UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event Reported): August 8, 2019 (August 8, 2019)
SMTC CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware | 0-31051 | 98-0197680 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) |
7050 Woodbine Avenue, Suite 300 Markham, Ontario, CANADA L3R 4G8 |
(Address of Principal Executive Offices) (Zip Code) |
Registrant's telephone number, including area code: (905) 479-1810
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: | ||
[ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |
[ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |
[ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
[ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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, par value $0.01 per share | SMTX | NASDAQ Global Market |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). 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. [ ]
Item 2.02. Results of Operations and Financial Condition.
On August 8, 2019, SMTC Corporation issued a press release announcing its second quarter 2019 financial results, a copy of which is attached as Exhibit 99.1 to this Current Report and incorporated herein by reference. On August 8, 2019, SMTC Corporation held a teleconference announcing its second quarter 2019 financial results. A transcript of this teleconference is attached as Exhibit 99.2 to this Current Report and incorporated herein by reference. The information being furnished under Item 2.02 in this Form 8-K, including the accompanying exhibits, shall not be deemed to be “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liability of such section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of the general incorporation language of such filing, except as shall be expressly set forth by specific reference in such filing.Exhibit Number Description 99.1 Press Release of SMTC Corporation dated August 8, 2019 99.2 Transcript of SMTC Corporation’s second quarter 2019 results teleconference held August 8, 2019
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
SMTC CORPORATION | ||
Date: August 8, 2019 | By: | /s/ Edward Smith |
Name: | Edward Smith | |
Title: | President and Chief Executive Officer | |
EXHIBIT 99.1
SMTC Corporation Reports Second Quarter Results
MC Assembly Integration Completed;
Strong Year-over-Year Growth
TORONTO, Aug. 08, 2019 (GLOBE NEWSWIRE) -- SMTC Corporation (Nasdaq:SMTX), a global electronics manufacturing services provider and winners of the Frost & Sullivan’s 2019 Best Practices Award for Customer Value Leadership in the Electronics Manufacturing Services Industry, today announced its second quarter 2019 results.
Second Quarter Financial Highlights
Q2 2018 | Q2 2018 | |||||
$s in millions | Q2 2019 | (as reported) | Change | Proforma1 | Change | |
Revenue | $90.9 | $44.5 | 104.4% | $82.0 | 10.9% | |
Gross Profit | $9.0 | $4.3 | 109.2% | $8.3 | 8.4% | |
Gross Margin | 9.9% | 9.6% | 10.1% | |||
Adjusted Gross Profit2 | $10.8 | $4.4 | 145.5% | $8.4 | 28.6% | |
Adjusted Gross Profit Percentage2 | 11.9% | 9.8% | 10.3% | |||
Net Loss | ($2.5) | ($0.1) | 2398% | ($1.1) | 127% | |
Adjusted Net Income (Loss)2 | $1.1 | $0.2 | 450.0% | ($0.7) | ||
Adjusted EBITDA2 | $6.1 | $1.6 | 279.8% | $3.5 | 73.6% | |
Net Debt | $86.0 | $19.7 | $89.5 |
1Proforma assumes MC Assembly Holdings, Inc. (“MC Assembly”), acquired on November 9, 2018 had been acquired by SMTC on April 1, 2018, the first day of the second quarter of 2018.
2Adjusted Gross Profit, Adjusted Gross Profit percentage, and Adjusted Net Income (Loss) and Adjusted EBITDA are non-GAAP measures. Please refer to the section below labeled Non-GAAP information and the various reconciliations shown below in this press release.
SMTC Corporation (“SMTC”) experienced robust year-over-year revenue growth, up 104.4% from its reported revenue in the second quarter of 2018 and up 10.9% on a proforma basis which assumes that MC Assembly, acquired in the fourth quarter of 2018, had been part of STMC in the second quarter of 2018. Revenue from Test and Measurement, Industrial, Power and Clean Tech and Aerospace and Defense customers were large contributors to the year-over-year growth in revenue.
As reported and Proforma Adjusted EBITDA both increased significantly over the second quarter of 2018. The improvement in Adjusted EBITDA metrics was due to higher revenue and gains from operational efficiencies resulting from various company initiatives, synergies achieved and increased scale from the completed integration of the of MC Assembly.
“During Q2 we completed the integration of MC Assembly and turned our attention toward executing our strategic growth plans. We invested $1.3 million in capital improvements initiatives that are intended to improve operating efficiencies, enhance service to support our growing customer base, and create value for our shareholders in the second quarter,” said Ed Smith, STMC President and CEO.
