Filed pursuant to Rule 424(b)(3) and Rule 424(c)
Registration No. 333-33208
PROSPECTUS SUPPLEMENT NO. 1
4,375,000 Shares
SMTC CORPORATION
Common Stock
This prospectus supplement amends the prospectus dated April 4, 2001
related to common stock that may be issued in exchange for exchangeable shares
of SMTC Manufacturing Corporation of Canada to include information related to
the financial condition and the results of operations for SMTC Corporation as of
and for the quarter ended April 1, 2001.
This prospectus supplement should be read in conjunction with the
prospectus dated April 4, 2001, which is to be delivered with this prospectus
supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
May 16, 2001
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001
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 0-31051
SMTC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0197680
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
635 HOOD ROAD
MARKHAM, ONTARIO, CANADA L3R 4N6
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 479-1810
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether SMTC Corporation: (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 [X] No [_].
As of April 1, 2001, SMTC Corporation had 22,318,820 shares of common stock, par
value $0.01 per share, and one share of special voting stock, par value $0.01
per share, outstanding. As of April 1, 2001, SMTC Corporation's subsidiary,
SMTC Manufacturing Corporation of Canada, had 6,370,959 exchangeable shares
outstanding, each of which is exchangeable into one share of common stock of
SMTC Corporation.
SMTC Corporation
Form 10-Q
Table Of Contents
Page No.
--------
PART I Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets as of April 1, 2001
and December 31, 2000 3
Consolidated Statements of Earnings (Loss) for the three months ended
April 1, 2001 and April 2, 2000 4
Consolidated Statements of Changes in Shareholders' Equity for the
three months ended April 1, 2001 5
Consolidated Statements of Cash Flows for the three months ended
April 1, 2001 and April 2, 2000 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
PART II Other Information 32
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
2
SMTC CORPORATION
Consolidated Balance Sheets
(Expressed in thousands of U.S. dollars)
(Unaudited)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
=========================================================================================================
April 1, December 31,
2001 2000
Assets
Current assets:
Cash and short-term investments $ 1,700 $ 2,698
Accounts receivable 174,671 194,749
Inventories (note 2) 158,091 191,821
Prepaid expenses 5,687 5,233
Deferred income taxes 1,123 1,044
---------------------------------------------------------------------------------------------------------
341,272 395,545
Capital assets 59,717 58,564
Goodwill 78,038 80,149
Other assets 9,618 9,859
Deferred income taxes 12,859 3,359
---------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity $501,504 $547,476
=========================================================================================================
Current liabilities:
Accounts payable $103,272 $141,574
Accrued liabilities 50,158 51,695
Income taxes payable 2,011 5,458
Current portion of long-term debt 8,750 7,500
Current portion of capital lease obligations 198 995
---------------------------------------------------------------------------------------------------------
164,389 207,222
Capital lease obligations 556 1,242
Long-term debt 125,537 108,305
Deferred income taxes 2,221 2,221
Shareholders' equity:
Capital stock 77,431 77,427
Warrants - 367
Loans receivable (13) (27)
Additional paid-in-capital 152,072 151,396
Deficit (20,689) (677)
---------------------------------------------------------------------------------------------------------
208,801 228,486
---------------------------------------------------------------------------------------------------------
$501,504 $547,476
=========================================================================================================
See accompanying notes to consolidated financial statements.
3
SMTC CORPORATION
Consolidated Statements of Earnings (Loss)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
(Unaudited)
=========================================================================================
Three months ended
----------------------------
April 1, April 2,
2001 2000
-----------------------------------------------------------------------------------------
Revenue $ 200,915 $ 124,333
Cost of sales (including restructuring charge
of $6,900; 2000 - $nil) (note 6) 199,401 113,127
-----------------------------------------------------------------------------------------
Gross profit 1,514 11,206
Selling, general and
administrative expenses 9,795 7,679
Amortization 2,352 1,272
Restructuring charge (note 6) 15,754 -
-----------------------------------------------------------------------------------------
Operating income (loss) (26,387) 2,255
Interest 2,892 3,789
-----------------------------------------------------------------------------------------
Loss before income taxes (29,279) (1,534)
Income tax recovery (9,267) (91)
-----------------------------------------------------------------------------------------
Net loss $ (20,012) $ (1,443)
=========================================================================================
Loss per share:
Basic $ (0.71) $ (1.16)
Diluted $ (0.71) $ (1.16)
=========================================================================================
Weighted average number of common
shares used in the calculations of
loss per share:
Basic 28,362,053 2,414,642
Diluted 28,362,053 2,414,642
=========================================================================================
See accompanying notes to consolidated financial statements.
4
SMTC CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Expressed in thousands of U.S. dollars)
Three months ended April 1, 2001
(Unaudited)
==============================================================================================================================
Additional
Capital paid-in Loans Shareholders'
stock Warrants capital receivable Deficit equity
------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $77,427 $ 367 $151,396 $ (27) $ (677) $228,486
Warrants exercised 4 (367) 363 - - -
Options exercised - - 313 - - 313
Repayment of loans receivable - - - 14 - 14
Loss for the period - - - - (20,012) (20,012)
------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 2001 $77,431 $ - $152,072 $ (13) $(20,689) $208,801
==============================================================================================================================
See accompanying notes to consolidated financial statements.
5
SMTC CORPORATION
Consolidated Statements of Cash Flows
(Expressed in thousands of U.S. dollars)
(Unaudited)
---------------------------------------------------------------------------------------------
Three months ended
------------------------
April 1, April 2,
2001 2000
---------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Net loss $ (20,012) $ (1,443)
Items not involving cash:
Amortization 2,352 1,272
Depreciation 2,896 2,475
Deferred income tax provision (benefit) (9,579) 225
Loss on disposition of capital assets - (44)
Impairment of assets 5,023 -
Change in non-cash operating working capital:
Accounts receivable 20,078 (9,054)
Inventories 33,730 (24,714)
Prepaid expenses (1,196) (1,694)
Accounts payable, accrued liabilities and
income taxes payable (44,565) 7,394
------------------------------------------------------------------------------------------
(11,273) (25,583)
Financing:
Increase in long-term debt 18,482 31,475
Principal payments on capital leases (204) (418)
Proceeds on issuance of common stock 313 -
Repayment of loans receivable 14 -
------------------------------------------------------------------------------------------
18,605 31,057
Investments:
Purchase of capital assets (8,330) (2,490)
Proceeds from sale of capital assets - 44
------------------------------------------------------------------------------------------
(8,330) (2,446)
---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (998) 3,028
Cash and cash equivalents, beginning period 2,698 2,083
---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,700 $ 5,111
=============================================================================================
See accompanying notes to consolidated financial statements.
6
SMTC CORPORATION
(FORMERLY HTM HOLDINGS, INC.)
Consolidated Statements of Cash Flows (continued)
(Expressed in thousands of U.S. dollars)
(Unaudited)
--------------------------------------------------------------------------------
Three months ended
---------------------
April 1, April 2,
2001 2000
Supplemental disclosures:
Cash paid during the period:
Income taxes $ 3,601 $ 837
Interest 2,826 3,919
Non-cash investing and financing activities:
Acquisition of equipment under
capital lease - 293
--------------------------------------------------------------------------------
Cash and cash equivalents is defined as cash and short-term investments.
