Celestica Inc

TSX:CLS

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Celestica Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Paul Carpino, Vice President of Investor Relations. Paul, you may begin.

[Paul Carpino, Vice President of Investor Relations]

Good afternoon, and thank you for joining us on Celestica's Third Quarter 2018 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 U.S. Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws, including those related to our future growth trends in the EMS industry generally and in relation to our business; our anticipated financial and/or operational results and our anticipated non-IFRS adjusted annual effective tax rate; our targets, priorities, guidance, plans and initiatives; the sale of our Toronto headquarters; our intention to launch an NCIB; the timing, amounts and benefits anticipated from our cost-efficiency initiatives; the anticipated impact of our comprehensive review of our CCS business; the expected timing of our anticipated acquisition of Impakt; and anticipated restructuring actions in capital expenditures. Such forward-looking statements are based on management's current expectations, forecasts 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 the material assumptions on which such forward-looking statements are based, as well as further information concerning financial guidance, please refer to the company's various public filings. These include our most recent MD&A and annual report on Form 20-F filed with and in reports on Form 6-K furnished to the U.S. Securities and Exchange Commission and as applicable to Canadian securities administrators, including the Risk Factors sections thereof. Please also refer to our cautionary statements regarding forward-looking information in such filings and in today's press release. Our public filings can be accessed at sec.gov and sedar.com. We assume no obligation to update any forward-looking statement except as required by applicable law.In addition, during this call, we will refer to certain non-IFRS measures, including operating margin; operating earnings; gross debt to non-IFRS adjusted EBITDA leverage ratio; adjusted net earnings and earnings per share; free cash flow; adjusted ROIC; adjusted SG&A expense; and adjusted effective tax rate. These non-IFRS measures do not have any standardized meaning 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 measures to describe similar operating metrics. We refer you today to today's press release and our Q3 2018 earnings presentation, which are available at celestica.com under the Investor Relations tab for more information about these and other non-IFRS measures, including a reconciliation of historical non-IFRS measures to the most directly comparable IFRS measures from our financial statements. We do not provide reconciliations or forward-looking non-IFRS financial measures as we are unable to provide a meaningful or accurate calculation or estimation of reconciling items, and the information is not available without unreasonable effort.Unless otherwise specified, all references to dollars on this call are to U.S. dollars.Let me now turn the call over to Rob.

[Robert A. Mionis, President, CEO & Director]