“With tariff concerns high on the mind of our customers, we incurred additional costs in the second quarter as we shifted some customer production to Mexico. To address this growing customer concern about tariffs, we have expanded our North American capabilities and production capacity at two facilities acquired in the 2018 acquisition of MC Assembly. This quarter we are adding a new capability in our Billerica, United States location that provides our customers with world-class 'Quick-turn' manufacturing and should enable an accelerated launch timetable for our customers’ products with the flexibility to scale into a low-cost geography that is available from other SMTC sites. We also upgraded and expanded our capacity at its Fresnillo facility in Zacatecas, Mexico enabling a 25% increase in capacity, which we started to ramp up during the third quarter,” added Smith.
“As part of our strategy to improve our capital structure, at the end of June we completed a Rights Offering and Registered Direct Offering that generated aggregate proceeds of approximately $14.6 million. On July 3, 2019 we used $12 million of these proceeds to accelerate pay-off of our outstanding Term B debt. This week we refinanced our credit agreements which reduced the Term A outstanding balance to $40 million from $50 million, reduced our interest costs and expanded borrowing capacity under the asset-based revolver facilities to $65 million to better support our future growth,” Smith commented.
Outlook
“Customer concerns about the continuing impact of tariffs and macro-economic factors has caused, as we experienced in the second quarter, many customers to review and begin to revise where they outsource their manufacturing. While we believe SMTC is well positioned with our North American facilities, we expect customer demand may be impacted over the second half of the year as customers continue to react and adjust to the ongoing geo-political impacts on global trade. As a result, our current expectation for revenue and Adjusted EBITDA for 2019 will more likely approach the lower end of our prior guidance of $393 to $408 million in revenue and $27 to $29 million for Adjusted EBITDA,” noted Smith.
Financial Results Conference Call
SMTC will host a conference call which will start at 5:00 p.m. Eastern Time on Thursday, August 8, 2019. The conference call can be accessed by visiting the Investor Relations section of SMTC’s web site on the Investor Relations Calendar page at https://www.smtc.com/investors/news-events/ir-calendar or dialing 1-877-317-6789 (for U.S. participants) or 1-412-317-6789 (for participants outside of the U.S ten minutes prior to the start of the call and request to join the SMTC Corporation’s Second Quarter 2019 Results Conference Call).
The conference call will be available for rebroadcast from the Investor Relations section of SMTC’s web site on the Investor Relations Calendar page.
Non-GAAP information
Adjusted Gross Profit, Adjusted Gross Profit Percent, Adjusted Net Income (Loss), EBITDA, and Adjusted EBITDA are non-GAAP measures. Adjusted Gross Profit is computed as gross profit excluding unrealized gains or losses on unsettled forward foreign exchange contracts and amortization of intangible assets. Adjusted Gross Profit Percentage is computed as Adjusted Gross Profit divided by revenue. A reconciliation of Adjusted Gross Profit to gross profit is included in the attachment. Adjusted Net Income (Loss) is computed as Net Income (Loss) excluding restructuring charges, unrealized foreign exchange gains/losses on unsettled forward foreign exchange contracts, stock-based compensation, stock-based compensation – warrant revaluation, amortization of intangible assets, merger and acquisition related expenses and gains or losses on contingent consideration. A reconciliation of Adjusted Net Income (Loss) to Net Income (Loss) is included in the attachment. EBITDA is defined as net income (loss) before Interest, taxes, depreciation and amortization. Adjusted EBITDA is computed as net income (loss) from operations excluding depreciation and amortization, restructuring charges, unrealized foreign exchange gains/losses on unsettled forward foreign exchange contracts, stock-based compensation, stock-based compensation – warrant revaluation, interest, income tax expense and merger and acquisition related expenses and gains or losses on contingent consideration. SMTC Corporation has provided in this release a non-GAAP calculation of Adjusted EBITDA as supplemental information regarding the operational performance of SMTC’s core business. A reconciliation of Adjusted EBITDA to Net Income (Loss) is included in the attachment. Management uses these non-GAAP financial measures internally in analyzing SMTC’s financial results to assess operational performance and liquidity as well as to provide a consistent method of comparison to historical periods and to the performance of competitors and peer group companies. SMTC believes that these non-GAAP financial measures are useful for management and investors in assessing SMTC’s performance and when planning, forecasting and analyzing future periods. SMTC believes these non-GAAP financial measures are useful to investors because they allow for greater transparency with respect to key financial metrics we use in making operating decisions and because investors and analysts use it to help assess the health of our business. Non-GAAP measures are subject to limitations as these measures are not in accordance with, or an alternative for, United States Generally Accepted Accounting Principles (US GAAP) and may be different from non-GAAP measures used by other companies. Because of these limitations, investors should consider Adjusted Gross Profit, Adjusted Gross Profit Percentage, Adjusted Net Income (Loss) and Adjusted EBITDA along with other financial performance measures, including revenue, gross profit and net earnings (loss), as reflected in SMTC’s interim consolidated financial statements prepared in accordance with US GAAP.
