UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
| For the quarterly period ended |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
| FOR THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NUMBER 000-31051000-31051
SMTC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
| 98-0197680 |
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) | (I.R.S. EMPLOYERIDENTIFICATION NO.) |
7050 WOODBINE AVENUE
Suite 300
MARKHAM, ONTARIO, CANADAOntario, Canada L3R 4G8
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 479-1810
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | SMTX |
|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging“emerging growth company.company”. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Smaller reporting company ☒ | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 12, 2019,August 6, 2020, SMTC Corporation had 28,098,47428,214,800 shares of common stock, par value $0.01 per share, outstanding.
SMTC CORPORATION
Table of Contents
3 | ||
|
|
|
Item 1 | 3 | |
|
|
|
| 3 | |
|
|
|
| Interim Consolidated Statements of | 4 |
|
|
|
| Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited) | 5 |
|
|
|
| 6 | |
Notes to Interim Consolidated Financial Statements (unaudited) | 7 | |
|
|
|
Item 2 |
|
|
|
|
|
Item |
|
|
|
|
|
Item |
|
|
37 | ||
|
|
|
Item |
|
|
|
| |
|
|
|
Item |
|
|
|
|
|
SMTC CORPORATION
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Interim Consolidated Balance Sheets:
(Expressed in thousands of U.S. dollars)
(Unaudited)
September 29, 2019 | December 30, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash | $ | 601 | $ | 1,601 | ||||
Accounts receivable — net (note 4) | 61,208 | 72,986 | ||||||
Unbilled contract assets (note 4) | 26,790 | 20,405 | ||||||
Inventories (note 4) | 49,535 | 53,203 | ||||||
Prepaid expenses and other assets | 6,658 | 5,548 | ||||||
Derivative assets (note 11) | — | 15 | ||||||
Income taxes receivable | 358 | 160 | ||||||
Total current assets | 145,150 | 153,918 | ||||||
Property, plant and equipment — net (note 4) | 26,348 | 28,160 | ||||||
Operating lease right of use assets — net (notes 2 and 6) | 3,887 | — | ||||||
Goodwill (note 4) | 18,165 | 18,165 | ||||||
Intangible assets — net (note 4) | 14,403 | 19,935 | ||||||
Deferred income taxes — net | 366 | 380 | ||||||
Deferred financing costs — net | 899 | 668 | ||||||
Total assets | $ | 209,218 | $ | 221,226 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Revolving credit facility (note 5) | $ | 34,840 | $ | 25,020 | ||||
Accounts payable | 67,082 | 76,893 | ||||||
Accrued liabilities (note 4) | 13,387 | 13,040 | ||||||
Warrant liability (note 5) | 1,090 | 2,009 | ||||||
Restructuring liability (note 12) | 2,736 | — | ||||||
Contingent consideration (note 4) | — | 3,050 | ||||||
Income taxes payable | 94 | 12 | ||||||
Current portion of long-term debt (note 5) | 1,250 | 1,368 | ||||||
Current portion of operating lease obligations (notes 2 and 6) | 1,483 | — | ||||||
Current portion of finance lease obligations (notes 2 and 6) | 1,316 | 1,547 | ||||||
Total current liabilities | 123,278 | 122,939 | ||||||
Long-term debt (note 5) | 34,154 | 56,039 | ||||||
Operating lease obligations (notes 2 and 6) | 2,818 | — | ||||||
Finance lease obligations (notes 2 and 6) | 9,105 | 9,947 | ||||||
Total liabilities | 169,355 | 188,925 | ||||||
Shareholders’ equity: | ||||||||
Capital stock (note 7) | 507 | 458 | ||||||
Additional paid-in capital | 293,152 | 278,648 | ||||||
Deficit | (253,796 | ) | (246,805 | ) | ||||
39,863 | 32,301 | |||||||
Total liabilities and shareholders’ equity | $ | 209,218 | $ | 221,226 |
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
| $ | 311 |
|
| $ | 1,368 |
|
Accounts receivable — net (note 3) |
|
| 65,071 |
|
|
| 69,919 |
|
Unbilled contract assets (note 3) |
|
| 38,647 |
|
|
| 26,271 |
|
Inventories (note 3) |
|
| 50,125 |
|
|
| 47,826 |
|
Prepaid expenses and other assets |
|
| 6,813 |
|
|
| 7,044 |
|
Derivative assets (note 9) |
|
| 459 |
|
|
| — |
|
Income taxes receivable |
|
| 160 |
|
|
| — |
|
Total current assets |
|
| 161,586 |
|
|
| 152,428 |
|
Property, plant and equipment — net (note 3) |
|
| 23,495 |
|
|
| 25,310 |
|
Operating lease right of use assets — net |
|
| 6,419 |
|
|
| 3,330 |
|
Goodwill (note 3) |
|
| 18,165 |
|
|
| 18,165 |
|
Intangible assets — net (note 3) |
|
| 10,383 |
|
|
| 12,747 |
|
Deferred income taxes — net |
|
| 473 |
|
|
| 540 |
|
Deferred financing costs — net |
|
| 749 |
|
|
| 859 |
|
Total assets |
| $ | 221,270 |
|
| $ | 213,379 |
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Revolving credit facility (note 4) |
| $ | 33,943 |
|
| $ | 34,701 |
|
Accounts payable |
|
| 70,591 |
|
|
| 74,126 |
|
Accrued liabilities (note 3) |
|
| 20,039 |
|
|
| 11,164 |
|
Warrant liability (note 4) |
|
| 1,612 |
|
|
| 1,730 |
|
Restructuring liability (note 10) |
|
| 675 |
|
|
| 1,597 |
|
Income taxes payable |
|
| 267 |
|
|
| 157 |
|
Current portion of long-term debt (note 4) |
|
| 1,875 |
|
|
| 1,250 |
|
Current portion of operating lease obligations |
|
| 1,494 |
|
|
| 1,128 |
|
Current portion of finance lease obligations |
|
| 1,110 |
|
|
| 1,226 |
|
Total current liabilities |
|
| 131,606 |
|
|
| 127,079 |
|
Long-term debt (note 4) |
|
| 32,903 |
|
|
| 33,750 |
|
Operating lease obligations |
|
| 5,339 |
|
|
| 2,615 |
|
Finance lease obligations |
|
| 8,278 |
|
|
| 8,838 |
|
Total liabilities |
|
| 178,126 |
|
|
| 172,282 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Capital stock (note 5) |
|
| 508 |
|
|
| 508 |
|
Additional paid-in capital |
|
| 293,706 |
|
|
| 293,389 |
|
Deficit |
|
| (251,070 | ) |
|
| (252,800 | ) |
|
|
| 43,144 |
|
|
| 41,097 |
|
Total liabilities and shareholders’ equity |
| $ | 221,270 |
|
| $ | 213,379 |
|
Commitments (note 11)
Subsequent event (note 12)
See accompanying notes to interim consolidated financial statements.
SMTC CORPORATION
Interim Consolidated Statements of OperationsOperations and Comprehensive Income (Loss)
(loss)
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 | |||||||||||||
Revenue (note 4) | $ | 88,682 | $ | 53,677 | $ | 282,267 | $ | 135,276 | ||||||||
Cost of sales (note 11) | 79,776 | 48,440 | 255,740 | 121,906 | ||||||||||||
Gross profit | 8,906 | 5,237 | 26,527 | 13,370 | ||||||||||||
Selling, general and administrative expenses | 6,549 | 3,682 | 19,908 | 10,838 | ||||||||||||
Change in fair value of warrant liability (note 5) | (858 | ) | — | (919 | ) | — | ||||||||||
Change in fair value of contingent consideration (note 4) | — | — | (3,050 | ) | — | |||||||||||
Loss on disposal of property, plant and equipment | — | 3 | — | 3 | ||||||||||||
Restructuring charges (note 12) | 6,454 | 58 | 8,624 | 154 | ||||||||||||
Operating income (loss) | (3,239 | ) | 1,494 | 1,964 | 2,375 | |||||||||||
Interest expense (note 4) | 2,679 | 485 | 8,349 | 1,195 | ||||||||||||
Income (loss) before income tax expense | (5,918 | ) | 1,009 | (6,385 | ) | 1,180 | ||||||||||
Income tax expense (recovery) (note 8): | ||||||||||||||||
Current | (103 | ) | 290 | 592 | 596 | |||||||||||
Deferred | (81 | ) | (145 | ) | 14 | (191 | ) | |||||||||
(184 | ) | 145 | 606 | 405 | ||||||||||||
Net income (loss) and comprehensive income (loss) | $ | (5,734 | ) | $ | 864 | $ | (6,991 | ) | $ | 775 | ||||||
Earnings per share of common stock: | ||||||||||||||||
Basic | $ | (0.20 | ) | $ | 0.04 | $ | (0.28 | ) | $ | 0.04 | ||||||
Diluted | $ | (0.20 | ) | $ | 0.04 | $ | (0.28 | ) | $ | 0.04 | ||||||
Weighted average number of shares outstanding (note 9): | ||||||||||||||||
Basic | 28,057,763 | 19,335,253 | 24,954,875 | 17,866,399 | ||||||||||||
Diluted | 28,057,763 | 19,986,756 | 24,954,875 | 18,517,902 |
|
| Three months ended |
|
| Six months ended |
| ||||||||||
|
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| ||||
Revenue (note 3) |
| $ | 90,406 |
|
| $ | 90,936 |
|
| $ | 185,544 |
|
| $ | 193,585 |
|
Cost of sales (note 9) |
|
| 79,720 |
|
|
| 81,939 |
|
|
| 165,219 |
|
|
| 175,964 |
|
Gross profit |
|
| 10,686 |
|
|
| 8,997 |
|
|
| 20,325 |
|
|
| 17,621 |
|
Selling, general and administrative expenses |
|
| 7,107 |
|
|
| 6,560 |
|
|
| 14,326 |
|
|
| 13,359 |
|
Change in fair value of contingent consideration |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,050 | ) |
Restructuring charges (reversal) (notes 3 and 10) |
|
| (125 | ) |
|
| 1,546 |
|
|
| (346 | ) |
|
| 2,170 |
|
Operating income |
|
| 3,704 |
|
|
| 891 |
|
|
| 6,345 |
|
|
| 5,142 |
|
Fair value measurement loss (gain) on warrant liability (note 4) |
|
| 399 |
|
|
| 40 |
|
|
| (118 | ) |
|
| (61 | ) |
Interest expense (note 3) |
|
| 1,987 |
|
|
| 2,800 |
|
|
| 4,080 |
|
|
| 5,670 |
|
Net income (loss) before income taxes |
|
| 1,318 |
|
|
| (1,949 | ) |
|
| 2,383 |
|
|
| (467 | ) |
Income tax expense (note 6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
| 311 |
|
|
| 416 |
|
|
| 586 |
|
|
| 695 |
|
Deferred |
|
| 52 |
|
|
| 103 |
|
|
| 67 |
|
|
| 95 |
|
|
|
| 363 |
|
|
| 519 |
|
|
| 653 |
|
|
| 790 |
|
Net income (loss) and comprehensive income (loss) |
|
| 955 |
|
|
| (2,468 | ) |
|
| 1,730 |
|
|
| (1,257 | ) |
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.03 |
|
| $ | (0.10 | ) |
| $ | 0.06 |
|
| $ | (0.05 | ) |
Diluted |
| $ | 0.03 |
|
| $ | (0.10 | ) |
| $ | 0.06 |
|
| $ | (0.05 | ) |
Weighted average number of shares outstanding (note 7): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 28,213,729 |
|
|
| 23,557,944 |
|
|
| 28,204,514 |
|
|
| 23,403,431 |
|
Diluted |
|
| 29,493,472 |
|
|
| 23,557,944 |
|
|
| 29,484,257 |
|
|
| 23,403,431 |
|
See accompanying notes to interim consolidated financial statements.
SMTC CORPORATION
Interim Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of U.S. dollars)
Three months ended September 29, 2019June 28, 2020
(Unaudited)
Common Shares | Capital | Additional | Deficit | Total | ||||||||||||||||
Balance, June 30, 2019 | 28,011,088 | $ | 506 | $ | 292,829 | $ | (248,062 | ) | $ | 45,273 | ||||||||||
Treasury stock | 21,264 | — | (75 | ) | — | (75 | ) | |||||||||||||
Restricted stock units vested and stock options exercised | 87,386 | 1 | 45 | — | 46 | |||||||||||||||
Stock-based compensation | — | — | 353 | — | 353 | |||||||||||||||
Net loss | — | — | — | (5,734 | ) | (5,734 | ) | |||||||||||||
Balance, September 29, 2019 | 28,119,738 | 507 | 293,152 | (253,796 | ) | 39,863 |
|
| Common Shares |
|
| Capital stock |
|
| Additional paid-in capital |
|
| Deficit |
|
| Total Shareholders’ equity |
| |||||
Balance, March 29, 2020 |
|
| 28,195,300 |
|
| $ | 508 |
|
| $ | 293,551 |
|
| $ | (252,025 | ) |
| $ | 42,034 |
|
RSU vested and stock options exercised |
|
| 19,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 155 |
|
|
| — |
|
|
| 155 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 955 |
|
|
| 955 |
|
Balance, June 28, 2020 |
|
| 28,214,800 |
|
|
| 508 |
|
|
| 293,706 |
|
|
| (251,070 | ) |
|
| 43,144 |
|
Three months ended SeptemberJune 30, 2018
(Unaudited)
Common Shares | Capital | Additional | Deficit | Total | ||||||||||||||||
Balance, July 1, 2018 | 17,303,510 | $ | 399 | $ | 265,916 | $ | (246,446 | ) | $ | 19,869 | ||||||||||
Issuance of common shares from rights offering (note 7) | 5,777,768 | 58 | 12,529 | — | 12,587 | |||||||||||||||
Stock-based compensation | — | — | 75 | — | 75 | |||||||||||||||
Net income | — | — | — | 864 | 864 | |||||||||||||||
Balance, September 30, 2018 | 23,081,278 | 457 | 278,520 | (245,582 | ) | 33,395 |
Nine months ended September 29, 2019
(Unaudited)
Common Shares | Capital | Additional | Deficit | Total | ||||||||||||||||
Balance, December 30, 2018 | 23,189,381 | $ | 458 | $ | 278,648 | $ | (246,805 | ) | $ | 32,301 | ||||||||||
Treasury stock | 21,264 | — | (75 | ) | — | (75 | ) | |||||||||||||
RSU vested and stock options exercised | 267,063 | 3 | 43 | — | 46 | |||||||||||||||
Issuance of common shares from rights offering (note 7) | 4,642,030 | 46 | 13,998 | — | 14,044 | |||||||||||||||
Stock-based compensation | — | — | 538 | — | 538 | |||||||||||||||
Net loss | — | — | — | (6,991 | ) | (6,991 | ) | |||||||||||||
Balance, September 29, 2019 | 28,119,738 | 507 | 293,152 | (253,796 | ) | 39,863 |
Nine months ended September 30, 2018
(Unaudited)
Common Shares | Capital | Additional | Deficit | Total | ||||||||||||||||
Balance, December 31, 2017 | 16,992,627 | $ | 396 | $ | 265,355 | $ | (246,677 | ) | $ | 19,074 | ||||||||||
Impact of adoption of ASC 606 (note 2) | — | — | — | 320 | 320 | |||||||||||||||
RSU vested and stock options exercised | 310,883 | 3 | 358 | — | 361 | |||||||||||||||
Issuance of common shares from rights offering (note 6) | 5,777,768 | 58 | 12,529 | — | 12,587 | |||||||||||||||
Stock-based compensation | — | — | 278 | — | 278 | |||||||||||||||
Net income | — | — | — | 775 | 775 | |||||||||||||||
Balance, September 30, 2018 | 23,081,278 | 457 | 278,520 | (245,582 | ) | 33,395 |
|
| Common Shares |
|
| Capital stock |
|
| Additional paid-in capital |
|
| Deficit |
|
| Total Shareholders’ equity |
| |||||
Balance, March 31, 2019 |
|
| 23,350,558 |
|
| $ | 460 |
|
| $ | 278,734 |
|
| $ | (245,594 | ) |
| $ | 33,600 |
|
RSU vested and issued in common shares |
|
| 18,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of common shares from rights offering |
|
| 4,642,030 |
|
|
| 46 |
|
|
| 13,998 |
|
|
| — |
|
|
| 14,044 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 97 |
|
|
| — |
|
|
| 97 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,468 | ) |
|
| (2,468 | ) |
Balance, June 30, 2019 |
|
| 28,011,088 |
|
| $ | 506 |
|
| $ | 292,829 |
|
| $ | (248,062 | ) |
| $ | 45,273 |
|
See accompanying notes to interim consolidated financial statements.
Six months ended June 28, 2020 |
| Common Shares |
|
| Capital stock |
|
| Additional paid-in capital |
|
| Deficit |
|
| Total Shareholders’ equity |
| |||||
Balance, December 29, 2019 |
|
| 28,195,300 |
|
| $ | 508 |
|
| $ | 293,389 |
|
| $ | (252,800 | ) |
| $ | 41,097 |
|
RSU vested and stock options exercised |
|
| 19,500 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 317 |
|
|
| — |
|
|
| 317 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,730 |
|
|
| 1,730 |
|
Balance, June 28, 2020 |
|
| 28,214,800 |
|
| $ | 508 |
|
| $ | 293,706 |
|
| $ | (251,070 | ) |
| $ | 43,144 |
|
Six months ended June 30, 2019 |
| Common Shares |
|
| Capital stock |
|
| Additional paid-in capital |
|
| Deficit |
|
| Total Shareholders’ equity |
| |||||
Balance, December 30, 2018 |
|
| 23,189,381 |
|
| $ | 458 |
|
| $ | 278,648 |
|
| $ | (246,805 | ) |
| $ | 32,301 |
|
RSU vested and issued in common shares |
|
| 179,677 |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
Issuance of common shares from rights offering |
|
| 4,642,030 |
|
|
| 46 |
|
|
| 13,998 |
|
|
| — |
|
|
| 14,044 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 185 |
|
|
| — |
|
|
| 185 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,257 | ) |
|
| (1,257 | ) |
Balance, June 30, 2019 |
|
| 28,011,088 |
|
| $ | 506 |
|
| $ | 292,829 |
|
| $ | (248,062 | ) |
| $ | 45,273 |
|
SMTC CORPORATION
Interim Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
Nine months ended |
| Six months ended |
| |||||||||||||
September 29, 2019 | September 30, 2018 |
| June 28, 2020 |
|
| June 30, 2019 |
| |||||||||
Cash provided by (used in): |
|
|
|
|
|
|
|
| ||||||||
Operations: |
|
|
|
|
|
|
|
| ||||||||
Net income (loss) | $ | (6,991 | ) | $ | 775 | |||||||||||
Net income(loss) |
| $ | 1,730 |
|
| $ | (1,257 | ) | ||||||||
Items not involving cash: |
|
|
|
|
|
|
|
| ||||||||
Depreciation of property, plant & equipment | 4,902 | 2,426 | ||||||||||||||
Depreciation of property, plant and equipment |
|
| 3,222 |
|
|
| 3,253 |
| ||||||||
Amortization of intangible assets | 5,532 | — |
|
| 2,364 |
|
|
| 3,688 |
| ||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (338 | ) |
|
| (459 | ) |
|
| — |
| |||||
Loss on sale of property, plant and equipment | — | 3 | ||||||||||||||
Write down of property, plant and equipment | 261 | — | ||||||||||||||
Deferred income taxes (recovery) | 14 | (191 | ) | |||||||||||||
Amortization of deferred financing fees | 1,300 | 34 | ||||||||||||||
Deferred income taxes |
|
| 67 |
|
|
| 95 |
| ||||||||
Amortization of deferred financing fees and debt insurance costs |
|
| 588 |
|
|
| 545 |
| ||||||||
Stock-based compensation | 538 | 278 |
|
| 317 |
|
|
| 185 |
| ||||||
Change in fair value of warrant liability | (919 | ) | — |
|
| (118 | ) |
|
| (61 | ) | |||||
Change in fair value of contingent consideration | (3,050 | ) | — |
|
| — |
|
|
| (3,050 | ) | |||||
Change in non-cash operating working capital: |
|
|
|
|
|
|
|
| ||||||||
Accounts receivable | 11,778 | (12,096 | ) |
|
| 4,848 |
|
|
| 8,035 |
| |||||
Unbilled contract assets | (6,385 | ) | (8,183 | ) |
|
| (12,376 | ) |
|
| (7,214 | ) | ||||
Inventories | 3,668 | (6,009 | ) |
|
| (2,299 | ) |
|
| 7,054 |
| |||||
Prepaid expenses and other assets | (1,095 | ) | (1,002 | ) |
|
| 231 |
|
|
| (1,128 | ) | ||||
Income taxes payable | (116 | ) | (32 | ) | ||||||||||||
Income taxes receivable/payable |
|
| (50 | ) |
|
| 203 |
| ||||||||
Accounts payable | (9,845 | ) | 16,582 |
|
| (3,377 | ) |
|
| (10,130 | ) | |||||
Accrued liabilities | (265 | ) | 2,449 |
|
| 8,875 |
|
|
| (9 | ) | |||||
Restructuring liability | 2,736 | — |
|
| (919 | ) |
|
| (857 | ) | ||||||
Net change in operating lease right of use asset and liability | 414 | — |
|
| 1 |
|
|
| 465 |
| ||||||
2,477 | (5,304 | ) |
|
| 2,645 |
|
|
| (183 | ) | ||||||
Financing: |
|
|
|
|
|
|
|
| ||||||||
Net advances of revolving credit facility | 9,820 | 4,515 | ||||||||||||||
Repayments of revolving credit facility |
|
| (758 | ) |
|
| (11,272 | ) | ||||||||
Repayment of long-term debt | (22,625 | ) | (1,500 | ) |
|
| (625 | ) |
|
| (625 | ) | ||||
Advance of equipment facility | — | 2,629 | ||||||||||||||
Deferred financing fees | (371 | ) | (48 | ) |
|
| (75 | ) |
|
| (50 | ) | ||||
Principal repayments of finance lease obligations | (1,199 | ) | (189 | ) |
|
| (676 | ) |
|
| (809 | ) | ||||
Proceeds from issuance of common stock through exercise of stock options | 45 | 361 | ||||||||||||||
Proceeds from issuance of common stock through rights offerings | 14,044 | 12,587 |
|
| — |
|
|
| 14,044 |
| ||||||
(286 | ) | 18,355 |
|
| (2,134 | ) |
|
| 1,288 |
| ||||||
Investing: |
|
|
|
|
|
|
|
| ||||||||
Purchase of property, plant and equipment | (3,191 | ) | (3,898 | ) |
|
| (1,568 | ) |
|
| (2,072 | ) | ||||
(3,191 | ) | (3,898 | ) |
|
| (1,568 | ) |
|
| (2,072 | ) | |||||
(Decrease) increase in cash | (1,000 | ) | 9,153 | |||||||||||||
Decrease in cash |
|
| (1,057 | ) |
|
| (967 | ) | ||||||||
Cash, beginning of period | 1,601 | 5,536 |
|
| 1,368 |
|
|
| 1,601 |
| ||||||
Cash, end of the period | $ | 601 | $ | 14,689 |
| $ | 311 |
|
| $ | 634 |
| ||||
|
|
|
|
|
|
|
| |||||||||
Supplemental Information |
|
|
|
|
|
|
|
| ||||||||
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accruals | 418 | 55 | ||||||||||||||
Property, plant and equipment acquired through capital lease | 126 | 627 | ||||||||||||||
Cash interest paid |
| $ | 3,946 |
|
| $ | 2,363 |
| ||||||||
Increase in operating right of use assets |
| $ | 3,840 |
|
| $ | 5,559 |
| ||||||||
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable and accrued liabilities |
| $ | 71 |
|
| $ | 260 |
|
See accompanying notes to interim consolidated financial statements.
