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Celestica, inc (NYSE:CLS)
Q2 2021 Earnings Call
Jul 27, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the Celestica Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Craig Oberg. Please go ahead.

Craig Oberg -- Vice President of Investor Relations & Corporate Development

Good morning and thank you for joining us on Celestica's second quarter 2021 Earnings Conference Call. On the call today are Rob Mionis President and Chief Executive Officer; and Mandeep Chawla Chief Financial Officer. As a reminder, during this call we will make forward-looking statements within the meanings of the US Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws. Such forward-looking statements are based on management's current expectations, forecast and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts or projections expressed in such statements. For identification and discussion of such factors and assumptions as well as further information concerning forward-looking statements, please refer to yesterday's press release including the cautionary note regarding forward-looking statements therein, our most recent Annual Report on Form 20-F and other public filings, which can be accessed at sec.gov and sedar.com.

We assume no obligation to update any forward-looking statement except as required by law. In addition, during this call, we will refer to various non-IFRS measures including operating earnings, operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A and adjusted effective tax rate. Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS measures whether or not specifically designated as such.

These non-IFRS measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS, or who report under U.S. GAAP and use non-GAAP financial measures to describe similar operating metrics. We refer you to yesterday's press release and our Q2 2021 earnings presentation, which are available at celestica.com under the Investor Relations tab. For more information about these and certain other non-IFRS financial measures including a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to U.S. dollars and per share information is based on diluted shares outstanding.

Let me now turn the call over to Rob.

Rob Mionis -- President & Chief Executive Officer

Thank you, Craig. Good morning everyone and thank you for joining us on today's conference call. Our strong performance in the second quarter is attributable to the execution of our multi-year transformation. It also reflects the stability and resilience of our global operations and our ability to operate under challenging conditions. Our second quarter revenue of $1.42 billion was at the high-end of our guidance range driven by another quarter of year-over-year double-digit growth in our hardware platform solutions or HPS business and double-digit growth in our ATS segment. Our non-IFRS adjusted EPS of $0.30 and non-IFRS operating margin of 3.9% both meaningfully exceeded the high end of our guidance range.

Our second quarter operating margin performance represented our 6th straight quarter of year-over-year operating margin improvement and was within our target range of 3.75% to 4.5%. Our strong Q2 performance and multi-year margin expansion efforts are result of the execution of our strategy, including portfolio shaping and driving operational excellence across the enterprise. On non-IFRS adjusted free cash flow came in at $31 million for the quarter were $52 million year-to-date, and we continue to target $100 million of free cash flow in 2021. Throughout the quarter, we continue to face operational challenges in the form of supply chain constraints and work forced contaminants and locations such as Malaysia due to the resurgence of COVID-19, but our teams operational agility and advanced planning tools are enabling us to effectively navigate this dynamic environment.

We believe that our portfolio is stronger than ever, with an improved margin profile and the fundamentals to drive long-term organic growth. We expect our operating margin to continue to expand in the coming quarters driven by our anticipation for higher HPS concentration in our CCS segment as well as volume leverage fueled by steady growth in our ATS segment. Despite being tempered by continued softness in our commercial aerospace business ATS segment revenue grew by 12% year-over-year in Q2 driven by another exceptionally strong quarter in our capital equipment business as well as return to growth in our industrial business. Our ATS segment reported its 5th consecutive quarter of sequential segment margin expansion remains on track to achieving segment margin within our 5% to 6% target range by the end of the year.

Within CCS, our non-Cisco portfolio experienced another quarter of year-over-year growth as both enterprise and communications end market revenues exceeded our expectations. The CCS segment continues to perform well with segment margin of 3.7% in the second quarter. With double-digit year-over-year growth, our HPS business recorded sales of more than $300 million in the second quarter. HPS grew 13% on a year-to-year basis and year-to-date HPS revenues of $501 million or up 24% compared to 2020. Demand for our hardware platform solutions continues to be robust and our current expectations are that revenue for HPS will exceed $1 billion for 2021. In recent quarters, we have begun to highlight the financial performance of a Lifecycle Solutions business, which combines the revenues of our HPS business and ATS segment.

As we noted during our previous quarterly conference calls our Lifecycle Solutions portfolio generates higher margins, presents greater barriers to entry for competitors, and offers a more robust growth profile compared to our traditional EMS portfolio. We are encouraged by the performance of our Lifecycle Solutions portfolio, which has exhibited double-digit revenue growth on a year-over-year and sequential basis.

Looking ahead, we are pleased to provide 3rd-quarter revenue guidance in the $1.4 billion to $1.5 billion range and non-IFRS operating margin guidance of 4% representing the midpoint of our revenue and adjusted EPS guidance ranges. Achievement of 4% operating margin would represent the highest quarterly operating margin at Celestica in the last 20 years. Additionally, we currently expect our performance in the 4th quarter to be at 3rd quarter levels, or better. I am pleased with the progress we have made in executing our strategy and transforming our business.

Year-over-year operating margin has been expanding for the last 6 quarters. Revenue from our Lifecycle Solutions business continues to grow as a percentage of overall revenue, and Celestica is currently on track to post year-over-year revenue growth on an absolute basis in the 4th quarter. Additionally, our bookings performance has been strong, driven by our engineering led approach and our efforts have resulted in a diversified portfolio with strong secular tailwinds.

Before I offer some additional detail on the outlook for each of our end markets and the overall business, I would like to turn the call over to Mandy, who will provide you with more color on our financial performance in the second quarter as well as more detail on our 3rd quarter guidance.

