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: MARCH 31, 2002
-------------------
[ ] 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: 1-8101
Exact Name of Registrant as
Specified in Its Charter: SMTEK INTERNATIONAL, INC.
-------------------------
DELAWARE 33-0213512
- ------------------------------ ------------------
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: Identification No.
Address of Principal Executive Offices: 200 Science Drive
Moorpark, CA 93021
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 2,284,343 shares of Common Stock outstanding as of
May 3, 2002.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands except share amounts)
March 31, June 30,
2002 2001
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 838 $ 224
Accounts receivable, less allowance for doubtful
accounts of $416 and $407, as of March 31,
2002 and June 30, 2001, respectively 9,290 11,905
Costs and estimated earnings in excess
of billings on uncompleted contracts 3,663 7,965
Inventories 7,738 6,833
Prepaid expenses 736 745
-------- --------
Total current assets 22,265 27,672
-------- --------
Property, equipment and improvements, net of
accumulated depreciation and amortization 9,351 7,319
Other assets 792 941
-------- --------
$ 32,408 $ 35,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of bank lines of credit payable $ 2,540 $ 1,468
Current portion of long-term debt 2,525 2,109
Accounts payable 6,409 6,161
Accrued liabilities 4,960 4,556
-------- --------
Total current liabilities 16,434 14,294
-------- --------
Long-term liabilities:
Long-term bank lines of credit payable 1,989 4,638
Long-term debt 6,363 5,780
-------- --------
Total long-term liabilities 8,352 10,418
-------- --------
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
authorized; 2,284,343 and 2,282,339 shares
issued and outstanding at March 31, 2002 and
June 30, 2001, respectively 23 23
Additional paid-in capital 37,028 37,018
Accumulated deficit (29,292) (25,632)
Accumulated other comprehensive loss (137) (189)
-------- --------
Total stockholders' equity 7,622 11,220
-------- --------
$ 32,408 $ 35,932
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues $16,067 $25,008 $55,295 $70,080
Cost of goods sold 15,677 21,715 50,939 61,482
------- ------- ------- -------
Gross profit 390 3,293 4,356 8,598
------- ------- ------- -------
Operating expenses:
Administrative and selling 3,416 1,976 7,562 5,175
Goodwill amortization 9 9 28 661
------- ------- ------- -------
Total operating expenses 3,425 1,985 7,590 5,836
------- ------- ------- -------
Operating income (loss) (3,035) 1,308 (3,234) 2,762
------- ------- ------- -------
Non-operating income (expense):
Interest expense, net (283) (319) (846) (1,120)
Other income (expense), net 211 (41) 265 (78)
------- ------- ------- -------
Total non-operating expense, net (72) (360) (581) (1,198)
------- ------- ------- -------
Income (loss) before income taxes (3,107) 948 (3,815) 1,564
Income tax provision (benefit) (182) 22 (155) (96)
------- ------- ------- -------
Net income (loss) $(2,925) $ 926 $(3,660) $ 1,660
Other comprehensive income (loss):
Foreign currency
translation adjustments 8 (61) 52 (65)
------- ------- ------- -------
Comprehensive income (loss) $(2,917) $ 865 $(3,608) $ 1,595
======= ======= ======= =======
Basic earnings (loss) per share $ (1.28) $ 0.41 $ (1.60) $ 0.73
======= ======= ======= =======
Diluted earnings (loss) per share $ (1.28) $ 0.38 $ (1.60) $ 0.71
====== ======= ======= =======
Shares used in computing basic and
diluted earnings (loss) per share:
Basic 2,284 2,277 2,284 2,276
======= ======= ======= =======
Diluted 2,284 2,409 2,284 2,354
======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
March 31,
---------------------
2002 2001
------- -------
Cash flows from operating activities:
Net income (loss) $(3,660) $ 1,660
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 1,867 2,208
Gain on sale of assets (203) -
(Increase) decrease in accounts receivable 2,976 (811)
Decrease in costs and estimated earnings in
excess of billings on uncompleted contracts 4,302 503
Increase in inventories (517) (2,994)
Increase (decrease) in accounts payable (166) 563
Increase in other accrued liabilities 284 308
Other, net 26 (83)
------- -------
Net cash provided by operating activities 4,909 1,354
------- -------
Cash flows from investing activities:
Capital expenditures (3,830) (1,938)
Purchase of Century Thailand, net of cash received (129) -
Proceeds from sale of assets 325 16
------- -------
Net cash used in investing activities (3,634) (1,922)
------- -------
Cash flows from financing activities:
Repayments of bank lines of credit (1,622) (700)
Proceeds of long-term debt 2,452 2,001
Repayments of long-term debt (1,514) (1,071)
Proceeds from the exercise of stock options 7 9
------- -------
Net cash provided by (used in) financing activities (677) 239
------- -------
Effect of exchange rate changes on cash 16 2
------- -------
Increase (decrease) in cash and cash equivalents 614 (327)
Cash and cash equivalents at beginning of period 224 532
------- -------
Cash and cash equivalents at end of period $ 838 $ 205
======= =======
Supplemental cash flow information:
Interest paid $ 677 $ 946
Income taxes paid 45 58
Non-cash investing activities:
Capital expenditures financed by lease
obligations and notes payable - 589
Other obligations 2 25
See accompanying notes to unaudited condensed consolidated financial statements
SMTEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended March 31, 2002 and 2001
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.
