Document



FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
 
For the month of July, 2018
 
001-14832
(Commission File Number)
__________________________________________
 CELESTICA INC.
(Translation of registrant’s name into English)
__________________________________________
844 Don Mills Road
Toronto, Ontario
Canada M3C 1V7
(416) 448-5800
(Address of principal executive offices)
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
 
Form 20-F  x
Form 40-F  o
 
Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
 
Indicate by check mark whether the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
 









Furnished Herewith (and incorporated by reference herein)
 
Exhibit No.
 
Description
 
 
 
99.1
 

The information contained in Exhibit 99.1 of this Form 6-K is not incorporated by reference into any registration statement (or into any prospectus that forms a part thereof) filed by Celestica Inc. with the Securities and Exchange Commission.




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
CELESTICA INC.
 
 
 
 
 
 
Date: July 31, 2018
BY:
/S/ ELIZABETH L. DELBIANCO
 
 
Elizabeth L. DelBianco
 
 
Chief Legal and Administrative Officer
 
 





 
EXHIBIT INDEX
 
Exhibit No.
 
Description
 
 
 
99.1
 


CLS-2018.06.30-6-K Press Release and Financial Statements Combined Document


FOR IMMEDIATE RELEASE                                  Exhibit 99.1
July 31, 2018
(All amounts in U.S. dollars.                             
Per share information based on diluted                         
shares outstanding unless otherwise noted.)

CELESTICA ANNOUNCES SECOND QUARTER 2018 FINANCIAL RESULTS

TORONTO, Canada - Celestica Inc. (TSX: CLS)(NYSE: CLS), a leader in design, manufacturing and supply chain solutions for the world's most innovative companies, today announced financial results for the quarter ended June 30, 2018. During the first quarter of 2018, Celestica completed a reorganization of its business into two operating and reportable segments Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS)*. Celestica also adopted new accounting standards effective January 1, 2018, and prior period comparatives have been restated. See “Adoption of IFRS 15” below.
Second Quarter 2018 Highlights

Revenue: $1.70 billion, compared to our previously provided guidance range of $1.575 to $1.675 billion, increased 9% compared to the second quarter of 2017; Operating margin (non-IFRS)**: 3.1%, compared to 3.2% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter, and 3.7% for the second quarter of 2017

Revenue dollars from our ATS segment increased 16% compared to the second quarter of 2017, and represented 33% of total revenue, compared to 31% of total revenue for the second quarter of 2017; ATS segment margin*** was 5.1% compared to 4.7% for the second quarter of 2017

Revenue dollars from our CCS segment increased 6% compared to the second quarter of 2017, and represented 67% of total revenue, compared to 69% of total revenue for the second quarter of 2017; CCS segment margin*** was 2.2% compared to 3.3% for the second quarter of 2017
IFRS EPS: $0.11 per share, compared to $0.24 per share for the second quarter of 2017
Adjusted EPS (non-IFRS)**: $0.29 per share, compared to our previously provided guidance range of $0.25 to $0.31 per share, and $0.32 per share for the second quarter of 2017
Adjusted ROIC (non-IFRS)**: 16.0%, compared to 20.8% for the second quarter of 2017
Free cash flow (non-IFRS)**: ($53.0 million), compared to $32.8 million for the second quarter of 2017
Entered into a new $800 million credit facility in June 2018


“Celestica’s second quarter results reflect strong year over year and sequential revenue growth in both our ATS and CCS segments, as well as improvements in our CCS segment margin from the prior quarter, said Rob Mionis, President and CEO, Celestica. “We are pleased with the ongoing successful execution of our ATS growth strategy, which continues to demonstrate our ability to diversify our revenue base and achieve consistent ATS segment margin performance.”

“As the broad-based proliferation of semiconductor usage continues to grow, our industry and customers are operating in a constrained materials environment. While this backdrop is driving near-term working capital and other operational inefficiencies across our businesses, we anticipate that our diversification strategy and ongoing cost reduction initiatives should still enable us to further improve our revenue mix and margins as we progress into the second half of 2018.”



*Our ATS segment consists of our ATS end market, and is comprised of our aerospace and defense, industrial, smart energy, healthtech, semiconductor capital equipment, and consumer businesses. Our CCS segment consists of our Communications and Enterprise end markets, and is comprised of our enterprise communications, telecommunications, servers and storage businesses. Prior period financial information has been reclassified to reflect this reorganized segment structure. See “Segment Reorganization” below.

** See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures.

*** Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). See note 4 to our June 30, 2018 unaudited interim condensed consolidated financial statements (Q2 2018 Interim Financial Statements) for further detail.

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Second Quarter and Year-to-Date Summary
 
Three months ended
 
Six months ended
 
June 30
 
June 30
 
2017
 
2018
 
2017
 
2018
Revenue (in millions)
$
1,557.6

 
$
1,695.2

 
$
3,039.7

 
$
3,194.9

 
 
 
 
 
 
 
 
IFRS net earnings (in millions)
$
34.6

 
$
16.1

 
$
57.1

 
$
30.2

IFRS EPS
$
0.24

 
$
0.11

 
$
0.39

 
$
0.21

 
 
 
 
 
 
 
 
Non-IFRS adjusted net earnings (in millions)  
$
46.3

 
$
40.2

 
$
88.1

 
$
74.1

Non-IFRS adjusted EPS
$
0.32

 
$
0.29

 
$
0.61

 
$
0.52

Non-IFRS adjusted return on invested capital (adjusted ROIC)
20.8
%
 
16.0
%
 
20.1
%
 
15.1
%
Non-IFRS operating margin
3.7
%
 
3.1
%
 
3.7
%
 
3.1
%
Notes to Table

International Financial Reporting Standards (IFRS) earnings per share (EPS) for the second quarter of 2018 included an aggregate charge of $0.16 (pre-tax) per share for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described on Schedule 1 attached hereto), and restructuring charges (see the tables in Schedule 1 and note 13 to the Q2 2018 Interim Financial Statements for per-item charges). This aggregate charge is within the range we provided on April 27, 2018 of between $0.13 to $0.19 per share for these items.

IFRS EPS for the second quarter and first half of 2018 included an aggregate $0.11 per share and $0.19 per share negative impact, respectively, attributable to other charges, most significantly restructuring charges incurred in connection with our cost efficiency initiative discussed under “Restructuring Update” below, and a $0.01 per share negative impact for each period resulting from the recognition of a $1.6 million fair value adjustment in cost of sales due to the write-up in the value of the inventory of Atrenne Integrated Solutions, Inc. (Atrenne) on the date of acquisition (Atrenne FVA), offset in part by an aggregate $0.03 per share and $0.06 per share net benefit pertaining to taxes, respectively (consisting of $0.03 per share tax benefit in each period resulting from the recognition of deferred tax assets attributable to our acquisition of Atrenne (Atrenne DTA) and a $0.04 per share tax benefit in each period arising from the reversal of previously-accrued Mexican taxes (Mexican Tax Reversal), offset in part by negative foreign currency tax impacts in each period). See notes 5, 13 and 14 to our Q2 2018 Interim Financial Statements for further detail. Non-IFRS adjusted EPS for the second quarter and first half of 2018 each excluded the impact of other charges, the Atrenne FVA and the Atrenne DTA, as these items are not reflective of our ongoing operational performance (see Schedule 1 for further detail).

IFRS EPS for the second quarter and first half of 2017 included a $0.05 and $0.11 per share negative impact, respectively, attributable to other charges, primarily restructuring charges incurred in connection with our organizational design and global business services initiatives, and the write-down of then-remaining solar panel manufacturing equipment in the second quarter of 2017, and was favorably impacted by a $0.03 per share deferred income tax benefit related to the write-downs and impairments we recorded for our solar assets in the then-current and prior quarters (Solar Benefit). See notes 13 and 14 to our Q2 2018 Interim Financial Statements for further detail. Non-IFRS adjusted EPS for the second quarter and first half of 2017 each excluded the impact of the Solar Benefit.

Non-IFRS operating margin for the second quarter and first half of 2018 were negatively impacted primarily by changes in overall mix, pricing pressures primarily in our CCS segment, and the additional inventory provisions we recorded in the second quarter of 2018 compared to the prior year periods.

Non-IFRS measures do not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other public companies that use IFRS or other generally accepted accounting principles (GAAP). See Non-IFRS Supplementary Information below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures.

Segment Reorganization

During the first quarter of 2018, we completed a reorganization of our reporting structure, including our sales, operations and management systems, into two operating and reportable segments: ATS and CCS. Prior to this reorganization, we operated in one reportable segment (Electronic Manufacturing Services), which was comprised of multiple end markets (ATS, Communications and Enterprise during 2017). Our prior period financial information has been reclassified to reflect the reorganized segment structure. Additional information regarding our reportable segments is included in note 4 to our Q2 2018 Interim Financial Statements.


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Segment Revenue as a Percentage of Total Revenue
Three months ended
 
Six months ended
 
June 30
 
June 30
 
2017
 
2018
 
2017
 
2018
ATS
31%
 
33%
 
32%
 
34%
CCS
69%
 
67%
 
68%
 
66%
        Communications
44
%
 
42
%
 
44
%
 
41
%
        Enterprise
25
%
 
25
%
 
24
%
 
25
%
Revenue (in billions)
$1.56
 
$1.70
 
$3.04
 
$3.19
Segment Income (in millions) and Margin
Three months ended June 30
 
Six months ended June 30
 
2017
 
2018
 
2017
 
2018
 
 
Segment Margin
 
 
Segment Margin
 
 
Segment Margin
 
 
Segment Margin
ATS
$
22.5

4.7
%
 
$
28.2

5.1%
 
$
45.8

4.7
%
 
$
56.1

5.2
%
CCS
35.7

3.3
%
 
24.9

2.2%
 
65.6

3.2
%
 
41.7
2.0
%

As part of our strategy to continue to diversify our business and improve overall shareholder returns, we are undertaking a comprehensive review of our CCS business, with the intention of addressing under-performing programs. This review could ultimately result in our disengagement from certain customer programs if we determine that financial returns from such programs are not anticipated to contribute to improved consistency in our revenues and operating margins for such segment. This could in turn result in corresponding declines in our CCS segment revenue. We intend to continue to invest in areas we believe are key to the long-term success of our CCS segment, including our JDM offering, to help drive improved CCS financial performance in future periods.