SMTC CORPORATION
Unaudited Notes to Interim Consolidated Financial Statements
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts)thousands)
1. | Business and Nature of |
Background
SMTC Corporation (the “Company,” “SMTC,” “we,” “us,“our,” or “our”“SMTC”) is a provider of end-to-end electronics manufacturing services (“EMS”), including product design and engineering services, printed circuit board assembly (“PCBA”), production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order (“CTO”), build to order (“BTO”) and direct order fulfillment. We havefulfillment (“DOF”). SMTC has more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Mexico,Canada and ChinaMexico that provide local support and manufacturing capabilities to our global customers. OurSMTC’s services extend over the entire electronic product life cycle from new product development and new product introduction (“NPI”) through to growth, maturity and end of life phases. As
Basis of September 29, 2019, we had 2,941 employees of which 2,541 were full time and contract employees.
In September 2019, the Company announced plans to close its manufacturing operations in China before the end of fiscal 2019. See Note 4 and Note 12 for further disclosure.
Presentation
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the accounting principles and methods of application disclosed in the audited consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 30, 2018,29, 2019, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2019, except for the adoption of the new accounting policies related to leases which is outlined in note 2.13, 2020. The accompanying unaudited interim consolidated financial statements include adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the consolidated financial statements under generally accepted accounting principles in the United States (“U.S. GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Form 10-K. The consolidated balance sheet at December 30, 201829, 2019 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.
Unless otherwise specified or the context requires otherwise, all statements in these notes to the interim consolidated financial statements regarding financial figures are expressed in thousands of U.S. dollars.
COVID-19 Pandemic
|
|
In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains, created significant volatility and disruption in financial markets and has resulted in an economic slowdown. In response to the impact of the COVID-19 pandemic, and given the uncertainty of its duration, the Company has initiated measures designed to protect our employees and will continue to adapt in order to maintain operations while providing a safe environment.
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842),is actively monitoring the global COVID-19 pandemic and continuously communicating with our customers, key suppliers, employees and union representatives, in addition to government and state representatives where our manufacturing facilities reside. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure for higher risk employees or personal commitments that restrict the ability of December 31, 2018, using the modified retrospective approach, which allows comparative periods notsome employees to be restated. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the Companycome to carry forward the historical lease classification, not reassess whether any expired or existing contracts are or contain leases and not to reassess initial direct costs for any existing leases. The Company also elected the hindsight expedient to determine the lease terms for existing leases. The election of the hindsight expedient did not have a significant impact on the calculation of the expected lease term.
The Company leases various office facilities and manufacturing equipment. The Company determines if an arrangement contains a lease at contract inception. An arrangement is, or contains, a lease if the agreement identifies an asset, implicitly or explicitly, that the Company has the right to use over a period of time. If an arrangement contains a lease, the Company classifies the lease as either an operating lease or as a finance lease based on the five criteria defined in Accounting Standards Codification (“ASC”) 842.
Lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. The corresponding right-of-use asset is recognized for the same amount as the lease liability adjusted for any payments made at or before the commencement date, any lease incentives received, and any initial direct costs. The Company’s lease agreements may include options to renew, extend or terminate the lease. These clauses are included in the initial measurement of the lease liability when at lease commencement the Company is reasonably certain that it will exercise such options. The discount rate used is the interest rate implicit in the lease or, if that cannot be readily determined, the Company's incremental borrowing rate.
Operating lease expense is recognized on a straight-line basis over the lease term and presented within cost of sales on the Company’s consolidated statements of operations. Finance lease right-of-use assets are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on the Company’s consolidated statements of operations and comprehensive income. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company’s variable lease payments primarily consists of real estate taxes, maintenance and usage charges. The Company made an accounting policy election to combine lease and non-lease components.
work. The Company has electedmodified shift schedules and hired temporary labor to exclude short-term leases fromhelp address this situation and meet our customers’ product shipping schedules. During the recognition requirementsthree months ended June 28, 2020, the Company incurred additional costs of ASC 842. A lease is short-term if,$1,185 that we have attributed to the COVID-19 pandemic, including additional temporary headcount as at risk employees are mandated to stay home in our Mexico locations as well as the commencement date, it has a termpurchase of less than or equalpersonal protective equipment and costs to one year. Lease expense relatedsanitize and clean facilities.
As at June 28, 2020, the additional funds available to short-term leases is recognized on a straight-line basis overborrow under our PNC Facility (as described and defined in note 4 below) after deducting the lease term. current borrowing base conditions and subject to debt covenants, should the Company require additional funding during the COVID-19 pandemic, was $30,875 (March 29, 2020 - $31,185). In addition, during the quarter ended June 28, 2020, the Company entered into amendments to its lending agreements with PNC and TCW, as disclosed in note 4, that would allow for the addback of certain costs attributable to the COVID-19 pandemic.
Transition of China Manufacturing
The adoptionDuring the fourth quarter of 2019, we ceased manufacturing in China and began to relocate the equipment used at our Chinese manufacturing facility to our other North American sites. During the first quarter of 2020, the Company completed final shipments for customers serviced at our Chinese manufacturing facility and completed the relocation of the new standardequipment to our other North American sites. Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors caused a number of our customers to begin to re-evaluate demand for some of their products and reconsider where they outsource their manufacturing. Revenues attributable to production from SMTC’s manufacturing operations in China declined in 2019 as compared to 2018, but more significant declines were anticipated in 2020 which would have resulted in negative operating margins from our China site. This ultimately resulted in the recognition of operating lease right of use assets and operating lease obligations of $5,452 and $5,915, respectively on December 31, 2018. The difference betweendecision to close the operating lease right of use asset and operating lease obligation related to accrued and prepaid rent of $463, which was reclassifiedmanufacturing facility.
2. | Accounting Pronouncements |
Recent Accounting Pronouncements Adopted
In August 2018, the FASB published ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the operating lease right of use asset. The standard did not materially impact consolidated net loss and had no impact on cash flows.
|
|
In June 2018, the Financial Accounting Standards Board (the “FASB”) published ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting.Disclosure Requirements for Fair Value Measurement. The amendment simplifiesincludes the applicationremoval, modification and addition of share-based payment accounting for non-employees.disclosure requirements under Topic 820. The amendments in this ASU are effective for public businessall entities for financial statements issued forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and interim periods within those fiscal years.2019. The impact of the adoption of the standard didexpands the disclosure of certain assets and liabilities recorded at fair value.
In March 2020, the FASB published ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this Update are effective for all entities as of March 12, 2020, through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The impact of the adoption of the standard is not have a material impact onto the consolidatedCompany, as alternative reference rates are available under the agreements governing the financial statements.instruments.
RecentAccounting Pronouncements Not Yet Adopted
In May 2016, the FASB published ASU 2016-132016-13: Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of Topic 326 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In April 2019, the FASB published ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which made certain amendments and corrections to the original codification. In May 2019, the FASB published ASU 2019-05 Financial Instruments – Credit losses (Topic 326) which made transitional relief available, specifically allowing the option to elect a fair value option for financial instruments measured at amortized cost. In November 2019, the FASB published ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments – Credit losses, which made certain amendments and corrections to the original codification. In November 2019, the FASB published ASU 2019-10 Financial Instruments – Credit losses (Topic 326), which made certain amendments to the effective dates of the new standard. The amendment is effective for the Company for years beginning after December 15, 20192022 including interim periods with those years. The Company continues to evaluateis currently evaluating the impact of this accounting standard. The impact of adoption ofstandard, but it is expected that the new standard has not yet been determined.may result in additional credit losses being recorded.
In January 2017, the FASB published ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): Topic 350 seeks to simplify goodwill impairment testing requirements for public entities. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductibletax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2022. The Company is currently evaluating the impact of the adoption of the standard is being considered, howeverthis accounting standard. However, it is expected that this may reduce the complexity of evaluating goodwill for impairment.
In August 2018,December 2019, the FASB published ASU 2018-13: Fair Value Measurement2019-12: Income Taxes (Topic 820)740): Disclosure Framework – ChangesSimplifying the Accounting for income taxes. The purpose of this codification is to simplify the accounting for income taxes, which addresses a number of topics including but not limited to the Disclosure Requirementsremoval of certain exceptions currently included in the standard related to intraperiod allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for Fair Value Measurement.the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 820 includes the removal, modification and additional of disclosure requirements. Topic 820740 is effective for allpublic entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2020. The impact of the adoption of the standard has not yet been determined and is not expected to have a material impact on the consolidated financial statements.being evaluated.
| Interim Consolidated financial statement details |
The following consolidated financial statement details are presented as of the period ended for the consolidated balance sheets and for the periods ended for each of the consolidated statements of operations and comprehensive income (loss).
Consolidated Balance Sheets
Accounts receivable – net:
|
|
September 29, 2019 | December 30, 2018 |
| June 28, 2020 |
|
| December 29, 2019 |
| |||||||||
Trade accounts receivable | $ | 62,330 | $ | 72,937 |
| $ | 67,192 |
|
| $ | 71,113 |
| ||||
Other receivables | 723 | 447 |
|
| 188 |
|
|
| 1,098 |
| ||||||
Allowance for doubtful accounts | (1,845 | ) | (398 | ) |
|
| (2,309 | ) |
|
| (2,292 | ) | ||||
Total | $ | 61,208 | $ | 72,986 |
| $ | 65,071 |
|
| $ | 69,919 |
|
The increase of $1,447 in allowance for doubtful accounts pertains primarily to one customer previously serviced out of Dongguan China. This was primarilyprovisioned and included with the resultrestructuring charges for the closure of specific provisionsthe facility in 2019. Refer to note 10 for further details. To date, there has been no material impact of $1,691the COVID-19 pandemic on customers serviced in the Dongguan manufacturing facility (note 12).allowance for doubtful accounts.
Unbilled contract assets
|
|
September 29, 2019 | December 30, 2018 | |||||||
Opening | $ | 20,405 | $ | 3,734 | ||||
Contract assets additions | 266,778 | 205,387 | ||||||
Contract assets invoiced | (260,393 | ) | (188,716 | ) | ||||
Ending | $ | 26,790 | $ | 20,405 |
|
|
September 29, 2019 | December 30, 2018 | |||||||
Raw materials | $ | 50,465 | $ | 52,102 | ||||
Finished goods | — | 418 | ||||||
Parts and other | 633 | 896 | ||||||
Provision for obsolescence | (1,563 | ) | (213 | ) | ||||
Total | $ | 49,535 | $ | 53,203 |
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Opening |
| $ | 26,271 |
|
| $ | 20,405 |
|
Contract assets additions |
|
| 172,217 |
|
|
| 350,709 |
|
Contract assets invoiced |
|
| (159,841 | ) |
|
| (344,843 | ) |
Ending |
| $ | 38,647 |
|
| $ | 26,271 |
|
Inventories:
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Raw materials |
| $ | 50,251 |
|
| $ | 48,067 |
|
Parts and other |
|
| 383 |
|
|
| 586 |
|
Provision for obsolescence |
|
| (509 | ) |
|
| (827 | ) |
Total |
| $ | 50,125 |
|
| $ | 47,826 |
|
The increase of $1,350 in the provision for obsolescence was dueprimarily pertains to specific provisions of $1,550 for customers previously serviced out of the Dongguan manufacturingfacility. These have been provisioned and included with the restructuring charges for the closure of the facility (note 12).in 2019. Refer to note 10 for further details.
Property, plant and equipment – net:
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Cost: |
|
|
|
|
|
|
|
|
Land |
| $ | 1,648 |
|
| $ | 1,648 |
|
Buildings (b) |
|
| 18,985 |
|
|
| 18,985 |
|
Machinery and equipment (a) (e) |
|
| 43,192 |
|
|
| 42,732 |
|
Office furniture and equipment (c) (e) |
|
| 836 |
|
|
| 1,005 |
|
Computer hardware and software (d) (e) |
|
| 3,679 |
|
|
| 3,979 |
|
Leasehold improvements (e) |
|
| 4,240 |
|
|
| 4,265 |
|
|
|
| 72,580 |
|
|
| 72,614 |
|
Less accumulated depreciation: |
|
|
|
|
|
|
|
|
Land |
|
| — |
|
|
| — |
|
Buildings (b) |
|
| (10,944 | ) |
|
| (10,392 | ) |
Machinery and equipment (a) (e) |
|
| (32,700 | ) |
|
| (31,192 | ) |
Office furniture and equipment (c) (e) |
|
| (393 | ) |
|
| (546 | ) |
Computer hardware and software (d) (e) |
|
| (3,082 | ) |
|
| (3,289 | ) |
Leasehold improvements (e) |
|
| (1,966 | ) |
|
| (1,885 | ) |
|
|
| (49,085 | ) |
|
| (47,304 | ) |
Property, plant and equipment—net |
| $ | 23,495 |
|
| $ | 25,310 |
|
|
|
|
|
September 29, 2019 | December 30, 2018 | |||||||
Cost: | ||||||||
Land | $ | 1,648 | $ | 1,648 | ||||
Buildings (b) | 18,985 | 18,985 | ||||||
Machinery and equipment (a) (d) | 41,702 | 40,083 | ||||||
Office furniture and equipment (c)(d) | 979 | 845 | ||||||
Computer hardware and software (d) | 3,894 | 3,945 | ||||||
Leasehold improvements (d) | 4,230 | 3,863 | ||||||
71,439 | 69,368 | |||||||
Less accumulated depreciation: | ||||||||
Land | — | — | ||||||
Buildings (b) | (10,113 | ) | (9,190 | ) | ||||
Machinery and equipment (a) (d) | (29,548 | ) | (27,093 | ) | ||||
Office furniture and equipment (c)(d) | (509 | ) | (457 | ) | ||||
Computer hardware and software (d) | (3,164 | ) | (3,053 | ) | ||||
Leasehold improvements (d) | (1,756 | ) | (1,415 | ) | ||||
(45,091 | ) | (41,208 | ) | |||||
Property, plant and equipment—net (d) | $ | 26,348 | $ | 28,160 |
(a) | Included within machinery and equipment were assets under |
(b) | |
| Included within buildings are costs associated with Melbourne facility under finance |
(c) | Included within office furniture and equipment were assets under finance leases with costs of |
(d) | Included |
(e) | Fully depreciated machinery and equipment with cost of |
Intangible assets:
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Cost: |
|
|
|
|
|
|
|
|
Customer relationships |
| $ | 12,350 |
|
| $ | 12,350 |
|
Order backlog |
|
| 6,990 |
|
|
| 6,990 |
|
Trade name |
|
| 1,300 |
|
|
| 1,300 |
|
Non-compete agreements |
|
| 360 |
|
|
| 360 |
|
|
|
| 21,000 |
|
|
| 21,000 |
|
Less accumulated amortization: |
|
|
|
|
|
|
|
|
Customer relationships |
|
| (2,031 | ) |
|
| (1,414 | ) |
Order backlog |
|
| (6,990 | ) |
|
| (5,333 | ) |
Trade name |
|
| (1,300 | ) |
|
| (1,300 | ) |
Non-compete agreements |
|
| (296 | ) |
|
| (206 | ) |
|
|
| (10,617 | ) |
|
| (8,253 | ) |
Intangible assets—net |
| $ | 10,383 |
|
| $ | 12,747 |
|
These intangible assets arose from the acquisition of MC Assembly Holdings Inc. (“MC Assembly”) in November 2018 and were allocated to the following operating segments: |
|
|
|
September 29, 2019 | December 30, 2018 | |||||||
Cost: | ||||||||
Customer relationships | $ | 12,350 | $ | 12,350 | ||||
Order backlog | 6,990 | 6,990 | ||||||
Trade name | 1,300 | 1,300 | ||||||
Non-compete agreements | 360 | 360 | ||||||
21,000 | 21,000 | |||||||
Less accumulated amortization: | ||||||||
Customer relationships | (1,105 | ) | (178 | ) | ||||
Order backlog | (4,168 | ) | (673 | ) | ||||
Trade name | (1,163 | ) | (188 | ) | ||||
Non-compete agreements | (161 | ) | (26 | ) | ||||
(6,597 | ) | (1,065 | ) | |||||
Intangible assets—net | $ | 14,403 | $ | 19,935 |
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
U.S. |
| $ | 3,115 |
|
| $ | 3,824 |
|
Mexico |
|
| 7,268 |
|
|
| 8,923 |
|
Total |
| $ | 10,383 |
|
| $ | 12,747 |
|
Amortization expense of $1,844 for the three months ended September 29, 2019 and $5,532 for the nine months ended September 29, 2019 are$2,364 is recorded in cost of sales in the consolidated statement of operationsincome and comprehensive income (loss).
for the six months ended June 28, 2020, and $3,688 for the six months ended June 30, 2019. Amortization expense for the next five years and thereafter is as follows:
|
|
2020 |
| $ | 682 |
|
2021 |
|
| 1,235 |
|
2022 |
|
| 1,235 |
|
2023 |
|
| 1,235 |
|
2024 |
|
| 1,235 |
|
2025 and thereafter |
|
| 4,761 |
|
Total amortization |
| $ | 10,383 |
|
Goodwill:
The carrying value of goodwill as at September 29, 2019June 28, 2020 was $18,165 (December 30, 201829, 2019 – $18,165). This goodwill arose from the acquisition of MC Assembly in November 2018 and was allocated to the following operating segments that are expected to benefit from the synergies of this business combination and has not changed since the acquisition:
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
U.S. |
| $ | 5,449 |
|
| $ | 5,449 |
|
Mexico |
|
| 12,716 |
|
|
| 12,716 |
|
Total |
| $ | 18,165 |
|
| $ | 18,165 |
|
The carrying value of goodwill is assessed annually as well as assessedat year-end and at each reporting period for impairment triggers to determine whether there exists any indicators of impairment. The assessment is done at the operating segment level as the group of components (production facilities) within each operating segment all have similar economic characteristics. Our business operations have generally performed as expected during the first half of 2020. While the COVID-19 pandemic creates significant uncertainty, in the near term, the Company did not identify any triggering events as at June 28, 2020.
Accrued liabilities:
|
|
September 29, 2019 | December 30, 2018 | |||||||
Payroll | $ | 5,655 | $ | 5,637 | ||||
Customer related | 2,764 | 2,237 | ||||||
Vendor related | 2,464 | 2,048 | ||||||
Professional services | 1,248 | 702 | ||||||
Rebates | — | 236 | ||||||
Interest | 552 | 381 | ||||||
Rent | — | 428 | ||||||
Other | 704 | 1,371 | ||||||
Total | $ | 13,387 | $ | 13,040 |
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Payroll |
| $ | 6,029 |
|
| $ | 5,504 |
|
Customer related |
|
| 5,527 |
|
|
| 2,185 |
|
Deferred revenue |
|
| 3,734 |
|
|
| — |
|
Vendor related |
|
| 2,941 |
|
|
| 1,742 |
|
Professional services |
|
| 760 |
|
|
| 612 |
|
Interest |
|
| 402 |
|
|
| 860 |
|
Other |
|
| 646 |
|
|
| 261 |
|
Total |
| $ | 20,039 |
|
| $ | 11,164 |
|
|
|
DuringDeferred Revenue is recorded when the first quarterCompany invoices and becomes eligible to receive payment for goods or services prior to the transferring of 2019, fair valuegoods or services to the customer under the terms of the contingent consideration liabilitycontract (i.e., all revenue recognition criteria are not yet met), which is included within accrued liabilities. As of June 28, 2020 and December 29, 2019, the balance of deferred revenue was determined to be $0 which resulted in a gain of $3,050 being recognized.$3,734 and Nil, respectively. NaN revenue was recognized during the six months ended June 28, 2020. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and related to a contingent earn-out paymentaccounts receivable balances associated with the acquisition of MC Assembly. Fair value estimate under purchase accounting of $3,050deferred revenue invoicing was derived from a multiple of earnings based on MC Assembly’s forecasted twelve-month earnings for the period ended March 31, 2019. Based on actual earnings, the contingent consideration liability was resolved and no longer payable$3,734 as at March 31, 2019.June 28, 2020. Deferred revenue is recognized into revenue when all revenue recognition criteria are met.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Interest expense:
|
|
Three months ended | Nine months ended | |||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 | |||||||||||||
Long-term debt | $ | 1,135 | $ | 107 | $ | 4,596 | $ | 321 | ||||||||
Revolving credit facility | 597 | 318 | 1,813 | 718 | ||||||||||||
Equipment facility | — | 43 | — | 57 | ||||||||||||
Amortization of deferred financing fees | 50 | 11 | 122 | 32 | ||||||||||||
Amortization of debt issuance costs (1) | 705 | — | 1,178 | — | ||||||||||||
Obligations under capital leases | 192 | 6 | 640 | 67 | ||||||||||||
Interest expense | $ | 2,679 | $ | 485 | $ | 8,349 | $ | 1,195 |
|
| Three months ended |
|
| Six months ended |
| ||||||||||
|
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| ||||
Long-term debt |
| $ | 1,020 |
|
| $ | 1,709 |
|
| $ | 2,068 |
|
| $ | 3,461 |
|
Revolving credit facility |
|
| 482 |
|
|
| 597 |
|
|
| 1,034 |
|
|
| 1,216 |
|
Amortization of deferred financing fees |
|
| 55 |
|
|
| 38 |
|
|
| 110 |
|
|
| 72 |
|
Amortization of debt issuance costs |
|
| 239 |
|
|
| 236 |
|
|
| 478 |
|
|
| 473 |
|
Obligations under finance leases |
|
| 188 |
|
|
| 220 |
|
|
| 380 |
|
|
| 448 |
|
Other interest |
|
| 3 |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
Total |
| $ | 1,987 |
|
| $ | 2,800 |
|
| $ | 4,080 |
|
| $ | 5,670 |
|
|
|
|
|
(a) Revolving credit and long-term debt facilities
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
Revolving credit facility |
| $ | 33,943 |
|
| $ | 34,701 |
|
Term loans: |
|
|
|
|
|
|
|
|
Term loan A facility |
| $ | 38,125 |
|
| $ | 38,750 |
|
Less deferred debt issue costs |
|
| (2,070 | ) |
|
| (2,286 | ) |
Less unamortized discount on debt |
|
| (1,277 | ) |
|
| (1,464 | ) |
Total term loans |
| $ | 34,778 |
|
| $ | 35,000 |
|
Less current portion |
|
| (1,875 | ) |
|
| (1,250 | ) |
Long term portion |
| $ | 32,903 |
|
| $ | 33,750 |
|
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), which governs the Company’s Revolving Credit Facilityrevolving credit facility (“PNC Facility”). The PNC Facility has a term ending on November 8, 2023. Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margina grid ranging from 0.75%0.50% to 1.25%,1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus an applicable margina grid ranging from 2.5%1.50% to 3.00%2.00%. The base commercial lending rate should approximate U.S. prime rate.
