SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: SEPTEMBER 30, 2001
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 1-8101
Exact Name of Registrant as
Specified in Its Charter: SMTEK INTERNATIONAL, INC.
-------------------------
DELAWARE 33-0213512
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State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Identification No.
Address of Principal Executive Offices: 2151 Anchor Court
Thousand Oaks, CA 91320
Registrant's Telephone Number: (805) 376-2595
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 [X] No [ ]
The registrant had 2,284,093 shares of Common Stock outstanding as of
November 5, 2001.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
September 30, June 30,
2001 2001
------------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,054 $ 224
Accounts receivable, less allowance for doubtful
accounts of $405 and $407, as of September 30,
2001 and June 30, 2001, respectively 10,714 11,905
Costs and estimated earnings in excess
of billings on uncompleted contracts 7,388 7,965
Inventories, net 7,023 6,833
Prepaid expenses 907 745
-------- --------
Total current assets 27,086 27,672
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 8,045 7,319
Other assets 832 941
-------- --------
$ 35,963 $ 35,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank lines of credit payable $ 1,845 $ 1,468
Current portion of long-term debt 2,117 2,109
Accounts payable 7,544 6,161
Other accrued liabilities 4,091 4,556
-------- --------
Total current liabilities 15,597 14,294
-------- --------
Long-term liabilities:
Long-term bank lines of credit payable 3,486 4,638
Long-term debt 5,582 5,780
-------- --------
Total long-term liabilities 9,068 10,418
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares
authorized; no shares issued or outstanding - -
Common Stock, $.01 par value; 3,750,000 shares
and authorized; 2,284,093 and 2,282,339 shares
issued outstanding at September 30, 2001 and
June 30, 2001, respectively 23 23
Additional paid-in capital 37,027 37,018
Accumulated deficit (25,605) (25,632)
Accumulated other comprehensive loss (147) (189)
-------- --------
Total stockholders' equity 11,298 11,220
-------- --------
$ 35,963 $ 35,932
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per share amounts)
Three Months Ended
September 30,
-------------------
2001 2000
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Revenues $19,634 $20,924
Cost of goods sold 17,630 18,372
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Gross profit 2,004 2,552
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Operating expenses:
Administrative and selling 1,708 1,543
Goodwill amortization 10 326
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Total operating expenses 1,718 1,869
------- -------
Operating income 286 683
------- -------
Non-operating income (expense):
Interest expense, net (272) (316)
Other income (expense), net 28 (32)
------- -------
Total non-operating expense, net (244) (348)
------- -------
Income before income taxes 42 335
Income tax provision 15 20
------- -------
Net income $ 27 $ 315
======= =======
Basic and diluted earnings per share $ 0.01 $ 0.14
======= =======
Shares used in computing basic and diluted
earnings per share:
Basic 2,283 2,275
======= =======
Diluted 2,461 2,307
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
September 30,
---------------------
2001 2000
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Cash flows from operating activities:
Net income $ 27 $ 315
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 565 808
Decrease in accounts receivable 1,300 1,495
(Increase) decrease in costs and estimated
earnings in excess of billings on
uncompleted contracts 578 (1,156)
Increase in inventories (117) (458)
Increase (decrease) in accounts payable 1,326 (361)
Increase (decrease) in other accrued liabilities (481) 337
Other, net (52) 14
------- -------
Net cash provided by operating activities 3,146 994
------- -------
Cash flows from investing activities:
Capital expenditures (1,099) (801)
Proceeds from sale of assets - 2
------- -------
Net cash used in investing activities (1,099) (799)
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Cash flows from financing activities:
Proceeds from (payments of) bank lines of credit (855) 86
Payments of long-term debt (360) (296)
Proceeds from the exercise of stock options 7 -
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Net cash used in financing activities (1,208) (210)
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Effect of exchange rate changes on cash (9) -
------- -------
Increase (decrease) in cash and cash equivalents 830 (15)
Cash and cash equivalents at beginning of period 224 532
------- -------
Cash and cash equivalents at end of period $ 1,054 $ 517
======= =======
Supplemental cash flow information:
Interest paid $ 259 $ 320
Income taxes paid 2 -
Non-cash investing activities:
Capital expenditures financed by lease
obligations and notes payable 95 440
See accompanying notes to unaudited condensed consolidated financial statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2001 and 2000
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SMTEK International, Inc. (the "Company," "we," "us" or "our") is an
electronics manufacturing services ("EMS") provider to original equipment
manufacturers ("OEMs") primarily in the industrial and instrumentation,
medical, telecommunications, financial services automation and aerospace and
defense industries. We provide integrated solutions to OEMs across the entire
product life cycle, from design to manufacturing to end-of-life services, for
the worldwide low-to-medium volume, high complexity segment of the EMS
industry.