Mandeep Chawla -- Chief Financial Officer

Thank you, Rob and good morning everyone. Second quarter 2021 revenue came in at $1.42 billion at the high end of our guidance range. Revenue decreased 5% year-over-year and increased 15% sequentially. Our non-Cisco revenues grew 6% year-over-year and grew 15% sequentially. We delivered non-IFRS operating margin of 3.9%, by 40 basis points ahead of the midpoint of our guidance range driven by stronger-than-expected performance in both segments. Non-IFRS operating margin was up 50 basis points year-over-year and up 40 basis points sequentially. The year-over-year improvement was driven by improved operating leverage and ATS resulting from double-digit revenue growth, and improved CCS performance including higher HPS revenue concentration. The sequential improvement was due to higher volumes and favorable mix across several businesses as well as strong performance in our CCS business. Non-IFRS adjusted earnings per share were $0.30 above the high end of our guidance of $0.27 and up $0.05 year-over-year and up $0.08 sequentially. IFRS earnings per share were $0.21, up $.011 year-over-year and up $0.13 sequentially. ATS revenue was up 12% compared to a year ago, slightly below our expectations of a mid-teen percentage year-over-year increase. Sequentially, ATS revenue was up 6%.

The year-over-year revenue growth in ATS was driven by a recovery in demand and a return to growth in our industrial business and new program wins and market share gains in our capital equipment business. This was partly offset by continued softness in commercial aerospace. Sequential growth was driven by continuing strength in capital equipment, partly offset by health tech. CCS segment revenue was down 14% year-over-year, largely driven by the Cisco disengagement, partly offset by strong demand from service provider customers, including in our HPS business. Sequentially, CCS revenue was up 22% led by strong demand from service provider customers, strong demand in our HPS business as well as normal seasonality in our enterprise business. Revenue in our CCS portfolio from businesses other than Cisco increased by 2% year-over-year.

Communications revenue was down 7% year-over-year, less than our expectation of a low double-digit percentage decrease. The decline was largely due to the Cisco disengagement, partly offset by strong demand from service provider customers. Sequentially, communications revenue was up 20% percent reflecting strength with service providers. Enterprise revenue in the quarter was down 25% percent year-over-year, less than our expectation of a low '30s percentage decrease. Lower revenue were the result of program specific demand dynamics with several of our server customers. Sequentially, enterprise revenue was up 26% driven by normal seasonality and program specific strength with certain storage customers.

Our HPS business delivered its highest revenue quarter ever with sales of $302 million, up 13% year-over-year, led by consistent demand strength and new program ramps with service providers, due to continued data center growth. As Rob mentioned, our Lifecycle Solutions business, a combination of the revenue from our ATS and HPS businesses continued its robust growth trajectory. Lifecycle Solutions accounted for 60% of sales on a year-to-date basis compared to 51% in the first half of 2020. We continue to believe Lifecycle Solutions is the best representation of our diversified portfolio. Our top 10 customers represented 67% of revenue during the second quarter, down 1% year-over-year and up 2% sequentially. For the second quarter, one customer represented 10% or more our total revenue versus one in the same quarter last year and none in the prior period.

Turning to segment margins. ATS delivered a segment margin of 4.1% in the second quarter, up 100 basis points year-over-year and 10 basis points sequentially. This marks the fifth consecutive quarter of sequential ATS segment margin expansion. The year-over-year margin improvement was driven by double-digit percentage revenue growth in capital equipment and growth and health tech, which more than offset a soft commercial aerospace demand environment. The sequential improvement was due primarily to strong growth in capital equipment driving better operating leverage.

CCS segment margin of 3.7% came in above our target range of 2% to 3% and was up 10 basis points year-over-year and up 60 basis points sequentially. This represents the sixth consecutive quarter of year-to-year margin improvement in our CCS segment. The year-over-year margin improvement was primarily driven by favorable mix due to our portfolio reshaping activities and an increase in concentration of revenue from our HPS business and strong commercial recoveries. The sequential margin improvement was due to demand strength in HPS.

Moving on to some additional financial metrics. IFRS net earnings for the quarter were $26.3 million or $0.21 per share compared to net earnings of $13.3 million or $0.10 per share in Q2 2020, and net earnings of $10.5 million or $0.08 per share in the previous quarter. Adjusted gross margin of 8,4% was up 90 basis points compared to the same period last year and down 20 basis points sequentially.

The year-over-year improvement was driven by strength in HPS and capital equipment, partly offset by headwinds in A&D, while the sequential decline was largely due to higher variable compensation. Second quarter adjusted SG&A of $54.7 million was up $1.4 million year-over-year primarily due to investments in the business. Adjusted SG&A was up $1.1 million sequentially. Non-IFRS operating earnings were $55.0 million, up $4.2 million from the prior year period and up $11.7 million sequentially. Our non-IFRS adjusted effective tax rate for second quarter was 20% compared to 24% for the prior year period and 21% last quarter.

For the second quarter non-IFRS adjusted net earnings were $37.9 million compared to $31.7 million for the prior year period and $27.8 million in the first quarter. Non-IFRS adjusted earnings per share of $0.30 was up $0.05 year-over-year due to higher non-IFRS operating earnings and lower interest expense. Sequentially, non-IFRS adjusted earnings per share were up $0.08 driven by higher non-IFRS operating earnings. Second quarter non-IFRS adjusted ROIC of 13.7% was up 0.8% compared to the same quarter of last year and up 2% sequentially.

Moving on to working capital. Our inventory at the end of the quarter was $1.22 billion, up $71 million sequentially and up $19 million compared to the same period last year, as we continue to support growth in our HPS business. Inventory turns were 4.4 turns in the second quarter, up from 4.0 turns last quarter, but down from 4.9 turns in the prior year period. Capital expenditures for the second quarter were $10 million or just less than 1% of revenue.

Non-IFRS free cash flow with $31.2 million in the second quarter compared to $37.9 million for the same period last year, and up from $20.9 million in the prior quarter. This is now our 10th consecutive quarter of delivering positive non-IFRS free cash flow.

Cash cycle days in the second quarter were 71 days, up 11 days year-over-year and down 11 days sequentially. The sequential improvement of our cash cycle days reflects normal seasonality and our continuing efforts to improve working capital performance despite the well-known challenges in the supply chain environment. In the second quarter, we incurred a $3 million of restructuring charges or $0.02 per share to further adjust our cost base to better align with changing demand levels in several of our businesses and geographies.