The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among usthe Company and certain of ourits subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company, LLC, as collateral agent for the Lenders (“TCW”), which. The Financing Agreement governs a term loan A facility (“Term(the “Term A Loan Facility” and together with the PNC Facility, the “Credit Facilities”) and previously governed a term loan B facility (the “Term Loan B Facility”) until it was paid in full on July 3, 2019. The Term Loan A Loan Facility matures on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before November 8, 2019, (ii) 2.00% in the event that such payment occurs after November 8, 2019 and on or before November 8, 2020, and (iii) 1.00% in the event that such payment occurs after November 8, 2020 and on or before November 8, 2021. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after November 8, 2021.
On August 8, 2019,June 26, 2020, the Company, and certain of its subsidiaries entered into that certain Amendments No. 2the Fourth Amendment to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 2”(“PNC Amendment”) and that certainthe Fifth Amendment No. 3. to the Financing Agreement (the “TCW Amendment No. 3”(“TCW Amendment”). The PNC Amendment No. 2,and TCW Amendments, among other things, (i) increasedamend the total amount available for borrowings under the PNC Facility to $65,000, (ii) provided for borrowings of up to $15,000 on assets located in Mexico, (iii) provided that borrowings under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%, (iv) reset the financial covenants, and (v) permitted the pay down of the Term A Loan Facility by up to $10,000. The TCW Amendment No. 3, among other things, (i) provided for a $20,000 increase in the total amount available for borrowings under the PNC Facility, (ii) provided for the pay down of the Term A Loan Facility by up to $10,000, (iii) provided that the interest rate for borrowings under the Financing Agreement was reset to LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%, (iv) deleted the senior leverage ratio covenant, (v) amended the total leverage ratio covenant, including the definition of total leverage ratio, to increase the maximum total leverage on a quarterly basis beginning with the fiscal quarter ended September 30, 2019, (vi) amended the fixed charge coverage ratio covenant to decrease the minimum fixed charge coverage ratio on a quarterly basis beginning with the fiscal quarter ending September 30, 2020 through the fiscal quarter ending December 31, 2021 and (vii) reset the call protection on the Term Loan A Facility.
On September 27, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 3 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 3”) and that certain Amendment No. 4. to the Financing Agreement (the “TCW Amendment No. 4”). The PNC Amendment No. 3, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for (i) non-recurring labor costs, temporary employee bonuses to reduce absenteeism, personal protective equipment costs, facility sanitation costs, and excess freight and logistics costs, not to exceed $1,200, and (ii) restructuring and transition costsseverance charges, accruals and charges incurred on or before December 31, 2020reserves in connection with the Company’s previously announced closure of business operationspermanent headcount reductions, in Dongguan, China, subject to certain exceptions,an aggregate amount not to exceed (a)$1,000 with respect to cash restructuring costs, $2,300, (b) with respectcorporate selling, general and administrative employees, in each case, for the period from June 1, 2020, to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined inincluding July 31, 2020. The PNC and TCW Amendments also amends the Amended and Restated Revolving Credit and Security Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Amended and Restated Revolving Credit and Security Agreement)Purchase Money Indebtedness” to or in SMTC Electronics Dongguan Company Limited, a limited liability company organized under the laws of China (“SMTC Dongguan”), solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments(i) allow for Indebtedness (as defined in the PNC Agreement) are madepursuant to financing provided by a third party lender for any fixed or tangible assets acquired prior to March 31,the June 26, 2020, (b)and (ii) increase the aggregate principal amount of all such Investments does not exceed $2,300 during the term of the Amended and Restated Revolving Credit and Security Agreement, (c) the BorrowersIndebtedness (as defined in the AmendedPNC Agreement and Restated Revolving Credit and Security Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash. The TCW Amendment No. 4, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Financing Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the Financing Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Financing Agreement and (c) the Borrowers (as defined in the Financing Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.
At September 29, 2019, $34,840 (December 30, 2018 - $25,020) was outstandingpermitted under the PNC Facility and is classified as a current liability based on the requirementAgreement to hold a “lock-box” under the terms of the PNC Facility. $3,750.
As at September 29, 2019,June 28, 2020, the additional funds available to borrow under the PNC Facility after deducting the current borrowing base conditions was $21,356were $30,875 (December 30, 201829, 2019 - $13,974)$21,644). The maximum amount of funds that could be available under the PNC Revolving Credit Facility is $65,000. However, availability under the PNC Revolving Credit Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, and certain conditions as determined by PNC. The Company is required to use a “lock-box” arrangement for the PNC Facility, whereby remittances from customers are swept daily to reduce the borrowings under this facility.
At June 28, 2020, $33,943 (December 29, 2019 - $34,701) was outstanding under the PNC Facility and is classified as a current liability based on the requirement to hold a “lock-box” under the terms of the PNC Facility.
At SeptemberJune 28, 2020, $38,125 (December 29, 2019 $39,376 (December 30, 2018 - $50,000)$38,750) was outstanding under the TCW Term Loan A Facility and $Nil (December 30, 2018 - $12,000) under the TCW Term Loan B Facility. The Term Loan A Facility isTCW Facilities are reported on the consolidated balance sheet net of deferred financing fees of $2,413$2,070 (December 30, 201829, 2019 - $2,749)$2,286) and a discount on debt of $1,559$1,277 (December 30, 201829, 2019 - $1,843)$1,464) related to the outstanding warrants described below. On July 3, 2019, the Company repaid the TCW Term Loan B Facility in full.
The Credit Facilities are joint and several obligations of the Company and its subsidiaries that are borrowers under the Credit Facilities and are jointly and severally guaranteed by certain other subsidiaries of the Company. RepaymentsRepayment under the PNC Facility and the Term A Loan Facility are collateralized by the assets of the Company and each of its subsidiaries.
(b) Covenants
The Credit Facilities contain certain financial and non-financial covenants.covenants, including restrictions on dividend payments. The financial covenants under each Credit Facility require the Company to maintain a fixed charge coverage ratio and a total leverage ratio quarterly during the term of the Credit Facilities.
The Company was in compliance with the covenants included in the Credit Facilities as at September 29, 2019. Management projectsJune 28, 2020. The Company’s continued financial covenant compliance withwill depend on key variables, including the financial covenants included in the Credit Facilities, however note that there are key assumptions included in theseCompany’s cash flow projections to support covenant calculations specifically related tofrom earnings before interest, income taxes and depreciation as well as anticipated debt levels. The estimateFor context, assuming no change to forecast debt balances, a reduction of cash flows are sensitive to these key assumptions, for instance, when considering our anticipatedapproximately 34% and 24% of earnings before interest, income taxes, depreciation and depreciationamortization as defined in PNC Agreement and Financing Agreement over the next six monthsmonth period, a reduction of approximately 5% could result in the breach of a covenant relative to its impact on our trailing twelve months results used in calculatingjeopardize covenant compliance inat the end of our first quarterthird and fourth quarters 2020, respectively, which test our ratios against twelve-month trailing results. The Company safeguards against this throughattempts to address risks of covenant compliance by taking measures to reduce its inventory, revolving credit facility and term debt balances accordinglyas necessary.
Market conditions, including the implications of the COVID-19 pandemic, may negatively impact our ability to secure and source alternative methods of financing. We do not currently foresee a material impact in orderthe short term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to comply with lenders covenants. us, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to secure alternative methods of financing.
The Company will continuecontinues to monitor operations and results closely and manage debt levels relative to our operational results to ensure compliance with its lenders covenants.
(c) Warrant liability
On November 8, 2018, 504,735 warrants were issued to TCW in connection with the Term Loan A FacilityFinancing Agreement and the Term Loan B Facility andare outstanding as at December 30, 2018.June 28, 2020. As a result of the anti-dilution provisions contained in the warrants that were triggered in connection with the Rights Offering and the Registered Direct Offering in June 2019, the warrants were exercisable to purchase an additional 7,214 shares of common stock (or a total of 511,949 shares) at June 28, 2020. These warrants are exercisable on a cashless basis, or for an exercise price of $0.01. The Company initially recorded the value of the warrants as a warrant liability with a corresponding discount on the long-term debt in the amount of $1,898. The fair value has been assessed at $2.13$3.15 per unit or $1,090$1,612 as at SeptemberJune 28, 2020 ($3.38 per unit or $1,730 – December 29, 2019. As a result of the anti-dilution provision contained in the warrants that was triggered in connection with the Rights Offering and the Registered Direct Offering, the warrants were exercisable to purchase 511,949 shares of common stock at September 29, 2019.2019). The fair value of the warrant obligation is presented as a warrant liability on the consolidated balance sheet with changes to the fair value recorded each reporting period as either a gain or a loss in the consolidated statement of operations and comprehensive income (loss).
|
|
The Company leases certain facility leases in various jurisdictions, including office space and manufacturing, warehouse space. The Company also leases certain production equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense is recognized on a straight-line basis over the lease term. Total short-term lease costs for the three and nine months ended September 29, 2019 was not significant.
Most leases contain renewal options, which are exercisable at the Company’s sole discretion. The extension terms are typically one to five years. Some leases may include options to purchase the leased property. The depreciable life is limited to the lease term unless title transfers or it is reasonably certain that a purchase option will be exercised. Operating lease liabilities recognized do not include $1,522 related to options to extend lease terms that are not reasonably certain of being exercised at September 29, 2019. Finance lease liabilities do not include $6,456 related to options to extend lease terms that are not reasonably certain of being exercised at September 29, 2019.
We rent and sublease one facility lease that is not occupied by SMTC.
|
|
| |||
| |||||
|
| ||||
|
| ||||
| |||||
| |||||
|
| ||||
|
| ||||
| |||||
|
| ||||
|
| ||||
|
|
Common shares
Three months ended | Nine months ended | ||||||||
Lease Cost | Classification | September 29, 2019 ($) | September 29, 2019 ($) | ||||||
Operating lease costs | |||||||||
Fixed lease costs | Cost of sales | 647 | 1,974 | ||||||
Finance lease costs | |||||||||
Depreciation of leased assets | Cost of sales | 360 | 1,081 | ||||||
Interest on lease liabilities | Interest expense | 192 | 640 | ||||||
Sublease income | Selling, general and administrative expenses | 47 | 176 |
Maturity of lease liabilities as at September 29, 2019 | Operating leases | Finance leases | Total | |||||||||
2019 | 635 | 559 | 1,194 | |||||||||
2020 | 1,371 | 1,982 | 3,353 | |||||||||
2021 | 930 | 1,665 | 2,595 | |||||||||
2022 | 632 | 1,323 | 1,955 | |||||||||
2023 | 606 | 1,261 | 1,867 | |||||||||
Thereafter | 872 | 7,660 | 8,532 | |||||||||
Total lease payments | 5,046 | 14,450 | 19,496 | |||||||||
Less: Interest | (745 | ) | (4,029 | ) | (4,774 | ) | ||||||
Present value of lease liabilities | 4,301 | 10,421 | 14,722 |
The company’s future minimum lease payments as of December 30, 2018, in accordance with legacy lease accounting standards, under non-cancelable operating and financing lease agreements were as follows:
Operating leases | Finance leases | |||||||
2019 | 2,575 | 2,417 | ||||||
2020 | 1,371 | 1,953 | ||||||
2021 | 930 | 1,633 | ||||||
2022 | 632 | 1,291 | ||||||
2023 | 606 | 1,229 | ||||||
Thereafter | 872 | 7,637 | ||||||
Total minimum lease payments | 6,986 | 16,160 | ||||||
Less interest | (1,047 | ) | (4,666 | ) | ||||
Present value of capital lease obligations | 5,939 | 11,494 |
|
| |||
| ||||
| ||||
| ||||
| ||||
| ||||
|
Other information | Three months ended September 29, 2019 | Nine months ended September 29, 2019 | ||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | 609 | 1,614 | ||||||
Operating cash flows from finance leases | N/A | N/A | ||||||
Financing cash flows from finance leases | 390 | 1,199 | ||||||
Leased assets obtained in exchange for new operating lease liabilities | — | — | ||||||
Leased assets obtained in exchange for new finance lease liabilities | 126 | 126 |
|
|
Common stock
Issued and outstanding:
The issued and outstanding number of shares common stockshares included in shareholders’ equity consisted of the following:
Number | $ | |||||||
Balance at December 30, 2018 | 23,189,381 | 458 | ||||||
New share issuance - rights offering and registered direct offering | 4,642,030 | 46 | ||||||
New share issuance - vested stock awards | 267,063 | 3 | ||||||
Treasury stock (1) | 21,264 | — | ||||||
Balance as September 29, 2019 | 28,119,738 | 507 |
|
| Number of shares |
|
| $ |
| ||
Balance at December 29, 2019 |
| $ | 28,195,300 |
|
| $ | 508 |
|
New share issuance-vested stock awards |
|
| 19,500 |
|
|
| - |
|
Balance June 28, 2020 |
| $ | 28,214,800 |
|
| $ | 508 |
|
|
|
Stock Options
For more detailed information regarding the Company’s stock option arrangements, see Note 67 of the consolidated financial statements within the Company’s Form 10-K.10-K for the fiscal period ended December 29, 2019. During the six month period ended June 28, 2020, there were no stock options granted, exercised or forfeited. A summary of stock option activity for the nine-monthsix month period ended September 29, 2019June 28, 2020 is as follows:
Number | Weighted | Aggregate | Weighted | |||||||||||||
Outstanding at December 30, 2018 | 1,719,824 | $ | 1.55 | 1,998 | 8.6 | |||||||||||
Options granted | 650,000 | 3.67 | ||||||||||||||
Options exercised | (25,450 | ) | 1.80 | |||||||||||||
Outstanding at September 29, 2019 | 2,344,374 | 2.14 | 639 | 8.2 | ||||||||||||
Exercisable at September 29, 2019 | 1,075,640 | 1.54 | 639 | 7.4 |
|
| Number of options |
|
| Weighted average exercise price |
|
| Aggregate intrinsic value |
|
| Weighted average remaining contractual term (years) |
| ||||
Outstanding at December 29, 2019 |
|
| 2,344,374 |
|
| $ | 2.14 |
|
|
| 2,016 |
|
|
| 7.9 |
|
Options granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Options forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Outstanding at June 28, 2020 |
|
| 2,344,374 |
|
|
| 2.14 |
|
|
| 1,757 |
|
|
| 7.4 |
|
Exercisable at June 28, 2020 |
|
| 1,088,140 |
|
|
| 1.55 |
|
|
| 1,741 |
|
|
| 6.7 |
|
During the three-month periods ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $57 and $27,$41, respectively. During the nine-monthsix month periods ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $120$115 and $86,$62, respectively.
Certain stock options outstanding have market conditions such that the awards are vested and exercisable only if the Company’s stock exceeds specified targets during the vesting period. If the market conditions are not met, the stock options will not vest and will expire.
|
|
Restricted Stock Units
and Restricted Stock Awards
For more detailed information regarding the Company’s Restricted Stock Units (“RSUs”RSU”) and Restricted Stock Awards (“RSA”) arrangements, see Note 67 of the annual consolidated financial statements within the Company’s Form 10-K for the yearfiscal period ended December 30, 2018, included in29, 2019. During the Company’s Annual Report on Form 10-K.six month period ended June 28, 2020, 63,000 RSUs were granted. A summary of the RSU activity for the nine-monthsix month period ended September 29, 2019June 28, 2020 is as follows:
Outstanding | Weighted | Weighted | ||||||||||
Outstanding balance at December 30, 2018 | 357,377 | $ | 0.96 | 1.21 | ||||||||
RSUs granted | 122,500 | 3.58 | ||||||||||
RSUs vested and issued in common shares | (262,877 | ) | 1.31 | |||||||||
RSUs forfeited | (25,000 | ) | 1.38 | |||||||||
Outstanding balance at September 29, 2019 | 192,000 | 2.10 | 1.63 |
|
| Outstanding RSU |
|
| Weighted average stock price |
|
| Weighted average remaining contractual term (years) |
| |||
Outstanding balance at December 29, 2019 |
|
| 348,000 |
|
| $ | 3.16 |
|
|
| 2.23 |
|
RSU granted |
|
| 63,000 |
|
|
| 2.74 |
|
|
|
|
|
RSU vested and issued in common shares |
|
| (19,500 | ) |
|
| 1.28 |
|
|
|
|
|
RSU forfeited |
|
| — |
|
|
| — |
|
|
|
|
|
Outstanding balance at June 28, 2020 |
|
| 391,500 |
|
|
| 3.19 |
|
|
| 2.24 |
|
Certain RSUs outstanding have a market condition such that the awards are vested and issuable only if the market price of the Company’s stock meets or exceeds a specified target during the vesting period. If the market condition is not met, the RSUs will not vest and will be forfeited.
Stock based compensation recognized during the three-month period ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 related to the restricted stock units was $296$98 and $48,$56, respectively. Stock based compensation recognized during the nine-monthsix month period ended September 29,June 28, 2020, and June 30, 2019, and September 30, 2018 related to the restricted stock units was $418$202 and $192,$123, respectively.
Rights Offering and Registered Direct Offering
In June 2019, the Company completed its (i) offering of subscription rights (the “Rights Offering”) to the Company’s stockholders and holders of the Company’s outstanding warrants as of the close of business on May 24, 2019, which was fully subscribed for the maximum offering amount of $9,136, and (ii) registered direct offering (the “Registered Direct Offering” and, together with the Rights Offering, the “Offerings”) of 1,732,483 shares of the Company’s common stock directly to certain investors, resulting in net proceeds to the Company of approximately $14,044, after deducting the offering expenses of approximately $532 and fees payable by the Company.
| Income taxes |
During the three month periods ended September 29, 2019 and September 30, 2018, the Company recorded a current income tax benefit of $103 and expense of $290, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax recovery of $81 and $145, respectively, in connection with temporary differences related to the Mexican operations. The current income tax benefit of $103 recorded during the three months ended September 29, 2019, is comprised of additional current tax expense of $210, net of prior period income tax recoveries of $183 from the US and foreign jurisdictions together with a reduction in estimated current income tax expense attributable to foreign jurisdictions in the amount of $130.
During the ninesix month period ended September 29,June 28, 2020 and June 30, 2019, and September 30, 2018, the Company recorded current income tax expense of $592$586 and $596,$695, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax expense of $14$67 and recovery of $191,$95, respectively, in connection with temporary differences related to the Mexican operations.
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC 740, Income Taxes (“ASC 740”) states that forming a conclusion that a valuation allowance is not needed is difficult when there is observable negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. The U.S., Canadian and Asian jurisdictions continue to have a full valuation allowance recorded against the deferred tax assets.
On March 27, 2020, the U.S. federal government enacted The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which provides for certain tax relief with favorable implications for the Company. Most significantly, these provisions include a temporary relaxation of limitations on annual interest expense under Internal Revenue Code Section 163(j), and accelerated refund of certain federal tax credits. For the six months ended June 28, 2020, the current income tax benefit of these provisions is estimated to be $45, reflected in current tax expense.
| Earnings per common share |
The following table details the weighted average number of shares of common stockshares outstanding for the purposes of computing basic and diluted earnings per common share for the following periods:
Three months ended | Nine months ended |
| Three months ended |
|
| Six months ended |
| |||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 | |||||||||||||||||||||||||||||
(Number of common shares) |
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| ||||||||||||||||||||
Basic weighted average shares outstanding | 28,057,763 | 19,335,253 | 24,954,875 | 17,866,399 |
|
| 28,213,729 |
|
|
| 23,557,944 |
|
|
| 28,204,514 |
|
|
| 23,403,431 |
| ||||||||||||
Dilutive stock awards (1) (a) | — | 651,503 | — | 651,503 | ||||||||||||||||||||||||||||
Dilutive stock awards (a,b) |
|
| 1,279,743 |
|
|
| — |
|
|
| 1,279,743 |
|
|
| — |
| ||||||||||||||||
Diluted weighted average shares outstanding | 28,057,763 | 19,986,756 | 24,954,875 | 18,517,902 |
|
| 29,493,472 |
|
|
| 23,557,944 |
|
|
| 29,484,257 |
|
|
| 23,403,431 |
|
|
|
(a) | For the three and |
(b) | For the three and six months ended June 30, 2019, as a result of net loss for the period, dilutive stock awards are not presented as this would be antidilutive. Had there been net income for the periods, the dilutive stock awards would have been calculated as |
| Segmented information |
|
General description
TheDuring the six months ended June 28, 2020, the Company is operated and managed geographically and has production facilitiesby geographic region in the United States, Mexico and China. TheChina, which are our operating and reportable segments. Commencing in the three months ended June 28, 2020, China is no longer included as a reportable segment. During the three months ended March 29, 2020, the Company utilizescompleted final shipments for customers serviced in our Chinese manufacturing facility and the relocation of the equipment to our other North American sites. We utilize each reportable segment’s site contribution (site revenue(revenue minus operating expenses, excluding unrealized foreign exchange gain (loss) on unsettled forward foreign exchange contracts, corporate allocations and restructuring expenses) to monitor reportable segment performance. Site contributionContribution by country is utilized by the chief operating decision-maker (defined as the Chief Executive Officer) as the indicator of reportable segment performance, as it reflects costs which our operating sitesegment management isare directly responsible for. Intersegment adjustments reflect intersegment sales that are generally recorded at prices that approximate arm’s-length transactions.