At September 30, 2001 we had four wholly owned subsidiaries: SMTEK, Inc.
(dba SMTEK Thousand Oaks), located in Thousand Oaks, California; Technetics,
Inc. (dba SMTEK San Diego), located in San Diego, California; Jolt Technology,
Inc. (aka SMTEK Fort Lauderdale), located in Fort Lauderdale, Florida; and
SMTEK Europe Limited, located in Craigavon, Northern Ireland.
All significant intercompany transactions and accounts have been
eliminated in consolidation. In the opinion of the Company's management, the
accompanying condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly our financial position, results of operations and cash flows as of and
for the periods presented.
We utilize a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 2001 fell on June 29, 2001. In the accompanying
condensed consolidated financial statements, the 2001 fiscal year end is shown
as June 30 and the interim period end for both years is shown as September 30
for clarity of presentation. The actual interim periods ended on September
28, 2001 and September 29, 2000.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these condensed financial statements should be read in conjunction
with our 2001 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on September 26, 2001.
Certain reclassifications have been made to the interim fiscal 2001
financial statements to conform with the interim fiscal 2002 financial
statement presentation. Such reclassifications had no effect on our results
of operations or stockholders' equity.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue Common Stock were exercised or
converted into Common Stock or resulted in the issuance of Common Stock that
then shared in our earnings.
Common stock equivalents used in the determination of diluted earnings
per share include the effect, when such effect is dilutive, of our outstanding
employee stock options, the 7% Convertible Subordinated Debentures (which were
convertible into 8,075 shares of Common Stock at $40.00 per share of Common
Stock), and the 8-1/2% Convertible Subordinated Debentures (which are
convertible into 7,435 shares of Common Stock at $212.50 per share of Common
Stock). The following is a summary of the calculation of basic and diluted
earnings per share (dollars in thousands, except per share data):
Three Months Ended
September 30,
----------------------
2001 2000
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Net income $ 27 $ 315
========= =========
Weighted average shares:
Basic weighted average number of
common shares outstanding 2,283,043 2,275,101
Dilutive effect of outstanding
common stock equivalents 177,781 31,474
--------- ---------
Diluted weighed average number of
common shares outstanding 2,460,824 2,306,575
========= =========
Earnings per share basic and diluted $ 0.01 $ 0.14
========= =========
Options to purchase approximately 126,200 shares of Common Stock at
prices ranging from $7.47 to $10.00 were outstanding at September 30, 2001,
and options and warrants to purchase approximately 178,900 shares of Common
Stock at prices ranging from $4.34 to $30.20 were outstanding at September 30,
2000, but were not included in the computation of diluted earnings per share
for the three months ended September 30, 2001 and 2000, respectively, because
the exercise price of these options and warrants were greater than the average
market price of the Common Stock.
Convertible subordinated debentures aggregating $1,580,000, due in 2008
and convertible at a price of $212.50 per share at any time prior to maturity
and convertible subordinated debentures aggregating $323,000, due on May 15,
2001 and convertible at a price of $40.00 per share at any time prior to
maturity, were outstanding during the three months ended September 30, 2001
and 2000, but were not included in the computation of diluted earnings per
share because the effect would be antidilutive.