Thanks, Paul, and good afternoon. Celestica delivered strong revenue growth and continued consolidated margin expansion in Q3. Mandeep will provide more details on the quarter, but let me highlight a few items. First, we were very encouraged by the improvements made in our CCS segment, which, for the second straight quarter, has delivered solid revenue growth and has moved towards the higher end of our target CCS margin range. As we have highlighted throughout our transformational journey, we believe a strong and focused CCS segment is essential to delivering on our strategic initiatives, and we continue to make progress in this regard.Second, we like how the diversification and strength within CCS helped offset some of the pressure we saw in our semiconductor capital equipment business. CCS revenue and segment margin have steadily recovered since the beginning of the year, and we are encouraged by the results of our investments, including in JDM, which is having another year of double-digit revenue growth.Third, the integration of Atrenne is substantially complete and meeting our objectives. With Atrenne, we were able to acquire and successfully integrate our business with a proven operational track record, and we are looking forward to the integration of Impakt later this year.And finally, I am pleased with continued consolidated non-IFRS operating margin expansion this quarter and with our Q4 guidance, where we are targeting to report additional improvement.The continued progression in our margin initiatives is key to supporting our recently increased and accelerated non-IFRS target operating margin range at 3.75% to 4.5% over the next 12 to 18 months.As previously highlighted, there are 3 main components in these initiatives: First, anticipated benefits from our $50 million to $75 million restructuring program, which is scheduled to run until May 2019; second, the ongoing expansion of our ATS portfolio, which is growing organically as well as strategically aligned acquisitions, such as Atrenne and recently announced Impakt; and third, the continuation of our CCS portfolio review, where we are targeting to better align our program investments in order to achieve our strategic and financial priorities.While the first 2 items are clear in terms of what we expect, let me provide more transparency on our CCS review. As part of our CCS review, we are making thoughtful and strategically aligned decisions regarding the capital and resources being deployed in this $4 billion-plus business. The investments in our CCS segment for our customers are meaningful as we provide significant manufacturing supply chain and JDM solutions throughout our global manufacturing network, invest hundreds of millions of dollars in working capital to support our customers' revenue and enable tens of thousands of talented employees who are deeply committed to executing on our customers' requirements.Clearly, with this level of investment, it is important for us to continually adapt our approach to this market in order to best serve our customers, shareholders and our employees. Across all of our business and within CCS, we have strong, longstanding relationships with many industry leaders. We have earned their trust. We have delivered cost-effective manufacturing and supply chain solutions for decades, and we believe we have helped them deliver on their promises to their customers.However, as the hardware industry has changed over time some of the economics of this business. As we execute on this review, we anticipate our CCS revenue will be down in 2019 compared to 2018, yet we anticipate this to be a value-creating exercise intended to improve CCS segment margins and the least working capital.While we are not providing 2019 guidance, we intend to action approximately $500 million of current CCS annual revenue over the next 12 to 18 months, with the intended benefit of expanding CCS margins. While executing on this program, overall CCS revenue is likely to be lower depending on market demand, new programs and other factors affecting our base CCS business. Hopefully, by providing the size of our review, you will have a better context in terms of what we are trying to accomplish. Importantly, with annual CCS revenues in excess of $4 billion, the directional guidepost provided also highlights the fact that we are not exiting the CCS business. To the contrary, we continue to bid on and win new programs in CCS that are better aligned to our strategy. Our JDM business is a great example of this, where we have a healthy pipeline of new opportunities, and revenue from this business continues to grow at double digits. There are also new program wins in our traditional EMS business, where we are partners to some of the world's leading OEMs and cloud providers. Additionally, as part of our review of the CCS portfolio, we are pleased that some customers are choosing to work with us on improved commercial terms that reflect the major investments we are committing to their programs.As we execute our CCS review over the next 12 to 18 months, we do not intend to update specific customer revenue or programs, but we will provide general context on our progress when appropriate. Additionally, you should assume that any anticipated impact from these programs will be factored into the quarterly guidance we provide.By reducing less strategically aligned revenue, we are targeting to expand non-IFRS operating margins and grow overall EPS, while redeploying working capital. These improvements are examples of what we have been working towards as we progress through our transformational journey, which we started 3 years ago, and I believe our progress to date is encouraging.I want to congratulate our employees for their successful execution of our strategy and for their ongoing commitment to provide the best solutions to our customers. We are also looking forward to welcoming the Impakt team later this year when our transaction closes.Let me now turn the call over to Mandeep to provide some additional details on the quarter.

[Mandeep Chawla, Chief Financial Officer]