Forward-Looking Statements
The statements contained in this release that are not purely historical are forward-looking statements, which involve risk and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. These statements may be identified by their use of forward looking terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other and similar words, and include, but are not limited to, statements regarding the expected outcome of our capital expenditure initiatives, the anticipated benefits to our customers of recent facilities improvements, and other For these statements, we claim the protection of the safe harbor for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Risks and uncertainties that may cause future results to differ from forward looking statements include the challenges of managing quickly expanding operations and integrating acquired companies, fluctuations in demand for customers' products and changes in customers' product sources, competition in the electronics manufacturing services industry, component shortages, and others risks and uncertainties discussed in SMTC's most recent filings with the Securities and Exchange Commission. The forward-looking statements contained in this release are made as of the date hereof and SMTC assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ materially from those projected in the forward-looking statements.
About SMTC
SMTC Corporation was founded in 1985 and acquired MC Assembly Holdings, Inc. in November 2018. Following this acquisition, SMTC has more than 50 manufacturing and assembly lines in United States, China and Mexico which creates a powerful low-to-medium volume, high-mix, end-to-end global electronics manufacturing services (EMS) provider. With local support and expanded manufacturing capabilities globally, including fully integrated contract manufacturing services with a focus on global original equipment manufacturers and emerging technology companies, including those in the Defense and Aerospace, Industrial, Power and Clean Technology, Medical and Safety, Retail and Payment Systems, Semiconductors and Telecom, Networking and Communications; and Test and Measurement industries. As a mid-size provider of end-to-end EMS, SMTC provides printed circuit boards assemblies production, systems integration and comprehensive testing services, enclosure fabrication, as well as product design, sustaining engineering and supply chain management services. SMTC services extend over the entire electronic product life cycle from the development and introduction of new products through to the growth, maturity and end-of-life phases.
SMTC is a public company incorporated in Delaware with its shares traded on the Nasdaq National Market System under the symbol SMTX and was added to the Russell Microcap® Index in 2018. For further information on SMTC Corporation, please visit our website at www.smtc.com.
Consolidated Statements of Operations and Comprehensive Income | |||||||||||||||
(Unaudited) | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts) | June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | |||||||||||
Revenue | $ | 90,936 | $ | 44,479 | $ | 193,585 | $ | 81,599 | |||||||
Cost of sales | 81,939 | 40,196 | 175,964 | 73,466 | |||||||||||
Gross profit | 8,997 | 4,283 | 17,621 | 8,133 | |||||||||||
Selling, general and administrative expenses | 6,600 | 3,647 | 13,298 | 7,156 | |||||||||||
Gain on Contingent Consideration | - | - | (3,050 | ) | - | ||||||||||
Restructuring charges | 1,546 | 96 | 2,170 | 96 | |||||||||||
Operating earnings | 851 | 540 | 5,203 | 881 | |||||||||||
Interest expense | 2,800 | 403 | 5,670 | 710 | |||||||||||
Net income (loss) before income taxes | (1,949 | ) | 137 | (467 | ) | 171 | |||||||||
Income tax expense (recovery) | |||||||||||||||
Current | 416 | 196 | 695 | 306 | |||||||||||
Deferred | 103 | 38 | 95 | (46 | ) | ||||||||||
519 | 234 | 790 | 260 | ||||||||||||
Net loss and comprehensive loss | $ | (2,468 | ) | $ | (97 | ) | $ | (1,257 | ) | $ | (89 | ) | |||
Basic loss per share | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.01 | ) | |||
Diluted loss per share | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.01 | ) | |||
Weighted average number of shares outstanding | |||||||||||||||
Basic | 23,557,944 | 17,222,439 | 23,403,431 | 17,131,971 | |||||||||||
