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SMTC Corporation plans to wind-down its Chinese manufacturing operations when its current Dongguan, China facility lease expires in December 2019.
“Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors have caused a number of our customers to begin to re-evaluate demand for some of their products and reconsider where they outsource their manufacturing. Revenues attributable to production from SMTC’s manufacturing operations in China, which accounted for 5.3% of SMTC’s revenue in the first half of 2019, are projected to decline more than 30% for full year 2019 as compared to full year 2018, with continued contraction in 2020 which would result in negative operating margins from our China site. As a result, after more than a decade in the Chinese market, we will use the end of our lease term later this year as an opportunity to exit manufacturing in China as we continue to augment our strong North American manufacturing footprint,” said SMTC Corporation President and CEO Ed Smith.
“Across our sites in North America, we are addressing our customers’ needs for a faster time-to-market for new product introductions by adding new capabilities and certifications in our Billerica, Massachusetts location this quarter that provides our customers 'Quick-turn' manufacturing. This expansion follows our investment last quarter when we upgraded and expanded our capacity at our Fresnillo facility in Zacatecas, Mexico enabling a 25% increase in capacity, contributing to continued efficiency and profitability gains. We believe our expanding North American operations provide a strong foundation for continued growth,” commented Smith.
SMTC expects to record, related to the closure of its China manufacturing operations, restructuring and other charges of $5.4 million to $5.8 million which includes up to $3.3 million of non-cash accelerated asset write-downs, and other cash-based expenses, including employee-related costs. The majority of these charges are expected to be incurred in the remainder of the third and fourth quarter of 2019 and the net cash required to wind down the Chinese manufacturing operation is not expected to exceed $1.5 million.
“In addition to the China closure, we are seeing softness in certain end-markets across semiconductor and data center expansions. Accordingly, we are updating full year 2019 revenue to range between $354 and $362 million, which excludes $16 million of revenues in 2019 attributable to SMTC’s operations in China, and Adjusted EBITDA to $25.0 and $26.0 million,” said Smith.
“With our integration of MC Assembly and bank refinancing completed last quarter, our collective focus is on growing our funnel of business, including recent awards of $15 million of new business and new programs during the current quarter which we anticipate will begin shipping Q1 of next year. We expect our 2020 revenue and Adjusted EBITDA, which will exclude any operations in China, to range between $390 and $410 million and $29.0 to $31.0 million, respectively. Finally, we expect to generate up to $14 million of cash flow from operating activities for the full year of 2020 which we anticipate will result in a debt-leverage ratio of 2.5, using outstanding revolving credit facility, term loans outstanding and financial capital lease obligations compared against adjusted EBITDA on a trailing twelve months basis, exiting 2020,” added Smith.
SMTC Corporation was founded in 1985 and acquired MC Assembly Holdings, Inc. in November 2018. Following this acquisition, SMTC has more than 50 manufacturing and assembly lines in United States, China and Mexico which creates a powerful low-to-medium volume, high-mix, end-to-end global electronics manufacturing services (EMS) provider. With local support and expanded manufacturing capabilities globally, including fully integrated contract manufacturing services with a focus on global original equipment manufacturers and emerging technology companies, including those in the Defense and Aerospace, Industrial, Power and Clean Technology, Medical and Safety, Retail and Payment Systems, Semiconductors and Telecom, Networking and Communications; and Test and Measurement industries. As a mid-size provider of end-to-end EMS, SMTC provides printed circuit boards assemblies production, systems integration and comprehensive testing services, enclosure fabrication, as well as product design, sustaining engineering and supply chain management services. SMTC services extend over the entire electronic product life cycle from the development and introduction of new products through to the growth, maturity and end-of-life phases.