SMTC reports Q3 results - continued profitability and reduction in debt
Nov 09, 2004
SMTC Corporation(1) (Nasdaq: SMTX, TSE: SMX) reported third quarter net earnings of $2.9 million, or $0.20 per share, on revenue of $60.8 million.
This compared with net earnings of $2.6 million, or $.46 per share, on revenue of $77.0 million for the same quarter last year and net earnings of $1.0 million, or $0.11 per share, on revenue of $66.3 million for the second quarter of 2004. In the third quarter of 2004, the Company settled two legal disputes. The first dispute related to the settlement of a claim for obsolete inventory previously written down. The Company recovered $1.8 million which was recorded in cost of sales. The second dispute related to the early termination of a lease obligation which was successfully settled, resulting in a $1.7 million favourable adjustment to a previously recorded restructuring charge. Also in the third quarter of 2004, the Company recorded restructuring charges related to plant optimization and cost containment measures of $1.0 million. Net earnings for the same quarter last year included earnings from discontinued operations of $1.3 million and net earnings from the second quarter of 2004 included earnings from is continued operations of $0.8 million.
Gross profit for the third quarter of 2004 was $7.3 million, or 12.1% of revenue, compared with $8.1 million, or 10.6% of revenue, for the same period in the prior year and $7.3 million, or 11.1% of revenue, for the second quarter of 2004. Excluding the proceeds from the settlement of the obsolete inventory claim, gross profit for the third quarter of 2004 was $5.5 million or 9.1% of revenue.
For the nine months ended October 3, 2004, the Company reported revenue of $196.6 million, compared with $229.2 million for the first nine months of 2003. Net earnings for the nine months ended October 3, 2004 were $3.8 million, or $0.39 per share, compared with a net loss of $37.2 million, or a loss of $6.48 per share, for the first nine months of 2003.
The Company recently announced it has entered into a long term supply agreement with Radio Systems Corporation (RSC), a new customer, following the completion of manufacturing qualification on an initial product family. Under this agreement, the Company will supply RSC with a full suite of electronic manufacturing services including engineering, printed circuit board and final product assembly and logistics services for RSC's end customer order fulfillment requirements.
"In a challenging environment, SMTC performed satisfactorily in the quarter," stated John Caldwell, President and Chief Executive Officer. "We have made considerable progress in executing our transformation plan. Our third quarter results met our internal targets. Our focus over the next few quarters will be on value-adding performance for our current customers, new customer acquisitions and strict cost containment."
On October 4, 2004 the Company completed a reverse stock split of its issued and outstanding common stock whereby every five shares of common stock were exchanged for one common share, resulting in 7,775,194 common shares outstanding. The Company's subsidiary, SMTC Manufacturing Corporation of Canada, completed a reverse stock split of its issued and outstanding exchangeable shares whereby every five shares of exchangeable shares were exchanged for one exchangeable share, resulting in 6,866,152 exchangeable shares outstanding. In accordance with generally accepted accounting principles, all previously reported per share amounts have been adjusted to reflect the reverse stock split.
As previously announced, the Company had received a notice from Nasdaq that its common stock failed to maintain a minimum bid price of $1.00, as required by the Marketplace Rules of The Nasdaq Stock Market. The Company was recently notified by Nasdaq that it has regained compliance with the minimum bid price requirement of $1.00 per share.
The Company generated cash from operations of $3.9 million during the third quarter of 2004 resulting in a reduction in the outstanding revolving credit facility from $13.3 million as at July 4, 2004 to $9.7 million as at October 3, 2004. Remittances from customers are applied to the revolving credit facility on a daily basis, and accordingly, the Company will report no cash balance on its balance sheet.
"We are pleased with our progress in improving the balance sheet of the Company," said Jane Todd, Senior Vice President Finance and Chief Financial Officer. "Since completing the recapitalization transactions in June, we have improved our supply chain relationships and performance through shortening payment cycles. At the same time we were able to reduce our total debt from $44 million last quarter to $40 million this quarter".
As a result of a technical accounting requirement (Financial Accounting Standard Board's Emerging Issues Task Force Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement), the Company will restate its balance sheet as at July 4, 2004 to reclassify the revolver balance of $13.3 million from a long-term liability to a current liability. The restated balance sheet has no effect on the Company's previously reported Statement of Operations or on its ability to draw on the credit facility. The Company currently is in discussions with its lender to amend its three year credit agreement to allow the amount outstanding under the revolving credit facility at the end of the third quarter of $9.7 million to be classified as long-term debt. While the Company is encouraged with the progress made with the lender, there can be no assurance the amendment will be completed.