Diluted | 23,557,944 | 17,222,439 | 23,403,431 | 17,131,971 | |||||||||||
Consolidated Balance Sheets | |||||||
(Unaudited) | |||||||
(Expressed in thousands of U.S. dollars) | June 30, 2019 | December 30, 2018 | |||||
Assets | |||||||
Current assets: | |||||||
Cash | $ | 634 | $ | 1,601 | |||
Accounts receivable - net | 64,951 | 72,986 | |||||
Unbilled contract assets | 27,619 | 20,405 | |||||
Inventories - net | 46,149 | 53,203 | |||||
Prepaid expenses and other assets | 6,691 | 5,548 | |||||
Derivative assets | - | 15 | |||||
Income taxes receivable | 158 | 160 | |||||
146,202 | 153,918 | ||||||
Property, plant and equipment - net | 26,855 | 28,160 | |||||
Operating lease right of use assets - net | 4,445 | - | |||||
Goodwill | 18,165 | 18,165 | |||||
Intangible assets - net | 16,247 | 19,935 | |||||
Deferred financing costs - net | 646 | 668 | |||||
Deferred income taxes - net | 285 | 380 | |||||
Total assets | $ | 212,845 | $ | 221,226 | |||
Liabilities and Shareholders' Equity | |||||||
Current liabilities: | |||||||
Revolving credit facility | 13,748 | $ | 25,020 | ||||
Accounts payable | 66,639 | 76,893 | |||||
Accrued liabilities | 12,174 | 13,040 | |||||
Warrant liability | 1,948 | 2,009 | |||||
Contingent consideration | - | 3,050 | |||||
Income taxes payable | 213 | 12 | |||||
Current portion of long-term debt | 1,368 | 1,368 | |||||
Current portion of operating lease obligations | 1,891 | - | |||||
Current portion of finance lease obligations | 1,401 | 1,547 | |||||
99,382 | 122,939 | ||||||
Long-term debt | 55,887 | 56,039 | |||||
Operating lease obligations | 3,019 | ||||||
Finance lease obligations | 9,284 | 9,947 | |||||
Total liabilities | 167,572 | 188,925 | |||||
Shareholders’ equity: | |||||||
Capital stock | 506 | 458 | |||||
Additional paid-in capital | 292,829 | 278,648 | |||||
Deficit | (248,062 | ) | (246,805 | ) | |||
45,273 | 32,301 | ||||||
Total liabilities and shareholders' equity | $ | 212,845 | $ | 221,226 | |||
Consolidated Statements of Cash Flows | |||||||||||||||
(Unaudited) | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
(Expressed in thousands of U.S. dollars) | |||||||||||||||
Cash provided by (used in): | June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | |||||||||||
Operations: | |||||||||||||||
Net loss | $ | (2,468 | ) | $ | (97 | ) | $ | (1,257 | ) | $ | (89 | ) | |||
Items not involving cash: | |||||||||||||||
Depreciation on property, plant and equipment | 1,626 | 769 | 3,253 | 1,543 | |||||||||||
Amortization of acquired Intangible assets | 1,844 | - | 3,688 | - | |||||||||||
Unrealized foreign exchange gain on unsettled forward | |||||||||||||||
exchange contracts | - | 89 | - | (230 | ) | ||||||||||
Deferred income taxes (recovery) | 103 | 38 | 95 | (46 | ) | ||||||||||
Amortization of deferred financing fees | 274 | 12 | 545 | 21 | |||||||||||
Stock-based compensation | 97 | 77 | 185 | 203 | |||||||||||
Change in fair value of warrant liability | 40 | - | (61 | ) | - | ||||||||||
Change in fair value of contingent consideration | - | - | (3,050 | ) | - | ||||||||||
Change in non-cash operating working capital: | |||||||||||||||
Accounts receivable | 9,229 | (1,223 | ) | 8,035 | (3,016 | ) | |||||||||
Unbilled contract assets | (3,411 | ) | (1,339 | ) | (7,214 | ) | (6,488 | ) | |||||||
Inventories | 2,511 | (4,516 | ) | 7,054 | (2,851 | ) | |||||||||
Prepaid expenses and other assets | (61 | ) | (1,068 | ) | (1,128 | ) | (1,437 | ) | |||||||
Income taxes payable | 174 | - | 203 | (48 | ) | ||||||||||
Accounts payable | (12,100 | ) | 4,383 | (10,130 | ) | 8,995 | |||||||||
Accrued liabilities | (952 | ) | 177 | (866 | ) | 1,361 | |||||||||
Net change in operating lease right of use asset and liability | 65 | - | 465 | - | |||||||||||
(3,029 | ) | (2,698 | ) | (183 | ) | (2,082 | ) | ||||||||
Financing: | |||||||||||||||
Advances (repayments) of revolving credit facility | (9,888 | ) | 1,940 | (11,272 | ) | (209 | ) | ||||||||
Repayments of long-term debt | (312 | ) | (500 | ) | (625 | ) | (1,000 | ) | |||||||
Principal repayments of finance lease obligations | (392 | ) | (50 | ) | (809 | ) | (94 | ) | |||||||
Proceeds from issuance of common stock | 14,044 | 361 | 14,044 | 361 | |||||||||||
Equipment facility advance | - | 1,894 | - | 1,894 | |||||||||||
Debt issuance and deferred financing fees | (50 | ) | (15 | ) | (50 | ) | (48 | ) | |||||||