New $800 Million Credit Facility

In June 2018, we entered into a new $800 million credit facility, which consists of a $350 million term loan (New Term Loan) that matures in June 2025, and a $450 million revolving credit facility (New Revolver) that matures in June 2023. The New Term Loan, which was fully drawn at closing, was used primarily to repay all amounts outstanding under our previous credit facility (Prior Facility) that was scheduled to mature in May 2020. Our Prior Facility was terminated on such repayment. Other than ordinary course letters of credit, there were no amounts outstanding under the New Revolver as of June 30, 2018. See Note 11 to our Q2 2018 Interim Financial Statements.

Atrenne Acquisition

In April 2018, we completed the acquisition of U.S.-based Atrenne, a designer and manufacturer of ruggedized electromechanical solutions, primarily for military and commercial aerospace applications. This acquisition is intended to expand our capabilities, improve our diversification, and bolster our leadership position within the aerospace and defense market. In addition, Atrenne's capabilities in the design and manufacture of value-added mechanical solutions are expected to expand our service offerings for our industrial customers. The purchase price for Atrenne was $141.7 million, net of cash acquired, including a net working capital adjustment of $3.8 million (which is subject to finalization). The purchase was funded with borrowings under the revolving portion of our Prior Facility. We also recorded a $1.6 million fair value adjustment to write-up Atrenne's inventory on the date of acquisition, representing the difference between the inventory's cost and its fair value. This fair value adjustment was fully recognized in cost of sales in the second quarter of 2018, with a resulting negative impact on gross profit and net earnings for the quarter. See note 5 to our Q2 2018 Interim Financial Statements.


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Restructuring Update

In the fourth quarter of 2017, we commenced the implementation of additional restructuring actions under a new cost efficiency initiative. We have recorded $23.7 million in restructuring charges from the commencement of this initiative through the end of the second quarter of 2018, including the $8.8 million of restructuring charges recorded in the second quarter of 2018. We currently estimate that we will incur aggregate restructuring charges of between $50 million and $75 million for this initiative, and that most of the charges will be recorded in the second half of 2018 through mid-2019.

Toronto Real Property and Related Transactions Update

We currently anticipate that the sale of our Toronto real property, which includes the site of our corporate headquarters and Toronto manufacturing operations, to close by the end of 2018, although further delays in the approval process could move the closing to early 2019. Should the sale be consummated, the sale price will be approximately $137 million Canadian dollars, including a cash deposit of $15 million Canadian dollars which we have already received.

The cash proceeds from the sale of this property (if consummated) are expected to more than offset the building improvements and other capitalized costs, as well as transition costs, associated with the relocation activities resulting from the anticipated property sale. We have incurred aggregate capitalized costs of approximately $11 million, as well as transition costs of approximately $7 million (since October 2017) in connection with our relocations and the preparation of our new facilities. We expect to incur total capitalized costs of $17 million, and total transition costs of up to $15 million, in each case through the end of the first quarter of 2019.

Adoption of IFRS 15

We adopted IFRS 15, Revenue from Contracts with Customers, effective January 1, 2018. We elected to apply the retrospective approach and as a result, have restated each of the required comparative reporting periods presented herein and in our Q2 2018 Interim Financial Statements. A description of the impact of our transition to IFRS 15 is included in notes 2 and 3 to our Q2 2018 Interim Financial Statements.

Third Quarter 2018 Outlook

For the quarter ending September 30, 2018, we anticipate revenue to be in the range of $1.65 billion to $1.75 billion, non-IFRS selling, general and administrative expenses (SG&A) to be in the range of $49.0 million to $51.0 million, non-IFRS operating margin to be 3.3% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter, and non-IFRS adjusted EPS to be in the range of $0.26 to $0.32. We expect a negative $0.17 to $0.23 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described on Schedule 1 hereto), and restructuring charges. We also anticipate our non-IFRS adjusted annual effective tax rate for 2018 to be between 17% and 19%. We cannot predict changes in currency exchange rates, the impact of such changes on our operating results, or the degree to which we will be able to manage such impacts.

See “Non-IFRS Supplementary Information” below for information on our rationale for the use of non-IFRS measures, and Schedule 1 for, among other items, non-IFRS measures included in this press release, as well as their definitions, uses, and a reconciliation of non-IFRS to IFRS measures.

Non-IFRS Operating Margin Goal
Our goal is for non-IFRS operating margin to be 3.5% or higher for the fourth quarter of 2018, as we anticipate the realization of cost efficiencies from our restructuring actions, and benefits from anticipated increases in ATS segment revenue.

We do not provide reconciliations for 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. This is due to the inherent difficulty of forecasting the timing or amount of various events that have not yet occurred, are out of our control and/or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking IFRS financial measure. For these same reasons, we are unable to address the probable

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significance of the unavailable information. Forward-looking non-IFRS financial measures may vary materially from the corresponding IFRS financial measures.

Second Quarter 2018 Webcast
Management will host its second quarter 2018 results conference call today at 5:00 p.m. Eastern Daylight Time. The webcast can be accessed at www.celestica.com.

Non-IFRS Supplementary Information
In addition to disclosing detailed operating results in accordance with IFRS, Celestica provides supplementary non-IFRS measures to consider in evaluating the company’s operating performance. Management uses adjusted net earnings and other non-IFRS measures to assess operating performance and the effective use and allocation of resources; to provide more meaningful period-to-period comparisons of operating results; to enhance investors’ understanding of the core operating results of Celestica’s business; and to set management incentive targets. We believe investors use both IFRS and non-IFRS measures to assess management's past, current and future decisions associated with our priorities and our allocation of capital, as well as to analyze how our business operates in, or responds to, swings in economic cycles or to other events that impact our core operations.

See Schedule 1 - Supplementary Non-IFRS Measures for, among other items, non-IFRS measures provided herein, non-IFRS definitions, and a reconciliation of non-IFRS to IFRS measures.

About Celestica

Celestica enables the world's best brands. Through our recognized customer-centric approach, we partner with leading companies in aerospace and defense, communications, enterprise, healthtech, industrial, semiconductor capital equipment, and smart energy to deliver solutions for their most complex challenges. As a leader in design, manufacturing, hardware platform and supply chain solutions, Celestica brings global expertise and insight at every stage of product development - from the drawing board to full-scale production and after-market services. With talented teams across North America, Europe and Asia, we imagine, develop and deliver a better future with our customers.

For more information, visit http://www.celestica.com.

Our securities filings can also be accessed at www.sedar.com and www.sec.gov.


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Cautionary Note Regarding Forward-looking Statements
This news release contains forward-looking statements, including, without limitation, those related to our future growth; trends in the electronics manufacturing services (EMS) industry, including the continuation of adverse market conditions, and their anticipated impact on our business and results of operations; our anticipated financial and/or operational results (including our anticipated quarterly revenue, non-IFRS adjusted SG&A expenses, non-IFRS operating margin, and non-IFRS EPS, as well as our non-IFRS operating margin goal for the fourth quarter of 2018 and anticipated non-IFRS annual adjusted effective tax rate for 2018); the anticipated realization of cost efficiencies from our restructuring actions and anticipated increases in ATS segment revenue in the fourth quarter of 2018; our potential disengagement from certain CCS customer programs as a result of our comprehensive review of our CCS business, and potential declines in our CCS segment revenue, changes to our manufacturing network and/or additional restructuring actions as a result of such review and/or any disengagement from under-performing programs; the cash, working capital and other operational inefficiency or financial impacts associated with prolonged materials constraints; the ability of our diversification strategy and cost reduction initiatives to further improve our revenue mix and segment and overall margins as we progress into the second half of 2018; the impact of acquisitions and program wins or losses on our liquidity, financial results and working capital requirements; anticipated expenses, restructuring actions and charges, capital expenditures and other anticipated working capital requirements, including the anticipated amounts, timing and funding thereof; the impact of tax and litigation outcomes; our cash flows, financial targets, priorities and initiatives; intended investments in our business; changes in our mix of revenue; our ability to diversify and grow our customer base and develop new capabilities; the expected impact of the acquisition of Atrenne on our position in the aerospace and defense and industrial markets, the expected increase in annual intangible asset amortization charges resulting from the Atrenne acquisition, and the expected timing of the completion of our Atrenne asset valuations and purchase price allocation; our intention to settle outstanding equity awards with subordinate voting shares; the timing and terms of the sale of our real property in Toronto and related transactions, including the expected lease of our new corporate headquarters (collectively, the Toronto Real Property Transactions); the costs, timing and execution of relocating our existing Toronto manufacturing operations and the anticipated temporary relocation of our corporate headquarters while space in a new office building is under construction (including our expectation that the costs of such relocations will be more than offset by the cash proceeds from the property sale, if consummated); the timing of the adoption of, and transition activities related to, newly-issued accounting standards; the potential true-up premium on the annuity purchased for our U.K. Main pension plan; and our intentions with respect to our U.K. Supplementary pension plan and the potential true-up premium on the annuity purchased with respect thereto. Such forward-looking statements may, without limitation, be preceded by, followed by, or include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “continues,” “project, “potential, possible, contemplate, seek,or similar expressions, or may employ such future or conditional verbs as “may,” “might,” “will,” “could,” “should” or “would,” or may otherwise be indicated as forward-looking statements by grammatical construction, phrasing or context. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995, where applicable, and applicable Canadian securities laws.

