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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2019

 

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

 

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SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

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DELAWARE	98-0197680
(STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)

 

7050 WOODBINE AVENUE

MARKHAM, ONTARIO, CANADA L3R 4G8

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

 

(905) 479-1810

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	SMTX	NASDAQ

 

 

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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company”. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ☐        Accelerated filer    ☐        Non-accelerated filer    ☐        Smaller reporting company    ☒        Emerging growth company    ☐        

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

As of May 9, 2019, SMTC Corporation had 23,353,558 shares of common stock, par value $0.01 per share, outstanding.

 

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Table of Contents

 

PART I FINANCIAL INFORMATION		3
Item 1	Financial Statements	3
	Interim Consolidated Balance Sheets (unaudited)	3
	Interim Consolidated Statements of Operations and Comprehensive Income (unaudited)	4
	Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	5
	Interim Consolidated Statements of Cash Flows (unaudited)	6
	Notes to Interim Consolidated Financial Statements (unaudited)	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3	Quantitative and Qualitative Disclosures about Market Risk	33
Item 4	Controls and Procedures	35
PART II OTHER INFORMATION		35
Item 1A	Risk factors	35
Item 6	Exhibits	36

  

 

 

		March 31, 2019				December 30, 2018
Assets
Current assets:
Cash		$	1,596			$	1,601
Accounts receivable — net (note 4)			74,180				72,986
Unbilled contract assets (note 4)			24,208				20,405
Inventories (note 4)			48,660				53,203
Prepaid expenses and other assets			6,630				5,548
Derivative assets (note 10)			—				15
Income taxes receivable			158				160
Total current assets			155,432				153,918
Property, plant and equipment — net (note 4)			27,213				28,160
Operating lease right of use assets — net (note 4 and 5)			4,904				—
Goodwill (note 4)			18,165				18,165
Intangible assets — net (note 4)			18,091				19,935
Deferred income taxes — net			388				380
Deferred financing costs — net			634				668
Total assets		$	224,827			$	221,226
Liabilities and Shareholders’ Equity
Current liabilities:
Revolving credit facility (note 5)		$	23,636			$	25,020
Accounts payable			78,806				76,893
Accrued liabilities (note 4)			13,022				13,040
Warrant liability (note 5)			1,908				2,009
Contingent consideration (note 4)			—				3,050
Income taxes payable			39				12
Current portion of long-term debt (note 5)			1,368				1,368
Current portion of operating lease obligations (notes 2 and 6)			2,070				—
Current portion of finance lease obligations (notes 2 and 6)			1,485				1,547
Total current liabilities			122,334				122,939
Long-term debt (note 5)			55,963				56,039
Operating lease obligations (notes 2 and 6)			3,338				—
Finance lease obligations (notes 2 and 6)			9,592				9,947
Total liabilities			191,227				188,925
Shareholders’ equity:
Capital stock (note 7)			460				458
Additional paid-in capital			278,734				278,648
Deficit			(245,594	)			(246,805	)
			33,600				32,301
Total liabilities and shareholders’ equity		$	224,827			$	221,226
Commitments (note 12)

 

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		Three months ended
		March 31, 2019				April 1, 2018
Revenue (note 4)		$	102,649			$	37,120
Cost of sales (note 11)			94,025				33,270
Gross profit			8,624				3,850
Selling, general and administrative expenses			6,698				3,509
Change in fair value of contingent consideration (note 4)			(3,050	)			—
Restructuring charges (note 4)			624				—
Operating income			4,352				341
Interest expense (note 4)			2,870				307
Net income before income taxes			1,482				34
Income tax expense (recovery) (note 8):
Current			279				110
Deferred			(8	)			(84	)
			271				26
Net income and comprehensive income			1,211				8
Net income per share:
Basic		$	0.05			$	0.00
Diluted		$	0.05			$	0.00
Weighted average number of shares outstanding (note 9):
Basic			23,248,918				17,041,504
Diluted			24,465,435				17,523,890

 

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		Common Shares				Capital stock				Additional paid-in capital				Deficit				Total Shareholders’ equity
Balance, December 30, 2018			23,189,381				458				278,648				(246,805	)			32,301
RSU vested and issued in common shares			164,177				2				(2	)			—				—
Stock-based compensation			—				—				88				—				88
Net income			—				—				—				1,211				1,211
Balance, March 31, 2019			23,350,558				460				278,734				(245,594	)			33,600

