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): May 7, 2020 (May 6, 2020)  

SMTC CORPORATION
(Exact Name of Registrant as Specified in Charter)

Delaware0-3105198-0197680
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareSMTXNASDAQ 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 May 6, 2020, SMTC Corporation issued a press release announcing its first quarter 2020 financial results, a copy of which is attached as Exhibit 99.1 to this Current Report and incorporated herein by reference.

On May 7, 2020, SMTC Corporation held a teleconference announcing its first quarter 2020 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.

Item 9.01. Financial Statements and Exhibits.

Exhibit
Number
Description
  
99.1 Press Release of SMTC Corporation dated March 6, 2020
99.2 Transcript of SMTC Corporation’s first quarter 2020 teleconference held May 7, 2020


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: May 7, 2020By: /s/ Edward Smith        
 Name: Edward Smith
 Title: President and Chief Executive Officer
  

EdgarFiling

EXHIBIT 99.1

SMTC Corporation Announces First Quarter Results

TORONTO, May 06, 2020 (GLOBE NEWSWIRE) -- SMTC Corporation (Nasdaq:SMTX), a global electronics manufacturing services provider and winners of Frost & Sullivan’s 2019 Best Practices Award for Customer Value Leadership in the Electronics Manufacturing Services Industry, today announced first quarter 2020 results.

Business Highlights

$s in thousandsQ1 2020 Q4 2019 ChangeQ1 2019Change
Revenue$95.1 $90.2 5.4% $102.6 (7.3%) 
GAAP     
Gross Profit$9.6 $10.5 (8.1%) $8.6 11.8% 
Gross Profit Percentage 10.1%  11.6%   8.4%  
Net Income (Loss)$0.8 $1.0 (22.2%) $1.2 (36.0%) 
EPS$0.03 $0.03 0.0% $0.05 (46.4%) 
Non-GAAP     
Adjusted Gross Profit$11.7 $12.2 (4.0%) $10.5 11.5% 
Adjusted Gross Profit Percentage 12.3%  13.5%   10.2%  
Adjusted Net Income$2.2 $2.9 (23.5%) $0.7 215.3% 
Adjusted EPS$0.08 $0.10 (20.0%) $0.03 163.9% 
Adjusted EBITDA$6.2 $7.0 (10.7%) $5.5 13.5% 
Adjusted EBITDA Percentage 6.5%  7.7%   5.3%  
Net Debt$83.6 $82.1 1.8%  95.9  

Note: Adjusted Gross Profit, Adjusted Gross Profit Percentage, Adjusted Net Income, Adjusted Earnings Per Common Share (Adjusted EPS), Adjusted EBITDA, Adjusted EBITDA Percentage, and Net Debt (each as defined below) are non-GAAP measures. Please refer to the section below labeled “Non-GAAP Information” and the various reconciliations to the applicable most directly comparable GAAP measures shown below in this press release.

Management Commentary

“We experienced stable demand in the first quarter from our customers in nearly all of the markets we serve. The sequentially higher first quarter revenue due primarily to revenue increases from our test and measurement, retail and payment systems, and avionics, aerospace and defense customers,” said Ed Smith, SMTC’s President and Chief Executive Officer.

Sequential revenue growth by industry sector is noted in the table below:

Industry Sector      
(Dollars in Millions)Q1 2020Q4 2019Change
Test and Measurement$29.430.9% $28.031.0% $1.40 5.0% 
Industrial, Power and Clean Technology$18.919.8% $19.121.2% ($0.20) (1.0%) 
Retail and Payment Systems$12.313.0% $10.611.7% $1.70 16.0% 
Medical$11.311.9% $11.312.5% $0.00 0.0% 
Avionics, Aerospace and Defense$10.410.9% $7.78.5% $2.70 35.1% 
Telecom, Networking and Communications$7.57.9% $8.89.7% ($1.30) (14.8%) 
Semiconductors$5.35.6% $4.85.3% $0.50 10.4% 
Total$95.1100.0% $90.2100.0% $4.80 5.4% 
       

“At $95.1 million, our first quarter sales were in-line with our forecasts, and bookings continued to show strength with further expansion of our customer base. We were awarded multi-year programs from four new customers plus new programs from five existing customers in the first quarter that have the potential to generate in excess of $50 million of revenue over the life of those programs, including wins in the avionics, aerospace and defense markets,” said Ed Smith. “We are excited that our new business pipeline continues to grow with an additional $7 million in new programs awarded to us in April and May, bringing the total of new orders received in 2020 to $57 million. With these new program awards, we expect the first half of 2020 will involve making incremental investments in our program management teams, production certifications and start-up phase costs to support the launch of new products before they reach volume production later this year and into 2021,” added Smith.