Forward-looking statements are provided for the purpose of assisting readers in understanding management’s current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. Forward-looking statements are not guarantees of future performance and are subject to risks that could cause actual results to differ materially from conclusions, forecasts or projections expressed in such forward-looking statements, including, among others, risks related to: our customers’ ability to compete and succeed in the marketplace with the services we provide and the products we manufacture; customer and segment concentration and the challenges of diversifying our customer base and replacing revenue from completed or lost programs or customer disengagements, which could be driven by a number of factors, including but not limited to operating performance, supply base consolidation, or our ability to achieve acceptable financial returns; changes in our mix of customers and/or the types of products or services we provide; higher concentration of fulfillment services and/or other lower margin programs impacting gross profit; price, margin pressures, including from customer re-negotiations, and other competitive factors affecting, and the highly competitive nature of, the EMS industry in general and our CCS segment in particular; responding to changes in demand, rapidly evolving and changing technologies, and changes in our customers’ business and outsourcing strategies, including the insourcing of programs; customer, competitor and/or supplier consolidation; integrating any acquisitions or strategic transactions (including “operate-in-place” arrangements and our recent acquisition of Atrenne), and achieving the anticipated benefits therefrom; retaining or expanding our business due to execution and quality issues (including our ability to successfully resolve these challenges); our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities, and potential negative impacts on our liquidity, financial condition and/or results of operations resulting from significant uses of cash and/or any future securities issuances or increased third-party indebtedness for acquisitions or to otherwise fund our operations; delays in the delivery and availability of components, services and materials, including from suppliers upon which we are dependent for certain components; our restructuring actions, including achieving the anticipated benefits therefrom, and the potential negative impact of transitions resulting from our restructuring actions on our operations; the incurrence of future impairment charges or other write-downs of assets; managing our operations, growth initiatives, and our working capital performance during uncertain market and economic conditions; disruptions to our operations, or those of our customers, component suppliers and/or logistics partners, including as a result of global or local events outside of our control (including as a result of Britain's intention to leave the European Union (Brexit), policies or legislation proposed or instituted by the current U.S. administration, including with respect to taxes and tariffs, and/or countermeasures implemented by other governments in response thereto); the expansion or consolidation of our operations; recruiting or retaining skilled talent; changes to our operating model; changing commodity, material and component costs as well as labor costs and conditions; defects or deficiencies in our products, services or designs; non-

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performance by counterparties; our financial exposure to foreign currency volatility, including fluctuations that may result from Brexit and/or the policies or legislation proposed or instituted by the current U.S. administration; managing our global operations and supply chain; our dependence on industries affected by rapid technological change; increasing income and other taxes, tax audits, and challenges of defending our tax positions, and obtaining, renewing or meeting the conditions of tax incentives and credits; the potential that conditions to closing the Toronto Real Property Transactions may not be satisfied on a timely basis or at all; the costs, timing and/or execution of relocating our existing Toronto manufacturing operations and/or corporate headquarters proving to be other than anticipated; computer viruses, malware, hacking attempts or outages that may disrupt our operations; the variability of revenue and operating results; compliance with applicable laws, regulations, government grants and social responsibility initiatives; and current or future litigation, governmental actions, and/or changes in legislation. The foregoing and other material risks and uncertainties are discussed in our public filings at www.sedar.com and www.sec.gov, including in our most recent MD&A, our 2017 Annual Report on Form 20-F filed with, and subsequent reports on Form 6-K furnished to, the U.S. Securities and Exchange Commission, and as applicable, the Canadian Securities Administrators.

Our revenue, earnings and other financial guidance contained in this press release is based on various assumptions, many of which involve factors that are beyond our control. Our material assumptions include those related to the following: production schedules from our customers, which generally range from 30 to 90 days and can fluctuate significantly in terms of volume and mix of products or services; the timing and execution of, and investments associated with, ramping new business (including new business associated with acquisitions); the successful pursuit, completion and integration of acquisitions; the success in the marketplace of our customers’ products; the pace of change in our traditional businesses (CCS segment) and our ability to retain programs and customers; the stability of general economic and market conditions, currency exchange rates, and interest rates; our pricing, the competitive environment and contract terms and conditions; supplier performance, pricing and terms; compliance by third parties with their contractual obligations, the accuracy of their representations and warranties, and the performance of their covenants; the costs and availability of components, materials, services, plant and capital equipment, labor, energy and transportation; the extent of the recently-imposed tariffs and countermeasures and our customers' liability for any such costs; operational and financial matters including the extent, timing and costs of replacing revenue from completed or lost programs, or customer disengagements; technological developments; that the impact of the recent U.S. tax reform on our operations will be as we currently anticipate; our ability to recover accounts receivable outstanding from a former solar supplier; the timing, execution and effect of restructuring actions; the successful resolution of quality issues that arise from time to time; our having sufficient financial resources and working capital to fund currently anticipated financial obligations and to pursue desirable business opportunities; our ability to diversify our customer base and develop new capabilities; the availability of cash resources for repurchases of outstanding subordinate voting shares under our current NCIB; compliance with applicable laws and regulations pertaining to NCIBs; that we are able to successfully integrate Atrenne and achieve the expected benefits from the acquisition; and that the sale of our Toronto real property will be consummated by early 2019. While management believes these assumptions to be reasonable under the current circumstances, they may prove to be inaccurate. Forward-looking statements speak only as of the date on which they are made, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
  
All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Contacts:
Celestica Communications                 Celestica Investor Relations
(416) 448-2200                        (416) 448-2211
media@celestica.com                     clsir@celestica.com


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Supplementary Non-IFRS Measures                                 Schedule 1

Our non-IFRS measures herein include adjusted gross profit, adjusted gross margin (adjusted gross profit as a percentage of revenue), adjusted selling, general and administrative expenses (SG&A), adjusted SG&A as a percentage of revenue, operating earnings (adjusted EBIAT), operating margin (adjusted EBIAT as a percentage of revenue), adjusted net earnings, adjusted earnings per share, adjusted return on invested capital (adjusted ROIC), free cash flow, adjusted tax expense and adjusted effective tax rate. Adjusted EBIAT, adjusted ROIC, free cash flow, adjusted tax expense and adjusted effective tax rate are further described in the tables below. In calculating these non-IFRS financial measures, management excludes the following items, where applicable: employee stock-based compensation expense, amortization of intangible assets (excluding computer software), restructuring and other charges, net of recoveries (including Toronto transition costs (recoveries), acquisition-related costs, legal settlements (recoveries), and the accelerated amortization of unamortized deferred financing costs (each described below)), impairment charges (i.e., the write-down of goodwill, intangible assets and property, plant and equipment), other solar charges, and the Atrenne inventory fair value adjustment (each described below), all net of the associated tax adjustments (which are set forth in the table below), deferred tax write-offs/costs or recoveries associated with restructuring actions or restructured sites, and non-core tax impacts (described below).
We believe the non-IFRS measures we present herein are useful, as they enable investors to evaluate and compare our results from operations and cash resources generated from our business in a more consistent manner (by excluding specific items that we do not consider to be reflective of our ongoing operating results) and provide an analysis of operating results using the same measures our chief operating decision makers use to measure performance. In addition, management believes that the use of a non-IFRS adjusted tax expense and a non-IFRS adjusted effective tax rate provides improved insight into the tax effects of our ongoing business operations, and is useful to management and investors for historical comparisons and forecasting. These non-IFRS financial measures result largely from managements determination that the facts and circumstances surrounding the excluded charges or recoveries are not indicative of the ordinary course of the ongoing operation of our business.

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-U.S. GAAP measures to describe similar operating metrics. Non-IFRS measures are not measures of performance under IFRS and should not be considered in isolation or as a substitute for any standardized measure under IFRS.
The most significant limitation to managements use of non-IFRS financial measures is that the charges or credits excluded from the non-IFRS measures are nonetheless charges or credits that are recognized under IFRS and that have an economic impact on the company. Management compensates for these limitations primarily by issuing IFRS results to show a complete picture of the companys performance, and reconciling non-IFRS results back to IFRS results.
The economic substance of these exclusions and management’s rationale for excluding them from non-IFRS financial measures is provided below:
Employee stock-based compensation expense, which represents the estimated fair value of stock options, restricted share units and performance share units granted to employees, is excluded because grant activities vary significantly from quarter-to-quarter in both quantity and fair value. In addition, excluding this expense allows us to better compare core operating results with those of our competitors who also generally exclude employee stock-based compensation expense in assessing operating performance, who may have different granting patterns and types of equity awards, and who may use different valuation assumptions than we do, including those competitors who report under U.S. GAAP and use non-U.S. GAAP measures to present similar metrics.
Amortization charges (excluding computer software) consist of non-cash charges against intangible assets that are impacted by the timing and magnitude of acquired businesses. Amortization of intangible assets varies among our competitors, and we believe that excluding these charges permits a better comparison of core operating results with those of our competitors who also generally exclude amortization charges in assessing operating performance.