See accompanying notes to consolidated financial statements.
7
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
(Unaudited)
--------------------------------------------------------------------------------
1. Basis of presentation:
The Company's accounting principles are in accordance with accounting
principles generally accepted in the United States.
The accompanying unaudited consolidated balance sheets as at April 1, 2001
and December 31, 2000, and the related unaudited consolidated statements of
earnings (loss) for the three month period ended April 1, 2001 and April 2,
2000, the unaudited consolidated statement of changes in shareholders'
equity for the three month period ended April 1, 2001; and the unaudited
consolidated statements of cash flows for the three month period ended
April 1, 2001 and April 2, 2000 have been prepared on substantially the
same basis as the annual consolidated financial statements. Management
believes the financial statements reflect all adjustments, consisting only
of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of the Company's financial position,
operating results and cash flows for the periods presented. The results of
operations for the three month period ended April 1, 2001 are not
necessarily indicative of results to be expected for the entire year. These
unaudited interim consolidated financial statements should be read in
conjunction with the annual consolidated financial statements and notes
thereto for the year ended December 31, 2000.
2. Inventories:
---------------------------------------------------------------------
April 1, December 31,
2001 2000
---------------------------------------------------------------------
Raw materials $ 94,905 $ 107,767
Work in process 36,211 56,521
Finished goods 25,544 25,493
Other 1,431 2,040
---------------------------------------------------------------------
$ 158,091 $ 191,821
=====================================================================
8
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
(Unaudited)
--------------------------------------------------------------------------------
3. Loss per share:
The following table sets forth the calculation of basic and diluted loss
per common share
-------------------------------------------------------------------------
Three months ended
------------------------
April 1, April 2,
2001 2000
-------------------------------------------------------------------------
Numerator:
Net loss $ (20,012) $ (1,443)
Less Class L preferred
entitlement - (1,366)
-------------------------------------------------------------------------
Loss available to
common shareholders $ (20,012) $ (2,809)
-------------------------------------------------------------------------
Denominator:
Weighted-average shares - basic 28,362,053 2,414,642
Effect of dilutive securities:
Employee stock options - -
Warrants - -
-------------------------------------------------------------------------
Weighted-average shares - diluted 28,362,053 2,414,642
-------------------------------------------------------------------------
Loss per share:
Basic $ (0.71) $ (1.16)
Diluted $ (0.71) $ (1.16)
-------------------------------------------------------------------------
For the three month period ended April 1, 2001 and April 2, 2000 options
and warrants to purchase common stock were outstanding during those periods
but were not included in the computation of diluted loss per share because
their effect would be anti-dilutive on the loss per share for the period.
4. Income taxes:
The Company's effective tax rate differs from the statutory rate primarily
due to non-deductible goodwill amortization and operating losses in certain
jurisdictions.
9
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
(Unaudited)
--------------------------------------------------------------------------------
5. Segmented information:
The Company derives its revenue from one dominant industry segment, the
electronics manufacturing services industry. The Company is operated and
managed geographically and has ten facilities in the United States, Canada,
Europe and Mexico. The Company monitors the performance of its geographic
operating segments based on EBITA (earnings before interest, taxes and
amortization) before restructuring charges. Intersegment adjustments
reflect intersegment sales that are generally recorded at prices that
approximate arm's-length transactions. Information about the operating
segments is as follows:
------------------------------------------------------------------------------------------------------
Three months ended April 1, 2001 Three months ended April 2, 2000
------------------------------------- ----------------------------------------
Net Net
Total Intersegment external Total Intersegment external
revenue revenue revenue revenue revenue revenue
------------------------------------------------------------------------------------------------------
United States $158,475 $ (7,416) $151,059 $106,796 $ (674) $106,122
Canada 26,941 (887) 26,054 13,038 (985) 12,053
Europe 7,797 - 7,797 4,727 (1,476) 3,251
Mexico 24,469 (8,464) 16,005 2,921 (14) 2,907
------------------------------------------------------------------------------------------------------
$217,682 $(16,767) $200,915 $127,482 $(3,149) $124,333
======================================================================================================
EBITA (before restructuring charges):
United States $ 1,432 $ 3,576
Canada 580 728
Europe (201) (494)
Mexico (3,192) (284)
--------------------------------------------------------------------------------------------------
(1,381) 3,527
Interest 2,892 3,789
Amortization 2,352 1,272
------------------------------------------------------------------------------------------------------
Earnings before income taxes
and restructuring charges $ (6,625) $ (1,534)
======================================================================================================
Capital expenditures:
United States $ 4,629 $ 1,264
Canada 756 665
Europe 23 178
Mexico 2,922 676
------------------------------------------------------------------------------------------------------
$ 8,330 $ 2,783
======================================================================================================
10
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
(Unaudited)
--------------------------------------------------------------------------------
5. Segmented Information (Continued):
The following enterprise-wide information is provided. Geographic revenue
information reflects the destination of the product shipped. Long-lived
assets information is based on the principal location of the asset.
===========================================================================
Three months ended
------------------------
April 1, April 2,
2001 2000
---------------------------------------------------------------------------
Geographic revenue:
United States $172,115 $110,881
Canada 14,046 3,304
Europe 12,060 7,795
Asia 2,668 2,353
Mexico 26 -
---------------------------------------------------------------------------
$200,915 $124,333
===========================================================================
===========================================================================
April 1, December 31,
2001 2000
---------------------------------------------------------------------------
Long-lived assets:
United States $ 76,510 $ 79,136
Canada 24,159 25,540
Europe 19,757 20,410
Mexico 17,329 14,627
---------------------------------------------------------------------------
$137,755 $138,713
===========================================================================
11
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
--------------------------------------------------------------------------------
6. Restructuring charge:
During the quarter, in response to the slowing technology end market, the
Company announced that, along with its work force reduction initiatives, it
would close its assembly facility in Denver, Colorado. As a result, the
Company recorded a restructuring charge of $22.7 million pre-tax during the
quarter. The following table details the components of the restructuring
charge, and the related amount included in accrued liabilities:
-----------------------------------------------------------------------------------------------
Restructuring Amounts
Charge included in
accrued liabilities
-----------------------------------------------------------------------------------------------
Inventory write-down $ 6,900 $ -
Lease and other contractual obligations 5,178 5,127
Severance 2,526 1,678
Asset impairment 5,023 -
Other facility exit costs 3,027 2,827
-----------------------------------------------------------------------------------------------
$ 22,654 $ 9,632
-----------------------------------------------------------------------------------------------
The closure of the assembly facility in Denver involves the severance of
employees, the disposition of assets and the decommissioning, exiting and
subletting of the facility. The severance costs related to Denver include
all 429 employees. The severance costs also include 847 plant and
operational employees at our Mexico facility and 45 plant and operational
employees at our Cork, Ireland facility. Of the total severance costs, $848
was paid out during the quarter.