		Common Shares				Capital stock				Additional paid-in capital				Deficit				Total Shareholders’ equity
Balance, December 31, 2017			16,992,627			$	396			$	265,355			$	(246,677	)		$	19,074
Impact of adoption of ASC 606			—				—				—				320				320
RSU vested and issued in common shares			99,746				1				(1	)			—				—
Stock-based compensation			—				—				126				—				126
Net income			—				—				—				8				8
Balance, April 1, 2018			17,092,373			$	397			$	265,480			$	(246,349	)			19,528

 

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		Three months ended
		March 31, 2019				April 1, 2018
Cash provided by (used in):
Operations:
Net income		$	1,211			$	8
Items not involving cash:
Depreciation of property, plant & equipment			1,627				774
Amortization of intangible assets			1,844				—
Unrealized foreign exchange gain on unsettled forward exchange contracts			—				(319	)
Deferred income taxes (recovery)			(8	)			(84	)
Amortization of deferred financing fees			271				9
Stock-based compensation			88				126
Change in fair value of warrant liability			(101	)			—
Change in fair value of contingent consideration			(3,050	)			—
Change in non-cash operating working capital:
Accounts receivable			(1,194	)			(1,793	)
Unbilled contract assets			(3,803	)			(1,735	)
Inventories			4,543				(974	)
Prepaid expenses and other assets			(1,067	)			(369	)
Income taxes payable			29				(48	)
Accounts payable			1,970				3,837
Accrued liabilities			486				1,184
			2,846				616
Financing:
Repayments of revolving credit facility			(1,384	)			(2,149	)
Repayment of long-term debt			(313	)			(500	)
Debt issuance and deferred financing fees			—				(33	)
Principal repayments of finance lease obligations			(417	)			(44	)
			(2,114	)			(2,726	)
Investing:
Purchase of property, plant and equipment			(737	)			(104	)
			(737	)			(104	)
Decrease in cash			(5	)			(2,214	)
Cash, beginning of period			1,601				5,536
Cash, end of the period		$	1,596			$	3,322
Supplemental Information
Property, plant and equipment acquired that was unpaid in cash and included in accounts payable			330				16

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1.	Nature of the business

 

SMTC Corporation (the “Company” or “SMTC”) is a provider of end-to-end electronics manufacturing services (“EMS”), including product design and engineering services, printed circuit board assembly (“PCBA”), production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order (“CTO”), build to order (“BTO”) and direct order fulfillment (“DOF”). We have more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Canada, Mexico, and China that provide local support and manufacturing capabilities to our global customers. Our services extend over the entire electronic product life cycle from new product development and new product introduction (“NPI”) through to growth, maturity and end of life phases. As of March 31, 2019, we had 3,202 employees of which 2,697 were full time and contract employees.

 

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the accounting principles and methods of application disclosed in the audited consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 30, 2018, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2019, except for the adoption of the new accounting policies related to leases which is outlined in note 2. The accompanying unaudited interim consolidated financial statements include adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the consolidated financial statements under generally accepted accounting principles in the United States (“U.S. GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Form 10-K. The consolidated balance sheet at December 30, 2018 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.

 

Unless otherwise specified or the context requires otherwise, all statements in these notes to the interim consolidated financial statements regarding financial figures are expressed in thousands of U.S. dollars.

 

 

 

2.	Impact of adoption of ASC 842

 

The company adopted ASU No. 2016-02, Leases (Topic 842), as of December 31, 2018, using the modified retrospective approach, which allows comparative periods not to be restated. In addition, the company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the company to carry forward the historical lease classification, not reassess whether any expired or existing contracts are or contain leases and not to reassess initial direct costs for any existing leases. The company also elected the hindsight expedient to determine the lease terms for existing leases. The election of the hindsight expedient did not have a significant impact on the calculation of the expected lease term.

 

The Company leases various office facilities and manufacturing equipment. The Company determines if an arrangement contains a lease at contract inception. An arrangement is or contains a lease if the agreement identifies an asset, implicitly or explicitly, that the Company has the right to use over a period of time. If an arrangement contains a lease, the Company classifies the lease as either an operating lease or as a finance lease based on the five criteria defined in ASC 842.