In assessing the performance of the reportable segments, management attributes site revenue to the reportable segment that ships the product to the customer, irrespective of the product’s destination. Information about the reportable segments is as follows:
Three months ended | Nine months ended |
| Three months ended |
|
| Six months ended |
| |||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 |
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| |||||||||||||||||
Revenues | ||||||||||||||||||||||||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Mexico | $ | 57,328 | $ | 40,485 | $ | 182,424 | $ | 105,139 |
| $ | 58,801 |
|
| $ | 59,336 |
|
| $ | 122,165 |
|
| $ | 125,096 |
| ||||||||
China | 8,092 | 8,073 | 22,541 | 19,092 |
|
| — |
|
|
| 5,793 |
|
|
| 4,207 |
|
|
| 14,449 |
| ||||||||||||
U.S. | 27,426 | 8,581 | 86,448 | 19,167 |
|
| 32,136 |
|
|
| 29,211 |
|
|
| 65,517 |
|
|
| 59,022 |
| ||||||||||||
Total | $ | 92,846 | $ | 57,139 | $ | 291,413 | $ | 143,398 |
| $ | 90,937 |
|
| $ | 94,340 |
|
| $ | 191,889 |
|
| $ | 198,567 |
| ||||||||
Intersegment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Mexico | $ | (550 | ) | $ | (1,206 | ) | $ | (1,293 | ) | $ | (1,944 | ) |
| $ | (147 | ) |
| $ | (594 | ) |
| $ | (2,569 | ) |
| $ | (743 | ) | ||||
China | (3,580 | ) | (2,183 | ) | (7,687 | ) | (5,962 | ) |
|
| — |
|
|
| (2,681 | ) |
|
| (3,303 | ) |
|
| (4,107 | ) | ||||||||
U.S. | (34 | ) | (73 | ) | (166 | ) | (216 | ) |
|
| (384 | ) |
|
| (129 | ) |
|
| (473 | ) |
|
| (132 | ) | ||||||||
Total | $ | (4,164 | ) | $ | (3,462 | ) | $ | (9,146 | ) | $ | (8,122 | ) |
| $ | (531 | ) |
| $ | (3,404 | ) |
| $ | (6,345 | ) |
| $ | (4,982 | ) | ||||
Net external revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Mexico | $ | 56,778 | $ | 39,279 | $ | 181,131 | $ | 103,195 |
| $ | 58,654 |
|
| $ | 58,742 |
|
| $ | 119,596 |
|
| $ | 124,353 |
| ||||||||
China | 4,512 | 5,890 | 14,854 | 13,130 |
| $ | — |
|
|
| 3,112 |
|
| $ | 904 |
|
|
| 10,342 |
| ||||||||||||
U.S. | 27,392 | 8,508 | 86,282 | 18,951 |
|
| 31,752 |
|
|
| 29,082 |
|
|
| 65,044 |
|
|
| 58,890 |
| ||||||||||||
Total segment revenue (which also equals consolidated revenue) | $ | 88,682 | $ | 53,677 | $ | 282,267 | $ | 135,276 |
| $ | 90,406 |
|
| $ | 90,936 |
|
| $ | 185,544 |
|
| $ | 193,585 |
| ||||||||
Site Contribution | ||||||||||||||||||||||||||||||||
Segment contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Mexico | $ | 4,815 | $ | 3,552 | $ | 15,456 | $ | 9,267 |
| $ | 5,088 |
|
| $ | 5,835 |
|
| $ | 10,963 |
|
| $ | 10,641 |
| ||||||||
China | 1,313 | 556 | 3,012 | 998 |
| $ | — |
|
|
| 844 |
|
|
| (2 | ) |
|
| 1,699 |
| ||||||||||||
U.S. | 2,191 | 214 | 5,378 | 175 |
|
| 2,270 |
|
|
| 1,764 |
|
|
| 5,231 |
|
|
| 3,187 |
| ||||||||||||
Total | $ | 8,319 | $ | 4,322 | $ | 23,846 | $ | 10,440 |
| $ | 7,358 |
|
| $ | 8,443 |
|
| $ | 16,192 |
|
| $ | 15,527 |
| ||||||||
Corporate costs | 5,962 | 2,878 | 17,227 | 8,249 | ||||||||||||||||||||||||||||
Corporate expenses |
|
| 4,750 |
|
|
| 6,006 |
|
|
| 10,652 |
|
|
| 11,265 |
| ||||||||||||||||
Restructuring charges (recovery) |
|
| (125 | ) |
|
| 1,546 |
|
|
| (346 | ) |
|
| 2,170 |
| ||||||||||||||||
Change in fair value of warrant liability | (858 | ) | — | (919 | ) | — |
|
| 399 |
|
|
| 40 |
|
|
| (118 | ) |
|
| (61 | ) | ||||||||||
Change in fair value of contingent consideration | — | — | (3,050 | ) | — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,050 | ) | |||||||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (108 | ) | — | (338 | ) | ||||||||||||||||||||||||||
Interest | 2,679 | 485 | 8,349 | 1,195 | ||||||||||||||||||||||||||||
Restructuring and closure charges | 6,454 | 58 | 8,624 | 154 | ||||||||||||||||||||||||||||
Earnings (loss) before income taxes | $ | (5,918 | ) | $ | 1,009 | $ | (6,385 | ) | $ | 1,180 | ||||||||||||||||||||||
Unrealized foreign exchange loss on unsettled forward exchange contracts |
|
| (971 | ) |
|
| — |
|
|
| (459 | ) |
|
| — |
| ||||||||||||||||
Interest expense |
|
| 1,987 |
|
|
| 2,800 |
|
|
| 4,080 |
|
|
| 5,670 |
| ||||||||||||||||
Income(loss) before income taxes |
| $ | 1,318 |
|
| $ | (1,949 | ) |
| $ | 2,383 |
|
| $ | (467 | ) |
Three months ended June 28, 2020 |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Test and Measurement |
| $ | 4,220 |
|
| $ | 9,718 |
|
| $ | — |
|
| $ | 13,938 |
|
Retail and Payment Systems |
|
| 6,750 |
|
|
| — |
|
|
| — |
|
|
| 6,750 |
|
Telecom, Networking and Communications |
|
| 1,764 |
|
|
| 3,223 |
|
|
| — |
|
|
| 4,987 |
|
Medical and Safety |
|
| 7,863 |
|
|
| 2,298 |
|
|
| — |
|
|
| 10,161 |
|
Industrial, Power and Clean Technology |
|
| 30,952 |
|
|
| 7,339 |
|
|
| — |
|
|
| 38,291 |
|
Semiconductors |
|
| 7,105 |
|
|
| — |
|
|
| — |
|
|
| 7,105 |
|
Avionics, Aerospace and Defense |
|
| — |
|
|
| 9,174 |
|
|
| — |
|
|
| 9,174 |
|
Segment Revenue |
|
| 58,654 |
|
|
| 31,752 |
|
|
| — |
|
|
| 90,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by category |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Point in time |
| $ | 551 |
|
| $ | 1,353 |
|
|
| — |
|
|
| 1,904 |
|
Over time |
|
| 58,103 |
|
|
| 30,399 |
|
|
| — |
|
|
| 88,502 |
|
Total Revenue |
|
| 58,654 |
|
|
| 31,752 |
|
|
| — |
|
|
| 90,406 |
|
Three months ended September 29, 2019 | Mexico | U.S. | China | Total | ||||||||||||
Market Sector: | ||||||||||||||||
Test and Measurement | $ | 19,188 | $ | 8,287 | $ | — | $ | 27,475 | ||||||||
Retail and Payment Systems | 10,460 | — | — | 10,460 | ||||||||||||
Telecom, Networking and Communications | 3,986 | 1,393 | 4,192 | 9,571 | ||||||||||||
Medical | 7,861 | 2,637 | 40 | 10,538 | ||||||||||||
Industrial, Power and Clean Technology | 10,154 | 9,851 | 280 | 20,285 | ||||||||||||
Semiconductor | 5,129 | — | — | 5,129 | ||||||||||||
Aerospace and Defense | — | 5,224 | — | 5,224 | ||||||||||||
Segment Revenue | 56,778 | 27,392 | 4,512 | 88,682 |
Three months ended June 30, 2019 |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Test and Measurement |
| $ | 2,403 |
|
| $ | 9,648 |
|
| $ | — |
|
| $ | 12,051 |
|
Retail and Payment Systems |
|
| 12,149 |
|
|
| — |
|
|
| — |
|
|
| 12,149 |
|
Telecom, Networking and Communications |
|
| 3,503 |
|
|
| 2,314 |
|
|
| 2,200 |
|
|
| 8,017 |
|
Medical and Safety |
|
| 8,093 |
|
|
| 3,104 |
|
|
| 47 |
|
|
| 11,244 |
|
Industrial, Power and Clean Technology |
|
| 26,845 |
|
|
| 9,178 |
|
|
| 865 |
|
|
| 36,888 |
|
Semiconductors |
|
| 5,749 |
|
|
| 16 |
|
|
| — |
|
|
| 5,765 |
|
Avionics, Aerospace and Defense |
|
| — |
|
|
| 4,822 |
|
|
| — |
|
|
| 4,822 |
|
Segment Revenue |
|
| 58,742 |
|
|
| 29,082 |
|
|
| 3,112 |
|
|
| 90,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by category |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Point in time |
| $ | 781 |
|
| $ | 1,386 |
|
| $ | 73 |
|
|
| 2,240 |
|
Over time |
|
| 57,961 |
|
|
| 27,696 |
|
|
| 3,039 |
|
|
| 88,696 |
|
Total Revenue |
|
| 58,742 |
|
|
| 29,082 |
|
|
| 3,112 |
|
|
| 90,936 |
|
Six months ended June 28, 2020 |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Test and Measurement |
| $ | 8,404 |
|
| $ | 17,766 |
|
| $ | — |
|
| $ | 26,170 |
|
Retail and Payment Systems |
|
| 19,073 |
|
|
| — |
|
|
| — |
|
|
| 19,073 |
|
Telecom, Networking and Communications |
|
| 4,799 |
|
|
| 7,014 |
|
|
| 714 |
|
|
| 12,527 |
|
Medical and Safety |
|
| 16,426 |
|
|
| 4,875 |
|
|
| 130 |
|
|
| 21,431 |
|
Industrial, Power and Clean Technology |
|
| 58,473 |
|
|
| 15,830 |
|
|
| 60 |
|
|
| 74,363 |
|
Semiconductors |
|
| 12,421 |
|
|
| — |
|
|
| — |
|
|
| 12,421 |
|
Avionics, Aerospace and Defense |
|
| — |
|
|
| 19,559 |
|
|
| — |
|
|
| 19,559 |
|
Segment Revenue |
|
| 119,596 |
|
|
| 65,044 |
|
|
| 904 |
|
|
| 185,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by category |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Point in time |
| $ | 1,050 |
|
| $ | 2,420 |
|
| $ | 452 |
|
|
| 3,922 |
|
Over time |
|
| 118,546 |
|
|
| 62,624 |
|
|
| 452 |
|
|
| 181,622 |
|
Total Revenue |
|
| 119,596 |
|
|
| 65,044 |
|
|
| 904 |
|
|
| 185,544 |
|
Six months ended June 30, 2019 |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Market Sector: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Test and Measurement |
| $ | 4,434 |
|
| $ | 20,654 |
|
| $ | — |
|
| $ | 25,088 |
|
Retail and Payment Systems |
|
| 25,078 |
|
|
| — |
|
|
| — |
|
|
| 25,078 |
|
Telecom, Networking and Communications |
|
| 7,507 |
|
|
| 4,391 |
|
|
| 6,884 |
|
|
| 18,782 |
|
Medical and Safety |
|
| 16,501 |
|
|
| 6,756 |
|
|
| 441 |
|
|
| 23,698 |
|
Industrial, Power and Clean Technology |
|
| 57,779 |
|
|
| 15,271 |
|
|
| 3,017 |
|
|
| 76,067 |
|
Semiconductors |
|
| 13,054 |
|
|
| 16 |
|
|
| — |
|
|
| 13,070 |
|
Avionics, Aerospace and Defense |
|
| — |
|
|
| 11,802 |
|
|
| — |
|
|
| 11,802 |
|
Segment Revenue |
|
| 124,353 |
|
|
| 58,890 |
|
|
| 10,342 |
|
|
| 193,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by category |
| Mexico |
|
| U.S. |
|
| China |
|
| Total |
| ||||
Point in time |
| $ | 1,216 |
|
| $ | 3,098 |
|
| $ | 76 |
|
|
| 4,390 |
|
Over time |
|
| 123,137 |
|
|
| 55,792 |
|
|
| 10,266 |
|
|
| 189,195 |
|
Total Revenue |
|
| 124,353 |
|
|
| 58,890 |
|
|
| 10,342 |
|
|
| 193,585 |
|
Three months ended September 30, 2018 | Mexico | U.S. | China | Total | ||||||||||||
Market Sector: | ||||||||||||||||
Test and Measurement | $ | 3,277 | $ | 7,181 | $ | — | $ | 10,458 | ||||||||
Retail and Payment Systems | 10,815 | — | — | 10,815 | ||||||||||||
Telecom, Networking and Communications | 3,596 | 833 | 5,613 | 10,042 | ||||||||||||
Medical | 7,400 | 91 | 37 | 7,528 | ||||||||||||
Industrial, Power and Clean Technology | 6,495 | 403 | 240 | 7,138 | ||||||||||||
Semiconductor | 7,696 | — | — | 7,696 | ||||||||||||
Segment Revenue | 39,279 | 8,508 | 5,890 | 53,677 |
Certain customers were reclassified from the Test and Measurement sector to the Industrial IoT, Power and Clean Technology sector during the three months ended June 28, 2020. The comparative periods have been adjusted to conform to this classification.
Nine months ended September 29, 2019 | Mexico | U.S. | China | Total | ||||||||||||
Market Sector: | ||||||||||||||||
Test and Measurement | $ | 59,054 | $ | 29,054 | $ | 2,447 | $ | 90,555 | ||||||||
Retail and Payment Systems | 35,537 | — | — | �� | 35,537 | |||||||||||
Telecom, Networking and Communications | 11,495 | 5,783 | 11,078 | 28,356 | ||||||||||||
Medical | 24,362 | 9,393 | 482 | 34,237 | ||||||||||||
Industrial, Power and Clean Technology | 32,502 | 25,008 | 847 | 58,357 | ||||||||||||
Semiconductor | 18,181 | 16 | — | 18,197 | ||||||||||||
Aerospace and Defense | — | 17,028 | — | 17,028 | ||||||||||||
Segment Revenue | 181,131 | 86,282 | 14,854 | 282,267 |
Nine months ended September 30, 2018 | Mexico | U.S. | China | Total | ||||||||||||
Market Sector: | ||||||||||||||||
Test and Measurement | $ | 10,772 | $ | 14,039 | $ | — | $ | 24,811 | ||||||||
Retail and Payment Systems | 27,215 | — | — | 27,215 | ||||||||||||
Telecom, Networking and Communications | 9,053 | 3,672 | 12,022 | 24,747 | ||||||||||||
Medical | 21,788 | 270 | 44 | 22,102 | ||||||||||||
Industrial, Power and Clean Technology | 13,561 | 970 | 1,064 | 15,595 | ||||||||||||
Semiconductor | 20,806 | — | — | 20,806 | ||||||||||||
Segment Revenue | 103,195 | 18,951 | 13,130 | 135,276 |
|
|
Additions to property, plant and equipment
The following table contains additions, including those acquired through capital leases, to property, plant and equipment for the three and ninesix months ended September 29, 2019 and September 30, 2018:ended:
Three months ended | Nine months ended |
| Three months ended |
|
| Six months ended |
| |||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 |
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| |||||||||||||||||
U.S. |
| $ | 375 |
|
| $ | 256 |
|
| $ | 919 |
|
| $ | 517 |
| ||||||||||||||||
Mexico | $ | 859 | $ | 1,287 | $ | 2,212 | $ | 3,663 |
|
| 326 |
|
|
| 965 |
|
|
| 486 |
|
|
| 1,353 |
| ||||||||
China | 98 | 190 | 152 | 198 |
|
| — |
|
|
| 23 |
|
|
| 2 |
|
|
| 54 |
| ||||||||||||
U.S. | 446 | 21 | 963 | 579 | ||||||||||||||||||||||||||||
Segment total | 1,403 | 1,498 | 3,327 | 4,440 |
|
| 701 |
|
|
| 1,244 |
|
|
| 1,407 |
|
|
| 1,924 |
| ||||||||||||
Corporate and other | — | 7 | 24 | 117 |
|
| 3 |
|
|
| 24 |
|
|
| 3 |
|
|
| 24 |
| ||||||||||||
Total | $ | 1,403 | $ | 1,505 | $ | 3,351 | $ | 4,557 |
| $ | 704 |
|
| $ | 1,268 |
|
| $ | 1,410 |
|
| $ | 1,948 |
|
Property, plant and equipment operating lease right of use assets (a)
September 29, 2019 | December 30, 2018 |
| June 28, 2020 |
|
| December 29, 2019 |
| |||||||||
U.S. |
| $ | 19,570 |
|
| $ | 16,904 |
| ||||||||
Mexico | $ | 11,560 | $ | 11,851 |
|
| 10,221 |
|
|
| 10,970 |
| ||||
China | 630 | 1,153 |
|
| — |
|
|
| 670 |
| ||||||
U.S | 14,047 | 15,013 | ||||||||||||||
Segment total | 26,237 | 28,017 |
|
| 29,791 |
|
|
| 28,544 |
| ||||||
Corporate and other | 111 | 143 |
|
| 123 |
|
|
| 96 |
| ||||||
Segment assets | $ | 26,3489 | $ | 28,160 | ||||||||||||
Total |
| $ | 29,914 |
|
| $ | 28,640 |
|
Other long term segment assets (b)
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
U.S. |
| $ | 8,564 |
|
| $ | 9,273 |
|
Mexico |
|
| 20,457 |
|
|
| 22,179 |
|
China |
|
| — |
|
|
| — |
|
Segment total |
|
| 29,021 |
|
|
| 31,452 |
|
Corporate and other |
|
| 749 |
|
|
| 859 |
|
Total |
| $ | 29,770 |
|
| $ | 32,311 |
|
Total segment assets (a)
|
| June 28, 2020 |
|
| December 29, 2019 |
| ||
U.S. |
| $ | 125,222 |
|
| $ | 112,789 |
|
Mexico |
|
| 95,153 |
|
|
| 93,349 |
|
China |
|
| — |
|
|
| 6,694 |
|
Segment total |
|
| 220,375 |
|
|
| 212,832 |
|
Corporate and other |
|
| 895 |
|
|
| 547 |
|
Total |
| $ | 221,270 |
|
| $ | 213,379 |
|
(a) | Property, plant and equipment information is based on the principal location of the asset. |
(b) | Includes Goodwill, Intangible assets, deferred income taxes and deferred financing costs. |
Geographic revenue
The following table contains geographic revenuesrevenue based on the product shipment destination,our customer invoicing location, for the three and ninesix months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 2018:2019.
Three months ended | Nine months ended |
| Three months ended |
|
| Six months ended |
| |||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 |
| June 28, 2020 |
|
| June 30, 2019 |
|
| June 28, 2020 |
|
| June 30, 2019 |
| |||||||||||||||||
U.S. | $ | 83,276 | $ | 43,324 | $ | 260,210 | $ | 108,153 |
| $ | 85,413 |
|
| $ | 82,593 |
|
| $ | 174,922 |
|
| $ | 176,934 |
| ||||||||
Canada | 3,916 | 7,413 | 13,686 | 20,431 |
|
| 4,646 |
|
|
| 4,860 |
|
|
| 9,668 |
|
|
| 9,770 |
| ||||||||||||
China | 1,490 | 2,940 | 8,371 | 6,692 |
|
| 347 |
|
|
| 3,483 |
|
|
| 954 |
|
|
| 6,881 |
| ||||||||||||
Total | $ | 88,682 | $ | 53,677 | $ | 282,267 | $ | 135,276 |
| $ | 90,406 |
|
| $ | 90,936 |
|
| $ | 185,544 |
|
| $ | 193,585 |
|
|
|
Significant customers and concentration of credit risk
Sales of the Company’s products are concentrated in certain cases among specific customers in the same industry. The Company is subject to concentrations of credit risk in trade receivables. The Company considers concentrations of credit risk in establishing the allowance for doubtful accounts and believes the recorded allowances are adequate.
The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its revenue. In addition to having a limited number of customers, the Company manufactures a limited number of products for each customer. If the Company loses any of its larger customers or any product line manufactured for one of its larger customers, it could experience a significant reduction in revenue. Also, the insolvency of one or more of its larger customers or the inability of one or more of its larger customers to pay for its orders could decrease revenue. As many costs and operating expenses are relatively fixed, a reduction in net revenue can decrease profit margins and adversely affect the business, financial condition and results of operations.