3,402 | 3,630 | 1,288 | 904 | ||||||||||||
Investing: | |||||||||||||||
Purchase of property, plant and equipment | (1,335 | ) | (2,301 | ) | (2,072 | ) | (2,405 | ) | |||||||
(1,335 | ) | (2,301 | ) | (2,072 | ) | (2,405 | ) | ||||||||
Decrease in cash | (962 | ) | (1,369 | ) | (967 | ) | (3,583 | ) | |||||||
Cash, beginning of period | 1,596 | 3,322 | 1,601 | 5,536 | |||||||||||
Cash, end of the period | $ | 634 | $ | 1,953 | $ | 634 | $ 1,953 | ||||||||
Supplementary Information: | |||||||||||||||
Reconciliation of Adjusted EBITDA | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
Note 1 | Note 1 | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Net loss | $ | (2,468 | ) | $ | (97 | ) | $ | (1,257 | ) | $ | (89 | ) | |||
Add (deduct): | |||||||||||||||
Depreciation of property, plant and equipment | 1,626 | 769 | 3,253 | 1,543 | |||||||||||
Amortization of Intangible assets | 1,844 | - | 3,688 | - | |||||||||||
Interest | 2,800 | 403 | 5,670 | 710 | |||||||||||
Income tax expense | 519 | 234 | 790 | 260 | |||||||||||
EBITDA | $ | 4,321 | $ | 1,309 | $ | 12,144 | $ | 2,424 | |||||||
Add (deduct): | |||||||||||||||
Stock compensation expense | 97 | 77 | 185 | 203 | |||||||||||
Stock compensation expense - warrant revaluation | 40 | - | (61 | ) | - | ||||||||||
Restructuring charges | 1,546 | 96 | 2,170 | 96 | |||||||||||
Merger and acquisitions related expenses | 73 | - | 164 | - | |||||||||||
Contingent Consideration reversal | - | - | (3,050 | ) | - | ||||||||||
Unrealized foreign exchange loss (gain) | - | 89 | - | (230 | ) | ||||||||||
on unsettled forward exchange contracts | |||||||||||||||
Adjusted EBITDA | $ | 6,077 | $ | 1,571 | $ | 11,552 | $ | 2,493 | |||||||
Note 1: Reflects historical SMTC results as filed | |||||||||||||||
Supplementary Information: | |||||||||||||||
Reconciliation of Adjusted Gross Profit | |||||||||||||||
Three months ended | Six months ended | ||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Gross Profit | $ | 8,997 | $ | 4,283 | $ | 17,621 | $ | 8,133 | |||||||
Add (deduct): | |||||||||||||||
Amortization of intangible assets | 1,844 | - | 3,688 | - | |||||||||||
Unrealized foreign exchange loss (gain) | |||||||||||||||
on unsettled forward exchange contracts | - | 89 | - | (230 | ) | ||||||||||
Adjusted Gross Profit | $ | 10,841 | $ | 4,372 | $ | 21,309 | $ | 7,903 | |||||||
Adjusted Gross Profit Percentage | 11.9 | % | 9.8 | % | 11.0 | % | 9.7 | % | |||||||
Supplementary Information: | |||||||||||||||
Reconciliation of Adjusted Net (Loss) Income | Three months ended | Six months ended | |||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | ||||||||||||
Net Loss | $ | (2,468 | ) | $ | (97 | ) | $ | (1,257 | ) | $ | (89 | ) | |||
add back | |||||||||||||||
Amortization of intangible assets | 1,844 | - | 3,688 | - | |||||||||||
Unrealized foreign exchange loss (gain) | |||||||||||||||
on unsettled forward exchange contracts | - | 89 | - | (230 | ) | ||||||||||
Stock compensation expense | 97 | 77 | 185 | 203 | |||||||||||
Stock Revaluation of Warrant | 40 | - | (61 | ) | - | ||||||||||
Restructuring charges | 1,546 | 96 | 2,170 | 96 | |||||||||||
Merger and acquisitions related expenses | 73 | - | 164 | - | |||||||||||
Contingent Consideration reversal | - | - | (3,050 | ) | - | ||||||||||
Adjusted Net Income (Loss) | 1,132 | 165 | 1,839 | (20 | ) | ||||||||||
Supplementary Information: | ||||||||
Reconciliation of Net Debt | ||||||||
Proforma | ||||||||
June 30, 2019 | July 1, 2018 | July 1, 2018 | ||||||
Revolver | $ | 13,748 | 11,981 | 31,414 | ||||
Term Debt | 61,376 | 8,894 | 46,629 | |||||
Discount (Term Debt) | (4,121 | ) | - | 597 | ||||
Capital Lease (Finance) | 10,685 | 796 | 12,850 | |||||
Capital Lease (Operating) | 4,910 | - | - | |||||
$ | 86,598 | 21,671 | 91,490 | |||||
Cash | (634 | ) | (1,953 | ) | 2,024 | |||
Net Debt | $ | 85,964 | 19,718 | 89,466 | ||||
Consolidated Statements of Operations and Comprehensive Loss | |||||||||
(Unaudited) | |||||||||
SMTC | MC | Proforma | |||||||
July 1, 2018 | July 1, 2018 | July 1, 2018 | |||||||
Revenue | $ | 44,479 | $ | 37,544 | $ | 82,023 | |||
Cost of sales | 40,196 | 33,505 | 73,701 | ||||||
Gross profit | 4,283 | 4,038 | 8,321 | ||||||
Selling, general and administrative expenses | 3,647 | 2,946 | 6,593 | ||||||
Restructuring charges | 96 | 153 | 249 | ||||||