 

Lease liabilities are recognized at commencement date based on the present value of the remaining lease payments over the lease term. The corresponding right-of-use asset is recognized for the same amount as the lease liability adjusted for any payments made at or before the commencement date, any lease incentives received, and any initial direct costs. The Company’s lease agreements may include options to renew, extend or terminate the lease. These clauses are included in the initial measurement of the lease liability when at lease commencement the Company is reasonably certain that it will exercise such options. The discount rate used is the interest rate implicit in the lease or, if that cannot be readily determined, the Company's incremental borrowing rate.

 

Operating lease expense is recognized on a straight-line basis over the lease term and presented within cost of sales on the Company’s consolidated statements of operations. Finance lease right-of-use assets are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Interest expense on the finance lease liability is recognized using the effective interest rate method and is presented within interest expense on the Company’s consolidated statements of operations and comprehensive income. Variable rent payments related to both operating and finance leases are expensed as incurred. The Company’s variable lease payments primarily consists of real estate taxes, maintenance and usage charges. The Company made an accounting policy election to combine lease and non-lease components.

 

The Company has elected to exclude short-term leases from the recognition requirements of ASC 842. A lease is short-term if, at the commencement date, it has a term of less than or equal to one year. Lease expense related to short-term leases is recognized on a straight-line basis over the lease term. In addition, the company has also elected in accordance with Topic 842 to account for both the lease and non-lease components as a single component and account for it as a lease.

 

The adoption of the new standard resulted in the recording of additional net operating lease right of use assets and operating lease obligations of $5,452 and $5,915, respectively on December 31, 2018. The difference between the operating lease right of use asset and operating lease obligation related to accrued and prepaid rent of $463, which was reclassified to the operating lease right of use asset. The standard did not materially impact consolidated net income and had no impact on cash flows.

 

 

 

3.	Recent Accounting Pronouncements Not Yet Adopted

 

 

In May 2016, the FASB published ASU 2016-13 Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for years beginning after December 15, 2019 including interim periods with those years. Early adoption is permitted only for those annual reporting periods beginning on or after December 15, 2018. The Company continues to evaluate the impact of this accounting standard. The impact of adoption of the standard has not yet been determined.

 

In January 2017, the FASB published ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): The amendments seeks to simplify goodwill impairment testing requirements for public entities. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Board also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of the adoption of the standard is being considered, however it is expected that this may reduce the complexity of evaluating goodwill for impairment.

 

In June 2018, the FASB published ASU 2018-07: Compensation – Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting. The amendment simplifies the application of share-based payment accounting for non-employees. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The impact of the adoption of the standard is not expected to have a material impact on the consolidated financial statements.

 

In August 2018, the FASB published ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment includes the removal, modification and additional of disclosure requirements under Topic 820. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of the adoption of the standard is not expected to have a material impact on the consolidated financial statements.

 

 

 

4.	Interim Consolidated financial statement details

 

The following consolidated financial statement details are presented as of the period ended for the consolidated balance sheets and for the periods ended for each of the consolidated statements of operations and comprehensive loss.

 

Consolidated Balance Sheets

   

Accounts receivable – net:

 

 

Unbilled contract assets

 

 

Inventories:

 

 

 

4.	Interim Consolidated financial statement details cont’d

 

Property, plant and equipment – net:

 

 

(a)

Included within machinery and equipment were assets under finance leases with costs of $2,275 and associated accumulated depreciation of $550 and $409 as of March 31, 2019 and December 30, 2018, respectively. The related depreciation expense for the three months ended March 31, 2019 and December 30, 2018 was $142 and $187, respectively.

 

(b)

Included within buildings are costs associated with Melbourne facility under finance lease of $9,082 and associated accumulated depreciation of $297 and $96 as of March 31, 2019 and December 30, 2018, respectively. The related depreciation expense for three months ended March 31, 2019 and December 30, 2018 was $201 and $96, respectively.

 

(c)

Included within office furniture and equipment were assets under finance leases with costs of $158 and associated accumulated depreciation of $15 and $6 as of March 31, 2019 and December 30, 2018, respectively. The related depreciation expense for the year ended March 31, 2019 and December 30, 2018 was $10 and $6, respectively.

 

(d)

Included within computer hardware and software were assets under finance leases with costs of $91 and associated accumulated depreciation of $28 and $20 as of March 31, 2019 and December 30, 2018, respectively. The related depreciation expense for the year ended March 31, 2019 and December 30, 2018 was $8 and $20, respectively.

