Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Where we say “we”, “us”, “our”, the “Company” or “SMTC”, we mean SMTC Corporation or SMTC Corporation and its subsidiaries, as the context may require. Where we refer to the “industry”, we mean the electronics manufacturing services industry.
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in combination with the accompanying unaudited interim consolidated financial statements and related notes as well as the audited consolidated financial statements and the accompanying notes to the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) included within the Company’s Annual Report on Form 10-K filed on March
15, 2019
. The forward-looking statements in this discussion regarding the electronics manufacturing services industry, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion include numerous risks and uncertainties, some of which are as described in the “Risk Factors” section in the Annual Report on Form 10-K filed on March
15, 2019
, as updated by Item 1A in Part II of this quarterly report. Certain statements in this MD&A contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “envisions”, “seeks” and other similar language and are considered forward looking statements or information under applicable securities laws. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict and the actual outcome may be materially different. Except as required by applicable law, we may not update these forward-looking statements after the date of this Form 10-Q, even though our situation may change in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
This MD&A contains discussion in U.S. dollars (US$) unless specifically stated otherwise.
Background
We are a provider of end-to-end electronics manufacturing services (“EMS”), including product design and engineering services, printed circuit board assembly (“PCBA”), production, enclosure, cable assembly, precision metal fabrication, systems integration and comprehensive testing services, configuration to order (“CTO”), build to order (“BTO”) and direct order fulfillment (“DOF”). We have more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Canada, Mexico, and China that provide local support and manufacturing capabilities to our global customers. Our services extend over the entire electronic product life cycle from new product development and new product introduction (“NPI”) through to growth, maturity and end of life phases. As of March 31, 2019, we had 3,202 employees of which 2,697 were full time and contract employees.
Results of Operations
The unaudited interim consolidated financial statements of SMTC are prepared in accordance with U.S. GAAP.
Quarter ended
March 3
1
, 201
9
compared with the quarter ended April
1
, 201
8
:
The following table sets forth summarized operating results in millions of US$ for the periods indicated:
|
|
Three months ended
March
3
1
, 201
9
|
|
|
Three months ended
April
1
, 201
8
|
|
|
Change
201
8
to 201
9
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Revenue
|
|
|
102.6
|
|
|
|
100.0
|
|
|
|
37.1
|
|
|
|
100.0
|
|
|
|
65.5
|
|
|
|
176.5
|
|
Cost of sales
|
|
|
94.0
|
|
|
|
91.6
|
|
|
|
33.3
|
|
|
|
89.8
|
|
|
|
60.7
|
|
|
|
182.3
|
|
Gross profit
|
|
|
8.6
|
|
|
|
8.4
|
|
|
|
3.8
|
|
|
|
10.2
|
|
|
|
4.8
|
|
|
|
126.3
|
|
Selling, general and administrative expenses
|
|
|
6.7
|
|
|
|
6.5
|
|
|
|
3.5
|
|
|
|
9.4
|
|
|
|
3.2
|
|
|
|
91.4
|
|
Change in fair value of contingent consideration
|
|
|
(3.1
|
)
|
|
|
(3.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3.1
|
)
|
|
|
100
|
|
Restructuring
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.6
|
|
|
|
100
|
|
Operating income
|
|
|
4.4
|
|
|
|
4.3
|
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
4.1
|
|
|
|
1400
|
|
Interest expense
|
|
|
2.9
|
|
|
|
2.8
|
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
2.6
|
|
|
|
900.0
|
|
Income before income taxes
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
(0.0
|
)
|
|
|
0.0
|
)
|
|
|
1.5
|
|
|
|
|
|
Income tax expense (recovery)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
200.0
|
|
Deferred
|
|
|
(0.0
|
)
|
|
|
0.0
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
|
|
100.0
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.3
|
|
|
|
300.0
|
|