Operating income | 540 | 939 | 1,479 | ||||||
Interest expense | 403 | 1,835 | 2,238 | ||||||
Income (loss) before income taxes | 137 | (895 | ) | (758 | ) | ||||
Income tax expense (recovery) | |||||||||
Current | 196 | 112 | 308 | ||||||
Deferred | 38 | - | 38 | ||||||
234 | 112 | 346 | |||||||
Net loss from continuing operations | (97 | ) | (1,007 | ) | (1,104 | ) | |||
Net loss, and comprehensive loss | $ | (97 | ) | $ | (1,007 | ) | $ | (1,104 | ) |
Supplementary Information: | |||||||||
Reconciliation of Adjusted EBITDA | |||||||||
SMTC | MC | Proforma | |||||||
July 1, 2018 | July 1, 2018 | July 1, 2018 | |||||||
Net loss | $ | (97 | ) | $ | (1,007 | ) | $ | (1,104 | ) |
Add (deduct): | |||||||||
Depreciation of property, plant and equipment | 769 | 828 | 1,597 | ||||||
Interest | 403 | 1,835 | 2,238 | ||||||
Income tax expense | 234 | 112 | 346 | ||||||
EBITDA | $ | 1,309 | $ | 1,767 | $ | 3,076 | |||
Add (deduct): | |||||||||
Stock compensation expense | 77 | - | 77 | ||||||
Restructuring charges | 96 | 153 | 249 | ||||||
Unrealized foreign exchange loss | 89 | - | 89 | ||||||
on unsettled forward exchange contracts | |||||||||
Adjusted EBITDA | 1,571 | 1,920 | 3,491 | ||||||
Reconciliation of Adjusted Gross Profit | |||||||||
SMTC | MC | Proforma | |||||||
July 1, 2018 | July 1, 2018 | July 1, 2018 | |||||||
Gross Profit | $ | 4,283 | $ | 4,038 | $ | 8,321 | |||
Add (deduct): | |||||||||
Unrealized foreign exchange loss | |||||||||
on unsettled forward exchange contracts | 89 | - | 89 | ||||||
Adjusted Gross Profit | $ | 4,372 | $ | 4,038 | $ | 8,410 | |||
Adjusted Gross Profit % | 9.8 | % | 10.8 | % | 10.3 | % | |||
Investor Relations Contact
Peter Seltzberg
Managing Director
Darrow Associates, Inc.
516-419-9915
pseltzberg@darrowir.com
EXHIBIT 99.2
Note: Readers should refer to the audio replays, when available, on our website (www.smtc.com) for clarification and accuracy.
Second Quarter 2019
Conference Call Prepared Remarks
Operator
Good afternoon, ladies and gentlemen, and welcome to the SMTC Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference call will be recorded.
I would now like to introduce your host for today's conference, Mr. Blair McInnis, Vice President of Finance. You may begin.
Blair McInnis
Thank you. Before we begin the call, I'd like to remind everybody that the presentation will include statements about expected future events and financial results that are forward-looking in nature and subject to risks and uncertainties. The company cautions that actual performance will be affected by a number of factors, many of which are beyond the company's control, and that future events and results may vary substantially from what the company currently foresees. Discussion of the various factors that may affect future results is contained in the company's annual report on Form 10-K, on form 10-Q, and subsequent reports on Form 8-K and other filings with the Securities and Exchange Commission. All forward-looking statements are made as of the date of this call. And except as required by law, we do not intend to update this information. This conference call will also be available for audio replay in the Investor Relations section of SMTC's website at www.smtc.com.
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Information about upcoming investor conferences in which SMTC will be participating will be posted on the Investor Calendar on our website and include:
· | Dougherty’s 2019 Institutional Investor Conference in Minneapolis; |
· | Craig Hallum’s Alpha Select in New York; and |
· | The 12th Annual LD Micro Main Event in Los Angeles |
I will now pass the call over to Eddie Smith, SMTC's President and Chief Executive Officer.
Edward J. Smith
Thank you, Blair, and good afternoon ladies and gentlemen, I'm Eddie Smith, SMTC's President and Chief Executive Officer. On this call with me today is Rich Fitzgerald, our Chief Operating Officer, and Steve Waszak, SMTC's Chief Financial Officer.
As the press release we issued after the market closed today indicates we have completed our integration activities of MC Assembly; we continued to improve our operational efficiencies; and we reported strong year-over-year growth in revenue and Adjusted EBITDA, which remains on-track to show substantial growth over last year, and within the range of our previously communicated guidance.