“In order to meet our customers’ delivery requirements, we incurred COVID-19 related expenses in the first quarter of approximately $0.2 million. We also expect to incur an additional $1.2 million of COVID-19 related expenses in the second quarter. These additional expenses 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 all non-essential new hiring and new programs, and reducing our second quarter capital expenditures,” continued Smith.

“To meet the demands of our customers in industries deemed essential, including defense, medical devices, telecom infrastructure, and test and measurement systems, all of our facilities currently remain open and are operating in accordance with applicable health and safety regulations. The wellness and safety of our employees remain a top priority for SMTC. 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 who continue to work at our facilities, we have instituted programs of temperature metering, intensive cleaning and disinfection, social distancing and we are prohibiting visitors to our sites. We are also carefully monitoring the potential impact of the COVID-19 pandemic, including by proactively coordinating with our customers and key suppliers,” said Smith.

For the three months ended March 30, 2020, cash provided by operations was $2.9m million and capital expenditures were $0.9 million.  As of March 30, 2020, SMTC had $31.2 million available for borrowing under its asset-based lending facility.

Outlook

“While we believe we have been successful so far in mitigating the impacts of the COVID-19 pandemic and are encouraged by our continued success in winning new business, we also recognize the potential for additional negative impacts of the COVID-19 pandemic on our business, such as changes in customer demand, supply chain or product build-shipment interruptions, new or changing government regulations, impacts on our employees or our manufacturing facilities and impacts on the global economy. Thus, we believe it is prudent at this time to withdraw the full year 2020 guidance, initially provided on September 19, 2019 and reaffirmed on March 12, 2020, until such time that visibility returns to pre-COVID-19 levels,” Smith added.

Based on the Company’s current demand and supply chain visibility, and assuming its facilities continue to operate at currently planned levels, SMTC expects the following for the second quarter 2020:  

Financial Results Conference Call

SMTC will host a conference call which will start at 8:30 am Eastern Time on Thursday, May 7, 2020 to discuss its financial results. 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 1-844-369-8770 (for U.S. and Canadian participants) or 1-862-298-0840 (for participants outside of the U.S.) ten minutes prior to the start of the call and requesting to join the SMTC Corporation’s First Quarter 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 Percentage, Adjusted Net Income, Adjusted Earnings Per Common Share (Adjusted EPS), Adjusted EBITDA, Adjusted EBITDA Percentage, and Net Debt are non-GAAP measures and are referred to herein as “Non-GAAP Financial Measures.” Adjusted Gross Profit is computed as gross profit excluding amortization of intangible assets and unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts. Adjusted Gross Profit Percentage is computed as Adjusted Gross Profit divided by revenue. Adjusted Net Income is computed as net income (loss) before amortization of intangible assets, unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts, restructuring charges, stock-based compensation, fair value adjustment of warrant liability, merger and acquisition related expenses and fair value adjustment to contingent consideration. Adjusted EPS is computed as Adjusted Net Income divided by Diluted Weighted Average Shares Outstanding. Adjusted EBITDA is computed as net income (loss) before interest, taxes, depreciation and amortization and adjusted to exclude restructuring charges, stock-based compensation, fair value adjustment of warrant liability, merger and acquisition related expenses, fair value adjustment to contingent consideration and unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts. Adjusted EBITDA Percentage is computed as Adjusted EBITDA divided by revenue. Net Debt is computed as Total debt minus cash. Reconciliations of Adjusted Gross Profit to gross profit, Adjusted Gross Profit Percentage to gross profit percentage, Adjusted Net Income to net income (loss), Net Debt to total debt, Adjusted EBITDA to net income (loss), and Adjusted EBITDA Percentage to net income (loss) percentage are each included in this press release below. Management believes 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 SMTC uses in its financial and operational decision making. These Non-GAAP Financial Measures are also frequently used by analysts, investors and other interested parties to evaluate companies in SMTC’s 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 GAAP, and should not be construed as an inference that SMTC’s future results will be unaffected by any items adjusted for in these Non-GAAP Financial Measures. In evaluating these non-GAAP measures, you should be aware that in the future SMTC may incur expenses that are the same as or similar to some of those adjusted in the presentation below. The Non-GAAP Financial Measures that SMTC uses are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.