Net income
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
1.2
|
|
|
|
—
|
|
Revenue
Industry Sector
|
|
Three months ended
March 31,
2019
|
|
|
Three months ended
April 1,
2018
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Test and Measurement
|
|
|
32.5
|
|
|
|
31.7
|
|
|
|
5.5
|
|
|
|
14.9
|
|
|
|
27.0
|
|
|
|
487.8
|
|
Retail and Payment Systems
|
|
|
12.9
|
|
|
|
12.6
|
|
|
|
7.3
|
|
|
|
19.5
|
|
|
|
5.7
|
|
|
|
78.3
|
|
Telecom, Networking and Communications
|
|
|
10.8
|
|
|
|
10.5
|
|
|
|
7.3
|
|
|
|
19.7
|
|
|
|
3.5
|
|
|
|
47.7
|
|
Medical
|
|
|
12.5
|
|
|
|
12.2
|
|
|
|
7.8
|
|
|
|
21.1
|
|
|
|
4.7
|
|
|
|
59.7
|
|
Industrial, Power and Clean Technology
|
|
|
19.6
|
|
|
|
19.1
|
|
|
|
3.6
|
|
|
|
9.8
|
|
|
|
16.0
|
|
|
|
447.1
|
|
Semiconductor
|
|
|
7.3
|
|
|
|
7.1
|
|
|
|
5.6
|
|
|
|
15.1
|
|
|
|
1.7
|
|
|
|
30.4
|
|
Aerospace and Defense
|
|
|
7.0
|
|
|
|
6.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7.0
|
|
|
|
N/A
|
|
Total
|
|
|
102.6
|
|
|
|
100.0
|
|
|
|
37.1
|
|
|
|
100.0
|
|
|
|
65.5
|
|
|
|
176.5
|
|
Revenue increased $65.5 million to $102.6 million for the first quarter of 2019 from $37.1 million in the first quarter of 2018. With the acquisition of MCA, we reported additional revenue of $43.5 million during the first quarter of 2019 compared to April 1, 2018. Volume increases with two customers serviced in the U.S., along with one new customer serviced in China, in the test and measurement sector, representing an increase in revenue of $7.9 million with an additional $19.9 million represented from the MCA acquisition. Two long-standing retail and payment systems customers serviced in Mexico represented an increase in revenue of $4.5 million. One long standing customer in the telecom, networking and communications sector serviced in China represented increased revenue of $2.1 million in addition to $2.3 million represented from the MCA acquisition. One customer serviced in Mexico in the semiconductor sector had increased volumes resulting in $1.7 million of additional revenue. In the industrial, power and clean technology sector one customer serviced in Mexico and one customer serviced in the U.S. had increased volumes representing an increase of $5.8 million in revenue with additional $10.0 million represented from the MCA acquisition. Also, revenue increased as a result of the MCA acquisition in the medical, and aerospace and defense sectors totaling $4.5 million and $7.0 million respectively.
We recorded approximately $2.2 million and $0.3 million of revenue from sales of raw materials inventory to customers during the first quarter of 2019 and the first quarter of 2018. The Company purchases raw materials based on customer purchase orders. When a customer requires an order to be altered or changed, the customer is generally obligated to purchase the original on-order raw material at cost, to the extent the materials are not consumed within a specified period.
Due to changes in market conditions, the life cycle of products, the nature of specific programs and other factors, revenue from a particular customer typically varies from quarter-to-quarter and year-to-year. The Company’s ten largest customers represented 55.7% of revenue during the first quarter of 2019, compared with 79.1% in the first quarter of 2018. Revenue from the largest customer during the first quarter of 2019 was $13.5 million representing 13.1% of total revenue. This compares with revenue from the four largest customers during the first quarter of 2018 of $5.0 million, $4.5 million, $3.8 million, and $3.7 million representing 13.4%, 12.1%, 10.2% and 10.1% respectively of total revenue. No other customers represented more than 10% of revenue in either period.
During the first quarter of 2019, 64.0% of our revenue was attributable to production from our operations in Mexico, 29.0% of our revenue was attributable to production from our operations in the U.S. and 7.0% of our revenue was attributable to production from our operations in China. During the first quarter of 2018, 78.0% of our revenue was attributable to production from our operations in Mexico, 13.9% of our revenue was attributable to production from our operations in the U.S. and 8.1% of our revenue was attributable to production from our operations in China.