Thank you, Rob, and good afternoon, everyone. Celestica reported strong revenue of $1.71 billion, an increase of 12% year-over-year, and exceeded the midpoint of our revenue guidance range. Our non-IFRS operating margin was 3.3%, up 20 basis points from the second quarter and in line with the midpoint of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter. Adjusted earnings per share were $0.26, at the low end of our guidance range. We had a $0.03 per share negative tax impact arising from taxable foreign exchange, primarily from the weakening Chinese renminbi relative to the U.S. dollar as well as an increased proportion of profits earned in higher tax rate jurisdictions.In ATS, we saw year-over-year revenue growth of 17% driven by new program revenue in aerospace and defense, including contributions from our recent acquisition of Atrenne and demand strength in industrial. Some of this growth was offset by demand weakness in capital equipment reflecting the well-documented cyclical moderation currently being experienced in the semiconductor capital equipment component of this business. For the third quarter of 2018, ATS segment income was $25.5 million and ATS margin was 4.6%, down 50 basis points from Q2 and slightly below our target ATS segment margin range of 5% to 6%. This decline was primarily driven by lower utilization in our capital equipment business.Our CCS revenue was strong in the third quarter led by better demand in both the communications and enterprise end markets, including JDM. Overall, CCS revenue was up 9% year-over-year and up 1% sequentially. CCS segment income was $30.9 million, translating to a margin of 2.7%, a solid 50 basis point increase from Q2 resulting from improved mix and operational performance. CCS segment margin in the third quarter was also up 100 basis points from the first quarter of this year, operating within our targeted 2% to 3% margin range for this segment. The margin improvement has been driven by better mix and benefits from our restructuring and productivity efforts.Within our CCS business, the communications end market represented 43% of our consolidated revenue in the third quarter. Communications revenue was up 7% year-over-year and 3% sequentially. This was driven by strong demand and new programs, including in JDM, offsetting some demand softness from legacy programs.Revenue from our enterprise end market represented 24% of consolidated revenue in the third quarter. In our enterprise end market, revenue increased 13% on a year-over-year basis driven by strong program demand in storage, including in JDM. Our top 10 customers represented 71% of revenue for the third quarter, unchanged from the second quarter of 2018 and the third quarter of 2017. For the third quarter, we had 2 customers individually contributing greater than 10% of total revenue.Moving to some of the other financial highlights for the quarter. IFRS net earnings for the quarter were $8.6 million or $0.06 per share compared to $34.8 million or $0.24 per share in the third quarter of 2017. Lower year-over-year IFRS net earnings were driven by higher restructuring costs, Toronto transition costs and acquisition-related costs as well as increased tax expense.Restructuring charges related to our cost efficiency initiatives were $13.3 million this quarter. This brings the total program spend to date to $37.0 million. This enterprise-wide cost efficiency program will run through mid-2019, and we anticipate the total cost of this program to range between $50 million to $75 million.Adjusted gross margin of 6.7% was up 30 basis sequentially, primarily due to better CCS performance. Our adjusted SG&A at $50.0 million was up approximately $5 million from the same period last year, primarily driven by expenses related to Atrenne. As a percentage of revenue, adjusted SG&A was 2.9%, relatively unchanged from last year.Non-IFRS operating earnings were $56.4 million, up $3.3 million sequentially and up slightly from last year.Our adjusted tax rate -- effective tax rate for the third quarter was 27%, driven by negative tax impacts from foreign currency and the increased proportion of profit in higher tax rate jurisdictions. Our fourth quarter tax rate is expected to be back in line with our annual guidance range of 17% to 19%. Adjusted net earnings for the third quarter were $36.0 million. Adjusted earnings per share of $0.26 represents a decline of $0.05 year-over-year. Adjusted ROIC of 16.2% was up 20 basis points sequentially and down approximately 290 basis points year-over-year, primarily affected by higher working capital.Our inventory at the end of September was $1.1 billion, an increase of $56 million from the second quarter. Inventory turns for the third quarter were 6.2, down 0.4 turns from last quarter and down 1.1 turns from the third quarter of 2017. The higher inventory levels were driven in part to support fourth quarter revenue growth as well as ongoing material constraints.Capital expenditures for the third quarter were $21 million or 1.2% of revenue. This lower level of spend was driven by timing of certain investments, and we expect CapEx for the year to end up at the lower end of our range of 1.5% to 2%.Cash flow from operating activities for the quarter were $55 million compared to cash used in operations of $8 million in the prior year period. Free cash flow was $25 million in Q3 compared to negative free cash flow of $44 million for the same period last year, driven primarily by improved working capital performance compared to last year. Cash cycle days in the third quarter of 54 days increased 1 day compared to the second quarter of this year.While the inventory environment continues to limit free cash flow, we will be receiving proceeds at the closing from the sale of our Toronto headquarters, which is currently expected by the end of the first quarter of 2019 or sooner. As mentioned earlier this month, we expect to receive the full payment of remaining proceeds of approximately CAD 122 million upon closing.Moving on to our balance sheet. Celestica continues to maintain a strong balance sheet. Our cash balance at quarter-end was $458 million, up $56 million sequentially and down $58 million year-over-year. As previously highlighted, we expect to finance the $329 million acquisition of Impakt through a combination of an extended term loan, the use of cash on hand and the company's revolver. The acquisition is expected to close late this quarter. Our balance sheet remains strong even post the acquisition with an expected gross debt to non-IFRS adjusted EBITDA leverage ratio of approximately 2x, allowing us to continue a balanced approach to capital allocation.This quarter, we repurchased 1.9 million shares for $23 million as part of our NCIB program. Since commencing this program in November of 2017, we repurchased 7.4 million shares at a cost of $82 million, and we remain committed to completing our current stock buyback program this quarter. In the fourth quarter of 2018, we expect to file with the Toronto Stock Exchange a Notice of Intention to commence a new NCIB. Subject to acceptance by the TSX, we expect to be permitted to repurchase for cancellation up to 10% of the public float of our subordinate voting shares over the 12 months following the acceptance.Now turning to our guidance for the fourth quarter of 2018. We are projecting fourth quarter revenue to be in the range of $1.70 billion to $1.80 billion. At the midpoint of this range, revenue would reflect an 11% increase over the fourth quarter of 2017. Fourth quarter non-IFRS adjusted net earnings are expected to range between $0.27 to $0.33 per share.At the midpoint of our revenue and EPS guidance ranges, non-IFRS operating margin would be approximately 3.5% and would improve sequentially by 20 basis points from the third quarter. We are continuing to execute on our margin expansion initiatives, including recently raising our consolidated non-IFRS margin target range to reflect the progress we are making across the business and in executing on our strategic initiatives. Non-IFRS adjusted SG&A expense for the fourth quarter is projected to be in the range of $49 million to $51 million. Finally, as mentioned, we estimate our annual non-IFRS adjusted effective tax rate for the fourth quarter to be in the range of 17% to 19%, excluding any impact from taxable foreign exchange.Looking at our end market outlook for the fourth quarter. In ATS, we are anticipating revenue to be up in the low double-digit percentage range year-over-year. In our communications end market, we anticipate revenue to continue to be strong and increase in the mid-teens range year-over-year. In our enterprise end market, we anticipate revenue to be up in the mid-single-digit range year-over-year.Overall, we're pleased with our progress to date and expect to end the year on solid footing, as we accelerate our transformation in 2019.I'd now like to turn the call over to the operator to begin our Q&A.