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 stability of customer demand, SMTC’s expected financial results in the second quarter of 2020, including revenue, adjusted EBITDA, as well as the anticipated revenue from specific new programs, SMTC’s expected investments in program management teams, production certifications and  new customer-program start-up costs and COVID-19 related expenses in the second quarter, the anticipated impact of the COVID-19 pandemic, including SMTC’s health and safety measures at its facilities, its ability to meet customers’ production requirements, and its ability to continue operations in accordance with applicable regulations, and  access to additional funding under its credit facilities. For these statements, SMTC claims 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 effect of the expanded outbreak of the COVID-19 pandemic on the economy generally and on SMTC, its operations, fluctuations in demand for customers’ products and changes in customers’ product sources, disruptions to the supply chain, availability of labor resources, and delivery logistics, component shortages, availability of credit or lending facilities, challenges of managing quickly expanding operations, competition in the electronics manufacturing services industry, changes in regulations and guidance from federal, state and local governments and public health officials, 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.  SMTC has more than 50 manufacturing and assembly lines in the United States 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 Avionics, Aerospace of Defense, 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, and 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. 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
       
(Expressed in thousands of U.S. dollars, except number of shares and per share amounts)March 29,
2020
 March 31,
2019
 December 29,
2019
       
Revenue $95,138  $102,649  $90,244 
Cost of sales  85,499   94,025   79,750 
Gross profit  9,639   8,624   10,494 
Selling, general and administrative expenses  7,219   6,799   7,132 
Gain on Contingent Consideration  -   (3,050)  - 
Restructuring charges  (221)  624   (669)
       
Operating earnings  2,641   4,251   4,031 
Change in fair value of warrant liability  (517)  (101)  640 
Interest expense  2,093   2,870   2,213 
Net income before income taxes  1,065   1,482   1,178 
Income tax expense (recovery)      
Current  275   279   356 
Deferred  15   (8)  (174)
   290   271   182 
Net income and comprehensive income $775  $1,211  $996 
       
Basic income per share $0.03  $0.05  $0.04 
Diluted income per share $0.03  $0.05  $0.03 
       
Weighted average number of shares outstanding      
Basic  28,195,300   23,248,918   28,117,372 
Diluted  29,228,403   24,465,435   29,402,054 


Consolidated Balance Sheets     
(Unaudited)     
      
(Expressed in thousands of U.S. dollars)  March 29,
2020
 December 29,
2019
Assets     
      
Current assets:     
Cash  $  1,354  $  1,368 
Accounts receivable - net     70,613     69,919 
Unbilled contract assets     28,779     26,271 
Inventories - net     43,321     47,826 
Prepaid expenses and other assets      6,393     7,044 
Income taxes receivable     160     - 
      150,620     152,428 
Property, plant and equipment - net     24,410     25,310 
Operating lease right of use assets - net     6,588     3,330 
Goodwill     18,165     18,165 
Intangible assets - net     11,229     12,747 
Deferred financing costs - net     804     859 
Deferred income taxes - net     525     540 
Total assets  $  212,341  $  213,379 
      
Liabilities and Shareholders' Equity     
      
Current liabilities:     
Revolving credit facility     33,340     34,701 
Accounts payable     67,736     74,126 
Accrued liabilities     14,702     11,164 
Warrant liability     1,213     1,730 
Restructuring liability     887     1,597 
Derivative liabilities     512     - 
Income taxes payable     276     157 
Current portion of long-term debt     1,562     1,250 
Current portion of operating lease obligations     1,566     1,128 
Current portion of finance lease obligations     1,166     1,226 
      122,960     127,079 
      