Gross Profit
Gross profit for the first quarter of 2019 increased by $4.8 million to $8.6 million or 8.4% of revenue compared with $3.9 million or 10.2% of revenue for the same period in 2018. When excluding unrealized foreign exchange gains on unsettled forward contracts and amortization of intangible assets, the adjusted gross profit was $10.5 million or 10.2% of revenue for the first quarter of 2019 compared with $3.5 million or 9.5% of revenue for the first quarter of 2018. This was due primarily to the $65.5 million increase in revenue quarter over quarter, partially offset by higher variable manufacturing expenses. The decrease in gross profit percentage was due in part to the amortization of intangible assets of $1.8 million included in cost of sales that was not included in the same period in the prior year.
The Company calculates an adjusted gross profit amount as we consider gross margins exclusive of such unrealized foreign exchange gains or losses on unsettled forward foreign exchange contracts to be a meaningful measure as it is non-cash and management does not consider the mark-to-market valuation reflective of operating performance in the current period. Management also excludes the impact of intangible assets amortization as these charges are non-cash in nature and are not believed to be reflective of operating performance. Below is the reconciliation from the financial statement presentation of gross profit to the non-GAAP measure of adjusted gross profit:
|
|
Three months
ended
March
31
, 201
9
|
|
|
Three months
ended
April
1
, 201
8
|
|
Gross profit
|
|
$
|
8,624
|
|
|
$
|
3,850
|
|
Add:
|
|
|
|
|
|
|
|
|
Unrealized foreign exchange gains on unsettled forward exchange contracts
|
|
|
—
|
|
|
|
(319
|
)
|
Amortization of intangible assets
|
|
|
1,844
|
|
|
|
—
|
|
Adjusted gross profit
|
|
$
|
10,468
|
|
|
$
|
3,531
|
|
Adjusted gross profit percentage
|
|
|
10.2
|
%
|
|
|
9.5
|
%
|
The Company previously entered into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso expenditures. These contracts were effective as hedges from an economic perspective, but do not meet the requirements for hedge accounting under ASC Topic 815 “Derivatives and Hedging”. Accordingly, changes in the fair value of these contracts were recognized into net income in the consolidated statement of operations and comprehensive income. The Company had no forward foreign exchange contracts in the first quarter of 2019. Included in cost of sales for the first quarter of 2019 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $0.01 million. Included in cost of sales for the first quarter of 2018 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $0.3 million, and a realized gain of $0.05 million. The average contract and mark-to-market rates for outstanding forward foreign exchange contracts were as follows;
|
|
March 3
1
,
201
9
|
|
|
December
3
0
,
201
8
|
|
Average USD:CAD contract rate
|
|
|
N/A
|
|
|
|
N/A
|
|
Average USD:CAD mark-to-market rate
|
|
|
N/A
|
|
|
|
N/A
|
|
Average USD:PESO contract rate
|
|
|
N/A
|
|
|
|
20.43
|
|
Average USD:PESO mark-to-market rate
|
|
|
N/A
|
|
|
|
19.66
|
|
EBITDA and Adjusted EBITDA Reconciliation:
EBITDA and Adjusted EBITDA, non-GAAP financial measures, are defined as earnings before interest, taxes, depreciation and amortization, with Adjusted EBITDA also excluding restructuring charges, stock based compensation, unrealized foreign exchange gains and losses on unsettled forward foreign exchange contracts, fair value adjustment of warrant liability, fair value adjustment to contingent consideration and merger and acquisition related expenses. Management presents EBITDA and Adjusted EBITDA, as it is utilized by management to monitor performance against budget as well as compliance with bank covenants. We also believe EBITDA and Adjusted EBITDA provide useful information to investors in understanding and evaluating our operating results in the same manner as management.
Below is the reconciliation of net loss, the closest GAAP measure, to EBITDA and Adjusted EBITDA.