We have seven wholly owned subsidiaries: SMTEK, Inc. (dba SMTEK
Moorpark), located in Moorpark, California; Technetics, Inc. (dba SMTEK San
Diego), located in San Diego, California; Jolt Technology, Inc. (aka SMTEK
Fort Lauderdale), located in Fort Lauderdale, Florida; SMTEK Europe Limited,
located in Craigavon, Northern Ireland; SMTEK New England, located in
Marlborough, Massachusetts; SMTEK Santa Clara, located in Santa Clara,
California; and SMTEK International Thailand Limited, located in Ayutthya,
Thailand.
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 March 31 for
clarity of presentation. The actual interim periods ended on March 29, 2002
and March 30, 2001.
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.
NOTE 2 - 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 $3.2 million in cash and was funded by our
existing long-term bank lines of credit.
Specifically, we purchased from Century certain equipment and machinery
for approximately $1.4 million and inventory for approximately $900,000. We
have and will continue to utilize some of the purchased assets at our other
locations. We negotiated new facility leases in Marlborough, Massachusetts
and Santa Clara, California and began operations in Marlborough and Santa
Clara in connection with the purchase of these assets.
As part of the Century agreement we purchased the common stock of the
Century subsidiary in Thailand for approximately $900,000. The acquisition of
the Thailand subsidiary provides us with a low cost manufacturing facility in
Southeast Asia. The acquisition of Century Thailand was accounted for using
the purchase method of accounting and, accordingly, the statements of
condensed consolidated operations include the results of the Thailand
subsidiary from the date of acquisition. The assets acquired and liabilities
assumed were recorded at fair value as determined by us based on information
currently available. A summary of the assets acquired and the liabilities
assumed in the acquisition is as follows (dollars in thousands):
Estimated fair values:
Assets acquired $1,392
Liabilities assumed 476
Purchase price $ 916
Less cash received 787
------
Net cash paid $ 129
======
Pro forma results of operations for the three and nine months ended March
31, 2002 and 2001, as if the acquisition of the Thailand subsidiary had
occurred at the beginning of the period reported, follow (dollars in
thousands). The pro forma results are not necessarily indicative of the
results which would have occurred if the business combination had occurred on
the date indicated:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenue $16,067 $26,735 $56,615 $76,474
======= ======= ======= =======
Net income (loss) $(2,925) $ 968 $(3,597) $ 1,851
======= ======= ======= =======
Earnings (loss) per share:
Basic $ (1.28) $ 0.43 $ (1.57) $ 0.81
======= ======= ======= =======
Diluted $ (1.28) $ 0.40 $ (1.57) $ 0.79
======= ======= ======= =======
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) 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 (loss) per share (dollars in thousands, except per share data):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss) $ (2,925) $ 926 $ (3,660) $ 1,660
========= ========= ========= =========
Weighted average shares:
Basic weighted average
number of common
shares outstanding 2,284,343 2,277,110 2,283,910 2,276,015
Dilutive effect of
outstanding common
stock equivalents - 131,974 - 78,024
--------- --------- --------- ---------
Diluted weighed average
number of common
shares outstanding 2,284,343 2,409,084 2,283,910 2,354,039
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (1.28) $ 0.41 $ (1.60) $ 0.73
========= ========= ========= =========
Diluted $ (1.28) $ 0.38 $ (1.60) $ 0.71
========= ========= ========= =========
Because we had a net loss for the three and nine months ended March 31,
2002, there were no common stock equivalents which had a dilutive effect on
earnings per share for such period. However, if we had reported net income
rather than a loss for the three and nine months ended March 31, 2002, the
additional diluted shares outstanding would have been 2,960 and 89,228 for the
three and nine months ended March 31, 2002, respectively. Further, options to
purchase approximately 571,700 shares of Common Stock at prices ranging from