Long-term debt     33,365     33,750 
Operating lease obligations     5,446     2,615 
Finance lease obligations     8,536     8,838 
Total liabilities     170,307     172,282 
      
Shareholders’ equity:     
Capital stock     508     508 
Additional paid-in capital     293,551     293,389 
Deficit     (252,025)    (252,800)
      42,034     41,097 
Total liabilities and shareholders' equity  $  212,341  $  213,379 
      


Consolidated Statements of Cash Flows     
(Unaudited)    
  Three months ended
(Expressed in thousands of U.S. dollars)    
Cash provided by (used in): March 29, 
2020
 March 31,
2019
Operations:    
Net income $775  $1,211 
Items not involving cash:    
Depreciation on property, plant and equipment  1,603   1,627 
Amortization of acquired Intangible assets  1,518   1,844 
Change in fair value of warrant liability  (517)  (101)
Unrealized foreign exchange loss on unsettled forward    
exchange contracts  512   - 
Write down of property, plant and equipment  -   - 
Deferred income taxes (recovery)  15   (8)
Amortization of deferred financing fees  294   271 
Stock-based compensation  162   88 
Change in fair value of contingent consideration  -   (3,050)
     
Change in non-cash operating working capital:    
Accounts receivable  (694)  (1,194)
Unbilled contract assets  (2,508)  (3,803)
Inventories  4,505   4,543 
Prepaid expenses and other assets  651   (1,067)
Income taxes payable  (41)  29 
Accounts payable  (6,196)  1,970 
Accrued liabilities  3,475   242 
Restructuring liability  (644)  244 
Net change in operating lease right of use asset and liability  11   - 
   2,921   2,846 
Financing:    
Repayments of revolving credit facility  (1,361)  (1,384)
Repayments of long-term debt  (312)  (313)
Net advances of long-term debt  -   - 
Principal repayments of finance lease obligations  (362)  (417)
Repayment of equipment facility  -   - 
   (2,035)  (2,114)
Investing:    
Acquisition of MC Assembly - net of cash acquired  -   - 
Purchase of property, plant and equipment  (900)  (737)
Proceeds from leaseholding improvement    
   (900)  (737)
Decrease in cash  (14)  (5)
Cash, beginning of period  1,368   1,601 
Cash, end of the period $1,354  $1,596 
     


Supplementary Information:      
Reconciliation of Adjusted Gross Profit      
       
  Three months ended
  March 29, 
2020
 March 31,
2019
 December 29,
2019
       
Gross Profit $9,639  $8,624  $10,494 
Add (deduct):      
Amortization of intangible assets  1,518   1,844   1,656 
Unrealized foreign exchange loss      
on unsettled forward exchange contracts  512   -   - 
       
Adjusted Gross Profit $11,669  $10,468  $12,150 
       
Adjusted Gross Profit Percentage  12.3%   10.2%   13.5% 
  


Supplementary Information:      
Reconciliation of Adjusted Net Income and Adjusted EPS   
       
  Three months ended
  March 29, 
2020
 March 31,
2019
 December 29,
2019
       
Net income $775  $1,211  $996 
Add (deduct):      
Amortization of intangible assets  1,518   1,844   1,656 
Restructuring charges  (221)  624   (669)
Stock compensation expense  162   88   238 
Fair value adjustment of warrant liability  (517)  (101)  640 
Merger and acquisitions related expenses  -   91   54 
Fair value adjustment of contingent consideration -   (3,050)  - 
Unrealized foreign exchange loss      
on unsettled forward exchange contracts  512   -   - 
       
       
Adjusted Net income $2,229  $707  $2,915 
Adjusted EPS $0.08  $0.03  $0.10 
Weighted average number of shares outstanding      
Basic  28,195,300   23,248,918   28,117,372 
Diluted  29,228,403   24,465,435   29,402,054 


Supplementary Information:      
Reconciliation of Adjusted EBITDA       
  Three months ended
       
  March 29, 
2020
 March 31, 
2019
 December 29,
2019
       
Net income (loss) $775  $1,211  $996 
Add (deduct):      
Depreciation of property, plant and equipment  1,603   1,627   1,646 
Amortization of Intangible assets  1,518   1,844   1,656 
Interest  2,093   2,870   2,213 
Income tax expense  290   271   182 
       