[Operator]

[Operator Instructions] Your first question comes from Robert Young with Canaccord Genuity.

[Robert Young, Director]

First question for me would be a clarification on the $500 million of CCS segment revenue you're looking at reducing by. You didn't give a range there. So is that a maximum figure or -- can you give maybe some context around that number? And I was also interested in the -- clarifying, you said that you expect single-digit percent reduction in total revenue. I assume that's 2019. And does that include any contribution from the acquisition of Impakt?

[Robert A. Mionis, President, CEO & Director]

Hey, Rob, this is Rob. So starting with the portfolio review, at this stage, we've done an exhaustive review of our $4.4 billion CCS portfolio. And based on that, as we said in the -- earlier, the $500 million of revenue is something we're looking to take out over the next 12 to 18 months. Again, our focus is on really improving the overall economics of the business while continuing to provide great support to our customers. From an overall company perspective, we anticipate that our revenues will be down in the single digit year-over-year next year, and that is while we expand margins, while we expand earnings and while we generate cash. However, as I mentioned on the call, this is somewhat variable because our base business might grow or contract just based on the broad market demand. But broadly speaking, we view this as a value-creating activity, and I'll turn it over to Mandeep for the second part.

[Mandeep Chawla, Chief Financial Officer]

Rob, I think the answer -- the question was answered. So from a 2019 perspective, I would think about the revenue as being down in the single digit on a consolidated basis, including Impakt and growth from ATS.

[Robert Young, Director]

Okay. So it does include Impakt?

[Mandeep Chawla, Chief Financial Officer]

Yes.

[Robert Young, Director]

Okay. And the second question, you said that you're bidding on and winning new business. And so I was wondering if you could talk about the dynamic between the rationalization of CCS, but at the same time winning new businesses, is that -- are you meeting any new opportunities or are you unable to win some new opportunities because of this? Is that changing the dynamic with some customers? If you could talk about the impact on the pipeline.