During the threesix months ended September 29, 2019, oneJune 28, 2020, 1 customer exceeded 10% of total revenue, comprising 12.3%of 14.3% of total revenue across all geographic segments. During the threesix months ended SeptemberJune 30, 2018, three customers exceeded 10% of total revenues comprising 35.7% (12.8%, 12.0%, and 10.9%, respectively) of total revenues. During the nine months ended September 29, 2019, one1 customer exceeded 10% of total revenue, comprising 13.0%of 13.1% of total revenue across all geographic segments. During the nine months ended September 30, 2018, two customers comprised 23.9% (13.5% and 10.4%, respectively) of total revenues.
As of September 29, 2019, noJune 28, 2020, 0 customers represented more than 10% of the trade accounts receivable. At December 30, 2018, two customers29, 2019, 1 customer comprised 21% (11% and 10%, respectively) of the Company’s trade accounts receivable. No other customers individually represented more than 10% of total revenue or trade accounts receivable in either period.receivable.
| Derivative financial instruments |
TheDuring the six months ended June 28, 2020, the Company previously entered into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso expenditures. These contracts were effective as hedges from an economic perspective, but do not meet the requirements for hedge accounting under ASC Topic 815 “Derivatives and Hedging”. Accordingly, changes in the fair value of these contracts were recognized into net income in the consolidated statement of operations and comprehensive income.income (loss). The Company had no0 outstanding forward foreign exchange contracts in the third quarterfirst half of 2019. Included in cost
The following table presents a summary of sales for the third quarter of 2019 was anoutstanding foreign currency forward contracts as at June 28, 2020:
Currency |
| Buy/Sell |
| Foreign Currency Amount |
| Notional Contract Value in USD |
| |
Mexican Peso |
| Buy |
| 285,000 MXN |
| $ | 11,668 |
|
The unrealized gain recognized in earnings as a result of revaluing the instruments to fair value of $NIL million. Includedon June 28, 2020 for the six months period ended was $459 (June 30, 2019– $Nil) which was included in cost of sales forin the third quarterinterim consolidated statement of 2018 was an unrealized gain recognized as a result of revaluingoperations and comprehensive income (loss). Fair value is determined using the instruments to fair value of $0.1 million,market approach with valuation based on market observables (Level 2 quantitative inputs in the hierarchy set forth under ASC 820 “Fair Value Measurements”).
The average contract and a realized loss of $0.01 million. There was nomark-to-market rates for outstanding forward foreign exchange contracts for the third quarter of 2019 and 2018.
were as follows:
| June 28, 2020 |
| December 29, 2019 | ||||||||
Average USD:PESO contract rate | 24.43 | N/A | |||||||||
Average USD:PESO mark-to-market rate | 23.50 | N/A |
The derivative assets were $459 as at June 28, 2020 (June 30, 2019 –Nil) which reflected the fair market value of the unsettled forward foreign exchange contracts. There was 0 derivative liability as at June 28, 2020 or June 30, 2019.
| Restructuring |
Three months ended | ||||||||
September 29, 2019 | September 30, 2018 | |||||||
Dongguan facility closure: | ||||||||
Involuntary employee termination benefits | $ | 997 | $ | - | ||||
Other exit costs | 1,040 | |||||||
Allowance for doubtful accounts receivables (note 4a) | 1,691 | - | ||||||
Provision for obsolete raw material inventories (note 4c) | 1,550 | - | ||||||
Write down of property, plant and equipment (note 4d) | 261 | - | ||||||
5,539 | - | |||||||
Other involuntary employee termination benefits (U.S., Canada and Mexico) | 915 | 58 | ||||||
6,454 | 58 |
Nine months ended | ||||||||
September 29, 2019 | September 30, 2018 | |||||||
Dongguan facility closure: | ||||||||
Involuntary employee termination benefits | $ | 997 | $ | - | ||||
Other exit costs | 1,040 | |||||||
Allowance for doubtful accounts receivables (note 4a) | 1,691 | - | ||||||
Provision for obsolete raw material inventories (note 4c) | 1,550 | - | ||||||
Write down of property, plant and equipment (note 4d) | 261 | - | ||||||
5,539 | - | |||||||
Other involuntary employee termination benefits (U.S., Canada and Mexico) | 3,085 | 154 | ||||||
8,624 | 154 |
Dongguan facility closure:
closure
In September 2019, the Company announced it plans to close its Dongguan manufacturing facility in China, concurrent with the expiryexpiration of the facility lease in December 2019.2019, which was extended to February 2020. The closure was formally approved by the Board of Directors in September 2019. The closure of the Dongguan manufacturing facility will impact approximately 137 employees at the Dongguan manufacturing facility. The employee group were notified of the closure in the last week of September 2019. A restructuring charge of $5,539$5,000 was recorded in the third quartertwelve months ended December 29, 2019 relating to the announced planned closure.
Other restructuring charges:
During the third quarter of 2019 involuntary employee termination benefit costs of $915 pursuant to one time termination plans were incurred related to the reduction of 19 full-time equivalents (“FTEs”) in U.S, 4 full-time equivalents (“FTEs”) in Markham, Canada and 89 FTEs and contract employees in Mexico.
During the nine months ended September 30, 2019 involuntary employee termination benefit costs of $3,085 pursuant to one time termination plans were incurred related to the reduction of 47 full-time equivalents (“FTEs”) in U.S, 8 full-time equivalents (“FTEs”) in Markham, Canada and 548 FTEs and contract employees in Mexico.
Restructuring Liability:
Termination benefits and other exit costs | ||||
Balance as at December 31, 2018 | $ | - | ||
Involuntary employee termination benefits | 4,082 | |||
Other exit costs | 1,040 | |||
Payments | (2,386 | ) | ||
Amounts reversed unutilized | - | |||
At September 29, 2019 | $ | 2,736 |
In September 2019, the Company announced it plans to close its Dongguan manufacturing facility in China, concurrent with the expiry of the facility lease in December 2019. The closure was formally approved by the Board of Directors in September 2019. The closure of the Dongguan manufacturing facility will resultresulted in a reduced labor force by approximately 135137 employees. The employee group was notified of the closure in the last week of September 2019. The planned closure of the Dongguan facility and majority of the cash outflows associated with the $2,037 included within the restructuring liability was for severance and other exit costs is anticipated to bewhich was substantially completed by the end of the fourthfirst quarter of 2019 (the remaining2020. During the six months ended June 28, 2020, restructuring liabilityrecoveries were recorded of $699 at September 29, 2019 relates$346 primarily related to other ongoing restructuring initiativesshipments and cash payments received on previously provisioned Dongguan inventory Remaining activities include a small number of support staff performing administrative duties, professional services to right sizebe rendered with respect to the Company’s workforce as noted above).closure activities, taxes and duties to be settled in addition to severance payments. Substantially all of the costs are anticipated to be spent by the third quarter of 2020. Manufacturing by the Company of certain products previously manufactured at the Dongguan Facility will befacility has been transferred to the Company’s other manufacturing facilities. A restructuring charge of $5,000 was recorded in the twelve months ended December 29, 2019 relating to the announced planned closure.
Restructuring Liability
|
| Termination benefits and other exit costs |
| |
Balance as at December 29, 2019 |
| $ | 1,597 |
|
Involuntary employee termination benefits |
|
| 115 |
|
Other exit cost payments and provisions reversed unutilized |
|
| (183 | ) |
Payments—Dongguan severance |
|
| (626 | ) |
Payments (U.S., Canada and Mexico) |
|
| (228 | ) |
At June 28, 2020 |
| $ | 675 |
|
| Commitments |
Purchase obligations not0t recorded on the balance sheet as at September 29, 2019June 28, 2020 consist of open non-cancellable purchase orders (PO) for raw materials for $25,866$50,455, which are expected to be paid within 12 months of the PO issue date. Purchase obligations not recorded on the balance sheet as at December 30, 201829, 2019, consisted of open non-cancellable purchase orders for raw materials for $48,224$27,959 to be paid within 12 months of the PO issue date.
12. | Subsequent Events |
Subsequent to June 28, 2020, and in part in response to economic conditions resulting from the COVID-19 pandemic, the Company effected cost-cutting measures including headcount reductions, the majority of which were at our Zacatecas, Mexico facility with a total cost amounting to $1,000.
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Where we say “we”, “us”, “our”, the “Company” or “SMTC”, we mean SMTC Corporation or SMTC Corporation and its subsidiaries, as the context may require. Where we refer to the “industry”, we mean the electronics manufacturing services industry.
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in combination with the accompanying unaudited interim consolidated financial statements and related notes as well as the audited consolidated financial statements and the accompanying notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) included within the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”)on March 15, 2019. 13, 2020.
The forward-looking statements in this discussion and elsewhere in this quarterly report, including those regarding the electronics manufacturing services industry, market conditions, our expectations regarding our future performance, liquidity and capital resources, the impact of accounting standards not yet adopted, compliance with financial covenants under our Credit Facilities, future response to and effects of the COVID-19 pandemic, including our continued operations, customer demand, supply chain availability and implementation of protective measures, public policy response to the COVID-19 pandemic including legislation or restrictions, our expectations regarding customer concentration, our expectations regarding timing and mitigation of the identified material weakness in internal control over financial reporting, and other non-historical statements in this discussion include numerous risks and uncertainties, some of which are as described in the “Risk Factors” section in the Annual Report on Form 10-K filed with the SEC on March 15, 2019,13, 2020, as updated by Item 1A in Part II of this quarterly report. Certain statements in this MD&A contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “envisions”, “seeks” and other similar language and are considered forward looking statements or information under applicable securities laws. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict and the actual outcome may be materially different. Except as required by applicable law, we maydo not intend to update these forward-looking statements after the date of this Form 10-Q,quarterly report, even though our situation may change in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
This MD&A contains discussion in U.S. dollars (US$) unless specifically stated otherwise.
Background
We are a provider of end-to-end electronics manufacturing services (“EMS”), including product design and engineering services, printed circuit board assembly (“PCBA”), production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order (“CTO”), build to order (“BTO”) and direct order fulfillment.fulfillment (“DOF”). We haveoperate more than 50 manufacturing and assembly lines in over 555,000 square feet of production space worldwide at strategically located facilities in the United States Canada,and Mexico, and China that provide local support, flexibility, fast turn around and delivery times, and low-cost, volume manufacturing capabilities, as well as new product integration (“NPI”) services, to our global customers. Our services extend over the entire electronic product life cycle from new product development and new product introductionNPI through to growth, maturity and end of life phases. As of September 29, 2019,June 28, 2020, we had 2,9413,196 employees of which 2,5412,589 were full time and contract employees.
COVID-19 Update
Our business operations have generally performed as expected during the first half of 2020. However, the fast developing COVID-19 pandemic represents significant uncertainty for the remainder of the year. So far, while we have experienced some impact to our business from the COVID-19 pandemic, and experienced forecast fluctuations in the second quarter from our end customers, all of our facilities remain in operation and in compliance with applicable COVID-19 health and safety measures. While demand from our customers has remained relatively stable, the COVID-19 pandemic could impact our customers and may result in unpredictable reductions or increases in demand across the industry sectors we service. We are proactively coordinating with our customers and key suppliers in anticipation of further possible COVID-19-related disruptions, including potential materials constraints for inventory sourced from certain regions, increased shipping costs, delays and lead-times. As at June 28, 2020, the funds available to borrow under our PNC Facility (as described and defined below) after deducting the current borrowing base conditions and subject to debt covenants were $30.9 million.
The Company believes that the effects of the COVID-19 pandemic have the potential to negatively impact the results of our operations, cash flows and financial position. In September 2019,response, management has implemented actions to mitigate the Company announcedpotential financial impact, to protect the health of our employees and to comply with government regulations at each of our facilities. We are taking extensive precautions intended to protect the health and safety of our employees and to ensure business continuity. Despite these efforts it plansis possible that an extended pandemic could disrupt the operation of one or more of our manufacturing facilities or our supply chain. Additionally, one or more of our manufacturing facilities may need to close its Chinese manufacturing operation when its current Dongguan, China facility lease expires in December 2019 as approvedlimit operations or temporarily close. Although many of the products we manufacture for our customers are deemed essential, the COVID-19 pandemic may impact demand for our customers’ products, which could impact our production schedules. Our employees may be unable to perform their work due to illness caused by the BoardCOVID-19 pandemic or local, state or federal orders and restrictions requiring employees to remain at home. These possible impacts could result from both the pandemic itself and the extensive public restrictions imposed to limit the spread of Directors. The closureCOVID-19. If one or more of our manufacturing facilities were temporarily closed or had its operations limited, or customers pushed out demand due to the Dongguan manufacturing facility is intended to reduce the labor force which is anticipated to impact approximately 135 employees at the Dongguan manufacturing facility. Impacted employees were notified in the last week of September 2019. The closure of the Dongguan facility will reduce forecasted losses thatpandemic, this would have otherwise been incurreda material impact on our operations.
We are actively monitoring the global COVID-19 pandemic and in fiscal 2020 as the Dongguan facility was not expected to be fully utilized. The wind downcontinuous communication with our employees and closure of the Dongguan facility is anticipated to be substantially completed by the end of the fourth quarter of 2019, however it is expected there will be some continued deregistration and filing requirements in 2020. Manufacturing by the Company of certain products previously manufactured at the Dongguan Facility will be transferred to the Company’s other manufacturing facilities.
During the three months ended September 29, 2019, restructuring charges of $5.5 million were recorded associated with the closure of the Dongguan manufacturing facility. Included in this total are charges of $2.0 million primarily related to severance and other facility closing chargesunion representatives, in addition to $0.3government and state representatives where our manufacturing facilities reside. We have instructed those employees at higher risk of COVID-19 to stay home and have directed all non-essential employees to work remotely. For those employees continuing to work in our facilities, we have instituted programs of temperature metering, intensive cleaning and disinfection, social distancing and are prohibiting visitors to our sites. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure or personal commitments restrict the ability of some employees to come to work. The Company has modified shift schedules and hired temporary labor to help address this situation and meet our customers’ product shipping schedules. We anticipate incurring higher direct labor charges in the third quarter of 2020 as a result of this. Decisions on further measures or the continuation of these measures will depend on the impact of the COVID-19 pandemic on our operations and the requirements of each jurisdiction in which we operate.
We incurred an additional $1.2 million in property, plantCOVID-19 related expenses in the second quarter primarily due to the retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment write down charges, $1.7 million in write down of accounts receivable and $1.5 million in write down of inventory. The majorityrelated supplies, costs related to facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. With respect to liquidity, we are evaluating and taking actions to reduce costs and spending across our Company. This includes putting a pause on all non-essential new hiring and new programs and reducing our capital expenditures. While we are unable to determine or predict the nature, duration or scope of the cash outlays associatedoverall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we will continue to actively monitor the situation and may take further actions that alter our business operations to comply with required by federal, state or local authorities or that we determine are in the $2.0 million in severancebest interests of our employees, customers, suppliers, and other facility closing activities are anticipated to be completed by the end of the fourth quarter of 2019.stockholders.
Results of Operations
The unaudited interim consolidated financial statements of SMTC are prepared in accordance with U.S. GAAP.
Quarter ended September 29, 2019June 28, 2020 compared with the quarter ended SeptemberJune 30,, 2018:
2019:
The following table sets forth summarized operating results in millions of US$ for the periods indicated:
Three months ended September 29, 2019 | Three months ended September 30, 2018 | Change 2018 to 2019 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Revenue | 88.7 | 100.0 | 53.7 | 100.0 | 35.0 | 65.2 | ||||||||||||||||||
Cost of sales | 79.8 | 90.0 | 48.5 | 90.3 | 31.3 | 64.5 | ||||||||||||||||||
Gross profit | 8.9 | 10.0 | 5.2 | 9.7 | 3.7 | 71.2 | ||||||||||||||||||
Selling, general and administrative expenses | 6.6 | 7.4 | 3.7 | 6.9 | 2.9 | 75.7 | ||||||||||||||||||
Change in fair value of warrant liability | (0.9 | ) | (1.0 | ) | — | — | (0.9 | ) | — | |||||||||||||||
Restructuring charges | 6.4 | 7.2 | — | — | 6.4 | — | ||||||||||||||||||
Operating income | (3.2 | ) | (3.6 | ) | 1.5 | 2.8 | (4.7 | ) | (313.3 | ) | ||||||||||||||
Interest expense | 2.7 | 3.0 | 0.5 | 0.9 | 2.2 | 440.0 | ||||||||||||||||||
Income (loss) before income taxes | (5.9 | ) | (6.7 | ) | 1.0 | 1.9 | (6.9 | ) | (690.0 | ) | ||||||||||||||
Income tax expense (recovery) | ||||||||||||||||||||||||
Current | (0.1 | ) | (0.1 | ) | 0.3 | 0.6 | (0.4 | ) | (133.3 | ) | ||||||||||||||
Deferred | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) | 0.1 | 500.0 | ||||||||||||||
(0.2 | ) | (0.2 | ) | 0.1 | 0.2 | (0.3 | ) | (300.0 | ) | |||||||||||||||
Net income (loss) | (5.7 | ) | (6.4 | ) | 0.9 | 1.7 | (6.6 | ) | (733.3 | ) |
Revenue
Industry Sector | Three months ended September 29, 2019 | Three months ended September 30, 2018 | Change | |||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Test and Measurement | 27.5 | 31.0 | 10.5 | 19.5 | 17.0 | 161.9 | ||||||||||||||||||
Retail and Payment Systems | 10.5 | 11.8 | 10.8 | 20.1 | (0.3 | ) | (2.8 | ) | ||||||||||||||||
Telecom, Networking and Communications | 9.6 | 10.8 | 10.1 | 18.8 | (0.5 | ) | (5.0 | ) | ||||||||||||||||
Medical | 10.5 | 11.8 | 7.5 | 14.0 | 3.0 | 40.0 | ||||||||||||||||||
Industrial, Power and Clean Technology |
| 20.3 | 22.9 | 7.1 | 13.3 | 13.2 | 186 | |||||||||||||||||
Semiconductor | 5.1 | 5.8 | 7.7 | 14.3 | (2.6 | ) | (33.8 | ) | ||||||||||||||||
Aerospace and Defense | 5.2 | 5.9 | — | — | 5.2 |
| NA | |||||||||||||||||
Total | 88.7 | 100.0 | 53.7 | 100.0 | 35.0 | 65.2 |
|
| Three months ended June 28, 2020 |
|
| Three months ended June 30, 2019 |
|
| Change 2019 to 2020 |
| |||||||||||||||
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||
Revenue |
|
| 90.4 |
|
|
| 100.0 |
|
|
| 90.9 |
|
|
| 100.0 |
|
|
| (0.5 | ) |
|
| (0.6 | ) |
Cost of sales |
|
| 79.7 |
|
|
| 88.2 |
|
|
| 81.9 |
|
|
| 90.1 |
|
|
| (2.2 | ) |
|
| (2.7 | ) |
Gross profit |
|
| 10.7 |
|
|
| 11.8 |
|
|
| 9.0 |
|
|
| 9.9 |
|
|
| 1.7 |
|
|
| 18.9 |
|
Selling, general and administrative expenses |
|
| 7.1 |
|
|
| 7.9 |
|
|
| 6.7 |
|
|
| 7.4 |
|
|
| 0.4 |
|
|
| 6.0 |
|
Restructuring charges (recovery) |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| 1.5 |
|
|
| 1.7 |
|
|
| (1.6 | ) |
|
| (106.7 | ) |
Operating income |
|
| 3.7 |
|
|
| 4.1 |
|
|
| 0.8 |
|
|
| 0.9 |
|
|
| 2.9 |
|
|
| 362.5 |
|
Fair value measurement loss (gain) on warrant liability |
|
| 0.4 |
|
|
| 0.4 |
|
|
| — |
|
|
| 0.0 |
|
|
| 0.4 |
|
| 100 |
| |
Interest expense |
|
| 2.0 |
|
|
| 2.2 |
|
|
| 2.8 |
|
|
| 3.1 |
|
|
| (0.8 | ) |
|
| (28.6 | ) |
Income before income taxes |
|
| 1.3 |
|
|
| 1.4 |
|
|
| (2.0 | ) |
|
| (2.2 | ) |
|
| 3.3 |
|
|
| 165.0 |
|
Income tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
| 0.3 |
|
|
| 0.3 |
|
|
| 0.4 |
|
|
| 0.4 |
|
|
| (0.1 | ) |
|
| (25.0 | ) |
Deferred |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| (0.1 | ) |
|
| (100.0 | ) |
|
|
| 0.3 |
|
|
| 0.3 |
|
|
| 0.5 |
|
|
| 0.6 |
|
|
| (0.2 | ) |
|
| (40.0 | ) |
Net income(loss) |
|
| 1.0 |
|
|
| 1.1 |
|
|
| (2.5 | ) |
|
| (2.8 | ) |
|
| 3.5 |
|
|
| 140.0 |
|
Revenue increased $35.0by Industry Sector
|
| Three months ended June 28, 2020 |
|
| Three months ended June 30, 2019 |
|
| Change |
| |||||||||||||||
Industry Sector |
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||
Test and Measurement |
|
| 13.9 |
|
|
| 15.4 |
|
|
| 12.1 |
|
|
| 13.3 |
|
|
| 1.8 |
|
|
| 14.9 |
|
Retail and Payment Systems |
|
| 6.7 |
|
|
| 7.4 |
|
|
| 12.1 |
|
|
| 13.3 |
|
|
| (5.4 | ) |
|
| (44.6 | ) |
Telecom, Networking and Communications |
|
| 5.0 |
|
|
| 5.5 |
|
|
| 8.0 |
|
|
| 8.8 |
|
|
| (3.0 | ) |
|
| (37.5 | ) |
Medical and Safety |
|
| 10.2 |
|
|
| 11.3 |
|
|
| 11.2 |
|
|
| 12.3 |
|
|
| (1.0 | ) |
|
| (8.9 | ) |
Industrial, Power and Clean Technology |
|
| 38.3 |
|
|
| 42.4 |
|
|
| 36.9 |
|
|
| 40.6 |
|
|
| 1.4 |
|
|
| 3.8 |
|
Semiconductors |
|
| 7.1 |
|
|
| 7.9 |
|
|
| 5.8 |
|
|
| 6.4 |
|
|
| 1.3 |
|
|
| 22.4 |
|
Avionics, Aerospace and Defense |
|
| 9.2 |
|
|
| 10.2 |
|
|
| 4.8 |
|
|
| 5.3 |
|
|
| 4.4 |
|
|
| 91.7 |
|
Total |
|
| 90.4 |
|
|
| 100.0 |
|
|
| 90.9 |
|
|
| 100.0 |
|
|
| (0.5 | ) |
|
| (0.6 | ) |
Certain customers were reclassified from the test and measurement sector to the industrial IoT, power and clean technology sector during the three months ended June 28, 2020. The comparative periods have been adjusted to conform to this classification.