Moving on to some additional key metrics. Our cash balance at the end of the second quarter was $467 million, up $31 million year-over-year and up $18 million sequentially. Combined with our $450 million revolver, which remains undrawn. We continue to have a very strong liquidity position of approximately $900 million in available funds. We continue to believe that our liquidity is sufficient to meet our current business needs. We ended the quarter with gross debt of $440 million, unchanged from the previous quarter, leaving us with a net cash position of $27 million.

Our second quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.4 turns, flat sequentially and an improvement of 0.3 turns from the same quarter last year. At the end of June 2000-21, we were compliant with all financial covenants under our credit agreement. During the quarter, we repurchased approximately 1.6 million shares at a cost of $13.4 million Since commencing our NCIB program last November, we have repurchased a total of 2 million shares at a cost of $18.7 million and we intend to deploy capital towards share repurchases in the third quarter of 2021. We ended the quarter with 126.8 million shares outstanding, a reduction of approximately 2% from the prior year period.

We remain committed to our previously stated capital allocation priorities. We are focused on generating positive free cash flow and balancing the paying down of our debt with maintaining optimal financial flexibility and dry powder to enable the acceleration of our strategy through disciplined M&A. We continue to target returning 50% of non-IFRS free cash flow to shareholders with the other 50% to be reinvested in our business over the long term. Given our strong levels of our share price relative to our view of our fundamentals. We will continue to opportunistically purchase shares for cancellation under our NCIB program. Our current NCIB plan expires in November of 2021 and has up to approximately 6.8 million shares remaining that are eligible for repurchase.

Now, turning to our guidance for the 3rd quarter of 2021. We are projecting 3rd quarter revenue to be in the range of $1.4 billion to $1.55 billion. We note that we have widened our typical guidance range for revenue this quarter from $100 million to $150 million to account for the potential impacts from a dynamic supply chain environment. At the midpoint of this range revenue would be up 4% sequentially and down 5% year-over-year. For our non-fiscal portfolio achievement of the midpoint of our guidance range would represent revenue growth of 6% year-over-year.

Third quarter non-IFRS adjusted earnings per share are expected to range from $0.30 to $0.36. At the midpoint of our revenue and adjusted EPS guidance ranges non-IFRS operating margin would be approximately 4.0%, an increase of 10 basis points over the same period last year and up 10 basis points sequentially. Non-IFRS adjusted SG&A expense for the 3rd quarter is expected to be in the range of $56 million to $58 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 20% excluding any impacts from taxable foreign exchange or unanticipated tax settlements.

Turning to our end market outlook for the 3rd quarter of 2021. In our ATS end market, we anticipate revenue to be up in the low double-digit percentage range year-over-year, driven by continued demand strengthen our capital equipment and health tech businesses and a continued recovery in industrial, partially offset by continuing demand softness in commercial aerospace as a result of COVID-19. In CCS, we anticipate our communications end market revenue to be down in the high single-digit percentage range year-over-year, driven by our disengagement from Cisco. The remainder of our communications portfolio is growing, driven by strength in demand from our service provider customers, as well as our HPS business.

In our enterprise end market, we anticipate revenue to decrease in the low 20s percentage range year-over-year due to market demand softness, particularly from server customers and a relatively strong comparative quarter last year. Our outlook Lifecycle Solutions continuing to account for a growing portion of our consolidated revenues as we continue to diversify our portfolio. It will serve as our long-term driver of operating margin improvement. We maintain our expectation for Lifecycle Solutions revenue to grow in the low double-digit percentage range in 2021.

I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.

Rob Mionis -- President & Chief Executive Officer

Thank you Mandeep. Our financial metrics are beginning to reflect the benefits of the critical decisions we made to improve the business over the last 24 months. We believe we have strong momentum and are opportunistic regarding our ability to capitalize on the opportunities that lie ahead. However, the road ahead does not come without its challenges. Material constraints are becoming more severe in the second half of 2021 and then certain geographies concerns are rising regarding the resurgence of COVID-19.

To the best of our ability, we have factored these dynamics into our outlook and feel confident that our talented team can effectively address any challenges ahead. Now turning to the outlook for our segments. In ATS, we remain on track to achieve our target of 10% revenue growth in 2021. We continue to strengthen capital equipment growing momentum in industrial and an expectation of a modest recovery in commercial aerospace as we ramp new wins in the second half of the year, we are on our way towards reaching our target segment margin range of 5% to 6% by the end of the year.

Our capital equipment business continues to experience very strong growth supported by demand tailwinds and market share gains. The demand environment in the semiconductor capital equipment market remains robust. As we have noted before, we believe that the factors driving this growth have an extended runway and are not short-term in nature. We expect these conditions to persist for the remainder of the current year and into 2022. In the display market, we believe that spending is shifting to subsequent periods as component shortages are delaying new program ramps and capacity expansion plans. We continue to anticipate capex spending growth to resume in the future periods supported by new OLED technology shifts and demand tailwind in key end markets, including mobile, TV, and IT applications.

We reiterate our expectation for our capital equipment business to exceed $700 million in revenue in 2021, which would represent 30% plus growth compared to 2020. In industrial, we are seeing the beginning of a demand recovery with double-digit growth during Q2 2021 compared to the prior-year period, driven by new wins, largely in energy storage and EV charging markets. As an example, we are excited by our recently announced win with Luminar where we will partner to produce its Irish slide our system. With engineering led wins like this and continuing demand strength across our industrial business, we expect year-over-year growth in industrial to continue into the second half of 2021.

In A&D while demand appears to have stabilized on a sequential basis headwinds in the commercial aerospace market persist and the market remains meaningfully softer than a year ago. While we expect demand in commercial aerospace market to remain depressed compared to pre-COVID levels into 2022, we do expect a modest recovery to materialize in the latter half of this year and should begin to see sequential improvement as new programs begin to ramp. In our health tech business, demand remains robust supported by new program ramps and COVID-19 related projects. Our outlook calls for continued year-over-year growth for the duration of 2021. In the second half, while we do anticipate a moderation and demand for some COVID-19 products, we expect growth in other programs such as surgical instruments.