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Restructuring and other charges, net of recoveries, include costs relating to employee severance, lease terminations, site closings and consolidations, write-downs of owned property and equipment which are no longer used and are available for sale, reductions in infrastructure, Toronto transition costs (recoveries) (discussed below), acquisition-related consulting, transaction and integration costs, legal settlements (recoveries), and the accelerated amortization of unamortized deferred financing costs (discussed below). We exclude restructuring and other charges, net of recoveries, because we believe that they are not directly related to ongoing operating results and do not reflect expected future operating expenses after completion of these activities. We believe these exclusions permit a better comparison of our core operating results with those of our competitors who also generally exclude these charges, net of recoveries, in assessing operating performance.
Restructuring and other charges, net of recoveries, includes Toronto transition costs (recoveries), which are costs (recoveries) recorded in connection with the sale of our Toronto real property, the relocation of our existing Toronto manufacturing operations, the move of our corporate headquarters to a temporary location while space in a new office building for such headquarters at our current location (to be built by, and which we intend to lease from, the purchasers of our Toronto real property) is under construction, as well as the move to such new office space upon its completion. Toronto transition costs consist of direct relocation costs, duplicate costs (such as rent expense, utility costs, depreciation charges, and personnel costs) incurred during the transition period, as well as cease-use costs incurred in connection with idle or vacated portions of the relevant premises that we would not have incurred but for these relocations. Toronto transition recoveries will consist of amounts received from the purchasers of the Toronto real property or gains we record in connection with its sale, if consummated. We believe that excluding these costs and recoveries permits a better comparison of our core operating results from period-to-period, as these costs will not reflect our ongoing operations once these relocations are complete.
Restructuring and other charges, net of recoveries, include the accelerated amortization of $1.2 million in unamortized deferred financing costs recorded on the extinguishment of our Prior Facility during the second quarter of 2018. We have excluded the impact of this non-cash charge because we believe such exclusion permits a better comparison of our core operating results from period-to-period, as this charge is not representative of our typical operational charges.
Impairment charges, which consist of non-cash charges against goodwill, intangible assets and property, plant and equipment, result primarily when the carrying value of these assets exceeds their recoverable amount. Our competitors may record impairment charges at different times, and we believe that excluding these charges permits a better comparison of our core operating results with those of our competitors who also generally exclude these charges in assessing operating performance.
Other solar charges, consisting of non-cash charges to further write down the carrying value of our then-remaining solar panel inventory and the write-down of solar accounts receivable (A/R) (primarily as a result of a solar customer's bankruptcy) to estimated recoverable amounts, were recorded in the second quarter of 2017 through cost of sales and SG&A expenses, respectively. Both of these impairment charges, which were identified during the wind down phase of our solar operations after our decision to exit the solar panel manufacturing business, are excluded as they pertain to a business we have exited, and we therefore believe they are no longer directly related to our ongoing core operating results. Although we recorded significant impairment charges to write down our solar panel inventory in the third quarter of 2016, those charges were not excluded in the determination of our non-IFRS financial measures for such period, as we were then still engaged in the solar panel manufacturing business. In connection with this wind-down, we also recorded net non-cash impairment charges to write down the carrying value of our solar panel manufacturing equipment held for sale to its estimated sales value less costs to sell, which we recorded through other charges during 2017.
The Atrenne inventory fair value adjustment consists of a $1.6 million write-up of the inventory acquired in connection with our purchase of Atrenne, representing the difference between the cost and fair value of such inventory. Acquired assets and liabilities are recorded on our balance sheet at their fair values as of the date of acquisition. The amount of the Atrenne fair value adjustment is recognized through cost of sales as the inventory is sold. During the second quarter of 2018, we recognized the full $1.6 million adjustment (as such acquired inventory was sold during the quarter), which negatively impacted our gross profit and net earnings for the period. We have excluded the impact of this adjustment (which is not applicable to any other period) because we believe such exclusion permits a better comparison of our core operating results from period-to-period, as the impact of the fair value adjustment is not indicative of our ongoing operating performance.

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Deferred tax write-offs/costs or recoveries associated with restructuring actions or restructured sites are excluded, as we believe that these write-offs/costs or recoveries do not reflect core operating performance and vary significantly among those of our competitors who also generally exclude these costs or recoveries in assessing operating performance. The impact of infrequent or unusual tax items (non-core tax impacts) are excluded because we believe such exclusion permits a better comparison of our core operating results from period to period, as the impact of such items is not indicative of our ongoing operating performance.
The following table sets forth, for the periods indicated, the various non-IFRS measures discussed above, and a reconciliation of IFRS to non-IFRS measures (in millions, except percentages and per share amounts):

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Three months ended June 30
 
Six months ended June 30
 
2017
 
2018
 
2017
 
2018
 
 
% of revenue
 
 
% of revenue
 
 
% of revenue
 
 
% of revenue
IFRS revenue
$
1,557.6

 
 
$
1,695.2

 
 
$
3,039.7

 
 
$
3,194.9

 
 
 
 
 
 
 
 
 
 
 
 
 
IFRS gross profit
$
108.8

7.0%
 
$
104.8

6.2%
 
$
211.3

7.0%
 
$
198.3

6.2%
Employee stock-based compensation expense
3.4

 
 
2.8

 
 
8.5

 
 
7.9

 
Other solar charges (inventory write-down)
0.9

 
 

 
 
0.9

 
 

 
   Atrenne inventory fair value adjustment

 
 
1.6

 
 

 
 
1.6

 
Non-IFRS adjusted gross profit
$
113.1

7.3%
 
$
109.2

6.4%
 
$
220.7

7.3%
 
$
207.8

6.5%
 
 
 
 
 
 
 
 
 
 
 
 
IFRS SG&A
$
50.4

3.2%
 
$
52.7

3.1%
 
$
104.1

3.4%
 
$
105.0

3.3%
Employee stock-based compensation expense
(2.3
)
 
 
(4.4
)
 
 
(8.2
)
 
 
(9.7
)
 
Other solar charges (A/R write-down)
(0.5
)
 
 

 
 
(0.5
)
 
 

 
Non-IFRS adjusted SG&A
$
47.6

3.1%
 
$
48.3

2.8%
 
$
95.4

3.1%
 
$
95.3

3.0%
 
 
 
 
 
 
 
 
 
 
 
 
IFRS earnings before income taxes
$
39.0

2.5%
 
$
20.9

1.2%
 
$
69.5

2.3%
 
$
40.3

1.2%
Finance costs
2.6

 
 
4.9

 
 
5.2

 
 
8.2

 
Employee stock-based compensation expense
5.7

 
 
7.2

 
 
16.7

 
 
17.6

 
Amortization of intangible assets (excluding computer software)
1.5

 
 
2.7

 
 
3.0

 
 
3.8

 
Net restructuring, impairment and other charges (recoveries) (1)
8.0

 
 
15.8

 
 
15.6

 
 
26.3

 
Other solar charges (inventory and A/R write-down)
1.4

 
 

 
 
1.4

 
 

 
   Atrenne inventory fair value adjustment

 
 
1.6

 
 

 
 
1.6

 
Non-IFRS operating earnings (adjusted EBIAT) (1)
$
58.2

3.7%
 
$
53.1

3.1%
 
$
111.4

3.7%
 
$
97.8

3.1%
 
 
 
 
 
 
 
 
 
 
 
 
IFRS net earnings
$
34.6

2.2%
 
$
16.1

0.9%
 
$
57.1

1.9%
 
$
30.2

0.9%
Employee stock-based compensation expense
5.7

 
 
7.2

 
 
16.7

 
 
17.6

 
Amortization of intangible assets (excluding computer software)
1.5

 
 
2.7

 
 
3.0

 
 
3.8

 
Net restructuring, impairment and other charges (recoveries) (1)
8.0

 
 
15.8

 
 
15.6

 
 
26.3

 
Other solar charges (inventory and A/R write-down)
1.4

 
 

 
 
1.4

 
 

 
Atrenne inventory fair value adjustment

 
 
1.6

 
 

 
 
1.6

 
Adjustments for taxes (2)
(4.9
)
 
 
(3.2
)
 
 
(5.7
)
 
 
(5.4
)
 
Non-IFRS adjusted net earnings
$
46.3

 
 
$
40.2

 
 
$
88.1

 
 
$
74.1

 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
 

 
Weighted average # of shares (in millions)
145.5

 
 
140.7

 
 
144.8

 
 
142.1

 
IFRS earnings per share
$
0.24

 
 
$
0.11

 
 
$
0.39

 
 
$
0.21

 
Non-IFRS adjusted earnings per share
$
0.32

 
 
$
0.29

 
 
$
0.61

 
 
$
0.52

 
# of shares outstanding at period end (in millions)
143.6

 
 
139.3

 
 
143.6

 
 
139.3

 
 
 
 
 
 
 
 
 
 
 
 
 
IFRS cash provided by (used in) operations
$
55.2

 
 
$
(14.9
)
 
 
$
90.8

 
 
$
(20.3
)
 
Purchase of property, plant and equipment, net of sales proceeds
(24.1
)
 
 
(25.1
)
 
 
(49.0
)
 
 
(38.8
)
 
Finance lease payments
(1.6
)
 
 
(0.8
)
 
 
(3.1
)
 
 
(12.6
)
 
Repayments from former solar supplier
5.7

 
 

 
 
12.5

 
 

 
Finance costs paid
(2.4
)
 
 
(12.2
)
 
 
(4.9
)
 
 
(15.4
)
 
Non-IFRS free cash flow (3)
$
32.8

 
 
$
(53.0
)
 
 
$
46.3

 
 
$
(87.1
)
 
IFRS ROIC % (4)
14.0
%
 
 
6.3
%
 
 
12.5
%
 
 
6.2
%
 
Non-IFRS adjusted ROIC % (4)
20.8
%
 
 
16.0
%
 
 
20.1
%
 
 
15.1
%
 



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(1)
Management uses non-IFRS operating earnings (adjusted EBIAT) as a measure to assess performance related to our core operations. Non-IFRS adjusted EBIAT is defined as earnings before finance costs (consisting of interest and fees related to our credit facility, our accounts receivable sales program and a customer's supplier financing program), amortization of intangible assets (excluding computer software) and income taxes. Non-IFRS adjusted EBIAT also excludes, in periods where such charges have been recorded, employee stock-based compensation expense, net restructuring and other charges (recoveries) (including acquisition-related consulting, transaction and integration costs (net of recoveries) (Acquisition Costs), legal settlements (recoveries), Toronto transition costs (recoveries), impairment charges (recoveries), and the accelerated amortization of unamortized deferred financing costs), other solar charges, and the Atrenne inventory fair value adjustment. During the second quarter and first half of 2018, we recorded $3.5 million and $5.2 million of Toronto transition costs, respectively, which are reported under other charges (no such costs were recorded during the second quarter or first half of 2017) and we expect these costs to continue into 2019. See note 13 to our Q2 2018 Interim Financial Statements for separate quantification and discussion of restructuring charges, Toronto transition costs, Acquisition Costs, the accelerated amortization of unamortized deferred financing costs, and legal settlements (recoveries).