Total Revenue decreased $0.5 million to $88.7$90.4 million for the thirdsecond quarter of 20192020 from $53.7$90.9 million in the same period in the prior year due to some demand reductions from retail payment systems and commercial avionics program, among others, and order rescheduling from other customers in the latter part of 2018. With the acquisitionsecond quarter of MC Assembly Holdings, Inc. (“MCA”), we recognized additional revenue2020. We believe this resulted in part from the COVID-19 pandemic and our customers modifying their requirements in response to the shifting demand of $41.0their respective end customers.
Revenue increased $4.2 million duringin the thirdtest and measurement sector compared to the second quarter of 2019, which was not includedprimarily due to volume increases for two customers serviced in Mexico.
Revenue decreased $5.4 million in the same period during 2018. Netretail and payment systems sector compared to the second quarter of 2019, primarily due to decreased volume decreases withfrom one long-standing customer serviced in Mexico.
Revenue decreased $3.0 million in the telecom, networking and communications sector compared to the second quarter of 2019, primarily due to decreased volume from two customers serviced in Mexico and one customer disengaging in China due to the Dongguan facility closure.
Revenue decreased $1.0 million in the medical and safety sector compared to the second quarter of 2019, primarily due to one customer serviced in the U.S. experiencing reduced volumes due to the customer’s program transitioning to end-of-life.
Revenue decreased $1.0 million in the test and measurement sector, represented a decrease in revenue of $1.6 million with an additional $18.5 million in revenue represented from the MCA acquisition. Volume increases of one long-standing retail and payment systems customer serviced in Mexico, offset by volume decreases of one long-standing customer also serviced in Mexico represented a decrease in revenue of $0.3 million. In the telecom, networking and communications sector, an increase in volume from a long-standing customer serviced in Asia was offset by decreased volume from two long standing customers (one serviced in Asia; one serviced in Mexico), and the move of business to other manufacturers from one customer serviced in Asia, resulted in reduced revenue of $2.2 million. An additional $1.8 million in revenue was represented from the MCA acquisition in the telecom, networking and communications sector. Revenue in the medical sector had $3.6 million in revenue resulting from the MCA acquisition, offset by decreased volumes of $1.4 million from one customer serviced in Mexico. In the industrial IoT, power and clean technology sector one customercompared to the second quarter of 2019, primarily due to decreased volume from two customers serviced in Mexico and two customers serviced in the U.S. had increased volumes,, partially offset by one customer serviced in Mexico with a reduction in volume, representing an increase of $1.0increased volumes.
Revenue increased $1.3 million in revenue with an additional $11.9the semiconductors sector compared to the second quarter of 2019, due to increased volume from one customer serviced in Mexico.
Revenue increased $4.4 million represented fromin the MCA acquisition. Twoavionics, aerospace and defense sector compared to the second quarter of 2019, due to the addition of three new customers serviced in the U.S.
Revenue by Geography
During the second quarter of 2020, 64.9% of our revenue was attributable to production from our operations in Mexico and 35.1% of our revenue was attributable to production from our operations in the semiconductor sector had decreased volumes resultingU.S. During the second quarter of 2019, 64.6% of our revenue was attributable to production from our operations in $2.6 millionMexico, 32.0% of reduced revenue. Also,our revenue was attributable to production from our operations in the aerospaceU.S. and defense sectors increased $5.5 million as a result3.4% of our revenue was attributable to production from our operations in China. Following the MCA acquisition.closure of our Dongguan manufacturing facility in China, manufacturing of certain products previously manufactured at that facility has been transferred to the Company’s other manufacturing facilities.
Additional Revenue Information
We recorded $3.6approximately $1.9 million and $0.6$2.2 million of revenue from sales of raw materials inventory to customers during the thirdsecond quarter of 2020 and the second quarter of 2019, and the third quarter of 2018, which carried limited margin.respectively. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.
Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenue from a particular customer typically varies from quarter-to-quarter and year-to-year. The Company’s ten largest customers represented 53.1%62.4% of revenue during the thirdsecond quarter of 2019,2020, compared with 78.9%55.9% in the thirdsecond quarter of 2018.2019. Revenue from the largest customer during the thirdsecond quarter of 20192020 was $10.9$14.6 million representing 12.3%16.1% of total revenue. This compares with revenue from the three largest customerscustomer during the thirdsecond quarter of 20182019 of $6.9 million, $6.4 million, and $5.8$12.3 million representing 12.8%, 12.0% and 10.9% respectively13.5% of total revenue. No other customers represented more than 10% of revenue in either period.
During the third quarter of 2019, 64.0% of our revenue was attributable to production from our operations in Mexico, 30.9% of our revenue was attributable to production from our operations in the U.S. and 5.1% of our revenue was attributable to production from our operations in China. During the third quarter of 2018, 73.1% of our revenue was attributable to production from our operations in Mexico, 15.9% of our revenue was attributable to production from our operations in the U.S. and 11.0% of our revenue was attributable to production from our operations in China.
Gross Profit
Gross profit for the thirdsecond quarter of 20192020 increased by $3.7$1.7 million to $8.9$10.7 million or 10.0%11.8% of revenue compared with $5.2$9.0 million or 9.7%9.9% of revenue for the same period in 2018.2019. When excluding unrealized foreign exchange gainsgain on unsettled forward contracts ,amortization of intangible assets and COVID-19 related expenses, the adjusted gross profit was $11.7 million or 13.0% of revenue for the second quarter of 2020 compared with $10.8 million or 11.9% of revenue for the second quarter of 2019. When excluding unrealized foreign exchange gain on unsettled forward contracts and amortization of intangible assets, the adjusted gross profit was $10.8consistent with the same period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $7.1 million or 12.1%in the second quarter of revenue for2020 from $6.7 million in the same period in 2019, mainly due to increased professional services rendered primarily related to additional compliance obligations under the Sarbanes-Oxley Act of 2002, increased variable compensation as well as new headcount additions in the second quarter of 2020.
Restructuring Charges
During the second quarter of 2020, restructuring recoveries were recorded of $0.1 million primarily related to the cash collections of previously provisioned inventory included in the Dongguan facility. During the second quarter of 2019, restructuring charges of $1.5 million were incurred related to the reduction of 18 full-time equivalents (“FTEs”) in U.S. and 292 FTEs and contract employees in Mexico.
As at June 28, 2020, the Company had $0.7 million of accrued restructuring charges remaining related to Dongguan to be paid by the end of the third quarter of 2020 mainly related to employee severance, estimated taxes and duties including shipping costs to pay for transfer of inventory and equipment to other facilities.
Interest Expense
Interest expense decreased to $2.0 million in the second quarter of 2020 compared to $2.8 million in the same period in 2019, respectively. The decrease was primarily the result of the pay down of the Term Loan B Facility in addition to lower average debt balance in the second quarter of 2020 compared to the same period in 2019. The weighted average interest rates with $5.1 million or 9.6% of revenuerespect to the debt on our PNC and TCW Facilities was 7.3%. The weighted average interest rates for the thirdsame period in the prior year was 9.8%.
Income Tax Expense
The Company recorded current income tax expense of $0.3 and $0.4 million for the second quarters of 2020 and 2019, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $Nil and $0.1 million in the second quarter of 2018.2020 and 2019, in connection with temporary differences related to the Mexican operations.
The US Congress passing of The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, provides for certain tax relief with favorable implications for the Company. Most significantly, these provisions include a temporary relaxation of limitations on annual interest expense under Internal Revenue Code Section 163(j), and accelerated refund of certain federal tax credits. For the six months ended June 28, 2020, the current income tax benefit of these provisions is estimated to be $0.1 million, reflected in current tax expense.
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures: Adjusted Gross Profit, EBITDA, Adjusted EBITDA and Adjusted Net Income (collectively the “Non-GAAP Financial Measures”). We believe that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making, as they exclude the effects of items that may not be indicative of, or are unrelated to, our underlying operating results, such as expenses related to the COVID-19 pandemic. The Company’s management believes that adjusting for the additional temporary costs attributable to the COVID-19 pandemic allows for a better comparison of the Company’s performance to prior periods, which is consistent with our recent amendments to the financial covenants in our financing agreements. These non-GAAP measures are used by the Company’s management to manage and monitor the Company’s performance, and also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by any items adjusted for in these non-GAAP measures. In evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of those adjusted in this presentation. The Non-GAAP Financial Measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.
Net Income and Adjusted Net Income Reconciliation
Adjusted Net Income, a non-GAAP financial measure, is defined as Net Income before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts and COVID-19 related expenses. Management presents Adjusted Net Income, as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.
Below is the reconciliation of Net Income to Adjusted Net Income (in thousands):
|
| June 28, 2020 |
|
| June 30, 2019 |
| ||
Net Income(loss) |
| $ | 955 |
|
| $ | (2,468 | ) |
Add: |
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
| 846 |
|
|
| 1,844 |
|
Restructuring charges (recovery) |
|
| (125 | ) |
|
| 1,546 |
|
Stock based compensation |
|
| 155 |
|
|
| 97 |
|
Fair value adjustment of warrant liability |
|
| 399 |
|
|
| 40 |
|
Merger and acquisitions related expenses |
|
| — |
|
|
| 73 |
|
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
|
Unrealized foreign exchange gain on unsettled forward foreign exchange contracts |
|
| (971 | ) |
|
| — |
|
Adjusted Net Income |
| $ | 2,444 |
|
| $ | 1,132 |
|
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
Net income increased to $1.0 million from $2.5 million loss in the second quarter of 2020 and 2019, respectively. This was due primarily to increased gross profit, driven by a gain on unrealized foreign exchange gain on unsettled forward contracts and a reduction in amortization of intangible assets. Also contributing was a decrease in interest expense and decreased restructuring cost recorded in the incremental margin earned on $41.0second quarter of 2020 over the same period in the prior year. The net income in the second quarter of 2020 was partially offset with costs incurred of $1.2 million related to COVID-19 not incurred for the same period in the prior year. When excluding the items in the reconciliation above, Adjusted Net Income increased $1.3 million in the second quarter of increased revenue from MCA acquisition.2020 over the same period in the prior year.
Gross Profit and Adjusted Gross Profit Reconciliation
Adjusted Gross Margin Reconciliation:
Adjusted gross margin,Profit, a non-GAAP financial measure, is defined as gross profit exclusive of unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts and the amortization of intangible assets. Management presentsThe Company calculates an adjusted gross marginprofit amount as management considerswe consider gross marginsprofit exclusive of such unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts to be a meaningful measure as it is non-cash and management does not consider the mark-to-market valuation reflective of operating performance in the current period. Management also excludes the impact of intangible assets amortization as these charges are non-cash in nature and are not believed to be reflective of operating performance. We also believe adjusted gross marginprofit provides useful information to investors in understanding and evaluating our operating results in the same manner as management.
Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross profit:profit (in thousands):
Three months ended September, 2019 | Three months ended September 30, 2018 |
| Three months ended June 28, 2020 |
|
| Three months ended June 30, 2019 |
| |||||||||
Gross profit | $ | 8,906 | $ | 5,237 |
| $ | 10,686 |
|
| $ | 8,997 |
| ||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Unrealized foreign exchange gains on unsettled forward exchange contracts | — | (108 | ) | |||||||||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts |
|
| (971 | ) |
|
| — |
| ||||||||
Amortization of intangible assets | 1,844 | — |
|
| 846 |
|
|
| 1,844 |
| ||||||
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
| ||||||||
Adjusted gross profit | $ | 10,750 | $ | 5,129 |
| $ | 11,746 |
|
| $ | 10,841 |
| ||||
Adjusted gross profit percentage | 12.1 | % | 9.6 | % |
|
| 13.0 | % |
|
| 11.9 | % |
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
EBITDA and Adjusted EBITDA Reconciliation:
Reconciliation
EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, income taxes, depreciation and amortization, with Adjusted EBITDA also excluding restructuring charges, stock-based compensation, fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts.contracts, fair value adjustment of warrant liability and merger and acquisition related expenses and COVID-19 related expenses. Management presents EBITDA and Adjusted EBITDA, as it isthey are utilized by management to monitor performance against budget as well as compliance with covenants governing our Credit Facilities (as defined below).bank covenants. We also believe EBITDA and Adjusted EBITDA provide useful information to investors in understanding and evaluating our operating results in the same manner as management.
Below is the reconciliation of net income (loss) income,, the closest GAAP measure, to EBITDA and Adjusted EBITDA.EBITDA (in thousands).
Three months ended September 29, 2019 | Three months ended September 30, 2018 |
| Three months ended June 28, 2020 |
|
| Three months ended June 30, 2019 |
| |||||||||
Net (loss) income | $ | (5,734 | ) | $ | 864 | |||||||||||
Net income(loss) |
| $ | 955 |
|
| $ | (2,468 | ) | ||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Depreciation of property, plant and equipment | 1,649 | 883 |
|
| 1,619 |
|
|
| 1,626 |
| ||||||
Amortization of intangible assets | 1,844 | — |
|
| 846 |
|
|
| 1,844 |
| ||||||
Interest | 2,679 | 485 |
|
| 1,987 |
|
|
| 2,800 |
| ||||||
Income taxes | (184 | ) | 145 |
|
| 363 |
|
|
| 519 |
| |||||
EBITDA | $ | 254 | $ | 2,377 |
| $ | 5,770 |
|
| $ | 4,321 |
| ||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Restructuring charges | 6,454 | 58 | ||||||||||||||
Restructuring charges (recovery) |
|
| (125 | ) |
|
| 1,546 |
| ||||||||
Stock based compensation | 353 | 75 |
|
| 155 |
|
|
| 97 |
| ||||||
Fair value adjustment of warrant liability | (858 | ) | — |
|
| 399 |
|
|
| 40 |
| |||||
Fair value adjustment to contingent consideration |
|
| — |
|
|
| — |
| ||||||||
Merger and acquisition related expenses | 68 | — |
|
| — |
|
|
| 73 |
| ||||||
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
| ||||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (108 | ) |
|
| (971 | ) |
|
| — |
| |||||
Adjusted EBITDA | $ | 6,271 | $ | 2,402 |
| $ | 6,413 |
|
| $ | 6,077 |
|
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
Adjusted EBITDA for three months ended September 29, 2019June 28, 2020 increased by $3.9$0.3 million to $6.3$6.4 million compared with $2.4$6.1 million for the same period in 20182019 due to the increase in large partgross profit, partially offset by increased selling, general and administrative expenses.
Six months ended June 28, 2020, compared with the six months ended June 30, 2019:
The following table sets forth summarized operating results in millions of US$ for the periods indicated:
|
| Six months ended June 28, 2020 |
|
| Six months ended June 30, 2019 |
|
| Change 2019 to 2020 |
| |||||||||||||||
|
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||
Revenue |
|
| 185.5 |
|
|
| 100.0 |
|
|
| 193.6 |
|
|
| 100.0 |
|
|
| (8.1 | ) |
|
| (4.2 | ) |
Cost of sales |
|
| 165.2 |
|
|
| 89.1 |
|
|
| 176.0 |
|
|
| 90.9 |
|
|
| (10.8 | ) |
|
| (6.1 | ) |
Gross profit |
|
| 20.3 |
|
|
| 10.9 |
|
|
| 17.6 |
|
|
| 9.1 |
|
|
| 2.7 |
|
|
| 15.3 |
|
Selling, general and administrative expenses |
|
| 14.3 |
|
|
| 7.7 |
|
|
| 13.3 |
|
|
| 6.9 |
|
|
| 1.0 |
|
|
| 7.5 |
|
Change in fair value of contingent consideration |
|
| — |
|
|
| — |
|
|
| (3.1 | ) |
|
| (1.6 | ) |
|
| 3.1 |
|
|
| 100.0 |
|
Restructuring charges (recovery) |
|
| (0.3 | ) |
|
| (0.2 | ) |
|
| 2.2 |
|
|
| 1.1 |
|
|
| (2.5 | ) |
|
| (113.6 | ) |
Operating income |
|
| 6.3 |
|
|
| 3.4 |
|
|
| 5.2 |
|
|
| 2.7 |
|
|
| 1.1 |
|
|
| 21.2 |
|
Fair value measurement loss (gain) on warrant liability |
|
| (0.1 | ) |
|
| (0.1 | ) |
|
| — |
|
|
| 0.0 |
|
|
| (0.1 | ) |
| 100 |
| |
Interest expense |
|
| 4.1 |
|
|
| 2.2 |
|
|
| 5.7 |
|
|
| 2.9 |
|
|
| (1.6 | ) |
|
| (28.1 | ) |
Income before income taxes |
|
| 2.3 |
|
|
| 1.2 |
|
|
| (0.5 | ) |
|
| (0.3 | ) |
|
| 2.8 |
|
|
| 560.0 |
|
Income tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
| 0.6 |
|
|
| 0.3 |
|
|
| 0.7 |
|
|
| 0.4 |
|
|
| (0.1 | ) |
|
| (14.3 | ) |
Deferred |
|
| 0.0 |
|
|
| 0.0 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| (0.1 | ) |
|
| (100.0 | ) |
|
|
| 0.6 |
|
|
| 0.3 |
|
|
| 0.8 |
|
|
| 0.4 |
|
|
| (0.2 | ) |
|
| (25.0 | ) |
Net income(loss) |
|
| 1.7 |
|
|
| 0.9 |
|
|
| (1.3 | ) |
|
| (0.7 | ) |
|
| 3.0 |
|
|
| 230.8 |
|
Revenue by Industry Sector
|
| Six months ended June 28, 2020 |
|
| Six months ended June 30, 2019 |
|
| Change |
| |||||||||||||||
Industry Sector |
| $ |
|
| % |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||
Test and Measurement |
|
| 26.1 |
|
|
| 14.1 |
|
|
| 25.3 |
|
|
| 13.1 |
|
|
| 0.8 |
|
|
| 3.2 |
|
Retail and Payment Systems |
|
| 19.0 |
|
|
| 10.2 |
|
|
| 25.0 |
|
|
| 12.9 |
|
|
| (6.0 | ) |
|
| (24.0 | ) |
Telecom, Networking and Communications |
|
| 12.5 |
|
|
| 6.7 |
|
|
| 18.8 |
|
|
| 9.7 |
|
|
| (6.3 | ) |
|
| (33.5 | ) |
Medical and Safety |
|
| 21.5 |
|
|
| 11.6 |
|
|
| 23.7 |
|
|
| 12.2 |
|
|
| (2.2 | ) |
|
| (9.3 | ) |
Industrial, Power and Clean Technology |
|
| 74.4 |
|
|
| 40.1 |
|
|
| 75.9 |
|
|
| 39.2 |
|
|
| (1.5 | ) |
|
| (2.0 | ) |
Semiconductors |
|
| 12.4 |
|
|
| 6.7 |
|
|
| 13.1 |
|
|
| 6.8 |
|
|
| (0.7 | ) |
|
| (5.3 | ) |
Avionics, Aerospace and Defense |
|
| 19.6 |
|
|
| 10.6 |
|
|
| 11.8 |
|
|
| 6.1 |
|
|
| 7.8 |
|
|
| 66.1 |
|
Total |
|
| 185.5 |
|
|
| 100.0 |
|
|
| 193.6 |
|
|
| 100.0 |
|
|
| (8.1 | ) |
|
| (4.2 | ) |
Certain customers were reclassified from the test and measurement sector to the industrial IoT, power and clean technology sector during the three months ended June 28, 2020. The comparative periods have been adjusted to conform to this classification.
Total revenue decreased $8.1 million to $185.5 million for the first half of 2020 from $193.6 million in the same period in the prior year primarily due to backlog fulfillment in the first half of 2019 associated with the acquisition of MC Assembly whichin November 2018, customer disengagement in China due to the Dongguan facility closure in the first quarter of 2020, along with some demand reductions from retail payment systems and commercial avionics programs, among others, and order rescheduling from other North America customers in the latter part of the second quarter of 2020. We believe this resulted in part from the COVID-19 pandemic and our customers modifying their requirements in response to shifting demand of their respective end customers.
Revenue increased $1.1 million in the test and measurement sector compared to the first half of 2019, primarily due to volume increases for three customers (two serviced in Mexico; one serviced in the U.S.), partially offset by volume decreases for one customer serviced in the U.S.
Revenue decreased $6.0 million in the retail and payment systems sector compared to the first half of 2019, primarily due to decreased volume from two customers serviced in Mexico.
Revenue decreased $6.3 million in the telecom, networking and communications sector compared to the first half of 2019, primarily due to decreased volume from one customer serviced in Mexico and two customers disengaging in China due to the Dongguan facility closure, partially offset by one customer serviced in the U.S. with increased volumes.
Revenue decreased $2.2 million in the medical and safety sector compared to the first half of 2019, primarily due to one customer serviced in the U.S. experiencing reduced volumes due to the customer’s program transitioning to end-of-life and decreased volume from one other customer serviced in Mexico, partially offset by one customer serviced in Mexico with increased volumes.
Revenue decreased $1.8 million in the industrial IoT, power and clean technology sector compared to the first half of 2019, primarily due to decreased volume from three customers (two serviced in Mexico; one serviced in the U.S.), partially offset by three customers (two serviced in Mexico; one serviced in the U.S.) with increased volumes.
Revenue decreased $0.7 million in the semiconductors sector compared to the first half of 2019, due to decreased volume from one customer serviced in Mexico, offset by one customer serviced in Mexico with increased volumes.
Revenue increased $7.8 million in the avionics, aerospace and defense sector compared to the first half of 2019, due to volumes increases with two customers serviced in the U.S., as well as the addition of three new customers serviced in the U.S.