EBITDA $6,279  $7,823  $6,693 
       
Add (deduct):      
Stock compensation expense  162   88   238 
Fair value adjustment of warrant liability  (517)  (101)  640 
Restructuring charges  (221)  624   (669)
Merger and acquisitions related expenses  -   91   54 
Fair value adjustment of contingent consideration  -   (3,050)  - 
Unrealized foreign exchange loss  512   -   - 
on unsettled forward exchange contracts      
       
Adjusted EBITDA $6,215  $5,475  $6,956 
       
Adjusted EBITDA Percentage  6.5%   5.3%   7.7% 
       


Supplementary Information:     
Reconciliation of Adjusted Net Debt     
      
   March 29,
2020
 December 29,
2019
      
Revolver  $33,340  $34,701 
Long-term debt   38,438   38,750 
Discount (long-term debt)   (3,511)  (3,750)
Finance lease obligations   9,702   10,064 
Operating lease obligations   7,012   3,743 
   $84,981  $83,508 
Cash  $(1,354) $(1,368)
Net Debt  $83,627  $82,140 
      
Note:  Impact of new Fremont lease $3.6 million included as at March 29, 2020


Supplementary Information:  
Reconciliation of Adjusted EBITDA   
   
  Forecasted Three
months ended
  June 28, 2020
   
Net Income* $500
Add (deduct):  
Depreciation  1,700
Amortization of Intangible  850
Interest  2,100
Income tax expense  300
   
EBITDA $5,450
   
Add (deduct):  
Stock compensation expense  150
Unrealized foreign exchange loss on forward contracts  400
   
   
Adjusted EBITDA $6,000

*Excludes COVID-19 related expenditures of up to $1,200

Relations Contact

Peter Seltzberg
Managing Director
Darrow Associates, Inc.
516-419-9915
pseltzberg@darrowir.com

EdgarFiling

Exhibit 99.2

 

Note: Readers should refer to the audio replays, when available, on our website (www.smtc.com) for clarification and accuracy.

 

 

First Quarter 2020

Conference Call Prepared Remarks

 

Operator

 

Good morning, ladies and gentlemen, and welcome to the SMTC First Quarter 2020 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, quarterly reports 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.

 

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During the call, we will also reference certain non-GAAP measures, including Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA. Please refer to the press release we issued yesterday for reconciliations between GAAP and adjusted results. Management believes 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 SMTC uses in its financial and operational decision-making. These Non-GAAP Financial Measures are also frequently used by analysts, investors and other interested parties to evaluate companies in SMTC’s 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 GAAP, and should not be construed as an inference that SMTC’s future results will be unaffected by any items adjusted for in these Non-GAAP Financial Measures.

 

Finally, this conference call will also be available for audio replay in the Investor Relations section of SMTC's website at www.smtc.com.

 

I will now pass the call over to Eddie Smith, SMTC’s President and Chief Executive Officer.

 

Eddie Smith

 

Thank you, Blair. Good morning. 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.

 

First, before discussing the quarter and our results which came in better than our internal budgets, I want to acknowledge that as a result of the emergence of the COVID-19 pandemic, we’re living and working in a time that is unlike anything we’ve seen before. I’d like to applaud the dedication and hard work of our entire SMTC team, and the support of our suppliers, our customers, and our partners. I would also like to thank our shareholders for their continued patience and support during these trying times.

 

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I am pleased to report that our focus on operational excellence is paying off as we continue to move our company forward and report a first quarter 5.4% sequential increase in revenue during what is typically a seasonally slow quarter, while at the same time, navigating through the health, safety and supply chain challenges resulting from the emergence of the COVID-19 pandemic.

 

During the first quarter we were awarded programs from four new customers, plus additional new programs from five existing customers that have the potential of generating in excess of $50 million of revenue over time. We are excited that our new business funnel continues to grow with an additional $7 million in new programs awarded to date during April and May.

 

On balance, our business remains intact. The SMTC team has demonstrated resilience during these challenging times. Our leadership team, myself included, is in weekly, and in some times daily, contact with our customers to make sure we stay on top of the evolving situation. While we need to make some incremental investments in the first half of the year to support the launch of new products before they reach volume production later this year and into 2021, we are simultaneously taking other steps to limit our expenses, including putting a pause on hiring for new positions and reducing our Q2 capital expenditure plans which Steve will discuss.