Now turning to CCS. Our CCS segment continues to perform well. The strong performance is driven by our portfolio reshaping initiatives and the continued growth of our HPS business both in absolute terms and as a portion of our CCS segment revenues. We expect both of these factors to continue to support strong margins in our CCS segment into 2022. Although CCS revenues remained lower on a year-to-year basis, our non-Cisco CCS business is up nearly 8% year-to-date compared to the first half of 2020. Our hardware platform solutions business continues to deliver strong results with year-over-year growth of 20% primarily driven by robust demand from service providers in our communications end market. Our order book and general market outlook continue to be very positive and we reiterate our expectations for HPS to achieve double-digit percentage revenue growth for 2021.

In the communications end market, we expect market demand to remain strong at 2021, logic comprised by service provider customers. Growth of these customers has backlog our capacity from the Cisco disengagement. As noted, although we expect communications year-to-year revenues to be lower compared to 2020 as a result of the Cisco disengagement, we expect communications revenue growth to resume on an adjusted basis in the 4th quarter compared to the prior year period.

In our enterprise end market, the demand environment continues to be relatively fast notably from server customers. We expect that these market conditions will persist for at least the duration of the year. As we enter the second half of 2021. We are pleased that our transformational efforts are yielding results. Our momentum continues to build and we believe we are positioned where we need to be in order to achieve our strategic goals and financial targets. Our areas of focus for the balance of the year remain unchanged, return to absolute growth. Margin expansion, including ATS returning to its target margin range and executing a disciplined capital allocation strategy. As we look, 2022, we expect the market to remain dynamic. However, we believe that robust secular tailwinds, strong operational performance, and the ramping of new programs to bode well for Celestica. As a result, assuming that the severity of supply chain constraints expected for the remainder of 2021 do not worsen, we anticipate revenue to grow in 2022 compared to 2021, and are targeting to generate $6 million or more of revenue for 2022 with operating margin within our target range at 3.75% to 4.5%. We are also anticipating that adjusted EPS will expand by approximately 10% or more in 2022 compared to 2021.

Our entire team remains focused on executing our game plan and driving the evolution of our business while effectively navigating any challenges. The commitment, talent, and resiliency of our entire global team remains a driving force behind our success there. Our ability to consistently meet the challenges faced by our business and deliver on expectations and stills me with the utmost confidence and optimism for the immediate and long-term future of our company.

We look forward to updating you on our progress over the coming quarters, and with that I would now like to turn the call over to the operator for Q&A.

Questions and Answers:



Operator

Thank you. [Operator Instructions] Your first question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Please go ahead.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Good morning and congrats on the very strong quarter. Rob, historically, you haven't been as specific in terms of providing color on the subsequent year. And so just curious as to what more dedicated to that this time. Jeff a higher level of visibility perhaps given the supply constraints or customers giving you maybe longer lead times as a result of that or does that also speak maybe to your confidence on the sustainability of some of the macro trends like in capital equipment.

Rob Mionis -- President & Chief Executive Officer

Yeah, a little bit of both channels, and thanks for the recognition on a strong quarter. In much of our business because the supply chain constraints are so prevalent and the lead times have extended, we have several customers that are saying they're spending their order horizon investors who saying listen if you could build it we will take it. So that's giving us some increased confidence. And then just looking more broadly at our wins over the last 18 to 24 months in terms of what we've been able to book, gives us confidence. And then lastly, I would say, just the broad secular tailwinds that we're seeing in the majority of our markets, and I would even say even in A&D we're starting to see recovery starting to happen, gives us the confidence to do some foreshadowing on what we think 2022 coming.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And in terms of the supply constraints. It was $30 million impact on revenue this quarter. What are you assuming it's going to be the upcoming quarter. I think you commented that it seems to be getting worse rather than better.

Rob Mionis -- President & Chief Executive Officer

Yeah, it is certainly getting more severe. Just stepping back -- I think we got to jump on it. We saw this happening in the second half of last year, so we extended our lead times with our suppliers. We asked -- we're close to with our customers to make sure they open up their order books. So for the first half of this year, I think we were only modestly impacted. Going into the back half of the year, I think everyone else has caught up frankly. So it's going to get a little bit more severe. That being said, the demand that we're seeing is largely not perishable, in fact, the demand is coming in stronger than our guidance range. So if we're able to push through and solve some of these shortages, there's possibility for upside as well.

And lastly, I would say that within HPS we've a lot of supply chain resiliency into our design process, which has proven to be a benefit and being a design authority within HPS has given us some incremental leverage versus some of the EMS players. So at this stage of the game. I would say it would be -- we're starting off the quarter with a higher amount of revenue that gated by material, hence our larger revenue guidance range, but at the same time, we've got -- we got to beat on it in terms of working it down.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great, thanks a lot for that.

Rob Mionis -- President & Chief Executive Officer

Thanks.

Operator

Your next question comes from Ruplu Bhattacharya from Bank of America. Please go ahead.

Ruply Bhattacharya -- Bank of America -- Analyst

Thank you for taking my questions. The CCS segment saw pretty strong sequential margin improvement. I think of the prepared remarks also talked about some one-time disengagement, can you just help us bridge the sequential improvement from 3.1% to 3.7%.

Mandeep Chawla -- Chief Financial Officer

Hi Ruplu, Mandeep here. Yeah, so, I would say that overall the strong performance in CCS was in-line with our expectations, high concentration of HPS and just performed very well in the quarter. And then of course, revenues were up sequentially. In terms of the recoveries we're actually quite pleased by it. As you know, we went through among disengagement and along the way, there is a number of various items that need to be negotiated with our end customers. We were able to operationally execute very well and had a number of signed releases in the quarter where we very to essentially get those recoveries that we've been working towards for quite some time, but even as we go forward we continue to expect the CCS business is going to perform very well as ATS concentration continues to grow.