Revenue by Geography
During the first half of 2020, 64.4% of our revenue was attributable to production from our operations in Mexico, 35.0% of our revenue was attributable to production from our operations in the U.S. and 0.6% of our revenue was attributable to production from our operations in China. During the first half of 2019, 64.2% of our revenue was attributable to production from our operations in Mexico, 30.4% of our revenue was attributable to production from our operations in the U.S. and 5.3% of our revenue was attributable to production from our operations in China. Following the closure of our Dongguan manufacturing facility in China, manufacturing of certain products previously manufactured at that facility has been transferred to the Company’s other manufacturing facilities.
Additional Revenue Information
We recorded approximately $3.9 million and $4.4 million of revenue from sales of raw materials inventory to customers during the first half of 2020 and the first half of 2019. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.
The Company’s ten largest customers represented an increase55.7% of revenue during the first half of 2020, compared with 53.6% in Adjusted EBITDAthe first half of $3.32019. Revenue from the largest customer during the first half of 2020 was $26.6 million representing 14.3% of total revenue. This compares with revenue from the largest customer during the first half of 2019 of $25.8 million representing 13.3% of total revenue. No other customers represented more than 10% of revenue in either period.
Gross Profit
Gross profit for the first half of 2020 increased by $2.7 million to $20.3 million or 10.9% of revenue compared with $17.6 million or 9.1% of revenue for the same period in 2019. When excluding unrealized foreign exchange gain on unsettled forward contracts, amortization of intangible assets and COVID-19 related expenses, the adjusted gross profit was $23.4 million or 12.6% of revenue for the first half of 2020 compared with $21.3 million or 11.0% of revenue for the first half of 2019. This was due primarily to higher gross profit due to product mix and lower variable manufacturing expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $14.3 million in the first half of 2020 from $13.3 million in the same period in 2019, mainly due to increased professional services rendered related to additional compliance obligations under the Sarbanes-Oxley Act of 2002, as well as new headcount hired in the first half of 2020.
Change in fair value of contingent consideration
During the first half of 2019, it was determined that there was no fair value of the contingent consideration liability, and that no obligation existed resulting in a recognized gain of $3.1 million. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and relates to a contingent earn-out payment associated with the acquisition of MC Assembly. The fair value estimate under purchase accounting of $3.1 million was derived from a multiple of earnings based on MC Assembly’s forecasted twelve-month earnings for the period ended June 30, 2019. Based on actual earnings, the contingent consideration liability was considered resolved and no longer payable as at June 30, 2019. No contingent consideration existed as at June 28, 2020.
Restructuring Charges
During the first half of 2020, restructuring recoveries were $0.3 million primarily related to the cash collections of previously provisioned inventory included in the Dongguan facility. During the first half of 2019, restructuring charges of $2.2 million were incurred related to the reduction of 28 full-time equivalents (“FTEs”) in the U.S. and 4 FTEs in Canada and 459 FTEs and contract employees in Mexico. As at June 28, 2020, the Company had $675 of accrued restructuring charges remaining to be paid by the end of the third quarter of 2020.
Interest Expense
Interest expense decreased to $4.1 million in the first half of 2020 compared to $5.7 million in the same period in 2019. The decrease was primarily the result of the pay down of the Term Loan B Facility in addition to lower average debt balance in the first half of 2020 compared to the same period in 2019. The weighted average interest rates with respect to the debt on our PNC and TCW Facilities was 7.5%. The weighted average interest rates for the same period in the prior year.year was 9.6%.
Income Tax Expense
The Company recorded current income tax expense of $0.6 million and $0.7 million for the first half of 2020 and 2019, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $Nil and $0.1 million in the first half of 2020 and 2019, in connection with temporary differences related to the Mexican operations.
The US Congress passing of The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, provides for certain tax relief with favorable implications for the Company. Most significantly, these provisions include a temporary relaxation of limitations on annual interest expense under Internal Revenue Code Section 163(j), and accelerated refund of certain federal tax credits. For the six months ended June 28, 2020, the current income tax benefit of these provisions is estimated to be $0.1 million, reflected in current tax expense.
Non-GAAP Financial Measures
Net Income (Loss)To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use the following non-GAAP financial measures: Adjusted Gross Profit, EBITDA, Adjusted EBITDA and Adjusted Net Income (Loss) Reconciliation:(collectively the “Non-GAAP Financial Measures”). We believe that these Non-GAAP Financial Measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to the key metrics we use in our financial and operational decision making, as they exclude the effects of items that may not be indicative of, or are unrelated to, our underlying operating results, such as expenses related to the COVID-19 pandemic. The Company’s management believes that adjusting for the additional temporary costs attributable to the COVID-19 pandemic allows for a better comparison of the Company’s performance to prior periods, which is consistent with our recent amendments to the financial covenants in our financing agreements. These non-GAAP measures are used by the Company’s management to manage and monitor the Company’s performance, and also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP, and they should not be construed as an inference that our future results will be unaffected by any items adjusted for in these non-GAAP measures. In evaluating these non-GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of those adjusted in this presentation. The Non-GAAP Financial Measures that we use are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.
Net Income and Adjusted Net Income Reconciliation
Adjusted Net Income, (Loss), a non-GAAP financial measure, is defined as Net Income (Loss) before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts.contracts and COVID-19 related expenses. Management presents Adjusted Net Income, (Loss), as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.
Below is the reconciliation of net lossNet Income to Adjusted Net (Loss) Income:Income (in thousands):
Three months ended September 29, 2019 | Three months ended September 30, 2018 |
| Six months ended June 28, 2020 |
|
| Six months ended June 30, 2019 |
| |||||||||
Net (loss) income | $ | (5,734 | ) | $ | 864 | |||||||||||
Net Income(loss) |
| $ | 1,730 |
|
| $ | (1,257 | ) | ||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Amortization of intangible assets | 1,844 | — |
|
| 2,364 |
|
|
| 3,688 |
| ||||||
Restructuring charges | 6,454 | 58 | ||||||||||||||
Restructuring charges (recovery) |
|
| (346 | ) |
| $ | 2,170 |
| ||||||||
Stock based compensation | 353 | 75 |
|
| 317 |
|
|
| 185 |
| ||||||
Fair value adjustment of warrant liability | (858 | ) | — |
|
| (118 | ) |
|
| (61 | ) | |||||
Merger and acquisition related expenses | 68 | — | ||||||||||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (108 | ) | |||||||||||||
Fair value adjustment of contingent consideration |
|
|
|
|
|
| (3,050 | ) | ||||||||
Merger and acquisitions related expenses |
|
| — |
|
|
| 164 |
| ||||||||
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
| ||||||||
Unrealized foreign exchange gain on unsettled forward foreign exchange contracts |
|
| (459 | ) |
|
| — |
| ||||||||
Adjusted Net Income | $ | 2,127 | $ | 889 |
| $ | 4,673 |
|
| $ | 1,839 |
|
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
Selling, General and Administrative Expenses
Selling, general and administrative expensesNet income increased to $6.5$1.7 million from a $1.3 million loss in the thirdfirst half of 2020 and 2019. In addition, the increase in net income was due to increased gross profit, unrealized foreign exchange gain on unsettled forward contracts, reduction in restructuring costs recorded in the second quarter of 2019 from $3.7 million in the same period in 2018, with $2.2 million of the selling general and administrative expenses increase in the third quarter of 2019 related to the MCA acquisition which were not reflected in2020 over the same period in the prior year. Therefore selling, general and administrative expenses increased to 7.3% of revenueWhen excluding the items noted in the third quarter of 2019 up from 6.9% of revenue in the same period in 2018.
Change in fair value of warrant liability
For the three months ended September 29, 2019 the Company recorded a $0.9 million gain as a result of the valuation of the 504,735 outstanding warrants issued to TCW. The fair value has been assessed at $2.13 per unit or $1,090 as at September 29, 2019 which was a reduction in the stock price from the prior valuation assessment at June 30, 2019.
Restructuring Charges
During the third quarter of 2019, restructuring charges of $5.5 million were accrued related to the Company’s previously announced closure of business operations in Dongguan, China, in addition to $0.9 million were incurred related to the reduction of 19 full-time equivalents (“FTEs”) in U.S, 4 FTEs in Canada and 89 FTEs and contract employees in Mexico. The $5.5 million of restructuring charges related to estimated closure costs of the Dongguan facility. These charges include $2.0 million of severance and other facility closure activities primarily related to severance charges of $1.4 million the reduction of 137 FTEs in addition to tax and duties accrued of $0.2 million and equipment decommissioning and facility charges of $0.4 million. In addition, included in the restructuring charges is a $1.7 million write down of accounts receivable, $1.5 million write down of inventory and $0.3 million write down of property, plant and equipment.
Interest Expense
Interest expenseabove reconciliation, Adjusted Net Income increased to $2.7 million in the third quarter of 2019 compared to $0.5 million in the same period in 2018. The increase was primarily the result of a higher average debt balance in the third quarter of 2019 and higher interest rates compared to the same period in 2018, specifically with $39.4 million of debt outstanding on the Term A Loan Facility related to financing the MCA acquisition. In addition to higher revolving credit facility balance utilized to support working capital needs of Company post acquisition of MCA. The weighted average interest rates with respect to the debt on our Credit Facilities was 12.2%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility (as defined below) was 5.9% for the third quarter of 2018.
Income Tax Expense
The Company recorded current income tax recovery of $0.1 million and expense $0.3 million, respectively, for each of the third quarters of 2019 and 2018, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax benefit of $0.1 million and deferred income tax expense of $0.1 million, respectively, for each of the second quarters of 2019 and 2018, in connection with temporary differences related to the Mexican operations. The recovery for the three months ended September 29, 2019 was due to recovery of taxes from the prior year, in addition to reduction of 2019 estimated taxes.
Nine months ended September 29, 2019 compared with the nine months ended September 30, 2018:
The following table sets forth summarized operating results in millions of US$ for the periods indicated:
Nine months ended September 29, 2019 | Nine months ended September 30, 2018 | Change 2018 to 2019 | ||||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Revenue | 282.3 | 100.0 | 135.3 | 100.0 | 147.0 | 108.6 | ||||||||||||||||||
Cost of sales | 255.7 | 90.6 | 121.9 | 90.1 | 133.8 | 109.8 | ||||||||||||||||||
Gross profit | 26.6 | 9.4 | 13.4 | 9.9 | 13.2 | 98.5 | ||||||||||||||||||
Selling, general and administrative expenses | 19.9 | 7.0 | 10.8 | 8.0 | 9.1 | 84.3 | ||||||||||||||||||
Change in fair value of warrant liability | (0.9 | ) | (0.3 | ) | — | — | (0.9 | ) | ||||||||||||||||
Change in fair value of contingent consideration | (3.0 | ) | (1.1 | ) | — | — | (3.0 | ) | ||||||||||||||||
Restructuring charges | 8.6 | 3.0 | 0.2 | 0.1 | 8.4 | 4,200.0 | ||||||||||||||||||
Operating income | 2.0 | 0.7 | 2.4 | 1.8 | (0.4 | ) | (16.7 | ) | ||||||||||||||||
Interest expense | 8.4 | 3.0 | 1.2 | 0.9 | 7.2 | 600.0 | ||||||||||||||||||
Income (loss) before income taxes | (6.4 | ) | (2.3 | ) | 1.2 | 0.9 | (7.6 | ) | (633.3 | ) | ||||||||||||||
Income tax expense | ||||||||||||||||||||||||
Current | 0.6 | 0.2 | 0.6 | 0.4 | — | — | ||||||||||||||||||
Deferred | — | — | (0.2 | ) | (0.1 | ) | (0.2 | ) | 100.0 | |||||||||||||||
0.6 | 0.2 | 0.4 | 0.3 | 0.2 | 50.0 | |||||||||||||||||||
Net (loss) income | (7.0 | ) | (2.5 | ) | 0.8 | 0.6 | (7.8 | ) | (975.0 | ) |
Revenue
Industry Sector | Nine months ended September 29, 2019 | Nine months ended September 30, 2018 | Change | |||||||||||||||||||||
$ | % | $ | % | $ | % | |||||||||||||||||||
Test and Measurement | 90.6 | 32.1 | 24.8 | 18.3 | 65.8 | 265.3 | ||||||||||||||||||
Retail and Payment Systems | 35.5 | 12.6 | 27.2 | 20.1 | 8.3 | 30.5 | ||||||||||||||||||
Telecom, Networking and Communications | 28.4 | 10.1 | 24.8 | 18.4 | 3.6 | 14.5 | ||||||||||||||||||
Medical | 34.2 | 12.1 | 22.1 | 16.3 | 12.1 | 54.8 | ||||||||||||||||||
Industrial, Power and Clean Technology | 58.4 | 20.7 | 15.6 | 11.5 | 42.8 | 274.4 | ||||||||||||||||||
Semiconductor | 18.2 | 6.4 | 20.8 | 15.4 | (2.6 | ) | (12.5 | ) | ||||||||||||||||
Aerospace and Defense | 17.0 | 6.0 | — | — | 17.0 |
| NA | |||||||||||||||||
Total | 282.3 | 100.0 | 135.3 | 100.0 | 147.0 | 108.6 |
Revenue increased $147.0 million to $282.3 million for the first nine months of 2019 from $135.3$2.8 million in the first nine monthsquarter half of 2018. With the acquisition of MCA, we reported additional revenue of $122.8 million during the first nine months of 2019 which was not included in2020 over the same period in the prior year. Volume increases with two customer servicedyear, which is mainly due to increased gross profit, reduced interest expense due to reduction in the U.S., along with one new customer serviced in China,debt and partially offset by volume decreases with one customer serviced in Mexico in the testincreased selling, general and measurement sector, represented an increase in revenue of $7.6 million with an additional $58.3 million represented from the MCA acquisition. Two long-standing retailadministrative expense.
Gross Profit and payment systems customers serviced in Mexico represented an increase in revenue of $7.5 million. In the telecom, networking and communications sector an increase in volume from one customer serviced in Asia, offset by decreases in volume from three customers (one serviced in Asia; one serviced in Mexico; and one serviced in the U.S.), and the move of business to other manufacturers from one customer serviced in Asia, represented a decrease in revenue of $1.9 million, with an additional $5.3 million of revenue from the MCA acquisition. In the industrial, power and clean technology sector one customer serviced in the U.S. had increased volumes representing an increase of $10.0 million in revenue with additional $30.1 million driven by the MCA acquisition. Also, revenue increased as a result of the MCA acquisition in the medical, and aerospace and defense sectors totaling $11.9 million and $17.3 million respectively.
We recorded $8.0 million and $1.9 million of revenue from sales of raw materials inventory to customers during the first nine months of 2019 and the first nine months of 2018, respectively, which carried limited margin.
Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenue from a particular customer typically varies from quarter-to-quarter and year-to-year. The Company’s ten largest customers represented 54.0% of revenue during the first nine months of 2019, compared with 78.5% in the first nine months of 2018. Revenue from the largest customer during the first nine months of 2019 was $36.7 million representing 13.0% of total revenue. This compares with revenue from the two largest customers during the first nine months of 2018 of $18.2 million and $14.1 million representing 13.5% and 10.4% respectively of total revenue. No other customers represented more than 10% of revenue in either period.
During the first nine months of 2019, 64.2% of our revenue was attributable to production from our operations in Mexico, 30.6% of our revenue was attributable to production from our operations in the U.S. and 5.2% of our revenue was attributable to production from our operations in China. During the first nine months of 2018, 76.3% of our revenue was attributable to production from our operations in Mexico, 14.0% of our revenue was attributable to production from our operations in the U.S. and 9.7% of our revenue was attributable to production from our operations in China.
Adjusted Gross Profit
Gross profit for the first nine months of 2019 increased by $13.2 million to $26.6 million or 9.4% of revenue compared with $13.4 million or 9.9% of revenue for the same period in 2018. When excluding unrealized foreign exchange gains on unsettled forward contracts and amortization of intangible assets, the adjusted gross profit was $32.1 million or 11.4% of revenue for the first nine months of 2019 compared with $13.0 million or 9.6% of revenue for the first nine months of 2018. This was due primarily to incremental margin on $124.4 million of additional revenue due to the acquisition of MCA. The decrease in gross profit percentage was due in part to the amortization of intangible assets of $5.5 million included in cost of sales that was not included in the same period in the prior year.
Reconciliation
Adjusted Gross Margin Reconciliation:
Adjusted gross margin,Profit, a non-GAAP financial measure, is defined as gross profit exclusive of unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts and the amortization of intangible assets. Management presentsThe Company calculates an adjusted gross marginprofit amount as management considerswe consider gross marginsprofit exclusive of such unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts to be a meaningful measure as it is non-cash and management does not consider the mark-to-market valuation reflective of operating performance in the current period. Management also excludes the impact of intangible assets amortization as these charges are non-cash in nature and are not believed to be reflective of operating performance. We also believe adjusted gross marginprofit provides useful information to investors in understanding and evaluating our operating results in the same manner as management.
Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross profit:profit (in thousands):
Nine months ended September 29, 2019 | Nine months ended September 30, 2018 |
| Six months ended June 28, 2020 |
|
| Six months ended June 30, 2019 |
| |||||||||
Gross profit | $ | 26,527 | $ | 13,370 |
| $ | 20,325 |
|
| $ | 17,621 |
| ||||
Add: |
|
|
|
|
|
|
|
| ||||||||
Unrealized foreign exchange gains on unsettled forward exchange contracts | — | (338 | ) | |||||||||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts |
|
| (459 | ) |
|
| — |
| ||||||||
Amortization of intangible assets | 5,532 | — |
|
| 2,364 |
|
|
| 3,688 |
| ||||||
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
| ||||||||
Adjusted gross profit | $ | 32,059 | $ | 13,032 |
| $ | 23,415 |
|
| $ | 21,309 |
| ||||
Adjusted gross profit percentage | 11.4 | % | 9.6 | % |
|
| 12.6 | % |
|
| 11.0 | % |
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
EBITDA and Adjusted EBITDA Reconciliation:
Reconciliation
EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, income taxes, depreciation and amortization, with Adjusted EBITDA also excluding restructuring charges, stock-based compensation, unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts, fair value adjustment of warrant liability, fair value adjustment to contingent consideration and merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts.COVID-19 related expenses. Management presents EBITDA and Adjusted EBITDA, as it isthey are utilized by management to monitor performance against budget as well as compliance with covenants governing our Credit Facilities.bank covenants. We also believe EBITDA and Adjusted EBITDA provide useful information to investors in understanding and evaluating our operating results in the same manner as management.
Below is the reconciliation of net income (loss) income,, the closest GAAP measure, to EBITDA and Adjusted EBITDA.
Nine months ended September 29, 2019 | Nine months ended September 30, 2018 | |||||||
Net (loss) income | $ | (6,991 | ) | $ | 775 | |||
Add: | ||||||||
Depreciation of property, plant and equipment | 4,902 | 2,426 | ||||||
Amortization of intangible assets | 5,532 | — | ||||||
Interest | 8,349 | 1,195 | ||||||
Income taxes | 606 | 405 | ||||||
EBITDA | $ | 12,398 | $ | 4,801 | ||||
Add: | ||||||||
Restructuring charges | 8,624 | 154 | ||||||
Stock based compensation | 538 | 278 | ||||||
Fair value adjustment of warrant liability | (919 | ) | — | |||||
Fair value adjustment to contingent consideration | (3,050 | ) | — | |||||
Merger and acquisition related expenses | 232 | — | ||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (338 | ) | |||||
Adjusted EBITDA | $ | 17,823 | $ | 4,895 |
Adjusted EBITDA for nine months ended September 29, 2019 increased by $12.9 million to $17.8 million compared with $4.9 million for the same period in 2018 due primarily to the acquisition of MCA, which represented an increase in Adjusted EBITDA of $10.3 million which was not included in the results in the same period in the prior year.(in thousands).
|
| Six months ended June 28, 2020 |
|
| Six months ended June 30, 2019 |
| ||
Net income(loss) |
| $ | 1,730 |
|
| $ | (1,257 | ) |
Add: |
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
| 3,222 |
|
|
| 3,253 |
|
Amortization of intangible assets |
|
| 2,364 |
|
|
| 3,688 |
|
Interest |
|
| 4,080 |
|
|
| 5,670 |
|
Income taxes |
|
| 653 |
|
|
| 790 |
|
EBITDA |
| $ | 12,049 |
|
| $ | 12,144 |
|
Add: |
|
|
|
|
|
|
|
|
Restructuring charges (recovery) |
|
| (346 | ) |
|
| 2,170 |
|
Stock based compensation |
|
| 317 |
|
|
| 185 |
|
Fair value adjustment of warrant liability |
|
| (118 | ) |
|
| (61 | ) |
Fair value adjustment to contingent consideration |
|
| — |
|
|
| (3,050 | ) |
Merger and acquisition related expenses |
|
| — |
|
|
| 164 |
|
COVID-19 related expenses (1) |
|
| 1,185 |
|
|
| — |
|
Unrealized foreign exchange gain on unsettled forward exchange contracts |
|
| (459 | ) |
|
| — |
|
Adjusted EBITDA |
| $ | 12,628 |
|
| $ | 11,552 |
|
Net Income (Loss) and Adjusted Net Income Reconciliation:
Adjusted Net Income (Loss), a non-GAAP financial measure, is defined as Net Income (Loss) before amortization of intangible assets, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, fair value adjustment to contingent consideration, merger and acquisition related expenses and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts. Management presents Adjusted Net Income (Loss), as it is believed the information is useful to investors in understanding and evaluating our operating results as it aligns the net income (loss) with those adjustments made to EBITDA and gross profit.
Below is the reconciliation of net (loss) income to Adjusted Net (Loss) Income:
Nine months ended September 29, 2019 | Nine months ended September 30, 2018 | |||||||
Net (loss) income | $ | (6,991 | ) | $ | 775 | |||
Add: | ||||||||
Amortization of intangible assets | 5,532 | — | ||||||
Restructuring charges | 8,624 | 154 | ||||||
Stock based compensation | 538 | 278 | ||||||
Fair value adjustment of warrant liability | (919 | ) | — | |||||
Fair value adjustment to contingent consideration | (3,050 | ) | — | |||||
Merger and acquisition related expenses | 232 | — | ||||||
Unrealized foreign exchange gain on unsettled forward exchange contracts | — | (338 | ) | |||||
Adjusted Net Income | $ | 3,966 | $ | 869 |
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $19.9 million in the first nine months of 2019 from $10.8 million in the same period in 2018, with $7.0 million of the selling general and administrative expenses increase related to MCA which were not reflected in the same period in the prior year. However, selling, general and administrative expenses decreased to 7.1% of revenue in the first nine months of 2019 down from 8.0% of revenue in the same period in 2018 due to increase in revenue and certain cost reductions and savings from restructuring that occurred in the first nine months of 2019.