$3.75 to $10.00 which were outstanding at March 31, 2002, would not have been
included in the computation of diluted earnings per share for the three and
nine months ended March 31, 2002, because the exercise price of these options
were greater than the average market price of the Common Stock. Options and
warrants to purchase approximately 99,500 shares of Common Stock at prices
ranging from $6.50 to $21.25 were outstanding at March 31, 2001, but were not
included in the computation of diluted earnings per share for the three and
nine months ended March 31, 2001, 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,
were outstanding during the three and nine months ended March 31, 2002 and
2001, but were not included in the computation of diluted earnings per share
because the effect would be antidilutive. 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 the May 15, 2001 maturity date are no
longer outstanding for the three and nine months ended March 31, 2002; but
were outstanding during the three and nine months ended March 31, 2001, and
were excluded from the computation of diluted earnings per share because the
effect would be antidilutive.
NOTE 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
We recognize revenues and cost of sales upon shipment of products except
at our Moorpark subsidiary which 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):
March 31, June 30,
2002 2001
------------- --------
Costs incurred to date on
uncompleted contracts $ 83,277 $ 82,929
Estimated earnings based on
percentage of completion 8,977 10,643
-------- --------
92,254 93,572
Less: Billings to date (88,591) (85,607)
-------- --------
Total costs and estimated
earnings in excess of billings
on uncompleted contracts $ 3,663 $ 7,965
======== ========
NOTE 5 - INVENTORIES
Inventories consist of the following (in thousands):
March 31, June 30,
2002 2001
------------- --------
Raw materials $5,761 $3,929
Work in process 1,804 2,700
Finished goods 173 204
------ ------
$7,738 $6,833
Total inventories ====== ======
Note 6 - PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following (in
thousands):
March 31, June 30,
2002 2001
------------- --------
Buildings and improvements $ 3,801 $ 2,827
Plant equipment 16,099 13,691
Office and other equipment 2,886 2,614
Less accumulated depreciation and amortization (13,435) (11,813)
-------- --------
Total property, equipment and improvements $ 9,351 $ 7,319
======== ========
NOTE 7- CREDIT AGREEMENTS
At March 31, 2002, borrowings under our working capital facility for our
domestic subsidiaries amounted to $2.0 million. After deducting for the
borrowings, our available borrowing capacity as of March 31, 2002 was
approximately $4.5 million. This credit facility matures on September 25,
2003. The line of credit contains certain financial covenants with which we
were not in compliance at March 31, 2002. As a result, the terms of our lines
of credit have been amended as of May 1, 2002. Under the new terms, our line
of credit is currently $11.0 million, interest is at either the bank's prime
rate (4.75% at March 31, 2002) plus 0.50% or a Eurodollar-base rate (1.86% at
March 31, 2002) plus 3.25%, and covenants have been amended. We are currently
and expect to be in compliance with the amended bank covenants.
In addition, we also have a $3.6 million equipment line of credit to
finance our capital expenditures, of which there was approximately $2.0
million in available borrowing capacity at March 31, 2002, which based on the
amended credit facility terms, as discussed above, will not be available to us
until a review by the bank at a future date. Each advance under the equipment
line will have a five year term. Under the amended credit facility terms,
interest is at either the bank's prime rate (4.75% at March 31, 2002) plus
0.50%, a fixed rate at closing, or a Eurodollar-base rate (1.86% at March 31,
2002) plus 3.25%.
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 $3.2
million at March 31, 2002), and bears interest at the bank's base rate (4.00%
at March 31, 2002) plus 2.00%. At March 31, 2002, borrowings outstanding
under this credit facility amounted to approximately $2.5 million and there
was nominal available borrowing capacity. This line of credit matures on
November 30, 2002.
