After Celestica (CLS) reported 2008 fourth quarter earnings, headlines in financial publications focused on the $827 million loss the company experienced for the quarter.
Lodged deep in most of the reports was the reality that the company actually improved its earnings after adjustments from $0.16 in the fourth quarter of 2007 to $0.26 in 2008.
At the end of the fourth quarter, Celestica wrote down $850.5 million of impaired assets, mostly goodwill, which has no impact on cash or cash flow. Among the positive results from the write-down of goodwill is to improve the company’s Return on Equity.
Celestica is a worldwide leader in providing solutions and services to Original Equipment Manufacturers in the communications, computing, consumer electronics and aerospace and defense industries.
Based in Toronto, Celestica has 42,000 employees in manufacturing facilities around the globe. Manufacturing and servicing facilities are located in the United States, Brazil, Europe, China, Japan, Singapore and Indonesia.
With nearly $8 billion in sales, the company ranks among the leaders in the industry.
Among the company’s customers are major electronics manufacturers such as Cisco (CSCO), Dell (DELL), Hewlett-Packard (HPQ), IBM (IBM), Motorola (MOT), NEC Corporation (NEC) and Sun Micro Systems (JAVA).
Celestica emerged from the electronics industry shake-out which occurred at the turn of the century. Originally a unit of IBM responsible for the manufacturing of the computer box, Celestica was spun-off from IBM in the early 1990’s. Purchased by Canadian company Onex in 1996, Celestica became a public company in 1998.
The need to reduce fixed costs at the major electronics companies in the early 2000’s gave impetus to the outsourcing of the manufacturing of component parts.
In response to this need, Celestica became a primary provider of printed circuit boards and related products for networking systems, wireless telecommunication systems, flat screen televisions and other entertainment devices and the electronic components of aerospace and defense products.
Following the fourth quarter earnings announcement, CLS shares closed the day at $4.16. The 52 week high for the stock in mid-May was and $9.86 and the low was $3.24 in mid-November.
Investment Grade?
Celestica currently has $758 million in long term debt on its balance sheet. With a debt to equity ratio of 0.34, a current ratio of 2 and interest coverage of 3.8, the company’s balance sheet is well structured to allow the company to meet its obligations and pursue growth opportunities.
Celestica bonds due in 2013 carrying a coupon of 7.625 are rated B by S&P and B3 by Moody’s, both below investment grade. Currently priced at 86, the bonds yield 11.78% to the investor. The company’s bonds due in 2011 have a 7.875 coupon and are trading at 94.75 to yield 10.38%.
At these prices, Celestica bonds offer attractive yields and are an attractive buy for the non-investment grade portion of a bond portfolio.