Steve will discuss our financial results for the second quarter and guidance for the balance of 2019. Following Steve’s review of our second quarter results and outlook for 2019, I’ll share my thoughts on our progress-made and priorities as we focus on providing our customers with best-in-class service and deliver increasing shareholder value.
Steven M. Waszak
Thank you, Eddie. Good afternoon everyone and thank you for taking time to join us. As Eddie mentioned, we will start the call with my review of the second quarter’s financial results and then I’ll turn the call back over to Eddie for his comments on the business.
As we did on last quarter’s conference call, I will be referencing numbers for 2019, which includes combined SMTC and MC Assembly results; 2018 year-over-year which include “as previously reported GAAP” numbers by SMTC which as a reminder include MC Assembly from acquisition date of November 9th 2018 and, finally, when you hear “pro-forma” this will include SMTC and MC Assembly assuming MC was part of SMTC in the entire second quarter of 2018.
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Now for the results, our revenue in the second quarter was $90.9 million, up 104%, compared to $44.5 million as previously reported in the second quarter of 2018. On a pro-forma basis, assuming MC Assembly had been part of SMTC in the second quarter of 2018, revenue increased 10.9% in Q2 2019 compared to the second quarter of 2018. Approximately $3.4 million of the revenues reported in the second quarter of 2019 was due to the impact of the revenue accounting standard ASC 606 compared to $1.3 million of the revenues in the same period in the prior year. During Q2 of 2019, we can report we had one 10%-plus customer in that period.
Our GAAP gross profit for Q2 2019 was $9 million or 9.9% of revenues, compared to $4.3 million or 9.6% of revenues as previously reported in the same quarter of 2018. The year-over-year increase in the GAAP gross margin percentages was primarily due to the $46.4 million increase in revenue quarter over quarter due to acquisition of MC Assembly.
Our Q2 2019 adjusted gross profit, which is a non-GAAP measure, was $10.8 million or 11.9% of revenue and excludes non-cash $1.8 million of amortization of intangibles recorded in connection with our transformative acquisition of MC Assembly last year. In comparison, Q2 2018 adjusted gross profit was $4.4 million or 9.8% of revenue.
Selling, General and Administrative expenses for Q2 2019 was $6.6 million, up from $3.7 million as reports in the same period in 2018. As a percent of revenues, SG&A expenses decreased to 7.3% of revenues in Q2 2019, compared to 8.2% of revenues as reported in the same period as reported in 2018, a function of the higher revenue ins Q2 2019.
We reported a $2.5 million net loss in the second quarter of 2019 which included a $1.5 million restructuring charges primarily associated with the integration of MC Assembly. In comparison, the company reported a net loss of $97 thousand in the same period a year ago.
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Now, adjusted EBITDA increased 280% to $6.1 million in Q2 2019, compared to $1.6 million, as “previously reported”, in the same period a year ago. Q2 2019’s adjusted EBITDA jumped 78% year-over-year on a pro-forma basis, again assuming SMTC and MC Assembly were combined in Q2 2018. The increase in the 2019 second quarter adjusted EBITDA compared to the same period in the prior year was driven by the 10.9% increased revenue from both SMTC and MC Assembly customers and generating efficiencies when combining the companies.
I'd like to comment on the balance sheet and other key financial metrics that we reported for the quarter. At the end of the Q2 2019, we had $634 thousand in cash, our cash-to-cash cycle was at 74 days, with DSO at approximately 64 days and DPO at approximately 71 days. Inventory turns were 4.5 turns for the second quarter of 2019.
Net Debt at the end of the second quarter was $86 million, and includes debt incurred in November 2018 associated with financing of the MC Assembly acquisition of $50 million Term A and $12 million Term B, and $15.6 million of finance and operating lease obligations, of which $5.6 million included in the $15.6 million represents operating lease right-to-use liabilities associated with the adoption on January 1st 2019 of the new lease accounting standard (ASC 842 – Leases). In comparison, net debt at the end of 2018 was $92.3 million. Net debt, excluding our finance and operating lease obligations, was
$70.4 million as of June 30, 2019, as compared to $80.8 million at the end of 2018.
As part of our ongoing activities to improve our capital structure, we completed a Rights Offering and Registered Direct Offering that generated gross proceeds of $14.6 million at the end of June. On July 3rd, we used $12 million of these proceeds to accelerate pay-off of our outstanding Term B debt. This week we refinanced our credit agreements. The amended credit agreements recorded and reduced the Term A outstanding balance to approximately $40 million from $50 million. We also expanded borrowing capacity, with improved covenants, under the asset-based revolver facilities to $65 million from $45 million to better support our future growth.