[Robert A. Mionis, President, CEO & Director]

Yes. Overall, we've had a very strong bookings in both segments, specifically in CCS. We're looking for work that plays to our strength, specifically in JDM. We're having a great year in JDM. Our growth should be north of 20%. And we're also continuing to win work in core EMS as well that plays to our strength of higher complexity, higher reliability. The portfolio reviews are really program-specific and largely on the work that has kind of less calories, if you will.

[Mandeep Chawla, Chief Financial Officer]

Robert, the only thing I'd add to that as well is, is that the $500 million is the net number, if you will, of revenue that will come out. The portfolio review has now been underway for some time. We've been making a lot of good progress in our conversations with a number of customers. We have been successful in renegotiating commercial terms to our benefit and, along with that, collaborating with our customers and generating new wins. When we've identified the $500 million, those are programs where we just agreed together that the investment that we're making and return that's going to come just don't really match up together.

[Robert Young, Director]

Okay. If I can ask one last one, just an update on the semiconductor equipment business. I noticed you called it the capital equipment business. Are you changing the name of it to include Impakt? And you said that you expected a pause last quarter. Are you expecting that to change? I'll pass the line.

[Robert A. Mionis, President, CEO & Director]

Yes. So with the -- with Impakt coming online, we view the entire portfolio as the capital equipment business. So it has an industrial sector, has a power sector, has a semiconductor capital equipment business and has a display business. And that overall is our capital equipment business. With respect to semi cap, it has been a good business for us even through the cycle. Bookings have been especially strong this year. We do view Q4 as flattish relative to Q3 from a revenue perspective.

[Operator]

Your next question comes from Thanos Moschopoulos with BMO.

[Thanos Moschopoulos, VP & Analyst]

Rob, as you go through the portfolio review process in CCS, what would you think that would do for your targeted margin range there?

[Mandeep Chawla, Chief Financial Officer]

Hey, Thanos, Mandeep here. Going back to some of the remarks that were made, as we have laid out the expansion on the margins to 3.75% to 4.5% over the next 12 to 18 months, it's being driven by a series of initiatives. One of them absolutely is the CCS portfolio review, but it's also being driven by the continuing growth in ATS as well as the expanding margins that we're seeing from the productivity program that's well underway right now. As mentioned, we spent $37 million toward the $50 million to $75 million program. And as you saw in the results this quarter from CCS, we're starting to see the benefit really hit the bottom line. So it's a combination of those 3 initiatives together.

[Thanos Moschopoulos, VP & Analyst]

I guess the question was more around what would the targeted range there will be as we look out longer term? I mean, would we -- should we be thinking about the maybe 2% to 4% range? Would that be achievable? Or I guess, should we wait until you get through the process before we talk about targets?

[Mandeep Chawla, Chief Financial Officer]

We think the target range of 2% to 3% continues to be the right target for the CCS business. It was stronger this quarter. The productivity actions have been helping, but there was also a benefit of mix. As we continue to execute the portfolio review, it'll allow us to stay within this range more predictably, and so we think that the 2% to 3% range continues. When you look at it from a company mix perspective, as we continue to grow the ATS portfolio, as we ramp new programs and integrate the Atrenne and Impakt acquisitions, we would be working to scale into the higher end of that range, which is 5% to 6%, as you know. And then through the mix of the portfolio, that's how we believe we can get to the 3.75% plus.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then can you update us on the tariff situation in terms of how your thinking is evolving maybe in terms of the potential impact on your business and whether -- and to what extent it's playing a role in your customer discussions?

[Robert A. Mionis, President, CEO & Director]

Yes. Certainly, a lot more active, Thanos, over the last couple of months. Customers who are actually buying hardware for their own use, they've been more active than classic OEMs, and they have been very anxious in quoting new programs in other regions outside of China. The classic OEMs have been more measured in their actions and working towards a more balanced supply chain. So far, customers have not opted to kind of move programs from where they are now, so the activity is largely on next-generation programs moving forward. Based on our footprint and where our capacity is, we do think we might be in a net benefactor of the disruption in the supply chain. That being said, we're going to be very deliberate on the programs that we choose to go after relative to the portfolio review that we're currently undergoing.

