Celestica comes alive: As sales and shares rise, CEO eyes acquisitions

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Celestica Inc. has been many things since going public 19 years ago.

The one-time IBM operation, which provides outsourced manufacturing services to electronics companies, was the jewel of the Onex Corp. empire in the 1990s. Then it became a symbol of excess during the dot-com bubble as its stock hit the clouds and its market capitalization topped $20-billion. Almost as quickly, Celestica turned into a pariah; its stock collapsed and revenues dwindled from a high of $10-billion (U.S.) in 2001 as the previously buoyant outsourcing market slowed.

Celestica posted eight years of heavy losses due to restructurings, writedowns and thousands of job cuts, and was targeted by shareholder lawsuits. "The industry as a whole destroyed a lot of value," said chief financial officer Darren Myers.

Now, under CEO Rob Mionis, Celestica is something it hasn't been for years: a growth story.

Since the 54-year-old American took over in August, 2015, Toronto-based Celestica has delivered six consecutive quarters of year-over-year revenue gains – following four years of quarterly declines. It is expected to notch a seventh this quarter, thanks to cyclical upswings in its core communications equipment business and diversification into other sectors as it makes such products as avionics boxes for jet builders, single-use devices for surgeons and renewable energy equipment.

These aren't the surging gains of hotshot startups or of the Celestica of yore. But analysts figure Celestica's 7-per-cent revenue increase last year, when its top line surpassed $6-billion (U.S.) for the first time since 2012, is a sign of more to come.

"It was a restructuring story for a very long time, [but] they now seem to be delivering sustained growth, said BMO Nesbitt Burns analyst Thanos Moschopoulos. The stock has appreciated by about 40 per cent in the past year and recently cracked $19 (Canadian) on the Toronto Stock Exchange – a level unseen since 2004. Celestica stock has recently traded at a discount to its peers (roughly 11 times forward earnings, compared with about 14.5 times for its peers), suggesting there's room to grow.

Furthermore, Mr. Mionis is gearing Celestica up to become an acquisition machine again. Under Onex's control (the buyout firm purchased Celestica from IBM in 1996 and took it public in 1998) Celestica spent more than $2-billion on 36 acquisitions in the first decade, but just $183-million (U.S.) on four deals since as it focused on controlling costs.

Last year the company, with 26,000 employees and facilities in 14 countries, posted adjusted operating earnings equal to 3.7 per cent of revenue, a 15-year high. Now "we intend to use our very strong balance sheet to … be more active in mergers and acquisitions going forward," Mr. Mionis said.

Celestica has been assembling a deal team under chief strategy officer Nicolas Pujet – an MIT-trained aeronautical and astronautical engineer and former McKinsey & Co. consultant hired from Level 3 Communications last year. After putting an end to stock buybacks in 2016, Celestica, which generates $100-million-plus in annual free cash flow, has the capacity to spend up to $800-million while keeping its leverage under 3.5 times enterprise value to earnings before interest, taxes, depreciation and amortization.

Celestica will target deals in what it calls the "advanced technology solutions" market, meaning sectors such as aerospace, health care and renewable energy where margins are higher, industries haven't done much outsourcing, and product cycles are longer than in consumer electronics. That category accounts for one-third of Celestica's revenue; the goal is to grow its share of the top and bottom line. "We like those markets better, and all our competitors" – including market leaders Flex Ltd., Jabil Circuit Inc. – "are of course moving into that space as well," chairman Bill Etherington said. "But there's huge opportunity."

Mr. Myers said the goal is to nudge up operating margins from the 3.5-to-4-per-cent range by about 1 percentage point. "That should be helpful for the stock's multiple over time," BMO's Mr. Moschopoulos said.

Mr. Mionis said Celestica is unlikely to make "a big bang" acquisition but rather deals valued in the $250-million range, "depending on what we see." One area likely to be targeted, he suggested, is aerospace and defence, where Mr. Mionis previously worked as a top executive, including a stint with Honeywell International Inc. "We're going to be very disciplined in our approach," he said. "The pipeline is starting to fill up, and we're starting to evaluate a number of targets." Mr. Myers said the firm could do a deal by year's end, but added: "We can afford to be patient."

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