Change in fair value of warrant liability
For the nine months ended September 29, 2019 the Company recorded a $0.9 million gain as a result of the valuation of the 504,735 outstanding warrants issued to TCW. The fair value has been assessed at $2.13 per unit or $1,090 as at September 29, 2019 which was a reduction in the stock price from the prior valuation assessment at December 30, 2018.
Change in fair value of contingent consideration
During the first quarter of 2019, the fair value of the contingent consideration liability was determined to be $Nil resulting in a gain of $3.0 million being recognized. The contingent consideration liability was initially recognized at fair value in the fourth quarter of 2018 and relates to a contingent earn-out payment associated with the acquisition of MCA. Fair value estimate under purchase accounting of $3.0 million was derived from a multiple of earnings based on MCA’s forecasted twelve-month earnings for the period ended March 31, 2019. Based on actual earnings, the contingent consideration liability was considered resolved and no longer payable as at March 31, 2019.
(1) | Includes costs attributable to the COVID-19 pandemic, including retention of temporary replacement labor, additional sanitation, cleaning and disinfection of facilities, personal protective equipment and related supplies, costs associated with facilitating social distancing and logistics costs associated with expediting inventory purchases from existing and new sources. |
Restructuring charges
During the first nine months of 2019, $8.6 million of restructuring charges were incurred related to the reduction of 137 FTEs in China, 28 FTEs in U.S., 4 FTEs in Canada and 459 FTEs and contract employees in Mexico. The majority of the charges were incurred during the three months ended September 29, 2019 as it related to the closure of the Dongguan manufacturing facility. During the three months ended September 29, 2019, restructuring charges of $5.5 million were incurred related to Dongguan facility exit, in addition to $0.9 million were incurred related to the reduction of 19 FTEs in U.S, 4 FTEs in Canada and 89 FTEs and contract employees in Mexico. The $5.5 million of restructuring charges related to estimated closure costs of the Dongguan facility. These charges include $2.0 million of severance and other facility closure activities primarily related to severance charges of $1.4 million the reduction of 137 FTEs in addition to tax and duties accrued of $0.2 million and equipment decommissioning and facility charges of $0.4 million. In addition, included in the restructuring charges is a $1.7 million write down of accounts receivable, $1.5 million write down of inventory and $0.3 million write down of property, plant and equipment.
Interest Expense
Interest expense increased to $8.4 million in the first nine months of 2019 compared to $1.2 million in the same period in 2018. The increase was primarily the result of debt incurred to finance the acquisition of MCA, in addition to higher average interest rates compared to the same period in 2018. The weighted average interest rates with respect to the debt on our Credit Facilities was 10.5%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility was 5.7% for 2018.
Income Tax Expense
The Company recorded current income tax expense of $0.6 million and $0.6 million, respectively, for each of first nine months of 2019 and 2018, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax expense of $NIL million and benefit of $0.2 million for each of first nine months of 2019 and 2018, in connection with temporary differences related to the Mexican operations.
Liquidity
As at September 29, 2019,June 28, 2020, the Company’s liquidity iswas comprised of $0.6$0.3 million in cash on hand and $21.4$30.9 million of funds available to borrow under the PNC Facility, which matures on November 8, 2023. The Company funds its operations by regularly utilizing its PNC Facility (refer to Note 5)4). The Company manages it capital requirements through budgeting and forecasting processes while monitoring for compliance with bank covenants. Funds available under the PNC Facility are managed on a weekly basis, based on the cash flow requirements of the various operating segments. Cash flows generated from operations are immediately applied towards paying down the PNC Facility.
Market conditions, including the implications of the COVID-19 pandemic, may negatively impact our ability to secure and source alternative methods of financing. We do not currently foresee a material impact in the short term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to seek alternative methods of financing.
Net cash generated in operating activities during the first ninethree six months ended September 29, 2019June 28, 2020, was $2.6 million. Cashmillion compared to $0.2 million used for the same period in the prior year. Working capital changes related to $4.8 million accounts receivable reduction were offset by the $12.4 million increase in the unbilled contract asset. Accounts receivable days sales outstanding increased to 62 days in the first half quarter of $8.62020 from 61 days for the first half of 2019. In addition, accrued liabilities increased $8.8 million was used from accounts payabledue to deferred revenue for the first half of 2020, partially offset by reduction in Accounts Payable of $3.4 million due to timing of payments. Accounts payable days outstanding decreased to 7170 days for the first nine monthshalf of 20192020 compared to 7372 days for the first nine monthshalf of 2018. Working capital changes related to $3.7 million decrease in inventory offset by the $6.4 million of increase in unbilled contract assets.2019. Inventory turnover, on an annualized basis, was 4.4decreased to 4.3 times for the first nine monthshalf of 20192020 compared to 4.94.5 times for the first nine monthshalf of 2018. The reduction in inventory turns was due in large part to timing of inventory receipts due to demand changes not entirely offset by revenue levels. Accounts receivable days outstanding was 61 days for the first nine months of 2019 and 2018.
2019.
Net cash used fromin financing activities during the first nine monthshalf of 20192020 was $0.4 million.$2.1 million compared to net cash generated by $1.3 million for the first half of 2019. During the nine months ended September 29,first half of 2020 and 2019, the Company generated net cash by $14.0 million from issuance of common stock through the Rights Offering (as defined below). The Company made net advances fromrepayments to the revolving credit facilitydebt of $9.8$0.8 million compared to $4.5and $11.3 million, for the same period in 2018.respectively. The Company also paid down its long-term debt in the amount of $22.6$0.6 million and $1.5 million, respectively in the nine months ended September 29, 2019first quarters of 2020 and September 30, 2018.2019. Principal repayments on capital lease obligations were $1.2$0.4 million in the nine months ended September 29, 2019first half of 2020 compared to $0.2$0.8 million in the same period in the prior year.
Net cash used in investing activities during the nine months ended September 29, 2019first half of 2020 was $3.2$1.6 million compared to $3.9$2.1 million in the same periodfirst half of 2018,2019, related to capital asset purchases.
Capital Resources
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement withthe PNC Bank, National Association (“PNC”),Facility, which governs the Company’s Revolving Credit Facility (“PNC Facility”). The PNC Facility has a term ending on November 8, 2023. Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%. The base commercial lending rate should approximate U.S. prime rate.
The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among us and certain of our subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company LLC, as collateral agent for the Lenders (“TCW”), which governs a term loan A facility (“Term A Loan Facility” and, together with the PNC Facility, the “Credit Facilities”), and previously governed a term loan B facility (the “Term Loan B Facility”) until it was repaid in full on July 3, 2019 with a portion of the proceeds from the Offerings (as defined below). The Term A Loan Facility that matures on November 8, 2023 (the “Maturity Date”).the Maturity Date. The Term Loan A Facility bears interest at LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before November 8, 2019, (ii) 2.00% in the event that such payment occurs after the November 8, 2019, and on or before November 8, 2020, and (iii) 1.00% in the event that such payment occurs after November 8, 2020, and on or before November 8, 2021. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after November 8, 2021.
On August 8, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 2 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 2”) and that certain Amendment No. 3. to the Financing Agreement (the “TCW Amendment No. 3”). The PNC Amendment No. 2, among other things, (i) increased the total amount available for borrowings under the PNC Facility to $65,000, (ii) provided for borrowings of up to $15,000 on assets located in Mexico, (iii) provided that borrowings under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%, (iv) reset the financial covenants, and (v) permitted the pay down of the Term A Loan Facility by up to $10,000. The TCW Amendment No. 3, among other things, (i) provided for a $20,000 increase in the total amount available for borrowings under the PNC Facility, (ii) provided for the pay down of the Term A Loan Facility by up to $10,000, (iii) provided that the interest rate for borrowings under the Financing Agreement was reset to LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%, (iv) deleted the senior leverage ratio covenant, (v) amended the total leverage ratio covenant, including the definition of total leverage ratio, to increase the maximum total leverage on a quarterly basis beginning with the fiscal quarter ended September 30, 2019, (vi) amended the fixed charge coverage ratio covenant to decrease the minimum fixed charge coverage ratio on a quarterly basis beginning with the fiscal quarter ending September 30, 2020 through the fiscal quarter ending December 31, 2021 and (vii) reset the call protection on the Term Loan A Facility.
On September 27, 2019, the Company and certain of its subsidiaries entered into that certain Amendments No. 3 to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment No. 3”) and that certain Amendment No. 4. to the Financing Agreement (the “TCW Amendment No. 4”). The PNC Amendment No. 3, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the Company’s previously announced closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Amended and Restated Revolving Credit and Security Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Amended and Restated Revolving Credit and Security Agreement) to or in SMTC Electronics Dongguan Company Limited, a limited liability company organized under the laws of China (“SMTC Dongguan”), solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the PNC Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Amended and Restated Revolving Credit and Security Agreement, (c) the Borrowers (as defined in the Amended and Restated Revolving Credit and Security Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash. The TCW Amendment No. 4, among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before December 31, 2020 in connection with the closure of business operations in Dongguan, China, subject to certain exceptions, not to exceed (a) with respect to cash restructuring costs, $2,300, (b) with respect to write-offs of accounts receivable, $1,623, and (c) with respect to write-offs of Inventory (as defined in the Financing Agreement), $1,607, (ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the Financing Agreement) are made prior to March 31, 2020, (b) the aggregate amount of all such Investments does not exceed $2,300 during the term of the Financing Agreement and (c) the Borrowers (as defined in the Financing Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.
The Credit Facilities are joint and several obligations of the Company and its subsidiaries that are borrowers under the facilities and are jointly and severally guaranteed by other subsidiaries of the Company. Repayment under the PNC Facility and Term A Loan Facility are collateralized by the assets of the Company and each of its subsidiaries. The Credit Facilities contain certain financial and non-financial covenants.covenants, including restrictions on dividend payments. The financial covenants under each Credit Facility require the Company to maintain a fixed charge coverage ratio and a total leverage ratio quarterly during the term of the Credit Facilities. The Company iswas in compliance with the financial covenants included in the Credit Facilities as at September 29, 2019. Management projects compliance with the financial covenants included in the Credit Facilities.
June 28, 2020.
We believe that our sources of liquidity and capital, including cash we expect to generate from operations, available cash and amounts available under our Credit Facilities, will be adequate to meet our debt service requirements, capital expenditures and working capital needs at our current level of operations for the next twelve months, althoughmonths. However, we make no assurance can be given in this regard,that these sources of liquidity and capital, particularly with respect to amounts available from lenders.lenders, will be sufficient to meet our future needs. We have agreed to a borrowing base formula under which the amount we are permitted to borrow under the PNC Facility is based on our accounts receivable and inventory. Further, there can bewe make no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to service our indebtedness. Our future operating performance and ability to service indebtedness will be subject to future economic conditions and to financial, business and other factors, certain of which are beyond our control.
Rights Offering and Registered Direct Offering
In June 2019,Market conditions, including the Company completed its (i) offering of subscription rights (the “Rights Offering”) to the Company’s stockholders and holdersimplications of the Company’s outstanding warrants asCOVID-19 pandemic, may negatively impact our ability to secure and source alternative methods of financing. We do not currently foresee a material impact in the closeshort term based on our working capital needs, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to secure alternative methods of financing. In order to meet our customers’ delivery requirements, we have incurred and may continue to incur COVID-19 related expenses. These are primarily due to incremental logistics costs associated with expediting inventory purchases from existing and new sources, and labor and production inefficiencies and retention of temporary replacement labor to address workplace absenteeism due to illness, potential COVID-19 exposure or personal commitments. We are currently taking steps to limit our expenses, including putting a pause on May 24, 2019, which was fully subscribed for the maximum offering amount of $9.1 millionall non-essential new hiring and (ii) registered direct offering (the “Registered Direct Offering”new programs, and together with the Rights Offering, the “Offerings”) of 1,732,483 shares of the Company’s common stock directly to certain investors, resulting in net proceeds to the Company of approximately $14.0 million, after deducting the offering expenses and fees payable the Company. The proceeds of the Offerings were used, in part, to repay the Term Loan B Facility in full as at July 3, 2019.
Off Balance Sheet Arrangements
As of September 29, 2019, the Company had no material off balance sheet arrangements as defined by the rules of the SEC.reducing our third quarter capital expenditures.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company borrows money under the PNC Facility. The PNC Facility, which has a term ending on November 8, 2023. Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from 0.75% to 1.25%, or LIBOR plus an applicable margin ranging from 2.50% to 3.00%. The base commercial lending rate should approximate U.S. prime rate. The base commercial lending rate should approximate U.S. prime rate.
The Company also borrows money underpursuant to the Financing Agreement. The Term A Loan A Facility matures on November 8, 2023.its Maturity Date. The Term Loan A Facility bears interest at LIBOR plus an applicable margin of 8.75% through June 30, 2020, and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from 7.25% to 8.75%. In July 2019, the Company paidPayments made under the Term Loan BA Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in full. the event that such payment occurs before November 8, 2019, (ii) 2.00% in the event that such payment occurs after November 8, 2019, and on or before November 8, 2020, and (iii) 1.00% in the event that such payment occurs after November 8, 2020, and on or before November 8, 2021. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after November 8, 2021.
The impact of a 10% change in interest rates would be estimated to have a materialthe following impact on our reported earnings.
10% increase in interest rate (million) | $ | 0.7 |
| $ | 0.5 |
| ||
10% decrease in interest rate (million) | $ | (0.7 | ) |
| $ | (0.5 | ) |
Foreign Currency Exchange Risk
Given our global business operations, we are exposed to exchange rate fluctuations on expenditures denominated in foreign currencies. However, most of our sales and component purchases are denominated in U.S. dollars, which limits our foreign currency risk. Our foreign exchange risk relates primarily to our Canadian, Mexican and Asian payroll, Euro basedEuro-based component purchases and other operating expenses denominated in local currencies in our geographic locations. To mitigate this risk, the Company enters into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso.peso expenditures. The strengthening of the Canadian dollar and Mexican peso would result in an increase in costs to the organization and may lead to a reduction in reported earnings.
The impact of a 10% change in exchange rates would be estimated to have the following impact on cost of sales for the Company:
10% increase in both the CAD and PESO foreign exchange rates (million) | $ | 2.2 | ||
10% decrease in both the CAD and PESO foreign exchange rates (million) | $ | (2.6 | ) |
10% increase in both the CAD and PESO foreign exchange rates (million) |
| $ | 1.4 |
|
10% decrease in both the CAD and PESO foreign exchange rates (million) |
| $ | (1.7 | ) |
Credit Risk
In the normal course of operations, there is a risk that a counterparty may default on its contractual obligations to us which would result in a financial loss that could impact our reported earnings. In order to mitigate this risk, we complete credit approval procedures for new and existing customers and obtain credit insurance where it is financially viable to do so given anticipated revenue volumes, in addition to monitoring our customers’ financial performance. We believe our procedures in place to mitigate customer credit risk and the respective allowance for doubtful accounts are adequate. TheAlthough the Company takes measures to reduce credit risk, these charges can have a material impact on our financial performance.
While we continue to communicate with our customers and monitor cash collections, market conditions, including as a result of the COVID-19 pandemic, may negatively impact our customers’ ability to pay. We do not currently foresee a material impact in the short term based on our customers’ payment patterns, however if a number of our customers reduce or temporarily cease payments to us, this would present a risk and any charges could have a material impact on our financial performance.
There is limited risk of financial loss of defaults on our outstanding forward currency contracts as the counterparty to the transactions had a Standard and Poor’s rating of A- or above as at June 28, 2020.
Liquidity Risk
There is a risk that we may not have sufficient cash available to satisfy our financial obligations as they come due. The financial liabilities we have recorded in the form of accounts payable, accrued liabilities and other current liabilities are primarily due within 90 days with the exception of the current portion of capital lease obligations which could exceed 90 days and our PNC Facility which utilizes a lock-box to pay down the obligation effectively daily. As at September 29, 2019,June 28, 2020, the Company’s liquidity wasis comprised of $0.6$0.3 million in cash on hand and $21.4$30.9 million of funds available to borrow under the PNC Facility. We believe that cash flow from operations, together with cash on hand and our PNC Facility, which has a maximum credit limit of $65.0 million of which $21.4$30.9 million of funds were available as at September 29, 2019June 28, 2020 is sufficient to fund our financial obligations. However, availability under the PNC Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, as determined by the lender.lender in addition to being subject to certain debt covenants.
On July 3, 2019,Market conditions, including as a result of the Company usedCOVID-19 pandemic, may negatively impact our ability to secure and source alternative methods of financing. We do not currently foresee a material impact in the net proceeds from the Rights Offeringshort term based on our working capital needs, however, if a number of our customers reduce or temporarily cease payments to repay the $12.0 millionus, this would present a risk and negatively impact our cash flow and ability to meet our working capital obligations to operate our business, which could require us to seek alternative methods of borrowings outstanding under its Term Loan B Facility.
financing, which may only be available to use on unfavorable terms, if at all.
Fair Value Measurement
The carrying values of the Company’s cash, accounts receivable, accounts payable and accrued liabilities due within one-year approximate fair values due to the short-term maturity of these instruments. The Company’s financial instruments at June 28, 2020, are comprised of the following:
As at September, 2019 | As at December 30, 2018 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Level 1 | ||||||||||||||||
Cash | $ | 601 | $ | 601 | $ | 1,601 | $ | 1,601 | ||||||||
Level 2 | ||||||||||||||||
Revolving credit facility | 34,840 | 34,840 | 25,020 | 25,020 | ||||||||||||
Current and long term debt | 35,404 | 39,375 | 57,407 | 62,000 | ||||||||||||
Warrant liability | 1,090 | 1,090 | 2,009 | 2,009 | ||||||||||||
Level 3 | ||||||||||||||||
Contingent consideration | — | — | 3,050 | 3,050 |
|
| As at June 28, 2020 |
|
| As at December 29, 2019 |
| ||||||||||
|
| Carrying Amount |
|
| Estimated Fair Value |
|
| Carrying Amount |
|
| Estimated Fair Value |
| ||||
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 311 |
|
| $ | 311 |
|
| $ | 1,368 |
|
| $ | 1,368 |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
| 33,943 |
|
|
| 33,943 |
|
|
| 34,701 |
|
|
| 34,701 |
|
Current and long term debt |
|
| 34,778 |
|
|
| 38,125 |
|
|
| 35,000 |
|
|
| 38,750 |
|
Warrant liability |
|
| 1,612 |
|
|
| 1,612 |
|
|
| 1,730 |
|
|
| 1,730 |
|
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this quarterly report, the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer) have conducted an evaluation of the Company’s disclosure controls and procedures.procedures as defined in Rules 13a-15(e) and 15(d)-15(e) under the Exchange Act. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures arewere not effective during and as at SeptemberJune 28, 2020 due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “2019 Form 10-K”). As previously described in Part II, Item 9A of our 2019 Form 10-K, we implemented a remediation plan to ensureaddress the material weakness. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that information required tothese controls are operating effectively. We expect that the remediation of this material weakness will be disclosedcompleted by the Company in reports that it files or submits under the Securities Exchange Actend of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the applicable SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.2020.
Changes in Internal Control over Financial Reporting
ThereExcept for the material weakness identified during the fiscal quarter ended December 29, 2019, as of June 28, 2020, there were no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 29, 2019June 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II OTHER INFORMATION
Item 1 Legal Proceedings
None.
Item 1A Risk Factors
ThereThe following additional risk factor should be read in conjunction with the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our Form 10-K for the fiscal year ended December 29, 2019 (“Annual Report”) and our other reports and registration statements filed with the SEC. The developments described in this additional risk factor have heightened, or in some cases manifested, certain of the risks disclosed in the risk factor section of our Annual Report, and such risk factors are further qualified by the information relating to the COVID-19 pandemic that is described in this Quarterly Report on Form 10-Q, including in the additional risk factor below. Except as described herein, there have been no other material changes to thein our risk factors disclosed in our Annual Report.
The effect of COVID-19 on our operations and the “Risk Factors” sectionoperations of our customers, suppliers and logistics providers may have a material, adverse impact on our financial condition and results of operations.
Our global operations expose us to risk arising from the global COVID-19 pandemic, which may impact our employees, operations, supply chain and distribution system. Indirect results of the COVID-19 pandemic, including public and private sector policies intended to reduce the transmission of COVID-19, could affect our employees, reduce capacity utilization levels, require the closure of facilities, or interrupt our supply chain. Factory closures or reductions in capacity utilization levels could cause us to incur direct costs and lose revenue. Closures or reductions in the capacity utilization of our suppliers could reduce our ability to source materials and meet production requirements. The COVID-19 pandemic may also impact our customers and create unpredictable changes in demand for our manufacturing services. The duration and extent of these impacts, most of which are beyond our control, continue to evolve and remain uncertain. Due to these possible impacts of the COVID-19 pandemic and as generally described in this quarterly report, the Company’s Annual Report on Form 10-Kconsolidated financial position, results of operations and cash flows for the year ended December 30, 2018.first half of 2020 are not necessarily indicative of future performance.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
Not applicable.
Item 5 Other Information
None.
None
Item 6 Exhibits
EXHIBIT INDEX
EXHIBIT INDEX
10.1 | |
10.2 | |
| |
| |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
101.INS* | Inline XBRL Instance Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | Inline XBRL Taxonomy Extension |
| |
101.LAB* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* | Filed herewith |
(1) |
|
(2) | Filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, SMTC Corporation has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
| SMTC CORPORATION | |
|
|
|
| By: | /s/ Edward Smith |
| Name: | Edward Smith |
| Title: | President and Chief Executive Officer |
|
|
|
| By: | /s/ Steve Waszak |
| Name: | Steve Waszak |
| Title: | Chief Financial Officer (Principal Accounting Officer) |
Date: |
|
|
44
39