[Operator]

Your next question comes from Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

I just want to expand on that question around the margin impact from the $500 million. On the programs that you're looking at within those $500 million, what is the financial -- what are the finances look alike around those programs, talking about like margins and ROIC? Because in the past, you've been able to get ROIC -- high ROIC from low-margin programs. Is that something that you're looking at, too?

[Mandeep Chawla, Chief Financial Officer]

Yes, Dan, it's nice to talk to you. The primary focus of our review is ROIC, it's ROIC. And so with the current constrained inventory environment and with just growth in overall invested capital, what could have been a good ROIC program at the outset could unwind sometimes quite quickly. And when you have very thin margins, there's variability there as well. So our focus is on ROIC. Sometimes, it's going to result in better pricing. Sometimes, it's going to result in better commercial terms around investments that we're making within the business. And so we're looking at it from all angles. And for the programs where we've already been able to negotiate better terms, it's addressed both of those areas.

[Daniel Chan, Research Analyst]

And the margin profile on the $500 million? Should we expect that to be kind of like in the low 2% range or below that?

[Mandeep Chawla, Chief Financial Officer]

So the margin profile often is dilutive to the overall CCS portfolio. If you were to look at the programs, they are predominantly on the fulfillment side. And so again, as you stated upfront, the nature of those types of programs typically have lower margin, although often good ROIC when they're performing well.

[Operator]

Your next question comes from Matt Sheerin with Stifel.

[Matthew John Sheerin, MD & Senior Equity Research Analyst]

Just a couple of questions for me. Relative to the $500 million revenue number in terms of the portfolio review, is -- does that all include the news recently that one of your customers is moving business away, which I think was deliberate on your part? Is that part of that $500 million or is that incremental to that?

[Robert A. Mionis, President, CEO & Director]

Matt, it's Rob. That is part of it. I can't comment on a specific customer activity. But what I can do is that, that action, the $500 million that we just announced with regard to our portfolio review, that customer comment was part of that review. And it goes to say that sometimes we decide to -- with our customers decide to exit certain programs, and in other cases, we decide to grow different programs within that customer. So these are really program by program, location by location kind of decisions that we work out with our customers.

[Matthew John Sheerin, MD & Senior Equity Research Analyst]

I got it. And as you do -- you deselect, you obviously will open up capacity and you've got equipment in place, but I imagine that all that equipment is fungible where you can move it for other programs. So when there is opportunity to backfill with higher margin, then that should help in terms of your CapEx.

[Mandeep Chawla, Chief Financial Officer]

Yes. Absolutely, Matt. We continue to optimize the portfolio as programs come to end of life and other programs that we're quoting on. We're looking at it holistically. Much of the CapEx that we do use is interchangeable between our sites. And we also believe, I'll make a note again, that the $500 million review there, any restructuring charges that would go along with it would be contained in our existing program of $50 million to $75 million.

[Matthew John Sheerin, MD & Senior Equity Research Analyst]

Got it. Okay. And then just a follow-up on the tariff question. It sounds like you and other EMS companies are having a lot of conversations with customers about potentially moving capacity if indeed -- particularly if there's a 25% tariff on communications equipment in the U.S. But are you actually -- is there actually plans in place where you're actively quoting and looking at moving business now? And how close are you in terms of customers and in terms of the cost? There's obviously got to be a cost relative to moving equipment inventory build ahead of that. And is that something that you think that you'll be able to pass along to customers? Or will that be something that you'll have to share with?

[Robert A. Mionis, President, CEO & Director]

Yes. Most of the activity has been really on next-generation program, so it would be a lead time away from when these new products get introduced and ramped. Very limited action right now, more point solutions on moving existing product around. And if it were to require additional CapEx or a major investment, that would all be taken into account in terms of our proposals with our customers and moving forward.

[Operator]

Your next question comes from Gus Papageorgiou with Macquarie.