NOTE 8 - 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 Nine Months Ended
March 31, March 31,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenues:
United States $13,172 $20,599 $47,704 $55,349
Northern Ireland 2,603 4,409 6,950 14,731
Thailand 292 - 641 -
------- ------- ------- -------
Total revenues $16,067 $25,008 $55,295 $70,080
======= ======= ======= =======
March 31, June 30,
2002 2001
--------- --------
Long-lived assets:
United States $7,922 $5,997
Northern Ireland 1,578 1,779
Thailand 280 -
------ ------
Total long-lived assets $9,780 $7,776
====== ======
NOTE 9 - COMMITMENTS AND CONTINGENCIES - 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 March 31, 2002, 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.
NOTE 10 - FOREIGN CURRENCY FORWARD CONTACTS
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. In accordance with Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," derivative financial instruments are recorded at fair value at
each quarter end with realized and unrealized gains and losses reflected in
current income. At March 31, 2002 we had a forward foreign currency contract
to sell $60,000 for approximately 43,000 British pounds sterling before May
31, 2002. The U.S. dollar to British pounds sterling exchange rate at March
31, 2002 was 1.44. Had we exercised this contract on March 31, 2002, we would
have realized a $1,300 gain on the transaction.
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 RESULTS, 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.
We have seven wholly owned subsidiaries: SMTEK, Inc. (dba SMTEK
Moorpark), located in Moorpark, California; Technetics, Inc. (dba SMTEK San
Diego), located in San Diego, California; Jolt Technology, Inc. (aka SMTEK
Fort Lauderdale), located in Fort Lauderdale, Florida; SMTEK Europe Limited,
located in Craigavon, Northern Ireland; SMTEK New England, located in
Marlborough, Massachusetts; SMTEK Santa Clara, located in Santa Clara,
California; and SMTEK International Thailand Limited, located in Ayutthya,
Thailand.
CRITICAL ACCOUNTING POLICIES
In response to SEC Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," we have identified our most
critical accounting policies that require significant management judgment or
involve complex estimates upon which our financial status depends. The
consolidated condensed financial statements and related notes within this
Quarterly Report on Form 10-Q contain information that is pertinent to our
accounting policies and to management's discussion and analysis and should
also be read in conjunction with our 2001 Annual Report on Form 10-K as filed
with the SEC on September 26, 2001. The information that follows describes
specific disclosures about our accounting policies regarding risks, estimates,
subjective decisions, or assessments that materially different results of
operations and financial condition could have been reported had different
assumptions been used or different conditions existed.
REVENUE AND COST RECOGNITION--We recognize revenues and cost of sales
upon shipment of products except at our Moorpark subsidiary which 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. A change in our estimate
of costs to complete could result in lower earnings than currently recorded.
A portion of the asset "costs and estimated earnings in excess of billings on
uncompleted contracts" contains revenues recognized in excess of amounts
billed.
INVENTORIES--Inventories are stated at the lower of cost or net
realizable value, with cost determined principally by use of the first-in,
first-out method. We write down inventory for slow-moving and obsolete
inventory based on assessments of future demands, market conditions and
customers who may be experiencing financial difficulties. If these factors
are less favorable than those projected, additional inventory write downs may
be required.
LONG-LIVED ASSETS--Property, equipment and improvements are stated at
cost. Depreciation and amortization are computed on the straight-line method.
The principal estimated useful lives are: buildings - 20 years; improvements
- - 10 to 18 years; and plant, office and other equipment - 3 to 7 years.
Property, equipment and improvements acquired by our foreign operating unit
are recorded net of capital grants received from the Industrial Development
Board ("IDB") for Northern Ireland. Goodwill represents the excess of
acquisition cost over the fair value of net assets of a purchased business,
and is being amortized over 15 years. The recoverability of long-lived assets
is evaluated whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and if future undiscounted
cash flows are believed insufficient to recover the remaining carrying value
of the asset, the carrying value is written down to fair value in the period
the impairment is identified. Factors we consider important which could
trigger an impairment review include, but are not limited to, the following:
- the asset's ability to continue to generate income;
- loss of legal ownership or title to the asset;
- significant changes in our strategic business objectives and
utilization of the asset; or
- the impact of significant negative industry or economic trends
ACCOUNTS RECEIVABLE--We perform ongoing credit evaluations of our
customers and adjust credit limits based upon each customer's payment history
and current credit worthiness, as determined by credit information available
at that time. We continuously monitor collections and payments from our
customers and we maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required
payments. If the condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
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 March 31 for
clarity of presentation. The actual interim periods ended on March 29, 2002
and March 30, 2001.