Ruply Bhattacharya -- Bank of America -- Analyst

Got it. Thanks for the clarification on that Mandeep. I wanted to ask on the guidance for fiscal 22. I think the margin guidance that would be within the 3.7% to 4.5% range, I just wanted to clarify that, even this quarter you are in that range. Are you saying that for the full year fiscal 2020 -- fiscal '22 you're going to be in that range or do you think that every quarter of the year you're going to be in the range.

Mandeep Chawla -- Chief Financial Officer

It will be probably a little bit early for us to give the specifics on the quarters because, of course, we're not giving guidance for the full year. But what I would say this, the performance that we had in the 3rd quarter were clearly seeing carry forward right now into the back half of the year and the strength that we are seeing in the second half is continuing into 2022. As you know, we do have a little bit of seasonality in our business and types Q1 is lower than when you look at the trailing quarters, but overall the fundamentals are continuing to strengthen. We do feel comfortable to be in the target margin range for the entire year and how each of the quarters play out. We'll give more color as we get closer to that.

Ruply Bhattacharya -- Bank of America -- Analyst

Thanks for that and just for my last question, I think you talked about the display market pushing out a bit. Do you expect that to happen in the first half of our next year or is there any -- any color on when that market [Indecipherable].

Craig Oberg -- Vice President of Investor Relations & Corporate Development

Hi Ruplu. No -- right now, I think we're seeing the majority of the ramping happening in '23 relative to '22. Reason being some of the chip shortages that are slowing down the introduction of new technologies. So the OEMs, the people buying the capex equipment actually flowing new product launches, and as a result of that, it's more regarding some of their capacity expansion plans. So, we're expecting the majority of the ramps actually been pushing right and we expect that to happen toward the end of '22 or into '23 at this stage again.

Ruply Bhattacharya -- Bank of America -- Analyst

Got it. Thanks for all the details and congrats on the quarter.

Craig Oberg -- Vice President of Investor Relations & Corporate Development

Thank you Ruplu.

Operator

Your next question comes from Todd Coupland from CIBC. Please go ahead.

Todd Coupland -- CIBC -- Analyst

Yes, good morning everyone. I also wanted to ask about 2022 6% above fax in terms of $6 billion versus consensus expectations. Between this quarter and last quarter, what sort of the biggest changes that you've seen in the market and if you could sort of rank order those as we think about 2022.

Rob Mionis -- President & Chief Executive Officer

Hey, Todd, you're thinking about -- I think the biggest change is our conviction in what we're seeing in capital equipment. The severity of the chip shortages, the spending strength that we see out of the end OEMs on adding capacity, the investments that people are making and will be making and the adoption of 3-nanometer nodes is all expected to accelerate and keep semiconductor capital equipment spending very robust. So that's giving us a lot of confidence moving forward. On top of that, we've been actually within capital equipment. We've been growing much faster than the market certainly this year, and looking at the wins that we've been able to clock up over the last 18 months we're also anticipating to grow faster than the market in next year. We've been gaining share in high level assembly and machining for new investments in robotics we've picked up some new customers. In display, we've been making some investments in new verticals, and frankly, being the largest and the most capable player out there relative to our peers, our customers are turning to us, especially in these times, because we've been able to meet their capacity.

Yeah, basically it's deliver on time and be able to ramp efficiently so that's giving us a lot of confidence. On top of that the strength that we're seeing in our HPS business in terms of pure data center growth is giving us a lot of confidence as well. And lastly just in some of the other segments. We're seeing increased outsourcing and health tech, we are seeing a recovery in our industrial markets and our defense markets are starting to pick up based on new program wins and we're seeing some good growth coming out of commercial aerospace again moving into the back half of the year and into next year is, has been picking up a little bit the MRO markets effect to turn. So it's a combination of a lot of different things.

Todd Coupland -- CIBC -- Analyst

Thank you for that. Just on the aerospace and defense. It sounds like we're being cautiously optimistic. Is that potentially a material swing factor as we go through 2022 currently. Could you just share what some of the upside items could be in that area. What should we watch for, in terms of, that actually coming through. Thank you.

Rob Mionis -- President & Chief Executive Officer

Yeah, in terms of 2022 A&D I wouldn't call it a material swing factor. We are counting on a gradual recovery of the A&D market. What we're seeing into the back half of the year, we're seeing a little bit of a pickup in defense, I'll say about, that's about 25% of the growth. The balance of the growth is coming out of commercial aerospace. It's being led by new programs, wins, and market recovery in single-aisle also and this is aviation. Some of the dual IO starting to pick up a little bit as well. What the analysts are saying the industry analysts regarding our commercial aerospace is an expecting full recovery before 2024, but it's more of a modest recovery, and I think we're in line with that modest recovery in terms of how we see our business [Indecipherable] business tracking.

Todd Coupland -- CIBC -- Analyst

Right. Just one last question on commercial aerospace. You had been on the 737 MAX program. Does that need to have a significant turnaround for you to achieve these goals or is it the single-aisle and defense that can still get you there regardless of what happens there. Thanks a lot.

Rob Mionis -- President & Chief Executive Officer

Yeah, it's the latter. Our exposure to 737 at this stage of the game from our percent of revenue is very low single digit. So it's just the broad market.

Todd Coupland -- CIBC -- Analyst

Thanks a lot.

Operator

Your next question comes from Robert Young of Canaccord Genuity. Please go ahead.

Robert Young -- Canaccord Genuity -- Analyst

Hi, good morning. Reiterated the expectations for the capital equipment business that I think some 100 million, but the display is pushed out. So the, -- I guess the semi capital businesses materially better than where you thought it was even a couple of months ago, and so I was wondering if you could confirm that, if there's any color around the magnitude of the improvement, and then if the display business comes back in the second half of 2022, what does that imply on the margin structure of the capital equipment business in those 2 businesses going strong.

Rob Mionis -- President & Chief Executive Officer

Hey, Rob. I'll start off and I'll let Mandeep finish up on that one. So yes, I think our views on the strength of the semiconductor capital equipment business has gotten more bullish as the year has gotten longer, and that's been bolstered by an uptick in our customers' forecast in the short to mid-term I would say and also been bolstered by some new wins that we have. Again, we're growing much faster than the market this year. We anticipate much to grow much faster than the market next year. So that's giving us a lot more -- more confidence.