(2)
The adjustments for taxes, as applicable, represent the tax effects of our non-IFRS adjustments, non-core tax impacts, and tax write-offs/costs or recoveries related to restructured sites (described below).

The following table sets forth a reconciliation of our IFRS tax expense and IFRS effective tax rate to our non-IFRS adjusted tax expense and our non-IFRS adjusted effective tax rate for the periods indicated, in each case determined by excluding the tax benefits or costs associated with the listed items (in millions, except percentages) from our IFRS tax expense for such periods:
 
Three months ended
 
Six months ended
 
June 30
 
June 30
 
2017
Effective tax rate
 
2018
Effective tax rate
 
2017
Effective tax rate
 
2018
Effective tax rate
IFRS tax expense and IFRS effective tax rate
$
4.4

11%
 
$
4.8

23%
 
$
12.4

18%
 
$
10.1

25%


 
 

 
 

 
 

 
Tax costs (benefits) of the following items excluded from IFRS tax expense:
 
 
 
 
 
 
 
 
 
 
 
Employee stock-based compensation
0.4

 
 
0.6

 
 
0.6

 
 
1.0

 
Amortization of intangible assets (excluding computer software)

 
 

 
 

 
 

 
Net restructuring, impairment and other charges
0.9

 
 
0.5

 
 
1.3

 
 
0.4

 
Other solar charges (inventory and A/R write-down)
0.4

 
 

 
 
0.4

 
 

 
Fair value adjustment on acquisition (Atrenne DTA)

 
 
3.7

 
 

 
 
3.7

 
Other charges related to restructured sites *
3.2

 
 
(1.6
)
 
 
3.4

 
 
0.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Non-IFRS adjusted tax expense and Non-IFRS adjusted effective tax rate
$
9.3

17%
 
$
8.0

17%
 
$
18.1

17%
 
$
15.5

17%

*
Includes the Solar Benefit in the three and six months ended June 30, 2017.

(3)
Management uses non-IFRS free cash flow as a measure, in addition to IFRS cash provided by (used in) operations, to assess our operational cash flow performance. We believe non-IFRS free cash flow provides another level of transparency to our liquidity. Non-IFRS free cash flow is defined as cash provided by (used in) operations after the purchase of property, plant and equipment (net of proceeds from the sale of certain surplus equipment and property), finance lease payments, repayments from a former solar supplier, and finance costs paid. As a measure of liquidity, we intend to include any amounts we receive from the sale of our Toronto real property, if consummated, in non-IFRS free cash flow in the period of receipt. See note 13(b) to our Q2 2018 Interim Financial Statements. Note that non-IFRS free cash flow, however, does not represent residual cash flow available to Celestica for discretionary expenditures.

(4)
Management uses non-IFRS adjusted ROIC as a measure to assess the effectiveness of the invested capital we use to build products or provide services to our customers, by quantifying how well we generate earnings relative to the capital we have invested in our business. Our non-IFRS adjusted ROIC measure reflects non-IFRS operating earnings, working capital management and asset utilization. Non-IFRS adjusted ROIC is calculated by dividing non-IFRS adjusted EBIAT by average net invested capital. Net invested capital (calculated in the table below) consists of the following IFRS measures: total assets less cash, accounts payable, accrued and other current liabilities and provisions, and income taxes payable. We use a two-point average to calculate average net invested capital for the quarter and a three-point average to calculate average net invested capital for the six-month period. A comparable measure under IFRS would be determined by dividing IFRS earnings before income taxes by net invested capital (which we have set forth in the charts above and below), however, this measure (which we have called IFRS ROIC), is not a measure defined under IFRS.


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The following table sets forth, for the periods indicated, our calculation of IFRS ROIC % and non-IFRS adjusted ROIC % (in millions, except IFRS ROIC % and non-IFRS adjusted ROIC %):
 
 
Three months ended
 
Six months ended
 
 
June 30
 
June 30
 
 
2017
 
2018
 
2017
 
2018
IFRS earnings before income taxes
 
$
39.0

 
$
20.9

 
$
69.5

 
$
40.3

Multiplier to annualize earnings
 
4

 
4

 
2

 
2

Annualized IFRS earnings before income taxes
 
$
156.0

 
$
83.6

 
$
139.0

 
$
80.6

 
 
 
 
 
 
 
 
 
Average net invested capital for the period
 
$
1,118.2

 
$
1,329.6

 
$
1,110.5

 
$
1,293.2

 
 
 
 
 
 
 
 
 
IFRS ROIC % (1)
 
14.0
%
 
6.3
%
 
12.5
%
 
6.2
%
 
 
 
 
 
 
 
 
 
 
 
Three months ended
 
Six months ended
 
 
June 30
 
June 30
 
 
2017
 
2018
 
2017
 
2018
Non-IFRS operating earnings (adjusted EBIAT)
 
$
58.2

 
$
53.1

 
$
111.4

 
$
97.8

Multiplier to annualize earnings
 
4

 
4

 
2

 
2

Annualized non-IFRS adjusted EBIAT
 
$
232.8

 
$
212.4

 
$
222.8

 
$
195.6

 
 
 
 
 
 
 
 
 
Average net invested capital for the period
 
$
1,118.2

 
$
1,329.6

 
$
1,110.5

 
$
1,293.2

 
 
 
 
 
 
 
 
 
Non-IFRS adjusted ROIC % (1)
 
20.8
%
 
16.0
%
 
20.1
%
 
15.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
2017
 
March 31
2018
 
June 30
2018
Net invested capital consists of:
 
 
 
 
 
 
 
 
Total assets
 
$
2,964.2

 
$
2,976.0

 
$
3,212.2

Less: cash
 
515.2

 
435.7

 
401.4

Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable
 
1,228.6

 
1,278.1

 
1,413.8

Net invested capital at period end (1)
 
$
1,220.4

 
$
1,262.2

 
$
1,397.0

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31
2016
 
March 31
2017
 
June 30
2017
Net invested capital consists of:
 
 
 

 
 
 
 
Total assets
 
$
2,841.9

 
$
2,833.5

 
$
2,876.7

Less: cash
 
557.2

 
558.0

 
582.7

Less: accounts payable, accrued and other current liabilities, provisions and income taxes payable
 
1,189.7

 
1,165.2

 
1,167.9

Net invested capital at period end (1)
 
$
1,095.0

 
$
1,110.3

 
$
1,126.1

(1) 
See footnote 4 of the previous table.

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GUIDANCE SUMMARY
 
Q2 2018 Guidance (1)
 
Q2 2018 Actual (1)
 
Q3 2018 Guidance (2)
IFRS revenue (in billions) 
$1.575 to $1.675
 
$1.70
 
$1.65 to $1.75
Non-IFRS operating margin
3.2% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges
 
3.1%
 
3.3% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges
Non-IFRS adjusted SG&A (in millions)
$51.0 to $53.0
 
$48.3
 
$49.0 to $51.0
Non-IFRS adjusted EPS
$0.25 to $0.31
 
$0.29
 
$0.26 to $0.32
 
 
 
 
 
 


(1) For the second quarter of 2018, our revenue of $1.70 billion was above our guidance range, driven by higher-than-expected demand from certain customers in our CCS segment. Although overall revenue was above our guidance range, our non-IFRS operating margin of 3.1% for the second quarter of 2018 compared to guidance of 3.2% at the mid-point of our revenue and non-IFRS adjusted EPS guidance ranges for the quarter, and was negatively impacted primarily by a higher-than-expected mix of CCS revenue and inventory provisions for certain aged items in the quarter. Our non-IFRS adjusted SG&A of $48.3 million was lower than our expectations, primarily due to lower discretionary spend and the foreign exchange gains we recorded in the second quarter of 2018.

(2) For the third quarter of 2018, we anticipate a negative $0.17 to $0.23 per share (pre-tax) aggregate impact on net earnings on an IFRS basis for employee stock-based compensation expense, amortization of intangible assets (excluding computer software), Toronto transition costs (described above), and restructuring charges. We cannot predict changes in currency exchange rates, the impact of such changes on our operating results, or the degree to which we will be able to manage such impacts. We expect our non-IFRS adjusted annual effective tax rate for 2018 to be between 17% and 19%. We do not provide reconciliations for 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.
  


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CELESTICA INC. 
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions of U.S. dollars)
(unaudited)
 
December 31
2017
 
June 30
2018
 
(restated)
 
 
Assets
 

 
 

Current assets:
 

 
 

     Cash and cash equivalents
$
515.2

 
$
401.4

     Accounts receivable (notes 3 & 7)
1,023.7

 
1,125.5

     Inventories (notes 3 & 8)
824.0

 
1,006.9

Income taxes receivable
1.6

 
1.6

    Assets classified as held for sale (note 9)
30.1

 
27.4

    Other current assets
82.0

 
89.7

Total current assets
2,476.6

 
2,652.5

 
 
 
 
Property, plant and equipment
323.9

 
340.4

Goodwill (note 5)
23.2

 
87.2

Intangible assets (note 5)
21.6

 
68.8

Deferred income taxes
37.6

 
38.4

Other non-current assets (note 10)
81.3

 
24.9

Total assets
$
2,964.2

 
$
3,212.2

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Current portion of borrowings under credit facility and finance lease obligations (note 11)
$
37.9

 
$
8.3

Accounts payable
931.1

 
1,118.8

Accrued and other current liabilities
233.2

 
235.3

Income taxes payable
37.7

 
33.5

Current portion of provisions
26.6

 
26.2

Total current liabilities
1,266.5

 
1,422.1

 
 
 
 
Long-term portion of borrowings under credit facility and finance lease obligations (note 11)
166.5

 
347.1

Pension and non-pension post-employment benefit obligations (note 10)
97.8

 
99.0

Provisions and other non-current liabilities
35.4

 
31.8

Deferred income taxes
27.8

 
21.8

Total liabilities
1,594.0

 
1,921.8

 
 
 
 
Equity:
 

 
 