Consolidated revenues for the three and nine months ended March 31, 2002
were $16.1 million and $55.3 million, respectively, compared to $25.0 million
and $70.1 million, respectively, for the three and nine months ended March 31,
2001. The decreases in revenues of 36% and 21% for the three and nine months
ended March 31, 2002, respectively, compared to the same periods of the prior
year, were primarily due to the current downward economic and EMS market
trends in the United States. Currently our Moorpark facility is entering into
sales contracts consistent with our other locations, and as such is
recognizing revenue on these new arrangements upon shipment of products rather
than on the percentage of completion method. We expect revenues to be
negatively impacted during the next three to nine months as a result of this
change in business practice. Starting in the third quarter of fiscal 2001,
existing customers began to defer shipments, and some have cancelled orders.
Under normal circumstances, there is a gestation period of six to twelve
months once a new order/product is received from a new customer.
Consolidated gross profit for the three and nine months ended March 31,
2002 was $390,000 (2.4% of sales) and $4.4 million (7.9% of sales),
respectively, compared to $3.3 million (13.2% of sales) and $8.6 million
(12.3% of sales) for the three and nine months ended March 31, 2001,
respectively. Gross profit for the three and nine months ended March 31, 2002
was positively impacted by the benefit received from inventory used during the
period that was purchased at a discount from the bankruptcy of Century
Electronics Manufacturing, Inc. ("Century"). Excluding the positive impact
from these reduced inventory costs, we estimate that the consolidated gross
profit for the three and nine months ended March 31, 2002 would have been
approximately negative $50,000 (-0.3% of sales) and $3.1 million (5.6% of
sales), respectively. We expect this benefit to continue for the next three
to six months, although the amount and impact of the benefit recognized may be
less in future periods. The decrease in gross profit and gross profit margin,
excluding the purchase benefit, was due to several factors. Revenues have
been declining at a faster rate than the decline in cost of sales, as fixed
costs have been spread over a smaller volume of production; and also during
the quarter ended March 2002, we recorded a $400,000 inventory write down for
excess/slow moving materials.
Administrative and selling expenses for the three and nine months ended
March 31, 2002 were $3.4 million and $7.6 million, respectively, compared to
$2.0 million and $5.2 million for the three and nine months ended March 31,
2001, respectively. The increase was due to selling and administrative
expenses incurred in our new facilities and to the expansion of our managerial
and administrative staff during fiscal 2001 caused by our growth during the
past fiscal year, recognition of a $342,000 bad debt provision in the third
quarter of 2002, recognition of a $510,000 loss related to the lease at our
former Thousand Oaks facility in the third quarter of 2002, and relocation
expenses relating to our San Diego (first quarter 2002) and Moorpark (third
quarter 2002) facilities.
Goodwill amortization decreased to $9,000 and $28,000 during the three
and nine months ended March 31, 2002, respectively, from $9,000 and $661,000
for the three and nine months ended March 31, 2001, respectively. 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 SMTEK, Inc.
in January 1996.
Total non-operating expense was $72,000 and $581,000 for the three and
nine months ended March 31, 2002, respectively, compared to $360,000 and $1.2
million for the three and nine months ended March 31, 2001, respectively. The
primary reason for this decrease was due to a gain on sale of assets of
$203,000 in the third quarter 2002 and the decrease in interest expense as a
result of lower average interest rates and lower levels of debt outstanding
during the three and nine months ended March 31, 2002 as compared to the three
and nine months ended March 31, 2001.
We had an income tax benefit of $182,000 and $155,000 for the three and
nine months ended March 31, 2002, respectively, as compared to income tax
expense of $22,000 and income tax benefit $96,000 for the three and nine
months ended March 31, 2001, respectively. The three and nine months ended
March 31, 2002 amounts reflect a $164,000 income tax benefit resulting from
passage of the 2002 Stimulus Package providing for the recovery of our
alternative minimum taxes paid in fiscal years 2000 and 2001. Without this
item, we would have reported an income tax benefit of $18,000 and income tax
expense of $9,000 for the three and nine months ended March 31, 2002,
respectively. The three and nine months ended March 31, 2001 amounts reflect
a $64,000 and $218,000, respectively, of income tax benefit resulting from a
reduction of a recorded liability for a federal tax assessment related to
prior years, as discussed in Note 6 of our 2001 Annual Report on Form 10-K.