The asset impairment reflects the write-down of certain long lived assets
primarily at the Denver location that became impaired as a result of the
rationalization of facilities. The asset impairment was determined based on
undiscounted projected future net cash flows relating to the assets
resulting in a write-down to estimated salvage values.
Other facility exit costs include personnel costs and other fees directly
related to exit activities at the Denver location.
The major components of the restructuring are estimated to be complete by
early fiscal year 2002.
7. Implementation of Recently Issued Accounting Standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as
other hedging activities. SFAS No. 133 requires all derivatives to be
recognized either as assets or liabilities and measured at fair value. SFAS
No. 137 delays the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company implemented SFAS No. 133 for the first
quarter of 2001. As
12
SMTC CORPORATION
Consolidated Notes to Financial Statements (continued)
(Expressed in thousands of U.S. dollars, except share quantities and per share
amounts)
Three months ended April 1, 2001 and April 2, 2000
(Unaudited)
--------------------------------------------------------------------------------
a result of implementing SFAS No. 133, the Company has recorded the
interest rate swaps in the balance sheet at fair value and recorded a $0.5
million charge to earnings representing the change in fair value of the
swaps for the period. The fair value of the interest rate swaps at the date
of implementation of SFAS No. 133 was not significant.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated financial statements of SMTC are prepared in accordance with
United States GAAP, which conforms in all material respects to Canadian GAAP.
Consolidated Statement of Operations Data (excluding $22.7 million pre-tax
restructuring charges):
(in millions, except per share amounts)
Three Months Ended
---------------------------------
April 1, 2001 April 2, 2000
Revenue $ 200.9 $ 124.3
Cost of sales 192.5 113.2
---------------------------------
Gross profit 8.4 11.1
Selling, general and administrative expenses 9.8 7.7
Amortization 2.3 1.2
---------------------------------
Operating income (loss) (3.7) 2.2
Interest 2.9 3.7
---------------------------------
Loss before income taxes (6.6) (1.5)
Income tax recovery (2.0) (0.1)
---------------------------------
Net loss $ (4.6) $ (1.4)
=================================
Net loss per common share:
Basic $ (0.16) $ (1.16)
Diluted $ (0.16) $ (1.16)
=================================
Weighted average number of shares outstanding:
Basic 28,362 2,415
Diluted 28,362 2,415
=================================
Consolidated Statement of Operations Data (including $22.7 million pre-tax restructuring charges):
(in millions, except per share amounts)
Three Months Ended
---------------------------------
April 1, 2001 April 2, 2000
---------------------------------
Revenue $ 200.9 $ 124.3
Cost of sales 199.4 113.2
---------------------------------
Gross profit 1.5 11.1
Selling, general and administrative expenses 9.8 7.7
Amortization 2.3 1.2
Restructuring charges 15.8 -
---------------------------------
Operating income (loss) (26.4) 2.2
Interest 2.9 3.7
---------------------------------
Loss before income taxes (29.3) (1.5)
Income tax recovery (9.3) (0.1)
---------------------------------
Net loss $ (20.0) $ (1.4)
=================================
Net loss per common share:
Basic $ (0.71) $ (1.16)
Diluted $ (0.71) $ (1.16)
=================================
Weighted average number of shares outstanding:
Basic 28,362 2,415
Diluted 28,362 2,415
=================================
14
Other Financial Data - Consolidated Adjusted Net Earnings (Loss):
(in millions, except per share amounts)
Three Months Ended
---------------------------------
April 1, 2001 April 2, 2000
---------------------------------
Net loss $ (20.0) $ (1.4)
Adjustments:
Amortization of goodwill 2.1 1.0
Restructuring charges 22.7 -
Income tax effect (7.7) (0.2)
----------------------------------
Adjusted net loss $ (2.9) $ (0.6)
----------------------------------
Adjusted net loss per common share:
Basic $ (0.10) $ (0.81)
Diluted $ (0.10) $ (0.81)
---------------------------------
Weighted average number of shares outstanding:
Basic 28,362 2,415
Diluted 28,362 2,415
=================================
As a result of the combination of Surface Mount and HTM and a number of
subsequent acquisitions, we use consolidated adjusted net earnings (loss) as a
measure of our operating performance. Consolidated adjusted net earnings (loss)
is consolidated net earnings (loss) adjusted for acquisition related charges
such as the amortization of goodwill, restructuring charges and the related
income tax effect of these adjustments. Consolidated adjusted net earnings
(loss) is not a measure of performance under United States GAAP or Canadian
GAAP. Consolidated adjusted net earnings (loss) should not be considered in
isolation or as a substitute for net earnings prepared in accordance with United
States GAAP or Canadian GAAP or as an alternative measure of operating
performance or profitability.
Consolidated Balance Sheet Data:
(in millions)
As at As at
April 1, December 31,
2001 2000
----------------- -----------------
Cash and short-term investments $ 1.7 $ 2.7
Working capital 176.9 188.3
Total assets 501.5 547.5
Total debt, including current maturities 135.0 118.0
Shareholders' equity 208.8 228.5
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading provider of advanced electronics manufacturing services, or
EMS, to electronics industry original equipment manufacturers, or OEM's,
worldwide. Our full range of value-added services include product design,
procurement, prototyping, advanced cable and harness interconnect,
high-precision enclosures, printed circuit board assembly, test, final system
build, comprehensive supply chain management, packaging, global distribution and
after sales support.
SMTC Corporation, or SMTC, is the result of the July 1999 combination of the
former SMTC Corporation, or Surface Mount, and HTM Holdings, Inc., or HTM. Upon
completion of the combination and concurrent recapitalization, the former
stockholders of HTM held approximately 58.0% of the outstanding shares of SMTC.
We have accounted for the combination under the purchase method of accounting as
a reverse acquisition of Surface Mount by HTM. Because HTM acquired Surface
Mount for accounting purposes, HTM's assets and liabilities are included in our
consolidated financial statements at their historical cost. The results of
operations of Surface Mount are included in our consolidated financial
statements from the date of the combination. Surface Mount was established in
Toronto, Ontario in 1985. HTM was established in Denver, Colorado in 1990. SMTC
was established in Delaware in 1998.
Our revenue has grown from approximately $59.0 million in 1997 to pro forma
revenue of $842.6 million in 2000 through both internal growth and strategic
acquisitions. The July 1999 combination of Surface Mount and HTM provided us
with increased customer relationships. Collectively, since 1995 we have
completed the following seven acquisitions:
. Radian Electronics' operations, which enabled our expansion into
Austin, Texas, and established our relationship with Dell, in
1996;
. Ogden Atlantic Design's operations in Charlotte, North Carolina, which
provided us with a facility in a major technology center in the
Southeastern United States, in 1997;
. Ogden International Europe's operations in Cork, Ireland, which
expanded our global presence into Europe, in 1998;
. Zenith Electronics' facility in Chihuahua, Mexico, which expanded our
cost-effective manufacturing capabilities;
. W.F. Wood, based outside Boston, Massachusetts, which provided us with
a manufacturing presence in the Northeastern United States, expanded
our value-added services to include high precision enclosures
capabilities, and added EMC and Sycamore Networks as customers, in
September 1999;
16
. Pensar Corporation, located in Appleton, Wisconsin, which provided us
with a wide range of electronics and design manufacturing services, on
July 27, 2000 and concurrent with the closing of the initial offering;
and
. Qualtron Teoranta, with sites in both Donegal, Ireland and Haverhill,
Massachusetts, which allowed us to expand our ability to provide
customers with a broad range of services focusing on fiber optic
connector assemblies and volume cable assemblies, on November 22, 2000.