     Capital stock (note 12)
2,048.3

 
2,003.9

     Treasury stock (note 12)
(8.7
)
 
(11.9
)
Contributed surplus
863.0

 
881.5

Deficit
(1,525.7
)
 
(1,558.8
)
Accumulated other comprehensive loss
(6.7
)
 
(24.3
)
Total equity
1,370.2

 
1,290.4

Total liabilities and equity
$
2,964.2

 
$
3,212.2

 Contingencies (note 16), Subsequent event (note 6), Transitional impacts of adopting IFRS 15 (notes 2 and 3).
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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CELESTICA INC. 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions of U.S. dollars, except per share amounts)
(unaudited)

 
 
Three months ended
 
Six months ended
{
June 30
 
June 30
 
2017
 
2018
 
2017
 
2018
 
(restated)
 
 
 
(restated)
 
 
Revenue
$
1,557.6

 
$
1,695.2

 
$
3,039.7

 
$
3,194.9

Cost of sales (note 8)
1,448.8

 
1,590.4

 
2,828.4

 
2,996.6

Gross profit
108.8

 
104.8

 
211.3

 
198.3

Selling, general and administrative expenses (SG&A)
50.4

 
52.7

 
104.1

 
105.0

Research and development
6.6

 
6.8

 
12.4

 
12.8

Amortization of intangible assets
2.2

 
3.7

 
4.5

 
5.7

Other charges (note 13)
8.0

 
15.8

 
15.6

 
26.3

Earnings from operations
41.6

 
25.8

 
74.7

 
48.5

Finance costs
2.6

 
4.9

 
5.2

 
8.2

Earnings before income taxes
39.0

 
20.9

 
69.5

 
40.3

Income tax expense (recovery) (note 14):
 

 
 

 
 
 
 
Current
12.9

 
5.6

 
27.1

 
19.4

Deferred
(8.5
)
 
(0.8
)
 
(14.7
)
 
(9.3
)
 
4.4

 
4.8

 
12.4

 
10.1

Net earnings for the period
$
34.6

 
$
16.1

 
$
57.1

 
$
30.2

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.24

 
$
0.12

 
$
0.40

 
$
0.21

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.24

 
$
0.11

 
$
0.39

 
$
0.21

 
 
 
 
 
 
 
 
Shares used in computing per share amounts (in millions):
 

 
 

 
 
 
 
Basic
143.4

 
139.6

 
142.9

 
140.9

Diluted
145.5

 
140.7

 
144.8

 
142.1

 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.



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CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions of U.S. dollars)
(unaudited)
 
 
Three months ended
 
Six months ended
 
June 30
 
June 30
 
2017
 
2018
 
2017
 
2018
 
(restated)
 
 
 
(restated)
 
 
Net earnings for the period
$
34.6

 
$
16.1

 
$
57.1

 
$
30.2

Other comprehensive income, net of tax:
 

 
 

 
 

 
 
Items that will not be reclassified to net earnings:
 
 
 
 
 
 
 
Losses on pension and non-pension post-employment benefit plans (note 10)

 
(63.3
)
 
(17.0
)
 
(63.3
)
Items that may be reclassified to net earnings:
 
 
 
 
 
 
 
  Currency translation differences for foreign operations

 
(1.1
)
 
0.8

 
0.2

  Changes from derivatives designated as hedges
9.2

 
(16.3
)
 
17.5

 
(17.8
)
Total comprehensive income (loss) for the period
$
43.8

 
$
(64.6
)
 
$
58.4

 
$
(50.7
)
 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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CELESTICA INC. 
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in millions of U.S. dollars)
(unaudited)
 
 
Capital stock
(note 12)
 
Treasury
stock (note 12)
 
Contributed
surplus
 
Deficit
 
Accumulated
other
comprehensive
loss (a)
 
Total equity
Balance -- January 1, 2017
$
2,048.2

 
$
(15.3
)
 
$
862.6

 
$
(1,632.0
)
 
$
(24.7
)
 
$
1,238.8

Impact of change in accounting policies (notes 2 and 3)

 

 

 
19.0

 

 
19.0

Restated balance at January 1, 2017
2,048.2

 
(15.3
)
 
862.6

 
(1,613.0
)
 
(24.7
)
 
1,257.8

Capital transactions (note 12):
 

 
 

 
 

 
 

 
 

 
 

Issuance of capital stock
29.8

 

 
(16.6
)
 

 

 
13.2

Purchase of treasury stock for stock-based plans

 
(6.5
)
 

 

 

 
(6.5
)
Stock-based compensation and other

 
16.9

 
0.8

 

 

 
17.7

Total comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net earnings for the period

 

 

 
57.1

 

 
57.1

  Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

 
 

 
 

Losses on pension and non-pension post-employment benefit plans (note 10)

 

 

 
(17.0
)
 

 
(17.0
)
Currency translation differences for foreign operations

 

 

 

 
0.8

 
0.8

Changes from derivatives designated as hedges

 

 

 

 
17.5

 
17.5

Balance -- June 30, 2017
$
2,078.0

 
$
(4.9
)
 
$
846.8

 
$
(1,572.9
)
 
$
(6.4
)
 
$
1,340.6

 
 
 
 
 
 
 
 
 
 
 
 
Balance -- January 1, 2018
$
2,048.3

 
$
(8.7
)
 
$
863.0

 
$
(1,545.2
)
 
$
(6.7
)
 
$
1,350.7

Impact of change in accounting policies (notes 2 and 3)

 

 

 
19.5

 

 
19.5

Restated balance at January 1, 2018
2,048.3

 
(8.7
)
 
863.0

 
(1,525.7
)
 
(6.7
)
 
1,370.2

Capital transactions (note 12):
 

 
 

 
 

 
 

 
 

 
 

Issuance of capital stock
12.7

 

 
(12.3
)
 

 

 
0.4

Repurchase of capital stock for cancellation
(57.1
)
 

 
18.8

 

 

 
(38.3
)
Purchase of treasury stock for stock-based plans

 
(9.6
)
 

 

 

 
(9.6
)
Stock-based compensation and other

 
6.4

 
12.0

 

 

 
18.4

Total comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

Net earnings for the period

 

 

 
30.2

 

 
30.2

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

 
 

 
 

 Losses on pension and non-pension post-employment benefit plans (note 10)

 

 

 
(63.3
)
 

 
(63.3
)
Currency translation differences for foreign operations

 

 

 

 
0.2

 
0.2

Changes from derivatives designated as hedges

 

 

 

 
(17.8
)
 
(17.8
)
Balance -- June 30, 2018
$
2,003.9

 
$
(11.9
)
 
$
881.5

 
$
(1,558.8
)
 
$
(24.3
)

$
1,290.4

 
(a)  Accumulated other comprehensive loss is net of tax.


The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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CELESTICA INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions of U.S. dollars)
(unaudited)

 
Three months ended
 
Six months ended
 
June 30
 
June 30
 
2017
 
2018
 
2017
 
2018
 
(restated)
 
 
 
(restated)
 
 
Cash provided by (used in):
 

 
 

 
 
 
 
Operating activities:
 

 
 

 
 
 
 
Net earnings for the period
$
34.6

 
$
16.1

 
$
57.1

 
$
30.2

Adjustments to net earnings for items not affecting cash:
 

 
 

 
 
 
 
Depreciation and amortization
19.1

 
21.6

 
37.5

 
42.9

Equity-settled stock-based compensation
5.7

 
7.2

 
16.7

 
17.6

Other charges
7.1

 
1.1

 
7.1

 
1.4

Finance costs
2.6

 
4.9

 
5.2

 
8.2

Income tax expense
4.4

 
4.8

 
12.4

 
10.1

Other
(1.2
)
 
(4.4
)
 
(4.7
)
 
(7.4
)
Changes in non-cash working capital items:
 

 
 

 
 
 
 
Accounts receivable
(5.4
)
 
(104.8
)
 
47.9

 
(86.4
)
Inventories
(21.1
)
 
(65.3
)
 
(74.0
)
 
(170.1
)
Other current assets
21.3

 
(6.2
)
 
12.9

 
(9.6
)
Accounts payable, accrued and other current liabilities and provisions
(1.5
)
 
121.4

 
(11.9
)
 
166.6

Non-cash working capital changes
(6.7
)
 
(54.9
)
 
(25.1
)
 
(99.5
)
Net income tax paid
(10.4
)
 
(11.3
)
 
(15.4
)
 
(23.8
)
Net cash provided by (used in) operating activities
55.2

 
(14.9
)
 
90.8

 
(20.3
)
 
 
 
 
 
 
 
 
Investing activities:
 

 
 

 
 
 
 
Acquisition, net of cash acquired (note 5)

 
(141.7
)
 

 
(141.7
)
Purchase of computer software and property, plant and equipment(a)
(24.1
)
 
(25.1
)
 
(49.6
)
 
(42.3
)
Proceeds/deposits related to the sale of assets

 

 
0.6

 
3.5

Repayment of advances from solar supplier (note 6)
5.7

 

 
12.5

 

Net cash used in investing activities
(18.4
)
 
(166.8
)
 
(36.5
)
 
(180.5
)
 
 
 
 
 
 
 
 
Financing activities:
 

 
 

 
 
 
 
Borrowings under prior credit facility (note 11)

 
163.0

 

 
163.0

Repayments under prior credit facility (note 11)
(6.3
)
 
(344.3
)
 
(27.5
)
 
(350.5
)
Borrowings under new credit facility (note 11)

 
350.0

 

 
350.0

Finance lease payments (note 11)
(1.6
)
 
(0.8
)
 
(3.1
)
 
(12.6
)
Issuance of capital stock (note 12)
3.4

 
0.2

 
13.2

 
0.4

Repurchase of capital stock for cancellation (note 12)

 
(3.2
)
 

 
(38.3
)
Purchase of treasury stock for stock-based plans (note 12)
(5.2
)
 
(5.3
)
 
(6.5
)
 
(9.6
)
Finance costs paid
(2.4
)
 
(12.2
)
 
(4.9
)
 
(15.4
)
Net cash provided by (used in) financing activities
(12.1
)
 
147.4

 
(28.8
)
 
87.0

 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
24.7

 
(34.3
)
 
25.5

 
(113.8
)
Cash and cash equivalents, beginning of period
558.0

 
435.7

 
557.2

 
515.2

Cash and cash equivalents, end of period
$
582.7

 
$
401.4

 
$
582.7

 
$
401.4

(a) Additional equipment of $5.0 was acquired through finance leases in the second quarter and first half of 2018 (first quarter and first half of 2017 $5.0).
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)



1.             REPORTING ENTITY
 
Celestica Inc. (Celestica) is incorporated in Ontario with its corporate headquarters currently located at 844 Don Mills Road, Toronto, Ontario, M3C 1V7. Celestica’s subordinate voting shares are listed on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).
 