We remain very focused on improving our efficiencies, as well as re-shaping our balance sheet to provide further flexibility and added growth capacity. We are currently evaluating a number of alternatives, which Eddie will comment on as well, and we will provide additional updates as appropriate.
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Before turning the call back to Eddie, let me quickly comment on the year’s outlook. Customer concerns about the continuing impact of tariffs and macro-economic factors has caused, as we experienced in the second quarter, many customers to review and begin to revise where they outsource their manufacturing. While we believe SMTC is well positioned with our North American facilities, we expect customer demand may be impacted over the second half of the year as customers continue to react and adjust to the ongoing geo-political impacts on global trade. As a result, our current expectation for revenue and Adjusted EBITDA for 2019 will more likely approach the lower end of our prior guidance of $393 to $408 million in revenue and $27 to $29 million for Adjusted EBITDA for the full year of 2019.
With that, here’s Eddie for some additional strategic commentary.
Edward J. Smith
Thank you, Steve.
As the numbers that Steve presented indicate, we continue to make solid progress in building a stronger SMTC. I’ll now add some color on the progress made in the second quarter and my priorities for the balance of 2019 in our journey of transforming SMTC into that stronger company.
First, we continued to experience robust year-over-year top line growth across all of our industry sectors, except for the semiconductor, capital equipment and data centers sectors-. Our sales growth was led by our Test and Measurement sector which was increased by $22.3 million or 269% from Q2 2018. Our growth in this sector was supported in part by the 5G telecom adoption in Korea. Our Industrial, Power and Clean Tech customers who grew by $13.6 million or 283% and our Aerospace and Defense business based in Florida added $4.8 million in sales in Q2 2019, compared to zero sales in Q2 2018.
As I mentioned on last quarter’s conference call, the slow start to the semiconductor sector this year was not surprising as many in the industry likely doubled booked semi orders last year when there was a supply constrained environment. As we look ahead, we do not anticipate a rebound for that industry until 2020 at the earliest. On a more positive note, we expect our Aerospace and Defense business to gain traction over time as past awards for new business start to place purchase orders and shipments. We have posted a slide deck on the Investor Relations section of our website that provides the specific revenue contributions from our various market segments.
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Looking ahead, we expect another year of double-digit revenue growth for SMTC. Our growth is being driven by increased business and several new programs at existing customers plus the addition of new customers. In the second quarter we were awarded four new programs from existing customers; and we expect to see growth from these customers in their existing programs. As important, we another two new customers in Q2 to our growing customer roster.
Second, we completed our integration of MC Assembly in the quarter as expected and started to initiated steps to improve the efficiencies at several of our sites, including a realignment of our workforce and strengthening on-site leadership at our Fresnillo factory in Zacatecas, Mexico. We also reviewed and reassigned some customers to specific SMTC teams and plants that would better meet their specific needs. Those initiatives, as well as synergistic cost savings we discussed in the past from the acquisition, are starting to pay off.
During the quarter, we also upgraded our Fresnillo facility by adding a “copy exact” full SMT standalone automated line designed for high volume low mix enterprise customer needs and other equipment that will increase our capacity by approximately 25%. Increasing capacity and improving the efficiencies of our Mexican operations is particularly important in light of today’s uncertain GEO-political environment. With tariff concerns high on the minds of our customers, we incurred additional costs in the second quarter as we shifted some customer production from our China facility to Mexico. We remain focused on identifying and implementing additional efficiencies, in our pursuit of achieving best-in-class operating and financial metrics among its EMS peers.
To better support our customers, we also expect to open our New Product Introduction (NPI) and Manufacturing Design (DFx) Center of Excellence in Billerica, Massachusetts this quarter to provide customers with world-class “Quick-turn” manufacturing that can accelerate the launch of products with the flexibility to scale into a low-cost geography that is available from our other sites.
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Which brings me to the third and final point I would like to emphasize on today’s call, namely our focus on strengthening our balance sheet to support growth. At the end of June, we completed an equity raise for a total of $14.6 million which we used to pay down our Term B loan. And this week, we have restructured our debt with less restrictive covenants and a higher level of available working capital. In addition, we are actively working to improve how we manage our working capital, for example, we have recently implemented an A/R Collections Improvement Plan and taking other steps to increase our inventory turns.
Let me wrap up by saying that we remain committed to further deleveraging our balance sheet, achieving industry-leading performance metrics, growing our business to become the premier Tier 3 EMS market segment leader, making our company an even stronger company that delights our customers with superior service, taking care of our employees, and rewarding our stockholders with enhanced shareholder value.
With that, Steve, Rich Fitzgerald and myself will take questions from those on the call today.
Q&A
Eddie Smith
Thank you, operator.
In closing, I want to thank our employees, leadership team, business partners, distributors and our stockholders for their support and look forward to reporting our progress to our various stakeholders over the next several quarters. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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