In terms of the display market, it is pushing -- continues to push to the right. At the end fundamentals mainly talk about the margin profile, but the end fundamentals of that market are still intact in that when the spending does resume based on the availability of chips to support the new product launches. It's going to come in the form of increased IT spend. There is broad OLED adoption for PCs and monitors, automotive spending in terms of OLED displays in cars for high contrast and robustness is picking up obviously mobile phones. In terms of from the and new advanced smartphones and large size TVs, mini, micro LEDs, advanced Technology OLED all on the horizon. It's just a question of when these product launches will occur and back to that a little bit of time and that's when spend will happen.

And I'll turn it over to Mandeep to talk about the margin profile.

Mandeep Chawla -- Chief Financial Officer

Yeah, good morning. As Rob has mentioned, we are growing faster than the overall market right now. We grew over 30% last year. We're tracking towards growing 30% or more this year as well, and a lot of it is because of market share gains overall. [Indecipherable] is performing very, very well. From a margin perspective, we're operating at the high end of the target margin range and that's with display being at slightly depressed levels. Eventually, we do expect in semi more moderate, but is display in some of your both coming in very strong we do have the opportunity to perform above the target margin range. I think you're hitting on it, which is as we look forward, eventually the semi demand will normalize, but we have 2 areas of strength that will, we believe keep ETFs overall segment in a strong margin profile, one of course is display, which still needs to come online and then aerospace and defense, which we expect will be a multi-year recovery should also help over the couple of years.

Robert Young -- Canaccord Genuity -- Analyst

That's great. And then the HPS revenue [Indecipherable] you said over $1 billion in 2021, that is to me to be below the pace for this current quarter and the first half. So are you expecting maybe a moderation there and then I was trying to reconcile that with the comments around the demand from hyperscale and comms seems to be a big driver behind HPS now. How durable is that demand, how strong is that pipeline.

Mandeep Chawla -- Chief Financial Officer

Yes. So it's a great question, Rob, because HPS is just performing very, very well. We mentioned that the year-to-date revenue was around $500 million and the reason that we shared that we expected to be $1 billion or more is to basically confirm that our second half expectations are in line with the first half, if not more. So we continue to see very strong growth coming into the back half of the year. It also goes to one of the earlier questions in terms of why are we showing strength for the fixed million dollars in going into next year. As we've been dealing with the material constrained environment, we have been working with our customers to get longer order lead times and in some cases from [Indecipherable] and as Robert also mentioned, from a macro perspective, data center growth rates are very, very high and we believe that that's continuing into next year and all of that bodes very well for HPS.

Basically to say the second half is going to be as strong as the first half were stronger and that momentum should be [Indecipherable].

Robert Young -- Canaccord Genuity -- Analyst

You're bit -- you're just afraid that material constraints are going to have a bigger impact on these high growth programs is that, so that be a factor.

Mandeep Chawla -- Chief Financial Officer

Yeah. I mean, we've taken that into account in our guidance, and so you're hitting on it, which is, we believe that we have been able to account for what the challenges future contracts would be, but we have an order book that is higher than the guidance that we're providing. Rob touched on this briefly, but so far the impact from a mature contract environment has been basically our inability to deal with the drop in orders and upside. It actually hasn't had a material impact on revenue that we had in the quarter. So on the HPS side, if we're able to secure all of the materials that we want, we keep growing faster than what we're opening.

Robert Young -- Canaccord Genuity -- Analyst

Thanks a lot.

Operator

Your next question comes from Paul Steep with Scotia Capital. Please go ahead.

Paul Steep -- Scotia Capital -- Analyst

Could you talk just a little bit maybe a different way to think about the visibility into the $6 billion. How much of that would actually be sort of booked and secured today or maybe stated another way. What else needs to occur to sort of exceed the $6 billion range based on what you already have in hand.

Mandeep Chawla -- Chief Financial Officer

While I start and I think it's just, we've actually on the phone. Is that [Indecipherable] talking to you.

Paul Steep -- Scotia Capital -- Analyst

No, it's Paul.

Mandeep Chawla -- Chief Financial Officer

Sorry Paul. Paul, what I would say is that overall, the growth rate that we're expecting on Lifecycle Solution is 10% or more. We talked already of those growth rate that we're seeing on the HPS side and then the ATS fundamentals we're targeting 10% or more next year as well. So if we can achieve 10% growth rate in Lifecycle Solutions or more, we feel that we have a very good line of sight to the $6 billion. On the remaining parts of the CCS portfolio, we are targeting growth in key areas that are strategic for us and that could possibly present some upside opportunity as well.

Paul Steep -- Scotia Capital -- Analyst

Great. And then maybe just the other question related to that would be, how far through the sort of, let's call it, portfolio rationalization, are we. But I know you've discontinued a lot and there is always moving parts quarter to quarter, but how sort of happy are you with the overall state of the business, things seem to be definitely heading in the right direction, but I'm just wondering how much more is sort of left to be done and which areas do you think broadly.

Mandeep Chawla -- Chief Financial Officer

I'll start and I'll let Rob finish off, maybe, but from a revenue perspective, if you look the only tailwind right now in our numbers is from Cisco, that continued to impact us on a year-over-year growth basis. But when you look at the portfolio, excluding Cisco we're growing and our guidance in the third quarter indicated the same thing. When we look towards the fourth quarter, Cisco is essentially going to lapse by then. And so, we are targeting to show revenue growth on an absolute basis starting in the fourth quarter. And I'll let Rob talk about the rest of the portfolio.