NOTE 3 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
We generally recognize revenues and cost of sales upon shipment of
products. However, our Thousand Oaks subsidiary uses the percentage of
completion method to recognize revenues and cost of sales on certain of its
long-term contracts with suppliers of electronic components and products.
Percentage of completion is determined on the basis of costs incurred to total
estimated costs. Contract costs include direct material and direct labor
costs and those indirect costs related to the assembly process, such as
indirect labor, supplies, tools, repairs and depreciation costs. Selling and
administrative costs are charged to expense as incurred. In the period in
which it is determined that a loss will result from the performance of a
contract, the entire amount of the estimated loss is charged to cost of goods
sold. Other changes in contract price and estimates of costs and profits at
completion are recognized prospectively. The asset "costs and estimated
earnings in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed.
Costs and estimated earnings in excess of billings on uncompleted
contracts consists of revenue recognized under electronics assembly contracts,
which amounts were not billable at the balance sheet date. Substantially all
of the unbilled amount is expected to be billed and collected within 180 days
of the balance sheet date. The components of costs and estimated earnings in
excess of billings on uncompleted contracts are as follows (in thousands):
September 30, June 30,
2001 2001
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Costs incurred to date on
uncompleted contracts $ 81,959 $ 82,929
Estimated earnings based on
percentage of completion 10,162 10,643
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92,121 93,572
Less: Billings to date (84,733) (85,607)
-------- --------
Total costs and estimated
earnings in excess of billings
on uncompleted contracts $ 7,388 $ 7,965
======== ========
NOTE 4 - INVENTORIES
Inventories consist of the following (in thousands):
September 30, June 30,
2001 2001
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Raw materials $4,113 $3,929
Work in process 2,192 2,700
Finished goods 718 204
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$7,023 $6,833
Total inventories ====== ======
Note 5 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
September 30, June 30,
2001 2001
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Buildings and improvements $ 3,061 $ 2,827
Plant equipment 14,520 13,691
Office and other equipment 2,719 2,614
Less accumulated depreciation and amortization (12,255) (11,813)
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Total property, equipment and improvements $ 8,045 $ 7,319
======== ========
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income is as follows (in thousands):
Three Months Ended
September 30,
-------------------
2001 2000
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Net income $27 $315
Other comprehensive income (loss):
Foreign currency translation adjustments 42 (26)
--- ----
Comprehensive income $69 $289
=== ====
NOTE 7 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
We operate in a single business segment - the EMS industry. Our revenues
and long-lived assets, net of accumulated depreciation, by geographic area are
as follows (in thousands):
Three Months Ended
September 30,
-------------------
2001 2000
------- -------
Revenues:
United States $17,942 $15,882
Northern Ireland 1,692 5,042
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Total revenues $19,634 $20,924
======= =======
September 30, June 30,
2001 2001
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Long-lived assets:
United States $6,717 $5,997
Northern Ireland 1,775 1,779
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Total long-lived assets $8,492 $7,776
====== ======
NOTE 8 - SUBSEQUENT EVENT - ACQUISITION OF THE ASSETS OF CENTURY ELECTRONICS
MANUFACTURING, INC.
On October 24, 2001, we completed a transaction to purchase out of
bankruptcy certain assets, but not assume any liabilities, of Century
Electronics Manufacturing, Inc. ("Century"), an EMS company. As part of this
transaction, we also purchased substantially all of the common stock of
Century's subsidiary in Thailand. The aggregate purchase price of this
transaction was approximately $3.1 million in cash and was funded by our
existing long-term bank lines of credit.
Specifically, we purchased certain equipment, machinery and inventory of
Century for approximately $2.4 million. We will use some of the purchased
assets at our other locations. We paid $700,000 for the common stock of
Century's subsidiary in Thailand. We also are currently renegotiating
Century's facility leases in Santa Clara, California and Marlborough,
Massachusetts. However, we did not assume previous debts related to those
leases.