In addition, we completed the following financing activities in 2000:
Initial Public Offering
. On July 27, 2000, we completed an initial public offering of our common
stock in the United States and the exchangeable shares of our
subsidiary, SMTC Manufacturing Corporation of Canada, in Canada,
raising net proceeds (not including proceeds from the sale of shares
upon the exercise of the underwriters' over-allotment option) of $157.1
million;
. Concurrent with the effectiveness of the initial public offering, we
completed a share capital reorganization;
. In connection with the initial public offering, we entered into an
amended and restated credit agreement with our lenders, which provided
for an initial term loan of $50.0 million and revolving credit loans,
swing line loans and letters of credit up to $100.0 million;
. On July 27, 2000, we paid a fee of $1.8 million to terminate a
management agreement under which we paid quarterly fees of
approximately $0.2 million; and
. On August 18, 2000, we sold additional shares of common stock upon
exercise of the underwriters' over-allotment option, raising net
proceeds of $24.6 million.
Pre Initial Public Offering
. In May 2000, we issued senior subordinated notes to certain
shareholders for proceeds of $5.0 million, which were repaid with the
proceeds of our initial public offering;
. On May 18, 2000, we issued 41,667 warrants for $2.5 million cash
consideration in connection with the May 2000 issue of $5.0 million in
senior subordinated notes; and
. On July 3, 2000, we issued demand notes in the aggregate principal
amount of $9.9 million, which were repaid with the proceeds of our
initial public offering.
17
Due to the continued economic downturn in the technology sectors, we expect that
we will be unable in the near term to maintain the historic growth we have
achieved to date. We expect lower sales volumes driven by push outs and
cancellations of orders and the general slow down of many of our technology OEM
customers.
During the first quarter of 2001, in response to the slowing technology end
market, we announced that we would close our Denver, Colorado facility, leaving
in place a sales and marketing presence to service the Rocky Mountain region.
Production at the Denver facility, one of the last remaining sites not recently
refurbished, will be migrated to SMTC facilities closer to customer locations,
and to our recently retrofitted and expanded lower cost, Chihuahua facility. In
connection with the closure of the Denver facility, and other cost realignment
initiatives, we recorded a restructuring charge of $22.7 million pre-tax during
the quarter, consisting primarily of an inventory write-down, an asset
impairment charge, lease and other contractual charges and employee severance
and other facility exit costs. The major components of the restructuring are
expected to be complete by early fiscal year 2002.
We continue to seek acquisition opportunities that enable us to expand our
geographic reach, add manufacturing capacity and diversify into new markets. We
are considering potential acquisitions in North America and Europe, and we are
targeting Asia for future expansion. We intend to continue to capitalize on
attractive acquisition opportunities in the EMS marketplace, and our goal is
generally to have each acquisition be accretive to earnings after a transition
period of approximately one year. We also plan to continue our strategy of
augmenting our existing EMS capabilities with the addition of related
value-added services. By expanding the services we offer, we believe that we
will be able to expand our business with our existing customers and develop new
opportunities with potential customers.
Consistent with our past practices and normal course of business, we engage from
time to time in discussions with respect to potential acquisitions. While we
have identified several opportunities that would expand our global presence, add
to our value-added services and establish strategic relationships with new
customers, we are not currently party to any definitive acquisition agreements.
We used approximately $143.7 million of the proceeds from our initial public
offering to reduce indebtedness under our credit facility. On July 27, 2000, we
entered into an amended and restated credit facility with our lenders, which
provided for an initial term loan of $50.0 million and revolving credit loans,
swing line loans and letters of credit up to $100.0 million. As at April 1,
2001, we had borrowed $134.3 million under this facility. We intend to continue
to borrow under our credit facility to finance working capital growth and any
cash portion of future acquisitions.
We currently provide turnkey manufacturing services to the majority of our
customers. In 2000, 98.8% of our pro forma revenue was from turnkey
manufacturing services compared to 97.1 % in 1999. From July 1999 to March 2000,
under the terms of a production agreement with Zenith, we manufactured products
for Zenith on a consignment basis. In a consignment arrangement, we provide
manufacturing services only, while the customer purchases the materials and
components necessary for production. In April 2000, we began to purchase
materials for Zenith, and as a result, our relationship with Zenith evolved into
a turnkey manufacturing relationship. Turnkey manufacturing services typically
result in higher revenue and higher gross profits but lower gross profit margins
when compared to consignment services.
With our turnkey manufacturing customers, we generally operate under contracts
that provide a general framework for our business relationship. Our actual
production volumes are based on purchase orders
18
under which our customers do not commit to firm production schedules more than
30 to 90 days in advance. In order to minimize customers' inventory risk, we
generally order materials and components only to the extent necessary to satisfy
existing customer forecasts or purchase orders. Fluctuations in material costs
are typically passed through to customers. We may agree, upon request from our
customers, to temporarily delay shipments, which causes a corresponding delay in
our revenue recognition. Ultimately, however, our customers are generally
responsible for all goods manufactured on their behalf.
We service our customers through a total of ten facilities located in the United
States, Canada, Europe and Mexico. In the first quarter of 2001, approximately
75.0% of our revenue was generated from operations in the United States,
approximately 13.0% from Canada, approximately 4.0% from Europe and
approximately 8.0% from Mexico. Our facility in Chihuahua was acquired in July
1999 from Zenith Electronics Corporation. We expect to continue to increase
revenue from this facility, with the transfer of certain production from other
facilities and with the addition of new business and increased volume from our
current business.
Our fiscal year end is December 31. The consolidated financial statements of
SMTC are prepared in accordance with United States GAAP, which conforms in all
material respects to Canadian GAAP.