[Gus Papageorgiou, Associate Director for Technology Research]

First, as a clarification that, Mandeep, did you say that there are 3 customers that account for 10% of revenue each?

[Mandeep Chawla, Chief Financial Officer]

Two customers in the quarter.

[Gus Papageorgiou, Associate Director for Technology Research]

Two, okay. So just on the inventory, you mentioned in your press release that you had to take additional inventory provisions, and the inventory days continue to remain stubbornly high. When do you -- so kind of around that, when do you think your inventory days will kind of normalize? And in terms of the additional inventory provisions, I think this may be the second quarter you mentioned that, how much risk is there in terms of your balance sheet? And what could we expect from those write-downs?

[Mandeep Chawla, Chief Financial Officer]

Yes. So Gus, the inventory did grow slightly quarter-to-quarter. It was up about $50 million or so. As you'll notice with the guidance that we have provided, we are continuing to see strong revenue growth, and we're seeing growth in Q4 to -- from Q3, and so we do support that. The constrained material environment, it continues to be a challenge. We are seeing some areas improve, but we're seeing other areas continuing to be quite stubborn. MLCCs continue to be an area with very long extended lead times. Our viewpoint right now is that the environment will improve closer to the back half of 2019. But it's a dynamic situation, as you know, and it does change quarter-to-quarter. I will make the point, which I've made in the past, which is, ultimately the inventory is the liability of our customers. And so while we had been building the inventory, it ultimately does go back to them. From a provision's perspective, our provision rates continue to be in line with the normal aging of our inventory. Our write-off history is actually quite lower than our provision. We have at times taken more conservative approaches towards the way we do our provisioning. And so again, as that inventory unwinds, we would expect that there would be an opportunity there as well.

[Operator]

Your next question comes from Todd Coupland with CIBC.

[Todd Adair Coupland]

Just wanted to clarify on the EPS in the quarter. So the adjusted number of $0.26, that was at the higher tax rate. So your comment of a $0.03 hit from FX in the higher tax rate was not included in that $0.26. Is that right? So sort of an adjusted, adjusted number would be $0.03 higher. Is that what you meant when you said that?

[Mandeep Chawla, Chief Financial Officer]

That's right. So we did hit the midpoint of our guidance, as you know, Todd, with revenue relatively at the midpoint. So the 3.3% was in line with our guidance, but we were at the low end of the EPS range because of $0.03 of additional taxes. And so that was made up primarily of taxable FX, but also tax that landed in other jurisdictions. If we were to normalize for those, we would have expected our adjusted EPS to be at the midpoint of our target.

[Todd Adair Coupland]

Right. And the mix issue of semi drag and better mix in CCS sort of offset each other, which I guess ultimately got you to that number as well. Okay. And my second question is with respect to free cash flow goals, in the past, I think you've had a running target of $100 million to $200 million per year. How are you thinking about 2019 with all the moving parts that you've called out of, inventory constraints and portfolio review, better margins, et cetera? Just give us your thoughts on what free cash flow might look like next year.

[Mandeep Chawla, Chief Financial Officer]

Sure, Todd. So we're pleased that we're able to generate positive free cash flow this quarter after, as you know, a number of quarters of negative free cash flow mainly due to the increasing levels of the inventory. The thing I'll point out though is the revenue for this year is on track to be up almost $500 million on a year-over-year basis. And so while the constrained inventory environment has definitely contributed to it, we've been also growing along the way our inventory to support the revenue. With the guidance that we've -- actually, I'll correct that, we're not giving guidance, but with the goalpost that we've provided for 2019, which is that the revenue would likely be down in the single digits, we would expect that, that would not happen again. And so as you know in our industry, as revenue unwinds, inventory also unwinds. And so all things being equal, we expect 2019 will be a year of positive free cash flow. And when this inventory environment does start to unwind, we expect that there'll be some additional benefits coming.

[Todd Adair Coupland]

Is -- so with that happening, are you saying you could see free cash flow above what your normal goals is or it just gets you into your typical range?