Concurrent with the purchase of the assets, we have now opened operations
in New England, Silicon Valley and Thailand under the SMTEK name.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q (THE "REPORT"), INCLUDING THE
DISCLOSURES BELOW, CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
SUBSTANTIAL RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE TERMS
"ANTICIPATES," "EXPECTS," "ESTIMATES," "BELIEVES" AND SIMILAR EXPRESSIONS, AS
THEY RELATE TO US OR OUR MANAGEMENT, ARE INTENDED TO IDENTIFY SUCH FORWARD-
LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS IN THIS REPORT OR HEREAFTER
INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), REPORTS TO THE STOCKHOLDERS OF SMTEK
INTERNATIONAL, INC., A DELAWARE CORPORATION (THE "COMPANY," "WE," "US" OR
"OUR") AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY US
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD
CAUSE OUR ACTUAL RESUTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS
TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT
CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS INCLUDE,
BUT ARE NOT LIMITED TO, THE RISKS SET FORTH HEREIN AND IN SUCH OTHER DOCUMENTS
WITH THE SEC, EACH OF WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND THE
ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. OUR ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED
ELSEWHERE IN THIS REPORT.
DESCRIPTION OF THE BUSINESS
SMTEK International, Inc. (the "Company," "we," "us" or "our") is an
electronics manufacturing services ("EMS") provider to original equipment
manufacturers ("OEMs") primarily in the industrial and instrumentation,
medical, telecommunications, financial services automation and aerospace and
defense industries. We provide integrated solutions to OEMs across the entire
product life cycle, from design to manufacturing to end-of-life services, for
the worldwide low-to-medium volume, high complexity segment of the EMS
industry.
At September 30, 2001 we had four wholly owned subsidiaries: SMTEK, Inc.
(dba SMTEK Thousand Oaks), located in Thousand Oaks, California; Technetics,
Inc. (dba SMTEK San Diego), located in San Diego, California; Jolt Technology,
Inc. (aka SMTEK Fort Lauderdale), located in Fort Lauderdale, Florida; and
SMTEK Europe Limited, located in Craigavon, Northern Ireland.
On October 24, 2001, we completed a transaction to purchase out of
bankruptcy certain assets, but not assume any liabilities, of Century
Electronics Manufacturing, Inc. ("Century"), an EMS company. As part of this
transaction we also purchased substantially all of the common stock of
Century's subsidiary in Thailand. The aggregate purchase price of this
transaction was approximately $3.1 million in cash and was funded by our
existing long-term bank lines of credit.
Concurrent with the purchase of the assets, we have now opened operations
in New England, Silicon Valley and Thailand under the SMTEK name.
RESULTS OF OPERATIONS
We utilize a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 2001 fell on June 29, 2001. In the accompanying
condensed consolidated financial statements, the 2001 fiscal year end is shown
as June 30 and the interim period end for both years is shown as September 30
for clarity of presentation. The actual interim periods ended on September 28,
2001 and September 29, 2000.
Consolidated revenues for the three months ended September 30, 2001 were
$19.6 million compared to $20.9 million for the three months ended September
30, 2000, a decrease of approximately 6%. The decrease in revenues was
primarily due to the current downward economic trends. Starting in the third
quarter of fiscal 2001, existing customers began to defer shipments, and some
have, more recently, cancelled orders. In addition, several of our customers
have been impacted by the recent terrorist attacks. We expect the deferral of
shipments to be temporary, as these customers have pushed out their orders to
later scheduled delivery dates. We have been adversely affected by these
economic trends and the recent terrorists attacks and may continue to be
throughout the remainder of fiscal 2002 and beyond. Although we continue to
book business, we have not and may not grow as fast as we did during the prior
fiscal year. Backlog at September 30, 2001 was $53.5 million compared to
$59.0 million at June 30, 2001.
Consolidated gross profit for the three months ended September 30, 2001
was $2.0 million (10.2% of sales) compared to $2.6 million (12.2% of sales)
for the three months ended September 30, 2000. The decrease in gross profit
and gross profit margin was due to revenues declining at a faster rate than
the decline in cost of sales, as fixed costs were spread over a smaller volume
of production.