19
SMTC Corporation
Results of Operations
The following table sets forth certain operating data expressed as a percentage
of revenue for the periods indicated:
Excluding $22.7 million pre-tax restructuring charges
Three months Ended
------------------------------
April 1, 2001 April 2, 2000
------------------------------
Revenue 100.0% 100.0%
Cost of sales 95.8 91.1
------------------------------
Gross profit 4.2 8.9
Selling, general and administrative
expenses 4.9 6.2
Amortization 1.1 0.9
Operating income (loss) (1.8) 1.8
Interest 1.4 3.0
------------------------------
Loss before income taxes (3.2) (1.2)
Income tax recovery (0.9) (0.1)
Net loss (2.3) (1.1)
------------------------------
Including $22.7 million pre-tax restructuring charges
Three months Ended
-------------------------------------
April 1, 2001 April 2, 2000
-------------------------------------
Revenue 100.0% 100.0%
Cost of sales 99.3 91.1
-------------------------------------
Gross profit 0.7 8.9
Selling, general and administrative
expenses 4.9 6.2
Amortization 1.1 0.9
Restructuring charges 7.9 -
-------------------------------------
Operating income (loss) (13.2) 1.8
Interest 1.4 3.0
-------------------------------------
Loss before income taxes (14.6) (1.2)
Income tax recovery (4.6) (0.1)
-------------------------------------
Net loss (10.0) (1.1)
=====================================
Quarter ended April 1, 2001 compared to the quarter ended April 2, 2000
Revenue
Revenue increased $76.6 million, or 61.6%, from $124.3 million in the first
quarter of 2000 to $200.9 million in the first quarter of 2001. The increase in
revenue is due to the acquisitions of Pensar and Qualtron, the transition of our
Chihuahua facility from consignment to turnkey and organic growth. Pensar and
Qualtron contributed $25.8 million and $8.2 million, respectively, to the
increase in revenue. Revenue at our Chihuahua facility increased $21.6 million
from $2.9 million in the first quarter of 2000 to $24.5 million in the first
quarter of 2001. Organic revenue from both existing and new customers grew $21.0
million or 17.3% during the first quarter of 2001. We recorded approximately
$11.5 million of sales of raw
20
materials inventory to customers, which carry no margin, during the first
quarter of 2001, compared to $4.2 million in the first quarter of 2000.
Revenue from IBM of $30.5 million, Dell of $22.4 million and Alcatel of $20.1
million for the first quarter of 2001 was 15.2%, 11.1%, and 10.0% respectively,
of total revenue. In the first quarter of 2000, revenue from Dell of $32.6
million represented 26.2% of total revenue. The 2000 revenue from Dell consisted
of approximately $12.4 million of revenue derived from personal computer based
products and $20.2 million of revenue derived from networking based products,
whereas the 2001 revenue from Dell consisted entirely of revenue derived from
networking based products. IBM did not exceed 10% of revenue and Alcatel was not
a customer of ours during the first quarter of 2000. No other customers
represented more than 10% of revenue.
In the first quarter of 2001, 75.2% of our revenue was generated from operations
in the United States, 12.9% from Canada, 8.0% from Mexico and 3.9% from Europe.
In the first quarter of 2000, 85.4% of our revenue was generated from operations
in the United States, 9.7% from Canada, 2.6% from Europe and 2.3% from Mexico.
Gross Profit
Gross profit, excluding a $6.9 million restructuring charge related to a
write-down of inventory related to the closure of our Denver facility, decreased
$2.7 million from $11.1 million in the first quarter of 2000 to $8.4 million in
the first quarter of 2001. Our gross profit margin, excluding the restructuring
charge, decreased from 8.9% in the first quarter of 2000 to 4.2% in the first
quarter of 2001.
The decline in the gross profit was due to an under absorption of the fixed
production overheads. The gross margin decreased due to lower utilization of
fixed costs and a change in revenue mix to include a higher proportion of raw
materials sales and turnkey sales rather than consignment sales. The lower
utilization of fixed costs accounted for 2.5% of the decline in gross margin and
the change in revenue mix accounted for 2.2% of the decline in gross margin.
Gross profit including $6.9 million of the total restructuring charge was $1.5
million at a gross margin of 0.7%.
Selling, General & Administrative Expenses
Selling, general and administrative expenses increased $2.1 million from $7.7
million in the first quarter of 2000 to $9.8 million in the first quarter of
2001. As a percentage of revenue, selling, general and administrative expenses
decreased from 6.2% in 2000 to 4.9% in 2001. The increase from 2000 is due to
the acquisitions of Pensar and Qualtron.
Amortization
Amortization of intangible assets of $2.3 million in the first quarter of 2001
included the amortization of $0.6 million of goodwill related to the combination
of Surface Mount and HTM, $0.4 million of goodwill
21
related to the acquisition of W.F. Wood, $0.7 million related to the acquisition
of Pensar and $0.4 million related to the acquisition of Qualtron. Amortization
of intangible assets in the first quarter of 2001 also included the amortization
of $0.1 million of deferred finance costs related to the establishment of our
senior credit facility in July 2000 and $0.1 million of deferred equipment lease
costs.
Amortization of $1.2 million in the first quarter of 2000 included the
amortization of $0.6 million of goodwill related to the combination of Surface
Mount and HTM, $0.4 million of goodwill related to the acquisition of W.F. Wood,
$0.1 million of deferred finance costs related to the establishment of our
senior credit facility in July 1999 and $0.1 million of deferred equipment lease
costs.
Restructuring Charge
In response to the economic slowdown, we announced during the first quarter of
2001 that along with other cost realignment initiatives, we will close our
assembly facility located in Denver, Colorado. As such a restructuring charge of
$22.7 million pre-tax was recorded, consisting of an inventory write-down of
$6.9 million, lease and other contractual obligations of $5.2 million, severance
costs of $2.5 million, asset impairment charges of $5.0 million and other
facility exit charges of $3.1 million. Of the total restructuring charge, $19.1
million relates to the closure of our Denver facility. The closure of the
assembly facility in Denver involves the severance of employees, the disposition
of assets and the decommissioning, exiting and subletting of the facility. The
severance costs related to Denver include all 429 employees. The severance costs
also include 847 plant and operational employees at our Mexico facility and 45
plant and operational employees at our Cork, Ireland facility. Of the total
severance costs, $848 was paid out during the quarter. The asset impairment
reflects the write-down of certain long lived assets primarily at the Denver
location that became impaired as a result of the rationalization of facilities.
The asset impairment was determined based on undiscounted projected future net
cash flows relating to the assets resulting in a write-down to estimated salvage
values. Other facility exit costs include personnel costs and other fees
directly related to exit activities at the Denver location.
The non-cash component of the write-down is $11.9 million. We recorded an income
tax recovery of $7.3 million related to the restructuring charge at an effective
rate of 32.2%.
The major components of the restructuring are estimated to be complete by early
fiscal year 2002.
Interest Expense
Interest expense decreased $0.8 million from $3.7 million in the first quarter
of 2000 to $2.9 million in the first quarter of 2001. The weighted average
interest rates with respect to the debt for the first quarter of 2000 and the
first quarter of 2001 were 10% and 8.7%, respectively. Interest expense included
a charge of $0.5 million related to the change in the fair value of interest
rate swaps, offset by $0.6 million of interest capitalized on construction in
progress.
22
Income Tax Expense
In the first quarter of 2001 an income tax recovery of $9.3 million was recorded
on a pre-tax loss of $29.3 million resulting in an effective tax recovery rate
of 31.7%, as we were not able to claim a recovery on losses of $1.2 million
incurred by our Irish subsidiary or deduct $1.0 million of goodwill related to
the combination of Surface Mount and HTM and the acquisition of Qualtron.
In the first quarter of 2000, an income tax recovery of $0.1 million was
recorded on a pre-tax loss of $1.5 resulting in an effective income tax recovery
rate of 6.7% as we were not able to claim a recovery on losses of $0.5 million
incurred by our Irish subsidiary or deduct $0.6 million of goodwill expense
related to the combination of Surface Mount and HTM.