 

 

4.	Interim Consolidated financial statement details cont’d

 

Intangible assets:

 

 

Amortization expense of $1,844 is recorded in cost of sales in the consolidated statement of income and comprehensive income.

  

Goodwill:

 

The carrying value of goodwill as at March 31, 2019 was $18,165 (December 30, 2018 – $18,165). The carrying value of goodwill is assessed annually as well as assessed each reporting period for impairment triggers to determine whether there exists any indicators of impairment.

 

Accrued liabilities: 

 

  

During the first quarter of 2019, restructuring charges of $624 were incurred related to the reduction of 10 full-time equivalents (“FTEs”) in U.S. and 4 FTEs in Canada and 167 FTEs  and contract employees in Mexico. As at March 31, 2019, the company had $254 of accrued restructuring charges remaining to be paid.

 

 

Contingent Consideration: 

 

During the quarter, fair value of the contingent consideration liability was determined to be nil resulting in a gain of of $3,050 being recognized.  The contingent consideration liability was initially recognized at fair value in the fourth quarter and relates to a contingent earn-out payment associated with the acquisition of MC Assembly.  Fair value estimate under purchase accounting of $3,050 was derived from a multiple of earnings based on MC Assembly’s forecasted twelve month earnings for the period ended March 31, 2019.  Based on actual earnings, the contingent consideration liability is considered resolved and no longer payable as at March 31, 2019. 

 

Consolidated Statements of Operations and Comprehensive Income

 

Interest expense:

 

 

 

 

5.

Debt

 

 (a) Revolving credit and long-term debt facilities 

 

The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) which governs the PNC Revolving Credit Facility (“PNC Facility”). The PNC Facility has a term ending on November 8, 2023. Advances made under the PNC Revolving Credit Facility bear interest at the U.S. base rate plus a grid ranging from 0.50% to 1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus a grid ranging from 1.50% to 2.00%. The base commercial lending rate should approximate U.S. prime rate.  

 

The Company also borrows money under a Financing Agreement with TCW Asset Management Company, LLC, as collateral agent, and lenders from time to time party thereto (collectively, “TCW”), which governs a term loan A facility (“Term A Loan Facility”) and a term loan B facility (“Term Loan B Facility” and, together with the Term Loan A Facility, the “TCW Facilities” and, together with the PNC Facility, the “Credit Facilities”). The TCW Facilities mature on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 5.00%.The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 8.50% or LIBOR plus 10.50%. The base rate should approximate U.S. prime rate. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before the first anniversary of the closing date, (ii) 2.00% in the event that such payment occurs after the first anniversary of the closing date and on or before the second anniversary of the closing date and (iii) 1.00% in the event that such payment occurs after the second anniversary of the closing date and on or before the third anniversary of the closing date. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after the third anniversary of the Closing Date.

 

As at March 31, 2019, the funds available to borrow under the PNC Revolving Credit Facility after deducting the current borrowing base conditions was $16,577 ( December 30, 2018 - $13,974). The maximum amount of funds that could be available under the PNC Revolving Credit Facility is $45,000. However, availability under the PNC Revolving Credit Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, and certain conditions as determined by PNC. The Company is required to use a “lock-box” arrangement for the PNC Revolving Credit Facility, whereby remittances from customers are swept daily to reduce the borrowings under this facility.

 

At March 31, 2019, $23,636 (December 30, 2018 - $25,020) was outstanding under the PNC Revolving Credit Facility and is classified as a current liability based on the requirement to hold a “lock-box” under the terms of the PNC Revolving Credit Facility.

 

At March 31, 2019, $49,688 (December 30, 2018 - $50,000) was outstanding under the TCW Term Loan A Facility and $12,000 under the TCW Term Loan B Facility (December 30, 2018 - $12,000). The TCW Term Loan Facilities are reported on the consolidated balance sheet net of deferred financing fees of $2,608 (December 30, 2018 - $2,749) and a discount on debt of $1,749 (December 30, 2018 - $1,843) related to the outstanding warrants described below.

 

The Credit Facilities are a joint and several obligations of the Company and its subsidiaries that are borrowers under the facilities and are jointly and severally guaranteed by other subsidiaries of the Company. Repayment under the PNC Facility and TCW Facilities are collateralized by the assets of the Company and each of its subsidiaries.

 

 

(b) Covenants

 

The Credit Facilities contain certain financial and non-financial covenants. The financial covenants require the Company to maintain a Fixed Charge Coverage Ratio, a Total Leverage Ratio, and a Senior Leverage Ratio quarterly during the term of the Credit Facilities.