Administrative and selling expenses increased 11% to $1.7 million for the
three months ended September 30, 2001 from $1.5 million for the three months
ended September 30, 2000. The increase was primarily due to expansion of our
managerial and administrative staff during fiscal 2001 caused by our growth
during the past fiscal year and relocation expenses relating to our San Diego
facility.
Goodwill amortization decreased to $10,000 during the three months ended
September 30, 2001 from $326,000 for the three months ended September 30,
2000. The reduction occurred because we had fully amortized, as of December
31, 2000, the goodwill of $6.3 million, which arose from our acquisition of
our Thousand Oaks subsidiary in January 1996.
Total non-operating expense was $244,000 for the three months ended
September 30, 2001 compared to $348,000 for the three months ended September
30, 2000. The primary reason for this decrease was due to the decrease in
interest expense as a result of lower average interest rates and lower levels
of debt outstanding during the three months ended September 30, 2001 as
compared to the three months ended September 30, 2000.
We had an income tax provision of $15,000 for the three months ended
September 30, 2001, as compared to $20,000 for the three months ended
September 30, 2000. Our tax rate is lower than the statutory income tax rates
due to the utilization of federal and state net operating loss carryforwards.
However, the income tax provision as a percentage of pretax income for the
three months ended September 30, 2001 was higher than that for the three
months ended September 30, 2000, as we had utilized a majority of our
California state net operating loss carryforwards during fiscal year 2001.
Net income was $27,000 for the three months ended September 30, 2001, or
$0.01 per diluted share, compared to $315,000 for the three months ended
September 30, 2000, or $0.14 per diluted share, due mainly to lower gross
profit and higher administrative and selling expenses, slightly offset by
lower goodwill amortization and non-operating expense.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, as well
as for all purchase method business combinations completed after June 30,
2001. In addition, SFAS No. 141 specifies the criteria for intangible assets
acquired in a purchase method business combination to be recognized and
reported apart from goodwill.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment, at least annually, in accordance with the provisions of SFAS
No. 142. SFAS No. 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 142 must be adopted in fiscal
years beginning after December 15, 2001, as of the beginning of the year.
Companies with fiscal years beginning after March 15, 2001, may adopt early
provided that first quarter financial statement have not been issued. We are
assessing the impact of SFAS No. 142.
In October 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The primary objectives of SFAS No. 144 were to
develop one accounting model, based on the framework established in SFAS No.
121, for long-lived assets to be disposed of by sale and to address other
significant implementation issues. While SFAS No. 144 supersedes SFAS No.
121, it retains many of the fundamental provisions of SFAS No. 121. SFAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalents, which
amounted to $1.1 million at September 30, 2001, and amounts available under
our bank lines of credit. During the three months ended September 30, 2001,
cash and cash equivalents increased by $830,000. This increase resulted from
cash provided by operations of $3.1 million, offset by purchases of equipment
of $1.1 million and payments of debt of $1.2 million.
Net cash provided by operating activities of $3.1 million for the three
months ended September 30, 2001 was attributable primarily to income before
depreciation and amortization of $592,000 and a decrease of $1.3 million in
accounts receivable, a decrease of $578,000 in costs and estimated earnings in
excess of billings on uncompleted contracts and an increase of $1.3 million in
accounts payable. Substantially all of the costs and estimated earnings in
excess of billings on uncompleted contracts at September 30, 2001 are expected
to be billed and collected within 180 days of that date.
Net cash used in investing activities was $1.1 million for the three
months ended September 30, 2001 compared to net cash used in investing
activities of $799,000 for the three months ended September 30, 2000. We
utilized cash of $1.1 million and $801,000 for capital expenditures for the
three months ended September 30, 2001 and 2000, respectively. Our
subsidiaries require continuing investment in plant and equipment to remain
competitive as technology evolves and to increase production capacity to
accommodate potential business growth and expansion. Capital expenditures,
including financed amounts by capital leases, were approximately $1.2 million
during the three months ended September 30, 2001 and 2000.