 

While we are pleased with our growing sales funnel and business prospects, given the unpredictability of the current COVID-19 pandemic environment, we decided it would be prudent to formally withdraw our full year guidance until such time that visibility returns to pre-COVID-19 levels. We are keeping the lines of communication open to provide reliable and timely information, both internally and externally, and we look forward to the day when the COVID-19 pandemic comes to an end and we can resume providing annual guidance that reflects our confidence in our ability to achieve industry leading financial metrics.

 

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Let me wrap up my introductory remarks by saying that the safety of our employees remains a top priority for SMTC as we continue to meet our customers’ requirements. Rich Fitzgerald, our Chief Operating Officer, will discuss in detail the actions we have taken to ensure the health and wellness of our employees and their families, and our efforts to keep our production up and running responsibly to meet our customers’ delivery requirements.

 

After Rich addresses the steps we have taken, Steve Waszak, our CFO, will discuss our first quarter results in more detail, including the investments we are making in support of new programs, and the expenses we have incurred as a result of our efforts to protect the health, safety and wellness of our employees in light of the COVID-19 pandemic. Steve will also share with you our thoughts for the second quarter before I return with some additional commentary on our business, our goals, and the markets we serve before we open the call to questions. With that, Rich Fitzgerald.

 

Rich Fitzgerald

 

Thank you Eddie, Good morning.

 

I would like to provide you with an update on SMTC’s COVID-19 global business continuity plan. First, I would like to thank our customers, employees, and channel partners during this time, as everyone has been instrumental in helping SMTC address the challenges that the COVID-19 pandemic presents. As Eddie said, the health, safety and wellness of our employees and their families has been and continues to be our top priority. The ability to keep our business operations running, while continuing to provide regular communication to all stakeholders, has become the regular operating rhythm for the SMTC team. Currently, all of our facilities around the world remain in operation and in accordance with all applicable health and safety regulations.

 

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As early signs of a potential pandemic were emerging in Asia in late January, we quickly began working on global initiatives to pull forward our supply chain and begin working on our business continuity plans. As we began feeling the effects of raw material and logistics challenges, with some of our key suppliers nearing shutdown, we quickly moved most of our ocean freight to air, increasing our freight costs to ensure business continuity for our clients. We also began conducting daily conversations with our channel partners and customers to align immediate needs versus non-critical demand. This became and continues to be our new paradigm.

 

Shortly after the California state government announced the first stay-at-home orders in the nation, we quickly responded and implemented a plan to comply with state requirements to protect the health and safety of our Fremont California employees and developed our business continuity plans for all of our other sites around the globe. This included working with respective governments, our customers, and our leadership team to define specific plans for each site. We quickly defined “essential business customers” across the globe and worked closely with our clients to ensure we had the proper letters of exemption to continue operations. We then worked with local governments where our operations are located to obtain additional documentation necessary for each of our sites to remain open. Following closely CDC recommendations, we quickly implemented the following measures at all of our facilities:

 

We immediately stopped all travel for all employees globally,
   
We limited access to all factories to essential employees only,
   
We instructed all non-essential personnel to work remotely,
   
We required all employees with pre-existing conditions, and in Mexico those over the age of 55, to stay at home with pay,
   
We strictly enforced and encouraged anyone who was feeling ill to stay home,
   
We instituted strict rules around hygiene at our facilities, including temperature metering and required the wearing of face masks,

 

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We modified shift patterns to ensure social distancing within our sites and limited the number of access points at each site, and
   
We continue to have medical personnel routinely check on our employees and have provided the proper personal protective equipment to our employees to support their health, safety and wellness.

 

Given the current outlook, with a phased approach to reducing stay at home orders being implemented in various locations, we will continue to enforce our rigorous standards to protect our employees, while responsibly addressing our customers’ delivery needs. We will continue to align our plans and we bring some of our non-essential employees back to work in a safe and controlled manner. All travel will continue to be halted until further notice. We will continue to communicate with our global employees through videos, and with our world class clients and channel partners through frequent and regular dialogue.