Liquidity and Capital Resources
Our principal sources of liquidity are cash provided from operations and from
borrowings under our senior credit facility and our access to the capital
markets. Our principal uses of cash have been to finance mergers and
acquisitions, to meet debt service requirements and to finance capital
expenditures and working capital requirements. We anticipate that these will
continue to be our principal uses of cash in the future.
Net cash used for operating activities for the three month period ended April 2,
2000 was $25.6 million compared to net cash used for operating activities of
$11.3 million for the three month period ended April 1, 2001. The continued
focus on improving our accounts receivable and inventory levels during the
quarter led to the reduced use of working capital.
Net cash provided by financing activities for the three month period ended April
2, 2000 was $31.1 million due to the net increase of borrowings of $31.5 million
which was offset by capital lease payments of $0.4 million. Net cash provided by
financing activities for the three month period ended April 1, 2001 was $18.6
million due to an increase in long-term debt of $18.5 million, the proceeds from
issuance of capital stock on the exercise of options of $0.3 million, which was
offset by payment of capital leases of $0.2 million. As at April 1, 2001, we had
borrowed $134.3 million under our credit facility. We intend to continue to
borrow under our credit facility to finance working capital growth and any cash
portion of future acquisitions.
Net cash used in investing activities for the three months ended April 2, 2000
was $2.5 million due to the net purchase of capital assets. Net cash used in
investing activities for the three months ended April 1, 2001 was $8.3 million
due to net purchase of capital assets. We expect our capital expenditures for
the balance of the year to be approximately $7.0 million to $8.0 million.
Our management believes that cash generated from operations, available cash and
amounts available under our senior credit facility will be adequate to meet our
debt service requirements, capital expenditures and working capital needs at our
current level of operations and organic growth, although no assurance can be
given in this regard. If we experience strong growth or pursue acquisitions, we
will likely require additional capital. There can be 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
23
operating performance and ability to service or refinance indebtedness will be
subject to future economic conditions and to financial, business and other
factors, certain of which are beyond our control.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. SFAS No. 133 requires all derivatives to be recognized either as
assets or liabilities and measured at fair value. SFAS No. 137 delays the
effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We
have implemented SFAS No. 133 for the first quarter of 2001. As a result of
implementing SFAS 133, we have recorded the interest rate swaps in our balance
sheet at fair value and recorded a charge to earnings representing the change
in fair value of the swaps for the period.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q are
forward-looking in nature. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally; these expectations may differ materially from SMTC's
actual future experience involving any one or more of such matters and subject
areas. SMTC cautions readers that all statements other than statements of
historical facts included in this report on Form 10-Q regarding SMTC's financial
position and business strategy may constitute forward-looking statements. All of
these forward-looking statements are based upon estimates and assumptions made
by SMTC's management, which although believed to be reasonable, are inherently
uncertain. Therefore, undue reliance should not be placed on such estimates and
statements. No assurance can be given that any of such estimates or statements
will be realized, and it is likely that actual results will differ materially
from those contemplated by such forward-looking statements. Factors that may
cause such differences include: (1) increased competition; (2) increased costs;
(3) the inability to consummate business acquisitions on attractive terms; (4)
the loss or retirement of key members of management; (5) increases in SMTC's
cost of borrowings or lack of availability of additional debt or equity capital
on terms considered reasonable by management; (6) credit agreement covenant
violations; (7) adverse state, federal or foreign legislation or regulation or
adverse determinations by regulators; (8) changes in general economic conditions
in the markets in which SMTC may compete and fluctuations in demand in the
electronics industry; (9) the inability to manage inventory levels efficiently
in light of changes in market conditions; and (10) the inability to sustain
historical margins as the industry develops. SMTC has attempted to identify
certain of the factors that it currently believes may cause actual future
experiences to differ from SMTC's current expectations regarding the relevant
matter or subject area. In addition to the items specifically discussed in the
foregoing, SMTC's business and results of operations are subject to the risks
and uncertainties described under the heading "Factors That May Affect Future
Results" below. The operations and results of SMTC's business may also be
subject to the effect of other risks and uncertainties. Such risks and
uncertainties include, but are not limited to, items described from time to time
in SMTC's reports filed with the Securities and Exchange Commission.
24
FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
A majority of our revenue comes from a small number of customers; if we lose any
of our largest customers, our revenue could decline significantly.
Our largest customer in the first quarter of 2001 was IBM, which represented
approximately 15.2% of our total revenue for such period. Our next five largest
customers collectively represented an additional 28.3% of our total revenue in
the first quarter of 2001. We expect to continue to depend upon a relatively
small number of customers for a significant percentage of our revenue. In
addition to having a limited number of customers, we manufacture a limited
number of products for each of our customers. If we lose any of our largest
customers or any product line manufactured for one of our largest customers, we
could experience a significant reduction in our revenue. Also, the insolvency of
one or more of our largest customers or the inability of one or more of our
largest customers to pay for its orders could decrease revenue. As many of our
costs and operating expenses are relatively fixed, a reduction in net revenue
can decrease our profit margins and adversely affect our business, financial
condition and results of operations.
Our industry is very competitive and we may not be successful if we fail to
compete effectively.
The electronics manufacturing services (EMS) industry is highly competitive. We
compete against numerous domestic and foreign EMS providers including Celestica
Inc., Flextronics International Ltd., Jabil Circuit, Inc., SCI Systems, Inc. and
Solectron Corporation. In addition, we may in the future encounter competition
from other large electronics manufacturers that are selling, or may begin to
sell, electronics manufacturing services. Many of our competitors have
international operations, and some may have substantially greater manufacturing,
financial research and development and marketing resources and lower cost
structures than we do. We also face competition from the manufacturing
operations of current and potential customers, which are continually evaluating
the merits of manufacturing products internally versus the advantages of using
external manufacturers.
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The reasons for
these fluctuations may similarly affect us in the future. Historically, our
calendar fourth quarter revenue has been highest and our calendar first quarter
revenue has been lowest. Prospective investors should not rely on results of
operations in any past period to indicate what our results will be for any
future period. Our operating results may fluctuate in the future as a result of
many factors, including:
. variations in the timing and volume of customer orders relative to our
manufacturing capacity;
. variations in the timing of shipments of products to customers;
. introduction and market acceptance of our customers' new products;
. changes in demand for our customers' existing products;
. the accuracy of our customers' forecasts of future production
requirements;
. effectiveness in managing our manufacturing processes and inventory
levels;
25
. changes in competitive and economic conditions generally or in our
customers' markets;
. changes in the cost or availability of components or skilled labor;
and
. the timing of, and the price we pay for, acquisitions and related
integration costs.