We anticipate that additional expenditures of as much as $1.7 million may
be made during the remainder of fiscal 2002, which excludes the amount used to
purchase the Century assets, primarily to improve production efficiency at our
Thousand Oaks and San Diego subsidiaries. A substantial portion of these
capital expenditures is expected to be financed by our $3.6 million equipment
line of credit.
Net cash used in financing activities was $1.2 million for the three
months ended September 30, 2001 compared to net cash used in financing
activities of $210,000 for the three months ended September 30, 2000. As
discussed in Note 5 to the notes to the consolidated financial statements in
our June 30, 2001 Form 10-K, we have bank lines of credit to finance the
working capital requirements of our domestic and foreign operations. At
September 30, 2001, we had approximately $6.3 million available to borrow
under our bank lines of credit.
We have a credit facility for our domestic subsidiaries which consists of
a $16 million working capital line secured by accounts receivable, inventory
and equipment. Borrowings under the credit agreement bear interest at either
the bank's prime rate (6.00% at September 30, 2001) or a Eurodollar-base rate
(2.62% at September 30, 2001) plus 1.75%. At September 30, 2001, borrowings
under this credit facility amounted to $3.5 million. Our available borrowing
capacity as of September 30, 2001 was approximately $6.1 million. This credit
facility matures on September 25, 2003. The line of credit contains certain
financial covenants with which we were in compliance at September 30, 2001.
In addition, we also have a $3.6 million equipment line of credit to finance
our capital expenditures. Each advance under the equipment line will have a
five year term at either the bank's prime rate, a fixed rate at closing, or at
a Eurodollar-base rate plus 1.75%.
We also have a credit facility agreement with Ulster Bank Markets for our
Northern Ireland subsidiary. This agreement consists of an accounts
receivable revolver, with maximum borrowings equal to the lesser of 70% of
eligible receivables or 2,250,000 British pounds sterling (approximately $3.3
million at September 30, 2001), and bears interest at the bank's base rate
(5.25% at September 30, 2001) plus 2.00%. At September 30, 2001, borrowings
outstanding under this credit facility amounted to approximately $1.8 million
and our available borrowing capacity was approximately $281,000. This line of
credit matures on November 30, 2001 and we are currently negotiating a renewal
and extension of this credit facility with Ulster Bank through November 30,
2002.
At September 30, 2001, the ratio of current assets to current liabilities
was 1.7 to 1.0 compared to 1.9 to 1.0 at June 30, 2001. The decrease in the
working capital ratio is due to decreases in our accounts receivable and
inventory balances and an increase in our accounts payable balance. At
September 30, 2001, we had $11.5 million of working capital. At September 30,
2001, we had long-term borrowings of $9.1 million compared to $10.4 million at
June 30, 2001.
SMTEK San Diego moved into a new leased facility in Poway, California,
near the city of San Diego, on July 16, 2001. The new facility is
approximately 45,000 square feet. The former facility was located in El
Cajon, another city near San Diego. The former facility was approximately
20,000 square feet. On October 8, 2001, the landlord for the El Cajon
facility released SMTEK San Diego from its lease for that facility.
SMTEK Thousand Oaks is planning to move in January 2002 to a remodeled
facility in Moorpark, California, which is near Thousand Oaks. The new
facility is approximately 115,500 square feet. The current facility is
approximately 45,000 square feet. The current facility lease is being
marketed for a subtenant. The lease does not expire until May 31, 2004. We
currently expect to sublease the Thousand Oaks facility. If we are unable to
find a subtenant, we will be responsible for cost and expenses associated with
holding a vacant building in addition to amounts under the lease agreements.
As more fully described in Note 6 to the notes to our consolidated
financial statements in our June 30, 2001 Form 10-K, at September 30, 2001, we
have a federal tax assessment liability of approximately $1.1 million and a
related accrued interest liability of approximately $956,000, which reflect
the results of a tentative settlement with the IRS Appeals Division in March
2001. Upon finalization of the settlement, we intend to seek an installment
payment plan with the IRS.