 

I am extremely proud of the work the team has done to address the challenges of the COVID-19 pandemic and the social responsibility that our employees have demonstrated through donations of goods and supplies to local hospitals to help the local communities that we all work in.

 

With that said, stay safe.

 

With that said, stay safe, I’ll turn the call over to Steve.

 

Steve Waszak

 

Thank you, Rich and I want to add my thanks to all of SMTC’s employees for their commitment and dedication as we work together through the challenges of the COVID-19 pandemic.

 

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Now let me discuss our financial results. Revenue in the first quarter 2020 was $95.1 million, up 5.4%, compared to the prior quarter, and down 7.3% from the first quarter a year ago. During the first quarter of 2020, we had one 10%-plus customer.

 

Included in our earnings press release is a table that breaks down our sales by industry sector. This table shows that nearly all of the markets that we serve were relatively stable, with strong growth in our Avionics, Aerospace and Defense business which increased by 35% to $10.4 million compared to $7.7 million and $7.0 million in the prior quarter and the same quarter a year ago, respectively.

 

Our Gross Profit for the first quarter of 2020 was $9.6 million or 10.1% of revenue, compared to $10.5 million or 11.6% of revenue in the prior quarter and $8.6 million or 8.4% in the same quarter a year ago. The sequential decline in Gross Profit was primarily due to program management, production certifications and start-up expenses for new customer programs, labor inefficiencies which resulted from the use of temporary staff to replace employees on leave with medical conditions that put them at higher risk for COVID-19, and certain supply chain logistic expenses incurred to meet our customers’ delivery schedules.

 

Our Q1 2020 Adjusted Gross Profit was $11.7 million or 12.3% of revenue excluding non-cash $1.5 million in Q1 of amortization of intangibles recorded in connection with our acquisition of MC Assembly in 2018 and unrealized foreign exchange loss on unsettled forward exchange contracts. In comparison, our Q4 2019 Adjusted Gross Profit was $12.2 million or 13.5% of revenue, while Adjusted Gross Profit for the same period a year ago was $10.5 million or 10.2% of revenue.

 

Selling, General and Administrative expenses for first quarter of 2020 was $7.2 million, essentially flat compared to $7.1 million reported in the fourth quarter of 2019 and $6.8 million in the same quarter a year ago. As a percent of revenue, SG&A expenses decreased to 7.6% in the first quarter of 2020 from 7.9% in the prior quarter. In comparison, SG&A was 6.6% in Q1 2019.

 

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We reported Net Income of $775 thousand in the first quarter of 2020, compared to $1.0 million in the prior quarter and $1.2 million in the same quarter a year ago. Adjusted Net Income in the first quarter of 2020 was $2.2 million. In comparison, we reported Adjusted Net Income of $2.9 in the prior quarter and $707 thousand in the same period a year ago.

 

Adjusted EBITDA in the first quarter of 2020 was $6.2 million, compared to $7.0 million in the prior quarter and $5.5 million in the same quarter a year ago.

 

Now I'd like to comment on the balance sheet and a few other key financial metrics that we reported for the first quarter. Our cash-to-cash cycle over the quarter averaged -72 days, compared with 80 days in Q4 2019, with DSO at 60 days and DPO at 68 days for the first quarter of 2020. Inventory turns were 4.5 turns.

 

Our de-leveraging focus continues. Net Debt at the end of the first quarter was $83.6 million, compared to $82.1 million in the prior quarter and down from $95.9 million from the same quarter a year ago. Net debt as of March 29, 2020 includes a $3.6 million increase for an extension of the facility lease at our Fremont California site. Net Debt, excluding our finance and operating lease obligations, at the end of the first quarter was $68.3 million, compared to $69.7 million at the end of the prior quarter and $81.0 million at the end of the same quarter a year ago.

 

At the end of the quarter, we had $31.2 million available under our asset-based lending credit facility. To ensure we manage our cash flow effectively, in the second quarter we instituted a hiring “pause” for new positions, reduced our Capital Expenditures to core essential needs, a 50% reduction from our internal plans, among other cost containment measures across the board.