 

The Company is in compliance with the financial covenants included in the Credit Facilities as at March 31, 2019. Management projects compliance with the financial covenants included in the Credit Facilities. Regarding the senior and total debt leverage ratios, these projections are sensitive to estimates, specifically forecasted adjusted earnings before interest, taxes and depreciation and projected debt balances at each reporting period.

 

 (c) Warrant liability

 

On November 8, 2018, 504,735 warrants were issued to TCW and outstanding as at December 30, 2018.  These warrants are exercisable on a cashless basis, or an exercise price of $0.01.  The Company initially recorded the value of the warrants as a warrant liability with a corresponding discount on the long term debt in the amount of $1,898.  The fair value has been assessed at $3.78 per unit or $1,908 as at March 31, 2019.  The warrants are exercisable at March 31, 2019.  The fair value of the warrant obligation is presented as a warrant liability on the consolidated balance sheet with changes to the fair value recorded each reporting period as either a gain or a loss in the consolidated statement of operations and comprehensive income in selling, general and administrative expenses.

 

 

 

6.

Leases

 

 

The Company leases certain facility leases in various jurisdictions, including office space and manufacturing, warehouse space. The Company also leases certain production equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense on a straight line basis over the lease term. Total short term lease costs for the three months ended March 31, 2019 was not significant.

 

Most leases contain renewal options, this is at the Company’s sole discretion. The extension terms are typically one to five years. Some leases may include options to purchase the leased property. The depreciable life is limited to the lease term unless title transfers or it is reasonably certain that a purchase option will be exercised. Operating lease liabilities recognized do not include $1,522 related to options to extend lease terms that are not reasonably certain of being exercised at March 31, 2019. Finance lease liabilities do not include $6,456 related to options to extend lease terms that are not reasonably certain of being exercised at March 31, 2019.

 

We rent or sublease one facility lease that is not occupied by SMTC.    

 

 

 

(a)

Refer to note 4 for details of the corresponding balances and accumulated amortization included within property, plant and equipment

 

 

 

 

 

The company’s future minimum lease payments as of December 30, 2018, in accordance with legacy lease accounting standards, under non-cancelable operating and financing lease agreements were as follows:

 

 

 

 

 

 

 

 

7.	Capital stock

 

Common shares

 

Issued and outstanding:

 

The issued and outstanding number of common shares included in shareholders’ equity consisted of the following:

 

 

 Stock Options

 

For more detailed information regarding the Company’s stock option arrangements, see Note 6 of the consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 30, 2018. During the three month period ended March 31, 2019, there were no stock options granted, exercised or forfeited. A summary of stock option activity for the three month period ended March 31, 2019 is as follows:

 

 

 

During the three month periods ended March 31, 2019 and April 1, 2018, the Company recorded stock-based compensation expense related to stock options and a corresponding increase in additional paid-in capital of $22 and $25, respectively.

 

Certain stock options outstanding have market conditions such that the awards are vested and exercisable only if the Company’s stock exceeds specified targets during the vesting period. If the market conditions are not met, the stock options will not vest and will expire.

 

   

7.	Capital stock cont’d

  

Restricted Stock Units

 

For more detailed information regarding the Company’s Restricted Stock Units (“RSU”) arrangements, see Note 6 of the consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 30, 2018. There were no RSUs granted during the three months ended March 31, 2019. A summary of the RSU activity for the three month period ended March 31, 2019 is as follows:

  

  

Certain RSUs outstanding have a market condition such that the awards are vested and issuable only if the market price of the Company’s stock meets or exceeds a specified target during the vesting period. If the market condition is not met, the RSUs will not vest and will be forfeited.

 

Stock based compensation recognized during the three month period ended March 31, 2019 and April 1, 2018 related to the restricted stock units was $66 and $101.  

 

   

 

8.	Income taxes

 

During the three month period ended March 31, 2019 and April 1, 2018, the Company recorded current income tax expense of $279 and $110, respectively, in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions. The Company also recorded deferred income tax recoveries of $8 and $84, respectively, in connection with temporary differences related to the Mexican operations.

  

     In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC 740, Income Taxes, (“ASC 740”) states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. The U.S., Canadian and Asian jurisdictions continue to have a full valuation allowance recorded against the deferred tax assets. 