[Mandeep Chawla, Chief Financial Officer]

No. So our inventory is up almost $250 million or close to $300 million year-over-year. Eventually, that unwinds. When we give our target of $100 million to $200 million, it's on a normalized basis. And so eventually, as that inventory unwinds, we would expect it to be in addition to the targets that we report.

[Operator]

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

[Paul Treiber, Associate]

Just, first, a clarification question. Just for Q4, your outlook for Q4, does that include any expected contribution from Impakt?

[Mandeep Chawla, Chief Financial Officer]

Hey, Paul. Good to talk to you. So we are currently anticipating that Impakt will close in late fourth quarter. We have included -- our guidance does include Impakt closing, but we expect that the contribution from a revenue and profit perspective from Impakt is going to be not material, and so it is included in our fourth quarter guidance.

[Paul Treiber, Associate]

Just second question is a follow-up just on the tariffs. To the comments you made on the tariff situation, does that apply to the existing tariffs? Or does it also take into account a possible increase to the next level of tariffs, the $270 billion?

[Robert A. Mionis, President, CEO & Director]

It probably applies to the existing tariffs in anticipation of being notched up a level here in the beginning of the year. I don't see -- but I could be wrong, I don't see customers moving existing product around. They're really more focused in on next-generation products and having a more balanced supply chain. Maybe in the past, some of our customers have over rotated with supply chains in China. And I think in this new world that we're in, they're looking to have more of a balanced portfolio in terms of where that capacity is. And I think their quoting activity looks like it's aligning to that for the next generation of products.

[Paul Treiber, Associate]

That's helpful. Just lastly, on JDM, I mean, obviously, it's been very healthy. The -- could you just elaborate on the trends that you're seeing in the JDM business right now, just particularly in regards to end customers as well, traditional OEMs versus maybe nontraditional customers?

[Robert A. Mionis, President, CEO & Director]

Yes. So we service both the traditional OEMs and nontraditional customers, and our broad JDM business is benefiting from increased deployment of data centers. Our go-to-market approach with nonclassical customers is largely through the JDM portfolio and with the growth in data centers. That's one of the main drivers for it. Our portfolio within JDM is fairly balanced between communications and enterprise, and it's been growing at a very nice quip. As I mentioned earlier, I think this year, we're on target to go north of 20% year-over-year. And we have a strong pipeline of products and programs and customers, and our products are performing very well in the marketplace. And it's really an alternative to ODMs. We don't, again, view us as competing with the OEMs. Our customers really view it and the market views us as an alternative to the ODMs, and it's being received very well in the marketplace.

[Operator]

Your next question comes from Jim Suva with Citi.

[Joshua Michael Kehoe, Senior Associate]

This is Josh Kehoe on behalf of Jim Suva. What is the revenue level needed for achieving your target operating margins of 3.75% to 4.5% over the next 12 to 18 months?

[Mandeep Chawla, Chief Financial Officer]

Yes. It's Mandeep here. So we believe that we're able to get to that levels knowing that 2019 is going to be down likely in the single-digit range. And so if you were to dissect that a little bit, we expect to see continuing growth in our ATS business. Our organic growth rate, our long-term target is 10% in addition to any acquisitions that we're able to add onto that business, so with the Impakt also contributing to the overall margin expansion opportunity in ATS. And then on CCS, it is not going to be a revenue story. It's going to be continuing productivity and portfolio optimization. And so -- but on an overall basis, we would expect that we would see continuing margin expansion in 2019 with EPS growth as well while revenue would be healthier.

[Operator]

There are no further questions at this time. I will now turn it back over to you, Paul (sic) [ Rob ].

[Robert A. Mionis, President, CEO & Director]

Thanks, Julie. I'm excited that we're able to sign Impakt earlier this month. It's a great business that's well positioned in a large growing technically demanding market. I think we're continuing to make very good progress on executing our strategy. We have great momentum across all our major priorities, and we're working towards a more diversified and profitable enterprise. Mandeep and I look forward to updating you on our progress next quarter. Thank you all, and have a good evening.

[Operator]

This concludes today's conference call. Thank you for your participation, and you may now disconnect.