In addition, most of our customers typically do not commit to firm production
schedules more than 30 to 90 days in advance. Accordingly, we cannot forecast
the level of customer orders with certainty. This makes it difficult to schedule
production and maximize utilization of our manufacturing capacity. In the past,
we have been required to increase staffing, purchase materials and incur other
expenses to meet the anticipated demand of our customers. Sometimes anticipated
orders from certain customers have failed to materialize, and sometimes delivery
schedules have been deferred as a result of changes in a customer's business
needs. Any material delay, cancellation or reduction of orders from our largest
customers could cause our revenue to decline significantly. In addition, as many
of our costs and operating expenses are relatively fixed, a reduction in
customer demand can decrease our gross margins and adversely affect our
business, financial condition and results of operations. On other occasions,
customers have required rapid and unexpected increases in production, which have
placed burdens on our manufacturing capacity. Any of these factors or a
combination of these factors could have a material adverse effect on our
business, financial condition and results of operations.
We are dependent upon the electronics industry, which produces technologically
advanced products with short life cycles.
Substantially all of our customers are in the electronics industry, which is
characterized by intense competition, short product life-cycles and significant
fluctuations in product demand. In addition, the electronics industry is
generally subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, their products could become obsolete and the demand
for our services could significantly decline. Our success is largely dependent
on the success achieved by our customers in developing and marketing their
products. Furthermore, this industry is subject to economic cycles and has in
the past experienced downturns. A recession or a downturn in the electronics
industry would likely have a material adverse effect on our business, financial
condition and results of operations.
Shortage or price fluctuation in component parts specified by our customers
could delay product shipment and affect our profitability.
A substantial portion of our revenue is derived from "turnkey" manufacturing. In
turnkey manufacturing, we provide both the materials and the manufacturing
services. If we fail to manage our inventory effectively, we may bear the risk
of fluctuations in materials costs, scrap and excess inventory, all of which can
have a material adverse effect on our business, financial condition and results
of operations. We are required to forecast our future inventory needs based upon
the anticipated demands of our customers. Inaccuracies in making these forecasts
or estimates could result in a shortage or an excess of materials. In addition,
delays, cancellations or reductions of orders by our customers could result in
an excess of materials. A shortage of materials could lengthen production
schedules and increase costs. An excess of materials may increase the costs of
maintaining inventory and may increase the risk of inventory obsolescence, both
of which may increase expenses and decrease profit margins and operating income.
Many of the products we manufacture require one or more components that we order
from sole-source suppliers. Supply shortages for a particular component can
delay productions of all products using that component or cause cost increases
in the services we provide. In addition, in the past, some of the materials we
use, such as memory and logic devices, have been subject to industry-wide
shortages. As a result, suppliers have been forced to allocate available
quantities among their customers and we have not been able to obtain all of the
materials desired. Our inability to obtain these needed materials could slow
production or assembly, delay shipments to our customers, increase costs and
reduce operating income. Also, we may bear the risk of periodic component price
increases. Accordingly, some component price increases could
26
increase costs and reduce operating income. Also we rely on a variety of common
carriers for materials transportation, and we route materials through various
world ports. A work stoppage, strike or shutdown of a major port or airport
could result in manufacturing and shipping delays or expediting charges, which
could have a material adverse effect on our business, financial condition and
results of operations.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired businesses and managing our expansion.
Since 1995, we have completed eight acquisitions. Acquisitions may involve
numerous risks, including difficulty in integrating operations, technologies,
systems, and products and services of acquired companies; diversion of
management's attention and disruption of operations; increased expenses and
working capital requirements; entering markets in which we have limited or no
prior experience and where competitors in such markets have stronger market
positions; and the potential loss of key employees and customers of acquired
companies. In addition, acquisitions may involve financial risks, such as the
potential liabilities of the acquired businesses, the dilutive effect of the
issuance of additional equity securities, the incurrence of additional debt, the
financial impact of transaction expenses and the amortization of goodwill and
other intangible assets involved in any transactions that are accounted for
using the purchase method of accounting, and possible adverse tax and accounting
effects. We have a limited history of owning and operating our acquired
businesses on a consolidated basis. There can be no assurance that we will be
able to meet performance expectations or successfully integrate our acquired
businesses on a timely basis without disrupting the quality and reliability of
service to our customers or diverting management resources. Our rapid growth has
placed and will continue to place a significant strain on management, on our
financial resources, and on our information, operating and financial systems. If
we are unable to manage this growth effectively, it may have a material adverse
effect on our business, financial condition and results of operations.
Our acquisition strategy may not succeed.
As part of our business strategy, we expect to continue to grow by pursuing
acquisitions of other companies, assets or product lines that complement or
expand our existing business. Competition for attractive companies in our
industry is substantial. We cannot assure you that we will be able to identify
suitable acquisition candidates or finance and complete transactions that we
select. Our failure to execute our acquisition strategy may have a material
adverse effect on our business, financial condition and results of operation.
Also, if we are not able to successfully complete acquisitions, we may not be
able to compete with larger EMS providers who are able to provide a total
customer solution.
If we do not effectively manage the expansion of our operations, our business
may be harmed.
We have grown rapidly in recent periods, and this growth may be difficult to
sustain. Internal growth and further expansion of services may require us to
expand our existing operations and relationships. We plan to expand our design
and development services and our manufacturing capacity by expanding our
facilities and by adding new equipment. Expansion has caused, and is expected to
continue to cause, strain on our infrastructure, including our managerial,
technical, financial and other resources. Our ability to manage future growth
effectively will require us to attract, train, motivate and manage new employees
successfully, to integrate new employees into our operations and to continue to
improve our operational and information systems. We may experience
inefficiencies as we integrate new operations and manage geographically
dispersed operations. We may incur cost overruns. We may encounter construction
delays, equipment delays or shortages, labor shortages and disputes, and
production start-up problems that could adversely affect our growth and our
ability to meet customers' delivery schedules. We may not be able to obtain
funds for this expansion on acceptable terms or at all. In addition, we expect
to incur new fixed operating expenses associated with our expansion efforts,
including increases in depreciation expense and rental expense. If our revenue
does not increase sufficiently to offset these expenses, our business, financial
condition and results of operations would be materially adversely affected.
27
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
The market for our products and services is characterized by rapidly changing
technology and continuing process development. The future success of our
business will depend in large part upon our ability to maintain and enhance our
technological capabilities, to develop and market products and services that
meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, the EMS
industry could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. There can be no assurance that we will
effectively respond to the technological requirements of the changing market. To
the extent we determine that new technologies and equipment are required to
remain competitive, the development, acquisition and implementation of such
technologies and equipment may require us to make significant capital
investments. There can be no assurance that capital will be available for these
purposes in the future or that investments in new technologies will result in
commercially viable technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including Paul Walker,
Philip Woodard, Gary Walker and Derrick D'Andrade. Our business also depends on
our ability to continue to recruit, train and retain skilled employees,
particularly executive management, engineering and sales personnel. Recruiting
personnel in our industry is highly competitive. In addition, our ability to
successfully integrate acquired companies depends in part on our ability to
retain key management and existing employees at the time of the acquisition.
There can be no assurance that we will be able to retain our executive officers
and key personnel or attract qualified management in the future.
Risks particular to our international operations could adversely affect our
overall results.
Our success will depend, among other things, on successful expansion into new
foreign markets in order to offer our customers lower cost production options.