 

9.	Earnings per common share

 

The following table details the weighted average number of common shares outstanding for the purposes of computing basic and diluted earnings per common share for the following periods:

 

 

(a)

For the three months ended March 31, 2019, as a result of net income for the period, dilutive earnings per share were calculated using the treasury stock method. The dilutive stock awards have been calculated as 1,216,517 for the three months ended March 31, 2019 related to outstanding unvested restricted stock units and incremental in-the-money stock options.

 

(b)

For the three months ended April 1, 2018, as a result of net income for the period, dilutive earnings per share were calculated using the treasury stock method. The dilutive stock awards have been calculated as 482,386 for the three months ended April 1, 2018 related to outstanding unvested restricted stock units and incremental in-the-money stock options.

 

 

 

10.	Segmented information

 

General description

 

The Company is operated and managed geographically and has production facilities in the United States, Mexico and China. The Company utilizes reportable segment’s site contribution (site revenue minus operating expenses, excluding unrealized foreign exchange, corporate allocations and restructuring expenses) to monitor reportable segment performance. Site contribution is utilized by the chief operating decision-maker as the indicator of reportable segment performance, as it reflects costs which our operating site management is directly responsible for. Intersegment adjustments reflect intersegment sales that are generally recorded at prices that approximate arm’s-length transactions. In assessing the performance of the reportable segments, management attributes site revenue to the reportable segment that ships the product to the customer, irrespective of the product’s destination. Information about the reportable segments is as follows:

 

 

 

 

 

 

 

10.	Segmented information cont’d

  

Additions to property, plant and equipment

 

The following table contains additions, including those acquired through capital leases, to property, plant and equipment for the three months ended:

 

    

Property, plant and equipment ^(a)

 

 

(a)

Property, plant and equipment information is based on the principal location of the asset.

 

Geographic revenue

 

The following table contains geographic revenue based on the product shipment destination, for the three months ended March 31, 2019 and April 1, 2018.

 

 

 

10.	Segmented information cont’d

  

Significant customers and concentration of credit risk

 

Sales of the Company’s products are concentrated in certain cases among specific customers in the same industry. The Company is subject to concentrations of credit risk in trade receivables. The Company considers concentrations of credit risk in establishing the allowance for doubtful accounts and believes the recorded allowances are adequate.

 

The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its revenue. In addition to having a limited number of customers, the Company manufactures a limited number of products for each customer. If the Company loses any of its larger customers or any product line manufactured for one of its larger customers, it could experience a significant reduction in revenue. Also, the insolvency of one or more of its larger customers or the inability of one or more of its larger customers to pay for its orders could decrease revenue. As many costs and operating expenses are relatively fixed, a reduction in net revenue can decrease profit margins and adversely affect the business, financial condition and results of operations.

 

During the three months ended March 31, 2019, one customer exceeded 10% of total revenue, comprising of 13.1% of total revenue across all geographic segments. During the three months ended April 1, 2018, four customers exceeded 10% of total revenue, comprising of 45.8% of total revenue across all geographic segments.

 

As of March 31, 2019, no customers represented more than 10% of the trade accounts receivable. At December 30, 2018, two customers comprised 21% (11% and 10%, respectively) of the Company’s trade accounts receivable. No other customers individually represented more than 10% of trade accounts receivable in either period.

 

 

 

11.	Derivative financial instruments

 

The Company previously entered into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso expenditures. These contracts were effective as hedges from an economic perspective, but do not meet the requirements for hedge accounting under ASC Topic 815 “Derivatives and Hedging”. Accordingly, changes in the fair value of these contracts were recognized into net income in the consolidated statement of operations and comprehensive income. The Company had no forward foreign exchange contracts in the first quarter of 2019. Included in cost of sales for the first quarter of 2019 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $0.01 million. Included in cost of sales for the first quarter of 2018 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $0.3 million, and a realized gain of $0.05 million. The average contract and mark-to-market rates for outstanding forward foreign exchange contracts were as follows;

 

 

 

 

12.	Commitments

 

Purchase obligations not recorded on the balance sheet as at March 31, 2019 consist of open non-cancellable purchase orders (PO) for raw materials for $23,785 which are expected to be paid within 12 months of the PO issue date. Purchase obligations not recorded on the balance sheet as at December 30, 2018 consisted of open non-cancellable purchase orders for raw materials for $39,951 to be paid within 12 months of the PO issue date.

 

 

 

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