On October 24, 2001, we completed a transaction to purchase out of
bankruptcy certain assets, but not assume any liabilities, of Century, an EMS
company. As part of this transaction, we also purchased substantially all of
the common stock of Century's subsidiary in Thailand. The aggregate purchase
price was approximately $3.1 million in cash and was funded by our bank lines
of credit. Approximately $1.5 million was funded by our $16 million domestic
working capital line of credit and approximately $1.6 million was funded by
our $3.6 million equipment line of credit. Concurrent with the purchase of
the assets, we have now opened operations in New England, Silicon Valley and
Thailand under the SMTEK name.
There can be no assurance that the equipment, machinery and inventory
purchased will be productive or useful to us. If we have to sell such
equipment, machinery or inventory, we can give no assurance that there will be
sufficient value received by us. There also can be no assurance that the
common stock of the Thailand operation will have significant value if the
foreign operation is not profitable in the future.
We may not be able to successfully integrate the new facilities and
operations into our overall business. We may not secure sufficient business
in the facilities being opened in New England, Silicon Valley and Thailand.
Also our debt-to-equity ratio may be adversely affected if the new facilities
are not profitable. If any adverse event related to these additional risk
factors arising out of the Century transaction, or the concurrent development
of our facilities, occurs, either alone, in conjunction with each other or in
conjunction with one or more of the risk factors identified in our other
filings with the SEC, there could be an adverse result in our operations or
financial condition.
Management believes that our cash resources and borrowing capacity on our
working capital lines of credit are sufficient to fund operations for at least
the next 12 months.
ENVIRONMENTAL MATTERS
Since the early 1990s, we continue to be involved in certain remediation
and investigative studies regarding soil and groundwater contamination at the
site of a former printed circuit board manufacturing plant in Anaheim,
California. One of our former subsidiaries, Aeroscientific Corp., leased the
Anaheim facility. Under the terms of a cost sharing agreement entered into
several years ago, the remaining remediation costs are currently being shared
on a 50-50 basis with the landlord. There is no environmental insurance
coverage for this remediation. At September 30, 2001, we had a reserve of
$431,000 for future remediation costs. Management, based in part on
consultations with outside environmental engineers and scientists, believes
that this reserve is adequate to cover its share of future remediation costs
at this site. However, the future actual remediation costs could differ
significantly from the estimates. Further, our portion could potentially
exceed the amount of our reserve. Our liability for remediation in excess of
our reserve could have a material adverse impact on our business, financial
condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents, accounts
receivable and short-term and long-term debt. At September 30, 2001, the
carrying amount of long-term debt (including current portion thereof but
excluding bank lines of credit) was $7.7 million and the fair value was $7.2
million. The carrying values of our other financial instruments approximated
their fair values. The fair value of our financial instruments is estimated
based on quoted market prices for the same or similar issues. A change in
interest rates of one percent would result in an annual impact on interest
expense of approximately $65,000.
It is our policy not to enter into derivative financial instruments for
speculative purposes. We may, from time to time, enter into foreign currency
forward exchange contracts in an effort to protect us from adverse currency
rate fluctuations on foreign currency commitments entered into in the ordinary
course of business. These commitments are generally for terms of less than
one year. The foreign currency forward exchange contracts are executed with
banks believed to be creditworthy and are denominated in currencies of major
industrial countries. Any gain or loss incurred on foreign currency forward
exchange contracts is offset by the effects of currency movements on the
respective underlying hedged transactions. We did not have any open foreign
currency forward exchange contracts at September 30, 2001.
A portion of our operations consists of investments in foreign
subsidiaries. As a result, our financial results have been and may continue
to be affected by changes in foreign currency exchange rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we experience various types of claims
which sometimes result in litigation or other legal proceedings. We do not
anticipate that any of these claims or proceedings that are currently pending
will have a material adverse effect on us.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 7, 2001 /s/ Kirk A. Waldron
--------------------------------- -----------------------------------
Date Kirk A. Waldron
Vice President - Finance
and Administration, Chief
Accounting Officer and
Treasurer (Principal
Financial Officer)
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