HealthTech business benefited from new program ramps in Q3 2020. We continue to see strong demand for diagnostic and 'point of care' equipment, and anticipate further improvements in the demand for products used in elective surgeries in the first half of 2021.

CCS Segment
The increase in CCS segment revenue in Q3 2020 compared to Q3 2019 reflects strength in our Joint Design and Manufacturing (JDM) business, including increased demand from service providers, which more than offset revenue declines from planned disengagements associated with our CCS revenue portfolio review (CCS Review), including programs with Cisco Systems, Inc. (Cisco). We expect continued JDM strength, fueled by program wins and strong demand. CCS segment margin improved in Q3 2020 compared to Q3 2019, primarily due to favorable mix, including increased JDM programs, improved operating leverage, and the positive impact of our productivity initiatives. We anticipate CCS segment margin to remain strong, but moderate starting in the fourth quarter of 2020 (Q4 2020).

Our JDM revenue for the first three quarters of 2020 (YTD 2020) increased approximately 90% compared to the first three quarters of 2019 (YTD 2019) to approximately $600 million, which accounted for approximately 15% of total YTD 2020 revenue.

Our disengagement from programs with Cisco (Cisco Disengagement) is progressing as planned. Manufacturing with respect to these programs was largely completed in Q3 2020, and we continue to expect that the disengagement (including associated restructuring actions) will be largely complete by the end of 2020.

COVID-19 Update
Our Q3 2020 results reflect the continued benefits of our portfolio reshaping initiatives, our productivity actions in both of our segments, and our value-added solutions across a broad range of markets. Notwithstanding the foregoing, COVID-19 continued to have an adverse impact on our business in Q3 2020. In addition to demand volatility (described above), we had an approximate $16 million aggregate adverse revenue impact across our businesses in Q3 2020 resulting from COVID-19-related materials constraints. We also estimate that COVID-19-related costs incurred during Q3 2020 were approximately $8 million, comprised of 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 IT-related services to support our work-from-home arrangements (collectively, COVID-19 Costs). During Q3 2020, we qualified for and recognized an aggregate of $11 million of COVID-19-related government subsidies, credits and grants and customer recoveries (collectively, COVID Recoveries), which helped mitigate the adverse impact of COVID-19 on our business. See footnote (1) to the table below for further detail.

For further information on the Q3 2020 impact of COVID-19 on our business, and the anticipated and potential future impact of COVID-19 on our business, please see "Segment Updates" above, and our Management’s Discussion and Analysis of Financial Condition and Results of Operations, to be filed at www.sedar.com and furnished on Form 6-K at www.sec.gov.

Restructuring Update
We continue to anticipate that total restructuring costs in 2020 will be approximately $30 million. We recorded a total of $19.0 million in restructuring charges during the first three quarters of 2020, including $3.7 million recorded in Q3 2020. Our restructuring charges for Q3 2020 consisted primarily of actions to adjust our cost base to address reduced levels of demand in certain of our businesses, including continued actions to right-size our commercial aerospace facilities as described above. We intend to implement restructuring actions in Q4 2020 in connection with the completion of the Cisco Disengagement, and to further adjust the cost base of our businesses undergoing continued demand pressures.



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