Celestica in ‘perfect storm’

The company employs about 6,000 people in Mexico at its Monterrey facility and an after-market location in Reynosa. The company didn’t provide a timeline for the cuts.

Celestica also said it would take a $30-million (U.S.) charge in the fourth quarter for a previously announced inventory writedown at the Monterrey plant — a new facility that had previously struggled to keep up with customer orders as it ramped up its workforce..

Celestica, which reports in U.S. dollars, said it expects the latest round of restructuring will result in between $60 million to $80 million in charges by the end of 2007. About $40 million of the cost was already posted in the fourth quarter and contributed to its loss..

Celestica shares tumbled more than 23 per cent, down $2.14 to close at $6.98 on the Toronto Stock Exchange. Earlier, they traded as low as $6.96 — a record since the shares began trading in mid-1998.

Celestica, which had been closing plants in the United States, Canada and Europe and cutting thousands of jobs in those high-cost areas, had been shifting work to the Mexican site within an 18-month window, which Muhlhauser blamed for much of the problem.

“We created the perfect storm for the company and this site by attempting to implement an accelerated transfer plan, which required the transfer of over 16 customers to Mexico,” he said.

But as the company began the process it was hit with operational difficulties that slowed down supply from the plant. Some customers became impatient and lost confidence in the company and decided to sever ties with the operations.

Problems deepened as a weaker market demand contributed to a backlog of material at the site.

Celestica declined to name any of the customers involved.

“The failure to deliver timely resolution of the issues and deliver the projected operational and financial results, quarter after quarter, have undermined our credibility and eroded shareholder value in the company,” he said.

“When we are at our best, we can perform with the very best in this industry and we can beat them,” Muhlhauser said. “When we are at our very worst, we obviously have the kinds of discussions that we are having here.”

Yet he later quashed one analyst’s suggestion that the company might look to sell itself. He said the company will instead will work to “fix” operations in Mexico.

“I don’t want to leave anybody with the impression that this entire company is broken,” he added, saying that parts of the company — particularly in Asia — are showing operating margins and financial performances above the industry average.

The company plans to shift at least six customers from the Mexico plant to operations in Asia by the end of the second quarter.

Two of Celestica’s most recent restructuring programs, one announced in 2004 and another the following year, which have run up a cumulative bill of about $340 million.

For the fourth quarter ended Dec. 31, the company reported a fourth-quarter net loss of US$60.8 million.

Revenue increased to $2.26 billion (U.S.) from a year earlier, up from $2.08 billion in the fourth quarter of 2005 when its net loss was $28.2 million.

The company expects first-quarter revenues will be substantially below analyst estimates. The period, which ends March 31, will see revenues in the range of $1.7 billion to $1.9 billion, and adjusted net loss per share to range from 15 to four cents, it predicted.

The estimate is well below the analyst consensus that initially put the quarter’s outlook at about $2.1 billion.

Muhlhauser said he expects the company will experience a ``hangover” effect on revenues in the first six months of this year.

Longtime chief financial officer Tony Puppi has also announced he intends to leave the company once a new CEO is found.

An investors report issued by RBC Capital Markets analyst Amit Daryanani maintained an “above average risk” rating for the company and a price target of $8 per share.

“We are maintaining our cautious stance towards Celestica and (the) electronic manufacturing service group and would recommend investors remain on the sidelines,” he wrote.

Merrill Lynch analyst Steven Fox said in a report that the restructuring plan is “not a very original solution given charges over the past two years.”

“We heard nothing on this morning’s call that makes us want to get immediately constructive on the shares,” Fox said, while maintaining a neutral rating.