Entry into new foreign markets may require considerable management time as well
as start-up expenses for market development, hiring and establishing office
facilities before any significant revenue is generated. As a result, operations
in a new foreign market may operate at low profit margins or may be
unprofitable. Pro forma revenue generated outside of the United States and
Canada was approximately 11% in 2000. International operations are subject to
inherent risks, including:
. fluctuations in the value of currencies and high levels of inflation;
. longer payment cycles and greater difficulty in collecting amounts
receivable;
. unexpected changes in and the burdens and costs of compliance with a
variety of foreign laws;
. political and economic instability;
. increases in duties and taxation;
. inability to utilize net operating losses incurred by our foreign
operations to reduce our U.S. and Canadian income taxes;
. imposition of restrictions on currency conversion or the transfer of
funds; and
. trade restrictions.
28
We are subject to a variety of environmental laws, which expose us to potential
financial liability.
Our operations are regulated under a number of federal, state, provincial, local
and foreign environmental and safety laws and regulations, which govern, among
other things, the discharge of hazardous materials into the air and water as
well as the handling, storage and disposal of such materials. Compliance with
these environmental laws is a major consideration for us because we use metals
and other hazardous materials in our manufacturing processes. We may be liable
under environmental laws for the cost of cleaning up properties we own or
operate if they are or become contaminated by the release of hazardous
materials, regardless of whether we caused such release. In addition we, along
with any other person who arranges for the disposal of our wastes, may be liable
for costs associated with an investigation and remediation of sites at which we
have arranged for the disposal of hazardous wastes, if such sites become
contaminated, even if we fully comply with applicable environmental laws. In the
event of a contamination or violation of environmental laws, we could be held
liable for damages including fines, penalties and the costs of remedial actions
and could also be subject to revocation of our discharge permits. Any such
revocations could require us to cease or limit production at one or more of our
facilities, thereby having a material adverse effect on our operations.
Environmental laws could also become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violation, which could have a material adverse effect on our business, financial
condition and results of operations.
RISKS RELATED TO OUR CAPITAL STRUCTURE
Our future indebtedness could adversely affect our financial health and severely
limit our ability to plan for or respond to changes in our business.
At April 1, 2001 we had $134.3 million of indebtedness under our senior credit
facility. We plan to incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other purposes. This debt could have
adverse consequences for our business, including:
. We will be more vulnerable to adverse general economic conditions;
. We will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of
cash for other purposes;
. We may have difficulty obtaining additional financing in the future
for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
. We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
. We could be limited by financial and other restrictive covenants in
our credit arrangements in our borrowing of additional funds; and
. We may fail to comply with the covenants under which we borrowed our
indebtedness, which could result in an event of default. If an event
of default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
There can be no assurance that our leverage and such restrictions will not
materially adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities. In addition, our
ability to pay principal and interest on our indebtedness to meet our financial
and restrictive covenants and to satisfy our other debt obligations will depend
upon our future operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond our control, as well as the availability of revolving credit
borrowings under our senior credit facility or successor facilities.
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The terms of our credit agreement impose significant restrictions on our ability
to operate.
The terms of our current credit agreement restrict, among other things, our
ability to incur additional indebtedness, pay dividends or make certain other
restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, merge, consolidate or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets. We
are also required to maintain specified financial ratios and satisfy certain
financial condition tests, which further restrict our ability to operate as we
choose. Substantially all of our assets and those of our subsidiaries are
pledged as security under our senior credit facility.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management have significant influence over our business, and could
delay, deter or prevent a change of control or other business combination.
Investment funds affiliated with Bain Capital, Inc., investment funds affiliated
with Celerity Partners, Inc., Kilmer Electronics Group Limited and certain
members of management held approximately 12.9%, 12.1%, 7.1% and 13.2%,
respectively, of our outstanding shares as of March 16, 2001. In addition, three
of the nine directors who serve on our board are, or were, representatives of
the Bain funds, two are representatives of the Celerity funds, two are
representatives of Kilmer Electronics Group Limited and two are members of
management. By virtue of such stock ownership and board representation, the Bain
funds, the Celerity funds, Kilmer Electronics Group Limited and certain members
of management have a significant influence over all matters submitted to our
stockholders, including the election of our directors, and exercise significant
control over our business policies and affairs. Such concentration of voting
power could have the effect of delaying, deterring or preventing a change of
control or other business combination that might otherwise be beneficial to our
stockholders.
Provisions in our charter documents and state law may make it harder for others
to obtain control of us even though some stockholders might consider such a
development favorable.
Provisions in our charter, by-laws and certain provisions under Delaware law may
have the effect of delaying or preventing a change of control or changes in our
management that stockholders consider favorable or beneficial. If a change of
control or change in management is delayed or prevented, the market price of our
shares could suffer.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our senior credit facility bears interest at a floating rate. The weighted
average interest rate on our senior credit facility for the quarter ended April
1, 2001 was 8.6%. We reduce our exposure to interest rate risks through swap
agreements. We have entered into swap agreements to hedge $65.0 million of our
outstanding debt. Under the terms of our current swap agreement expiring on
September 22, 2001, the maximum annual rate we would pay on approximately $65.0
million of our debt is 8.7%, as of April 1, 2001. The remainder of our debt of
$69.3 million bore interest at 7.6% on April 1, 2001 based on the Eurodollar
base rate. If the Eurodollar base rate increased by 10% to 8.1%, our interest
expense on the unhedged portion of our debt would increase by approximately $0.4
million and the fair value of our interest rate swap would increase by
approximately $0.4 million for the balance of 2001.
Foreign Currency Exchange Risk
Most of our sales and purchases are denominated in U.S. dollars, and as a result
we have relatively little exposure to foreign currency exchange risk with
respect to sales made. As a result of our Qualtron
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acquisition, we have assumed forward exchange contracts to sell U.S. dollars for
Irish punts. The aggregate principal amount of the contracts was $ 5.05 million
at April 1, 2001 and was valued at the closing dollar exchange rate of $1.11 for
financial statement purposes. These contracts mature at various dates through
July 31, 2001. If the U.S. dollar strengthened by 10% against the Irish punt, we
would experience an exchange loss of approximately $0.6 million in 2001.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is currently not a party to any material legal actions or
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits: None.
-----------------
(b) Reports on Form 8-K: A current report on Form 8-K was filed on
--------------------
February 5, 2001 as an amendment to a Form 8-K filed on December 7, 2000, which
reported SMTC's November 22, 2000 acquisition of Qualtron Teoranta under Item 2.
The February 5, 2001 Form 8-K amended the December 7, 2000 Form 8-K by providing
the financial statements and pro forma financial information of Qualtron
Teoranta under Item 7.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, SMTC Corporation has duly caused this quarterly report to be signed
on its behalf by the undersigned, thereto duly authorized, in the city of
Markham, province of Ontario, on the 15/th/ day of May, 2001.
SMTC CORPORATION
By: /s/ Paul Walker
---------------
Name: Paul Walker
Title: President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Richard Smith Chief Financial Officer May 15, 2001
----------------
Richard Smith
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