Rob Mionis -- President & Chief Executive Officer

Yeah, hi, Paul. So with respect to the portfolio actions. As I mentioned before, portfolio management is an active part of our strategy. That being said, we are ranking number one and number two on close to 95% of our customer scorecard. I think we've proven that we're pretty disciplined. So we're not pursuing revenue for revenue sake. We make sure that the revenue aligns with our capabilities and our strategy. So, at times we might feel that it's better to step away, but that would be through a strategic lens. But right now I think we're happy with our portfolio, and I think we're growing in all the areas that we want to grow in. And just to pick up a little bit on your first question with respect to next year is $6 billion, our anticipation.

We just finished our strategic planning process, that we do, we do it formally once a year and we refresh it quarterly. So we went market by market, account by account, we went through the bookings, we went through our technology roadmap and taking all that into account and the micro and macro environment, we feel pretty good about our ability to flash to everyone here on the call that we plan on doing $6 billion or more next year. We plan on expanding our EPS and we expand, and we expect to stay within our target margin range for the full year.

Paul Steep -- Scotia Capital -- Analyst

Great, that's helpful. Last one from me, just maybe a broader market question, Rob. What are you seeing in terms of maybe contracting dynamics within A&D if we think about more specifically the capital equipment business. Any changes out there in terms of how your competitors are going to market or do we think we've sort of sustained nice healthy environment with strong demand? Thanks.

Rob Mionis -- President & Chief Executive Officer

Yeah. Yeah, well within capital equipment. The supply chain, the order visibility is certainly longer, given the ordering lead time. So we have much more robust flat plans with our customers. So that's certainly helpful. And within A&D, a lot of our growth right now is on the heels of new program wins, and it's also on the heels of just this broad market recovery, if you want to look at some leading indicators, you look at air traffic and the amount of the fleet that's actually parked, so as air traffic picks up and some of these parked aircraft start getting back in service and the OEM build rates pick up, we're expecting our order book to hook up. But the contracting process, I, it's pretty disciplined and we haven't seen a lot of dysfunctional behavior, I would add.

Paul Steep -- Scotia Capital -- Analyst

Perfect, thank you.

Operator

Your next question comes from Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good morning. I just wanted to ask a question on the production side of the equation, can you speak at a high level what was this drive that you took to mitigate some of the challenges in Malaysia this past quarter? And then also, to what degree can you move production between various facilities in [Indecipherable].

Mandeep Chawla -- Chief Financial Officer

Yeah, so in Malaysia, the team has been very adept at making sure that we understand the government restrictions. With respect to the material control orders in terms of where people could go, how many people work at different times. So, we've been pretty innovative with shift patterns and other things along the lines to minimize the impact to our customers and also impact the impact to our financial performance. We also have a pretty broad network. So if we're not able to fulfill work out of Malaysia, then we're able to potentially fill it out of other regions. And that's been helpful as we move forward as well, to answer your second question.

Rob Mionis -- President & Chief Executive Officer

Yeah, Paul, I'll just add that to-date when we've seen challenges in various countries. As you know we're in 14 countries around the world. And we do get impacted by short term closures, we very quickly are deemed up to this point to be an essential service and so while we need to work with the local authorities to get proper documentation in place, we normally, and as we saw in the case of Malaysia are able to keep the factories running, very soon after.

And a bigger picture question in terms of production, just in regards to 2022. To what extent is your outlook constrained by production capacity, or maybe another way to ask it is, at what point in revenue annual revenue do you need to expand capacity, either bring more facilities on or add additional lines at those facilities? How do we think about CapEx going into 2022 and beyond?

Yeah. For the most part, we have ample capacity. There are, I wouldn't say any of the investments that we need to make are going to support 2022. But looking at a long-range plan, we probably need to make some investments on building out some additional North American capacity and those are some of the things that we're looking into right now. Some of it might be in Mexico. Some of it might be in other areas as we enter into new lines of business.

Mandeep Chawla -- Chief Financial Officer

Yeah. And just to build on Rob's answer. As he mentioned, we've just gone through a very detailed strategic planning process, which includes understanding the investments that we need to make to support the order book that we have. And we feel that for the large part we have sufficient utilization across the factories to support a pretty robust revenue level of growth.

On the investments that we're making in the US. These are really on the back of customer orders and customer requests, when we're investing green dollars in the US for facility expansion, as an example, we have an order book that follows behind it. And then in terms of just overall CapEx, as we look forward, we continue to think that the 1.5% to 2% of revenue range will be sufficient. We don't really need to build out a lot more capacity in order to support the revenue.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay, thank you.

Rob Mionis -- President & Chief Executive Officer

One of the things, just one other thing to add and later on this week we are having a grand opening in our New Hope facility in Minnesota, that's our ITAR facility to support increased defense work. So looking forward to seeing our brand new facility and meeting some of our customers there. And not only is it defense side, but it's also supporting some of our health tech business as well. And we expanded that facility up from 50,000 ft to 100,000 ft from where we were to where we are now.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay, great. Thanks a lot, [Indecipherable].

Operator

Your next question comes from Jim Suva of Citigroup. Please go ahead.

Jim Suva -- Citigroup -- Analyst

Thank you. And it's very encouraging to hear a company like Celestica talk about 2022. Behind that, can you let us know. Is it, you have like contracts that give you more confidence or the life cycle business is just much stronger, or was it you just want to send a message to people out there? It's just kind of interesting to see that you're, you have, so much conviction, which is quite positive to talk about 2022, when we still have six months left in this year.

Mandeep Chawla -- Chief Financial Officer

Hi, Jim. Yeah, we do have a lot of conviction as we move into, into 2022. As I mentioned, when you step back, we've really been working very hard on transforming our business and we think we're through the knothole, if you will. We're really pleased with the growth of our HPS portfolio. We're really pleased with the investments that we've made in our engineering capability to drive improved margin in across, our ATS segment. And going through our strategic planning process, going market by market, account by account, we thought that was the right time in our transformation, as we went from transformation to optimization, and now we are going from optimization to growth, to kind of let our investors know that we feel really good as we move into 2022. And to kind of set some guardrails of where we are targeting our business to be in terms of revenue and margin and earnings expansion. We've been getting

Rob Mionis -- President & Chief Executive Officer

I guess a little bit of top headline news, headwinds from the fiscal disengagement and frankly when you step back from it all, we have emerged a much stronger company and we just want to let our investors know that we feel really good about where we have been and where we're going.