Without these items, we would have reported income tax provisions of $86,000
and $122,000 in the three and nine months ended March 31, 2001, respectively.
Our tax rate is lower than the statutory income tax rates due to the
utilization of federal and state net operating loss carryforwards. During
fiscal year 2001, we had utilized a majority of our California state net
operating loss carryforwards, however, this ceased during fiscal year 2002 as
we have incurred operating losses. Based on the level of historical losses,
management believes that it does not have the basis to conclude that it is
more likely than not that the deferred tax assets will be realized, and
therefore, has recorded a 100% valuation allowance to offset the net deferred
assets.
Net loss for the three and nine months ended March 31, 2002, was $2.9
million and $3.7 million, respectively, or $1.28 and $1.60 loss per diluted
share, respectively, compared to net income of $926,000 and $1.7 million for
the three and nine months ended March 31, 2001, or $0.38 and $0.71 per diluted
share. This decrease is primarily due to lower revenues and higher
administrative and selling expenses, slightly offset by lower cost of sales,
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. We have adopted SFAS No. 141.
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" and SFAS No. 144 (see below) upon
adoption. We will adopt SFAS No. 142 as of July 1, 2002. 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. We are assessing the impact of SFAS No. 144.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalents, which
amounted to $838,000 at March 31, 2002, and amounts available under our bank
lines of credit, which amounted to $4.5 million. During the nine months ended
March 31, 2002, cash and cash equivalents increased by $614,000. This
increase resulted from cash provided by operations of $4.9 million, offset by
$3.8 million for the purchase of capital expenditures and $684,000 net
repayment of debt.
Net cash provided by operating activities of $4.9 million for the nine
months ended March 31, 2002 was attributable primarily to a decrease of $4.3
million in costs and estimated earnings in excess of billings on uncompleted
contracts, a decrease of $3.0 million in accounts receivables and $1.9 million
in depreciation and amortization, offset by the year to date net loss of $3.8
million and an increase of $517,000 in inventory. Substantially all of the
costs and estimated earnings in excess of billings on uncompleted contracts at
March 31, 2002 are expected to be billed and collected within 180 days of that
date.
Net cash used in investing activities was $3.6 million for the nine
months ended March 31, 2002 compared to net cash used in investing activities
of $1.9 million for the nine months ended March 31, 2001. We utilized cash of
$3.8 million and $1.9 million for capital expenditures for the nine months
ended March 31, 2002 and 2001, respectively. Amounts financed by notes
payable were approximately $2.5 million and $2.6 million for the nine months
ended March 31, 2002 and 2001, respectively. In the nine months ended March
31, 2002 we also utilized cash of $129,000 to purchase the common stock of
Century's subsidiary in Thailand. 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.
We anticipate that additional expenditures of as much as $650,000 may be
incurred during the remainder of fiscal 2002, primarily to improve production
efficiency at our Moorpark, San Diego and New England subsidiaries. A
substantial portion of these capital expenditures are expected to be financed
by our line of credit or other notes/leases payable.
Net cash used in financing activities was $677,000 for the nine months
ended March 31, 2002 compared to net cash provided by financing activities of
$239,000 for the nine months ended March 31, 2001. As discussed further 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 March 31, 2002, we
had approximately $4.5 million available to borrow under our revolving bank
lines of credit.
At March 31, 2002, borrowings under our working capital facility for our
domestic subsidiaries amounted to $2.0 million. After deducting for the
borrowings, our available borrowing capacity as of March 31, 2002 was
approximately $4.5 million. This credit facility matures on September 25,
2003. The line of credit contains certain financial covenants with which we
were not in compliance at March 31, 2002, as a result, the terms of our lines
of credit have been amended as of May 1, 2002. Under the new terms, our line
of credit currently is $11 million, interest is at either the bank's prime
rate (4.75% at March 31, 2002) plus 0.50% or a Eurodollar-base rate (1.86% at
March 31, 2002) plus 3.25%, and covenants have been amended. We are currently
and expect to be in compliance with the amended bank covenants.