Celestica delivers innovative supply chain solutions globally to customers in two operating and reportable segments: Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS). Our ATS segment consists of our ATS end market, and is comprised of our aerospace and defense, industrial, smart energy, healthtech, semiconductor capital equipment and consumer businesses. Our CCS segment consists of our Communications and Enterprise end markets, and is comprised of our enterprise communications, telecommunications, servers and storage businesses. See note 4 below for a discussion of the recent reorganization of our end markets and the division of our business into two operating and reportable segments. Our prior period financial information has been reclassified to reflect the reorganized segment structure and to conform to the current presentation.


2.             BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Statement of compliance:
 
These unaudited interim condensed consolidated financial statements for the period ended June 30, 2018 (Q2 2018 Interim Financial Statements) have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB) and the accounting policies we have adopted in accordance with International Financial Reporting Standards (IFRS). The Q2 2018 Interim Financial Statements should be read in conjunction with our 2017 annual audited consolidated financial statements (2017 AFS) and reflect all adjustments that are, in the opinion of management, necessary to present fairly our financial position as at June 30, 2018 and our financial performance, comprehensive income (loss) and cash flows for the three and six months ended June 30, 2018. The Q2 2018 Interim Financial Statements are presented in U.S. dollars, which is also our functional currency. Unless otherwise noted, all financial information is presented in millions of U.S. dollars (except percentages and per share amounts).
 
The Q2 2018 Interim Financial Statements were authorized for issuance by our board of directors on July 31, 2018.
 
Use of estimates and judgments:
 
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses, and the related disclosures of contingent assets and liabilities. We base these estimates and assumptions on current facts, historical experience and various other factors that we believe are reasonable under the circumstances. The near-term economic environment could also impact certain estimates necessary to prepare our consolidated financial statements, including the estimates related to the recoverable amounts used in our impairment testing of our non-financial assets, and the discount rates applied to our net pension and non-pension post-employment benefit assets or liabilities. Our assessment of these factors forms the basis for our judgments on the carrying values of assets and liabilities, and the accrual of costs and expenses. Actual results could differ materially from these estimates and assumptions. We review our estimates and underlying assumptions on an ongoing basis and make revisions as determined necessary by management. Revisions are recognized in the period in which the estimates are revised and may impact future periods. There have been no material changes to our assumptions or the judgments affecting the application of our estimates and assumptions during the second quarter and first half of 2018 from those described in the notes to our 2017 AFS. However, see “Accounting policies” below for a discussion of recently adopted accounting standards.
Accounting policies:
The Q2 2018 Interim Financial Statements are based upon accounting policies consistent with those used and described in note 2 of our 2017 AFS, except for the recently adopted accounting standards discussed below.

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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


Recently adopted accounting standards:
IFRS 15, Revenue from Contracts with Customers:

In May 2014, the IASB issued this standard, which provides a single, principles-based five-step model for revenue recognition to be applied to all customer contracts, and requires enhanced disclosures. The new standard is effective for annual periods beginning on or after January 1, 2018, and allowed for early adoption. We adopted this standard on January 1, 2018, and elected to use the retrospective approach, pursuant to which we have restated each of the required comparative reporting periods presented herein and recognized the transitional adjustments through equity at the start of the first comparative reporting period presented herein. The new standard has changed the timing of our revenue recognition for a significant portion of our business, resulting in the recognition of revenue for certain customer contracts earlier than under the previous revenue recognition rules (which was generally upon delivery). The new standard has materially impacted our consolidated financial statements, primarily in relation to inventory and accounts receivable balances. Transition activities have been completed, and the necessary changes have been made to our business processes, systems and controls to support the recognition and disclosures required by the new standard. See “Changes in accounting policies” below. Also see note 3 for the transitional impacts of adopting IFRS 15.
IFRS 9, Financial Instruments:
Effective January 1, 2018, we adopted IFRS 9, Financial Instruments issued by the IASB. This standard introduces a new model for the classification and measurement of financial assets, a single expected credit loss model for the measurement of the impairment of financial assets, and a new model for hedge accounting that is aligned with a company’s risk management activities. As a result of adopting IFRS 9, we have also complied with the transitional rules of IAS 1, Presentation of Financial Statements and IFRS 7, Financial Instruments Disclosures. Transition activities have been completed, and the necessary changes have been made to our business processes and controls to support the new standard.
Under IFRS 9, financial assets are classified as either: measured at amortized cost, fair value through other comprehensive income (FVOCI), or fair value through profit or loss (FVTPL). This classification is generally based on the business model in which the financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the held-to-maturity, loans and receivables, and available-for-sale categories previously allowed under IAS 39. Trade and non-customer receivables, that were previously classified as loans and receivables under IAS 39, are measured to amortized cost under IFRS 9. Although the classification of such assets changed, measurement of these assets continues to be at amortized cost, and no changes to their carrying amounts were required upon adopting IFRS 9. For financial liabilities, IFRS 9 largely retains the existing IAS 39 classifications, with the exception of those designated at FVTPL. Since we currently do not hold any liabilities designated as FVTPL, we were not impacted by this change. We do not currently hold any financial assets or liabilities under FVOCI.
In accordance with the transitional rules, we have applied the changes of IFRS 9 retrospectively, with the exception of the hedge accounting policies which we have applied prospectively as required by this standard. The adoption of this standard did not result in any adjustments to our Q2 2018 Interim Financial Statements and did not have a material impact on our accounting policies.
See “Changes in accounting policies” below for a description of accounting policy changes in connection with our adoption of IFRS 9 and IFRS 15.
Recently issued accounting pronouncements:
IFRS 16, Leases:
In January 2016, the IASB issued this standard, which brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. IFRS 16 supersedes IAS 17, Leases, and related interpretations and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted. We do not intend to adopt this standard early. We have established a project team to evaluate the anticipated impact of this standard on our consolidated financial statements, as well as any changes to our business processes, systems and controls that may be required to support the recognition

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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


and disclosures required by the new standard. Transition efforts are currently underway, and are anticipated to be complete by January 1, 2019.

Changes in accounting policies:
This section should be read as a modification to the significant accounting policies in notes 2 (q), (r), (s) and (t) of our 2017 AFS and reflects accounting policy changes in connection with our adoption of IFRS 9 and IFRS 15.

(a) Financial assets and financial liabilities:
We recognize financial assets and financial liabilities initially at fair value and subsequently measure these at either fair value or amortized cost based on their classification as described below.
Fair value through profit or loss (FVTPL):
Financial assets and financial liabilities that we purchase or incur, respectively, with the intention of generating earnings in the near term, and derivatives other than cash flow hedges, are classified as FVTPL. This category includes short-term investments in money market funds (if applicable) that we group with cash equivalents, and derivative assets and derivative liabilities that do not qualify for hedge accounting. See Derivatives and hedge accounting in note (c) below for derivative contracts that qualify for hedge accounting. For investments that we classify as FVTPL, we initially recognize such financial assets on our consolidated balance sheet at fair value and recognize subsequent changes in our consolidated statement of operations. We will expense transaction costs as incurred in our consolidated statement of operations. We do not currently hold any liabilities designated as FVTPL.
Amortized cost:
We classify financial assets held to collect the contractual cash flows (in the form of payment of principal and interest earned on the principal outstanding) at amortized cost, including our trade receivables, term deposits and non-customer receivables. We initially recognize the carrying amount of such assets on our consolidated balance sheet at fair value plus directly attributable transaction costs, and subsequently measure these at amortized cost using the effective interest rate method, less any impairment losses.
Other financial liabilities:
This category is for our financial liabilities that are not classified as FVTPL and includes accounts payable, the majority of our accrued liabilities and certain other provisions, as well as borrowings under our credit facility, including our term loan. We record these financial liabilities at amortized cost on our consolidated balance sheet.
(b) Impairment of financial assets:
We used a forward-looking “expected credit loss” (ECL) model in determining our allowance for doubtful accounts as it relates to trade receivables, contract assets (under IFRS 15), and other assets. Our allowance is determined by historical experiences, and considers factors including the aging of the balances, the customer's credit worthiness, updates based on current economic conditions, expectation of bankruptcies, and the political and economic volatility in the markets/location of our customers. A default of accounts receivable occurs when customers are unable to pay for the goods or services we provided in accordance with the contract terms and conditions. An accounts receivable balance is written off or written down to its net realizable value as soon as it is known to be in default or in partial default. We will adjust previous write-downs to reflect changes in estimates or actual experience.


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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


(c) Derivatives and hedge accounting:

The hedge accounting standards under IFRS 9 align the accounting for hedging instruments more closely to a company's risk management practices. Based on our assessment, all hedging relationships that were designated under IAS 39 as of December 31, 2017 met the criteria for hedge accounting under IFRS 9 effective January 1, 2018, and are considered continuing hedging relationships after transition. For foreign exchange forward and swap contracts that we designate as cash flow hedges and qualify for hedge accounting, we measure these derivatives at fair value on our consolidated balance sheet, and we defer the changes in the fair value of the hedging derivative, to the extent effective, in other comprehensive income (OCI) until we recognize the asset, liability or forecasted transaction being hedged in our consolidated statement of operations.