Jim Suva -- Citigroup -- Analyst

Great, thank you so much for the additional commentary and congratulations.

Rob Mionis -- President & Chief Executive Officer

Thank you, Jim.

Operator

Your next question comes from Daniel Chan of TD Securities. Please go ahead.

Daniel Chan -- TD Securities -- Analyst

Hi, good morning. There some comments in the industry of the chip shortage lasting even longer than expected. Do you think that potentially extends to semicap strength you're seeing?

Rob Mionis -- President & Chief Executive Officer

Repeat the second part of that, I missed your -- I got the first part in terms of extending but what was the second part of the sentence, Dan.

Daniel Chan -- TD Securities -- Analyst

Yeah. Do you think that potentially extends to semi-cap strength you're seeing.

Rob Mionis -- President & Chief Executive Officer

Yeah, there is different views on how long the chip shortage last. We heard from the Intel CEO, not so long ago, it should [Indecipherable] well into -- to the end of '23, I think he mentioned. My crystal ball is a little murky right now. I do think, the chip shortage probably will last certainly to the end of this year into mid next year. And as it gets into CapEx spending. I think the peak of CapEx spending as we see it right now. Might be in '22. But then, frankly, as you look into '23, '24, '25. Some of the adoption of the advanced nodes 3 nanometer should stabilize it. So I don't think is going to be again -- my words, I don't think it's going to be a sharp decline. I do think we have very strong secular tailwinds for years to come in this space.

We have been and we are anticipating to grow faster than the market.

Mandeep Chawla -- Chief Financial Officer

Yes, Dan just to build on it, which is -- you know while the very strong growth that we're seeing in semiconductor is maybe accelerated a little bit because of the mature environment, the industry itself has been growing now since 2019. And so even without extreme environment, we continue to see various good long-term trend happening in the capital equipment space for the things that Rob is talking about the applications that semiconductors is supporting are increasing and becoming more diverse than cycles before.

Daniel Chan -- TD Securities -- Analyst

Great, thank you.

Operator

Your next question comes from Kurt Swartz of Stifel. Please go ahead.

Kurt Swartz -- Stifel -- Analyst

Hi, good morning. On the supply side, hoping you can just maybe discuss in a bit more detail which component areas you're seeing as most constrained right now and whether there's been any particular areas that have significantly sort of pushed out from a lead time perspective over the past 3 months. And then can you also detail any pricing pressure you may be seeing and the extent to which you are able to pass on those elevated cost to customers.

Rob Mionis -- President & Chief Executive Officer

Sure. So I think the most constrained would be semicap, semiconductors, I should say, excuse me. semiconductor lead times are about 31 weeks right now, which frankly is about a 100% higher than normal levels. Several semi suppliers are asking for order coverage through the end of 2022. We are seeing wafer fabs above max capacity at 95%. Right behind it, we're actually seeing passives becoming more constrains, passive commodities have seen about a 30% increase in lead times over the last 6 months, whether its MLCCs, or resistors, or capacitors. We expect the lead times to further increase as in the back half of this year, we might even get back into allocation [Indecipherable], time will tell.

And lastly, to your point, Kurt. Material pricing has been on the rise. But I would say, for the most part, the majority of that has been being passed on through the entire value chain.

Kurt Swartz -- Stifel -- Analyst

Understood. And then maybe just on the working capital and cash flow side, how should we be thinking about cadence through the balance of the year and into fiscal '22, given some of the dynamics you've discussed?

Mandeep Chawla -- Chief Financial Officer

Yes, Kurt. We're pleased with the cash generation that we've already been able to have, about $52 million in the first half of the year. We're continuing to target $100 million for the full-year of 2021. And as we look into 2022, we're targeting $100 million more of free cash flows. We're pleased with the performance that we've had on the working capital side. Despite the very challenging materials environment. We generated positive free cash flow for the last two quarters and so we're expecting that to continue as well. And then just in terms of the balance sheet that goes with that. With our leverage at 1.4 times, the balance sheet is very healthy right now, and it gives us an opportunity to really continue to invest in the business but giving money back to the shareholders as well. And so we've been buying so far in our share buyback program. We're buying so far this quarter and we will continue to be opportunistic on deploying that cash.

Kurt Swartz -- Stifel -- Analyst

Great, thank you very much.

Operator

If there are no further questions at this time, I would now like to hand the conference back for any closing remarks. Thank you.

Rob Mionis -- President & Chief Executive Officer

Thank you. Overall, I'm pleased with our performance for the first half of 2021. Our efforts to diversify our portfolio are yielding results with Lifecycle Solutions representing 60% of the company's revenue, up 9% from a year ago. And in Q2, the revenue of the company's non-Cisco business was 6% year-over-year. And in the fourth quarter, we are currently on track to post year-over-year revenue growth on an absolute basis. Additionally, our operating margins continue to expand in Q2 and we posted our sixth sequential quarter of year-over-year non-IFRS margin expansion.

As we move into 2022, we are targeting to generate $6 billion or more of revenue. With operating margin within our target margin range of 3.75% to 4.5%. We are also currently anticipating that adjusted EPS will expand by approximately 10% or more in '22 compared to '21. We are excited about our efforts to transform our business are yielding results, I'd like to thank our global team for remaining vigilant and keeping themselves and each other safe and thank you for joining today's call. I look forward to updating you as we progress throughout the year.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Craig Oberg -- Vice President of Investor Relations & Corporate Development

Rob Mionis -- President & Chief Executive Officer

Mandeep Chawla -- Chief Financial Officer

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Ruply Bhattacharya -- Bank of America -- Analyst

Todd Coupland -- CIBC -- Analyst

Robert Young -- Canaccord Genuity -- Analyst

Paul Steep -- Scotia Capital -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Jim Suva -- Citigroup -- Analyst

Daniel Chan -- TD Securities -- Analyst

Kurt Swartz -- Stifel -- Analyst

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