SMTC Reports First Quarter 2017 Updates

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EMS firm SMTC Corp. has announced Q1 revenue of $33.2 million, gross profit of $3.6 million, and a net loss of $0.4 million. The company has also appointed Ed Smith as permanent president and chief executive officer. Rich Fitzgerald, meanwhile, joins as chief operating officer.

SMTC has implemented a global restructuring plan to align operational functions in order to better serve the customer base and reduce the global cost structure. As part of this strategy, the company will close down its Suzhou facility. This is expected to result in approximately $5 million in annualized savings.

First Quarter Fiscal 2017 Results Summary

Revenue for the first quarter was $33.2 million compared to $41.9 million in the first quarter of prior year. The decrease was primarily the result of one customer that transferred its business to other contract manufacturers.  In addition, demand decreased with one long standing customer, which was offset by revenue from a new customer during the quarter.

Gross profit for the first quarter was $3.6 million or 10.7% compared to $4.9 million or 11.6% in the first quarter of 2016.  Adjusted gross profit was $2.3 million or 6.9% compared to $3.8 million or 9.1% in the first quarter of the prior year. 

Net loss was $0.4 million for the quarter compared to a net income of $1.0 million for the first quarter in prior year. When excluding the impact of unrealized foreign exchange gain of $1.3 million on unsettled forward exchange contracts in the first quarter, net loss was 1.7 million.  When excluding the impact of unrealized foreign exchange gain of $1.0 million on unsettled forward exchange contracts in the first quarter of prior year, net income was nil. 

Adjusted EBITDA was $(0.3) million compared to $1.4 million in the first quarter of prior year due to the reduction in revenue, corresponding reduction in gross margin with higher relative selling, general and administrative expenses.

Management Team

On May 15, 2017, the Board of Directors has appointed Ed Smith as the Company’s President and Chief Executive Officer effective May 16, 2017, removing the interim designation. Smith stated, “Although the financial results for this quarter are disappointing, we have developed a detailed long term strategic plan for our Company to better align our cost structure with our current operating levels.  I am excited about this new phase for the Company and have just signed on as permanent President and Chief Executive Officer.  We have reorganized the Company to put more responsibility back in our manufacturing facilities and connect our customers directly with our factory leaders in order to better serve our customers and increase our response time and support the flexibility they require. We also recognize the importance of growing the top line and have a strong focus on sales, which will involve much of my time.”

In addition, the Company has hired Rich Fitzgerald as the Company’s Chief Operating Officer, a new position established as part of the global restructuring plan. Smith and Fitzgerald worked together at SMTEK, successfully turning around the company resulting in a substantial increase in shareholder value. The Chief Operating Officer will be responsible for the three manufacturing facilities in Chihuahua Mexico, Dongguan China and Fremont California in addition to the Engineering and Supply Chain groups.

Prior to joining the Company, Fitzgerald served as Global Vice President of Avnet Integrated Solutions from January 2017 to May 2017 and as Vice President of Business Operations of Avnet Electronics Embedded from July 2014 to January 2017.  Prior to joining Avnet, Fitzgerald served as Chief Operating Officer of Qual-Pro Corporation from January 2010 to July 2014 and as Chief Executive Officer of Team Precision Public Company Limited from July 2008 to December 2009, as well as Global Vice President of Operations for CTS Corporation. Fitzgerald has also held other manufacturing and operational excellence positions with SMTEK International, Inc., Intel Corp. and California Amplifier. Fitzgerald has a bachelor’s degree in business management from the University of Maryland – Robert H. Smith School of Business.

Global Restructuring Plan and Closure of Suzhou Factory

On May 15, 2017, the Board of Directors of the Company approved a corporate restructuring plan for its manufacturing facilities and corporate level operations, which includes the closure of the Suzhou Facility in China and a reduction in labor force impacting approximately 210 employees at the Company’s manufacturing facilities and its corporate headquarters.  The Restructuring Plan is expected to generate annualized expense reductions of approximately $5.0 million. The Restructuring Plan and the wind down and closure of the Suzhou Facility is expected to be substantially completed by the end of the second quarter of 2017. 

The Company estimates the expense to be recognized in connection with the closure of the Suzhou Facility will total approximately $0.6 million, which is comprised of employee severance costs of $0.5 million and equipment disposal and transfer costs of $0.1 million.  Exclusive of the expenses estimated to be incurred related to the closure of the Suzhou Facility, the Company estimates the expense to be recognized in connection with the Restructuring Plan will total approximately $1.1 million, primarily comprised of employee severance costs.  Total severance charges of approximately $1.6 million are expected to be recorded in the second quarter of 2017 related to the Global Restructuring Plan and the closure of the Suzhou Facility.

The Company’s prior cost structure was not scaled with our current level of operations.  With this Restructuring Plan, the Company will assign responsibilities of functions such as quoting and supply chain management to our manufacturing facilities with oversight from our new Chief Operating Officer.  We believe that this new structure will better serve our customers ever changing needs and allow us to be more flexible and responsive to those needs.

The Company has evaluated its’ Asia strategy in relation to the current two facilities in China. In order to reduce cost, improve efficiencies and better align with target markets, the Company has approved a plan to consolidate operations with the closure of its Suzhou Facility.  As a result of this decision to close the Suzhou Facility, we will be transferring customers to service them with existing capacity in our other manufacturing facilities. The wind down and closure of the Suzhou Facility is expected to be substantially complete by the end of the second quarter.  

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