(d) Revenue:

We derive the majority of our revenue from the sale of electronic products and services that we manufacture and provide to customer specifications. Our range of services includes, among others, design and development, engineering services, supply chain management, new product introduction, manufacturing, assembly, testing, systems integration, order fulfillment, logistics and after-market services.

We recognize revenue from the sale of products and services rendered when our performance obligation has been satisfied or when the associated control over the products sold has passed to the customer and no material uncertainties remain as to the collection of our receivables. For those businesses where the products are custom-made to meet a customers' specific requirements, and such customers are liable to compensate us for the work performed to date, we will recognize revenue over time as our production progresses to completion, or as services are rendered. We generally estimate revenue of our work in process based on costs incurred to date plus a reasonable profit margin for eligible products for which we do not have alternative uses. For other businesses that do not qualify for revenue recognition over time, we continue to recognize revenue at a point in time where control is passed to the customer, which is generally upon shipment and no further performance obligation remains except for our standard manufacturing or service warranties.

3.    TRANSITION TO IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue should be recognized, and replaces IAS 18, Revenues, IAS 11, Construction Contracts, and related interpretations. We adopted IFRS 15 effective January 1, 2018 by applying the retrospective method, and have restated each of the required comparative reporting periods presented herein. In computing the transitional adjustments, we applied the practical expedients in accordance with IFRS 15 to exclude certain contracts that we started and completed in the same annual reporting period, or were completed prior to January 1, 2016, the beginning of the earliest period to be presented in our 2018 annual audited consolidated financial statements. We recognized the transitional adjustments through equity as of the beginning of 2017 for our Q2 2018 Interim Financial Statements.

(a) Transitional impacts:

For a significant portion of our business, the timing of our revenue recognition has changed under the new standard from a point-in-time to over time, resulting in an earlier recognition of revenue than under the previous recognition rules (which was generally upon delivery). The most significant financial impacts of adopting IFRS 15 on the comparative periods in our consolidated financial statements are summarized as follows:


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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


 
 
 
 
Three
months
ended
Six
months
ended
 
 
 
December 31, 2016
June 30,
2017
June 30,
2017
June 30,
2017
December 31, 2017
 
 
Increase (decrease)
Contract assets (included in accounts receivable)
 
$
226.9

$
237.7



$
258.9

Inventories
 
(206.2
)
(217.5
)


(237.8
)
Deferred taxes
 
(1.7
)
(1.8
)


(1.9
)
Accrued and other current liabilities
 

(0.5
)


(0.3
)
Deficit
 
(19.0
)
(18.9
)


(19.5
)
 
 
 



 
Revenue
 


$
(0.9
)
$
11.3


Cost of sales
 


(1.3
)
11.3


Income tax expense
 


0.2

0.1


Net earnings
 


0.2

(0.1
)

 
 
 



 
Diluted earnings per share
 


$

$



(b) Contract assets and liabilities:

Our contract assets consist of unbilled amounts recognized as revenue under IFRS 15 and deferred investment costs incurred to obtain or fulfill a contract. As of June 30, 2018, we had approximately $275.3 (December 31, 2017 — $258.9) of contract assets recognized as revenue under IFRS 15, which we recorded in accounts receivable on our consolidated balance sheet. Deferred investment costs are recorded initially at cost in other current and non-current assets on our consolidated balance sheet, and subsequently amortized over the projected period of expected future benefits, or as recoveries are realized, from the new contracts. We monitor our contract assets for potential impairment on a regular basis. No significant impairment losses were recorded on our contract assets during the second quarter or first half of either 2018 or 2017. Our contract liabilities consist of advance payments from customers and deferred revenue, which we recorded in accrued and other current liabilities on our consolidated balance sheet.


4.             SEGMENT AND CUSTOMER REPORTING
 
Segment Reorganization:

Operating segments are defined as components of an enterprise that engage in business activities from which they may earn revenue and incur expenses; for which discrete financial information is available; and whose operating results are regularly reviewed by the chief operating decision maker in deciding how to allocate resources and to assess performance. No operating segments have been aggregated to determine our reportable segments.

During the first quarter of 2018, we completed a reorganization of our reporting structure, including our sales, operations and management systems, into two operating and reportable segments: ATS and CCS. Prior to this reorganization, we operated in one reportable segment (Electronic Manufacturing Services), which was comprised of multiple end markets (ATS, Communications and Enterprise during 2017). The change in operating and reportable segments was a result of modifications to our organizational and internal management structure which were initiated in 2017 to streamline business operations and improve profitability and competitiveness, and were completed in early 2018. As a result of these modifications, and commencing in the first quarter of 2018, our Chief Executive Officer (CEO), who is our chief operating decision maker, reviews segment revenue, segment income and segment margin (described below) to assess performance and make decisions about resource allocation. Our prior period financial information has been reclassified to reflect the reorganized segment structure and to conform to the current presentation.

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CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


The foregoing changes have no impact on our historical consolidated financial position, results of operations or cash flows as previously reported.

Factors considered in determining the two reportable segments included the nature of applicable business activities, management structure, market strategy and margin profiles. Our ATS segment consists of our ATS end market, and is comprised of our aerospace and defense, industrial, smart energy, healthtech, semiconductor capital equipment, and consumer businesses. Products and services in this segment are extensive and are often more regulated than in our CCS segment, and can include the following: government-certified and highly-specialized manufacturing, electronic and enclosure-related services for aerospace and defense-related customers; high-precision equipment and integrated subsystems used in the manufacture of semiconductors; a wide range of industrial automation, controls, test and measurement devices; advanced solutions for surgical instruments, diagnostic imaging and patient monitoring; and efficiency products to help manage and monitor the energy and power industries. Our ATS segment businesses typically have a higher margin profile and longer product life cycles than the businesses in our CCS segment. Our CCS segment consists of our Communications and Enterprise end markets, and is comprised of our enterprise communications, telecommunications, servers and storage businesses. Products and services in this segment consist predominantly of enterprise-level data communications and information processing infrastructure products, and can include routers, switches, servers and storage-related products used by a wide range of businesses and cloud-based service providers to manage digital connectivity, commerce and social media applications. Our CCS segment businesses typically have a lower margin profile and higher volumes than the businesses in our ATS segment, and have been impacted in recent periods (and continue to be impacted) by aggressive pricing, rapid shifts in technology, model obsolescence and the commoditization of certain products.

Segment performance is evaluated based on segment revenue, segment income and segment margin (segment income as a percentage of segment revenue). Revenue is attributed to the segment in which the product is manufactured or the service is performed. Segment income is defined as a segment’s net revenue less its cost of sales and its allocable portion of selling, general and administrative expenses and research and development expenses (collectively, Segment Costs). Identifiable Segment Costs are allocated directly to the applicable segment while other Segment Costs, including indirect costs and certain corporate charges, are allocated to our segments based on an analysis of the relative usage or benefit derived by each segment from such costs. Segment income excludes finance costs, amortization of intangible assets (excluding computer software), employee stock-based compensation expense, net restructuring, impairment and other charges (recoveries), other solar charges, and the fair value adjustment for inventory acquired in connection with our purchase of Atrenne Integrated Solutions, Inc. (Atrenne), as these costs and charges are managed and reviewed by our CEO at the company level. Net restructuring, impairment and other charges (recoveries) include, in applicable periods, restructuring charges (recoveries), impairment charges (recoveries), acquisition-related consulting, transaction and integration costs, legal settlements (recoveries), Toronto transition costs (recoveries), and the accelerated amortization of unamortized deferred financing costs. Our segments do not record inter-segment revenue. Although segment income and segment margin are used to evaluate the performance of our segments, we may incur operating costs in one segment that may also benefit the other segment. Our accounting policies for segment reporting are the same as those applied to the company as a whole.

Information regarding the results of each reportable segment is included below:

Revenue by segment:
Three months ended June 30
 
Six months ended June 30
 
2017
 
2018
 
2017
 
2018
 
 
% of total
 
 
% of total
 
 
% of total
 
 
% of total
ATS
$
478.5

31%
 
$
553.2

33%
 
$
969.9

32%
 
$
1,086.0

34%
CCS
1,079.1

69%
 
1,142.0

67%
 
2,069.8

68%
 
2,108.9

66%
Total
$
1,557.6


 
$
1,695.2


 
$
3,039.7


 
$
3,194.9



11more...



CELESTICA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in millions of U.S. dollars, except percentages and per share amounts)
(unaudited)


Segment income, segment margin, and reconciliation of segment income to IFRS earnings before income taxes:
Three months ended June 30
 
Six months ended June 30
 
2017
 
2018
 
2017
 
2018
 
 
Segment Margin
 
 
Segment Margin
 
 
Segment Margin
 
 
Segment Margin
ATS segment income and margin
$
22.5

4.7%
 
$
28.2

5.1%
 
$
45.8

4.7
%
 
$
56.1

5.2
%
CCS segment income and margin
35.7

3.3%
 
24.9
2.2%
 
65.6

3.2
%
 
41.7
2.0
%
Total segment income
58.2


 
53.1


 
111.4


 
97.8


Reconciling items:
 
 
 
 
 
 
 
 
 
 
 
Finance costs
2.6

 
 
4.9

 
 
5.2

 
 
8.2

 
Employee stock-based compensation expense
5.7

 
 
7.2

 
 
16.7

 
 
17.6

 
Amortization of intangible assets (excluding computer software)
1.5

 
 
2.7

 
 
3.0

 
 
3.8

 
Net restructuring, impairment and other charges (see note 13)
8.0

 
 
15.8

 
 
15.6

 
 
26.3

 
Other solar charges (inventory and A/R write-down)
1.4

 
 

 
 
1.4

 
 

 
Atrenne inventory fair value adjustment (see note 5)

 
 
1.6

 
 

 
 
1.6

 
IFRS earnings before income taxes
$
39.0

 
 
$
20.9

 
 
$
69.5

 
 
$
40.3