 

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We remain focused on reducing our debt leverage ratio. Since the MC Assembly acquisition, we have reduced our debt-to-adjusted EBITDA ratio, excluding lease obligations, from 4.67 to 2.68 with proceeds from our Rights Offering and our Registered Direct Offering, completed in June 2019, as well as from improvements in operating performance. Based on our current projections, we are targeting to achieve a debt-to-adjusted EBITDA ratio of less than 2.20, excluding leases, by the end of 2020

 

We expect revenue in the second quarter of 2020 to range between $96 to $99 million and adjusted EBITDA to range between $5.7 million and $6.4 million, which includes [misspoke should be excludes] $1.2 million in COVID-19 direct related expenses, based on our current demand and supply chain visibility, and assuming our facilities continue to operate at current planned levels as outlined by Rich.

 

While we believe we have thus far been successful in mitigating the impact of the COVID-19 pandemic and are very encouraged by our success in winning new business, we also recognize the potential for additional negative impacts of the COVID-19 pandemic on our business, such as changes in customer demand, supply chain or product build-shipment interruptions, new or changing government regulations, impacts on our employees or our manufacturing facilities and impacts on the global economy. Thus, we believe, as Eddie mentioned, that it is prudent to withdraw the guidance we initially provided on September 19, 2019 and reaffirmed on March 12, 2020 for the full year 2020 until such time that visibility returns to pre-COVID-19 levels.

 

With that said, here’s Eddie I’d like to return the call back to Eddie for some additional comments on our business. Thank you.

 

Eddie Smith

 

Thank you, Steve.

 

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2019 was a challenging year where SMTC made great progress. I suspect this year will be similar with challenges to overcome and progress to be made. I believe we were on track for a year of even stronger and more consistent financial performance before the emergence of the COVID-19 pandemic. At this point in time, while customer demand in our first half looks strong, there remains a fair degree of industry uncertainty regarding the balance of the year. Fortunately, many of our customers are operating in industries deemed essential, including defense, medical devices, and test and measurement systems. As a result, all of our facilities currently remain open and we continue to operate each of our facilities responsibly and in accordance with all applicable health and safety regulations. Where necessary, we are using temporary staff in place of those employees with medical conditions that put them at risk for COVID-19. We have also successfully migrated most of our customers from the China manufacturing operations we closed in the fourth quarter and have the final pieces of equipment on boats back to North America to be redeployed upon their arrival to our other facilities.

 

During the first quarter, the EMS industry experienced increasing lead times from suppliers in China, India and Italy due to COVID-19 pandemic-related production interruptions and shelter-in-place regulations. Drawing on key supplier relationships that we have developed over the years and out-of-the box thinking, our supply chain team has done a great job proactively working around many obstacles, expediting materials, setting up new sources of supplies, and anticipating potential component shortages.

 

Amid the challenges presented by COVID-19 pandemic, we launched 12 new programs through our Boston and Fremont New Product Introduction facilities. Our engineer and production staff have been hard at work making sure that these new customer programs have solid program management in place, have obtained the proper production certifications, and that their start-up processes are working smoothly.

 

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Our sales team has been successful in continuing to gain market share. We continue to grow deeper and wider with our customers. We have already secured a dozen or so new customer programs this year with the potential of generating revenue in excess of $57 million over time.

 

We are seeing increased success with our Avionics, Aerospace and Defense business. We expect our Test and Measurement 5G customers, along with our Datacenter and Power and Energy customers, to support our second half 2020 growth.

 

And finally, as I mentioned on our last call, to further reduce costs and improve production efficiencies, we have several ongoing global initiatives involving Lean Sigma programs.

 

Let me conclude by re-iterating what I said in my introductory remarks that we are carefully monitoring the impacts of the COVID-19 pandemic on our business and, as Rich has discussed, the team has been proactive in making sure our employees are healthy and safe and that our customers’ requirements are met. This remains our top priority.

 

And, finally, we remain committed to further deleveraging our balance sheet, achieving industry-leading performance metrics, including revenue, gross margin, EBITDA margin and net margin percentage, 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 and I will take questions from those on the call today.

 

Q&A

 

Eddie Smith

 

Thank you, operator.

 

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In closing, I want to once again thank our employees, leadership team, business partners, distributors and our stockholders for their continued 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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