In addition, we also have a $3.6 million equipment line of credit to
finance our capital expenditures, of which there was approximately $2.0
million in available borrowing capacity at March 31, 2002, which based on the
amended credit facility terms, as discussed above, will not be available to us
until a review by the bank at a future date. Each advance under the equipment
line will have a five year term. Under the amended credit facility terms,
interest is at either the bank's prime rate plus 0.50%, a fixed rate at
closing, or at a Eurodollar-base rate plus 3.25.
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 $3.2
million at March 31, 2002), and bears interest at the bank's base rate (4.00%
at March 31, 2002) plus 2.00%. At March 31, 2002, borrowings outstanding
under this credit facility amounted to approximately $2.5 million and had
nominal available borrowing capacity. This line of credit matures on November
30, 2002.
At March 31, 2002 the ratio of current assets to current liabilities was
1.4 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 cost and estimated earnings
in excess of billings balance and our accounts receivable balances and
increases in our inventory and line of credit balances. At March 31, 2002, we
had $5.8 million of working capital. At March 31, 2002, we had long-term
borrowings of $8.4 million which was lower than the balance at June 30, 2001
of $10.4 million.
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.
As a result of the acquisition of Century assets, we entered into a seven
year lease of a 69,400 square foot facility in Marlborough, Massachusetts and
we also entered into a seven month lease, subject to an option for a long-term
extension, of a 44,700 square foot facility in Santa Clara, California. The
current month base rents are approximately $33,000 and $32,000 for Marlborough
and Santa Clara, respectively.
SMTEK Moorpark has moved to a remodeled facility in Moorpark, California,
from its former location in Thousand Oaks. The Thousand Oaks building is
being marketed for a subtenant. This lease does not expire until May 31,
2004. We currently expect to sublease the Thousand Oaks building. 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. During the quarter ended March 31, 2002, we recognized
approximately $510,000 in administrative and selling expenses related to the
write off of leasehold improvements and holding expenses related to the
maintenance of the now vacant building. Monthly rent for the Thousand Oaks
building is approximately $35,000.
As more fully described in Note 6 to the notes to our consolidated
financial statements in our June 30, 2001 Form 10-K, at March 31, 2002, we
have a federal tax assessment liability of approximately $1.1 million and a
related accrued interest liability of approximately $1.1 million, which
reflect the results of a settlement with the IRS Appeals Division in December
2001. We are currently seeking an installment payment plan with the IRS.
On October 24, 2001, we completed a transaction to purchase out of
bankruptcy certain assets, but did not assume 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 $3.2 million in cash and was funded by our bank lines
of credit. Approximately $1.5 million was funded by our domestic working
capital line of credit and approximately $1.6 million was funded by our
equipment line of credit.
Specifically, we purchased from Century certain equipment and machinery
for approximately $1.4 million and inventory for approximately $900,000. We
have and will continue to use some of the purchased assets at our other
locations. We negotiated new facility leases in Marlborough, Massachusetts
and Santa Clara, California and began operations in Marlborough and Santa
Clara in connection with the purchase of these assets. Also, as part of the
Century agreement we purchased the common stock of the Century subsidiary in
Thailand for approximately $900,000.
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, Santa Clara and Thailand.
Also, our debt-to-equity ratio may be adversely affected if the new facilities
are not profitable or cash flow positive. 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 March 31, 2002, 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 March 31, 2002, the carrying
amount of long-term debt (including current portion thereof but excluding bank
lines of credit) was $8.9 million and the fair value was $8.4 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 $75,000.
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. Derivative financial instruments are recorded at fair
value at each quarter end with realized and unrealized gains and losses
reflected in current income. At March 31, 2002 we had a forward foreign
currency contract to sell $60,000 for approximately 43,000 British pounds
sterling before May 31, 2002. The U.S. dollar to British pounds sterling
exchange rate at March 31, 2002 was 1.44. Had we exercised this contract on
March 31, 2002, we would have realized a $1,300 gain on the transaction.
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. Exhibits:
10.1 Amendment No. 2 to Credit Agreement, dated May 1, 2002, between the
Company and Comerica Bank.
b. Reports on Form 8-K:
On February 19, 2002, we filed a Form 8-K acknowledging that
exploratory discussions of a possible merger with Electronic Product
Integration Corporation were underway.
On March 5, 2002, we filed a Form 8-K indicating the exploratory
merger discussions with Electronic Product Integration Corporation had ended.
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.
May 10, 2002 /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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