|
|
Three months
ended
March
31
, 201
9
|
|
|
Three months
ended
April
1
, 201
8
|
|
Net income
|
|
$
|
1,211
|
|
|
$
|
8
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
1,627
|
|
|
|
774
|
|
Amortization of intangible assets
|
|
|
1,844
|
|
|
|
—
|
|
Interest
|
|
|
2,870
|
|
|
|
307
|
|
Income taxes
|
|
|
271
|
|
|
|
26
|
|
EBITDA
|
|
$
|
7,823
|
|
|
$
|
1,115
|
|
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
624
|
|
|
|
—
|
|
Stock based compensation
|
|
|
88
|
|
|
|
126
|
|
Fair value adjustment of warrant liability
|
|
|
(101
|
)
|
|
|
—
|
|
Fair value adjustment to contingent consideration
|
|
|
(3,050
|
)
|
|
|
—
|
|
Merger and acquisition related expenses
|
|
|
91
|
|
|
|
—
|
|
Unrealized foreign exchange gain on unsettled forward exchange contracts
|
|
|
—
|
|
|
|
(319
|
)
|
Adjusted EBITDA
|
|
$
|
5,475
|
|
|
$
|
922
|
|
Adjusted EBITDA for three months ended March 31, 2019 increased by $4.6 million to $5.5 million compared with $0.9 million for the same period in 2018 due to the increase in gross profit. This was due in large part to the acquisition of MC Assembly, which represented an increase in adjusted EBITDA of $3.3 million compared to the same period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $6.7 million in the first quarter of 2019 from $3.5 million in the same period in 2018, $2.6 million of selling general and administrative expenses relates to the MC assembly acquisition which were not reflected in the same period in the prior year. However, selling, general and administrative expenses decreased to 6.5% of revenue in the first quarter of 2019 down from 9.4% of revenue in the same period in 2018 due to increase in revenue.
Change in fair value of contingent consideration
During the quarter, fair value of the contingent consideration liability was determined to be nil resulting in a gain of of $3,050 being recognized. The contingent consideration liability was initially recognized at fair value in the fourth quarter and relates to a contingent earn-out payment associated with the acquisition of MC Assembly. Fair value estimate under purchase accounting of $3,050 was derived from a multiple of earnings based on MC Assembly’s forecasted twelve month earnings for the period ended March 31, 2019. Based on actual earnings, the contingent consideration liability is considered resolved and no longer payable as at March 31, 2019.
Restructuring Charges
During the first quarter of 2019, restructuring charges of $0.6 million were incurred related to the reduction of 10 full-time equivalents (“FTEs”) in U.S. and 4 FTEs in Canada and 167 FTEs and contract employees in Mexico.
Interest Expense
Interest expense increased to $2.9 million in the first quarter of 2019 compared to $0.3 million in the same period in 2018. The increase was primarily the result of a higher average debt balance in the first quarter of 2018 compared to the same period in 2017, specifically with $62.0 million issuance of debt on the TCW Facilities on November 8, 2018 in order to finance the MCA acquisition. The weighted average interest rates with respect to the debt on our PNC Facility and TCW Facilities was 9.4%. The weighted average interest rates with respect to the debt on our predecessor PNC Facility was 5.5% for 2018.
Income Tax Expense
The Company recorded current income tax expense of $0.3 million and $0.1 million for each of the first quarter 2019 and 2018 in connection with U.S. state taxes and taxes on profits in certain foreign jurisdictions, and deferred income tax recovery of $0.0 million and income tax recovery of $0.1 million, respectively, in connection with temporary differences related to the Mexican operations.
Liquidity
As at March 31, 2019, the Company’s liquidity is comprised of $1.6 million in cash on hand and $16.6 million of funds available to borrow under the PNC Facility and TCW Facility, which mature on November 8, 2023. The Company funds its operations by regularly utilizing its PNC Facilities (refer to Note 5). The Company manages it capital requirements through budgeting and forecasting processes while monitoring for compliance with bank covenants. Funds available under the PNC Revolving Credit Facility are managed on a weekly basis based on the cash flow requirements of the various operating segments. Cash flows generated from operations are immediately applied towards paying down the PNC Revolving Credit Facility.
Net cash generated in operating activities during the three months ended March 31, 2019 was $2.9 million. Working capital changes related to $4.5 million reduction in inventory offset by the $3.8 million of increase in unbilled contract assets. In addition, a non cash adjustment of $3.1 million related to a fair value adjustment for contingent consideration during the quarter. Accounts payable had increased $2.0 million due to timing of payments and improved payment terms. Accounts payable days outstanding increased to 73 days for the first quarter of 2019 compared to 70 days for the first quarter of 2018. Inventory turnover, on an annualized basis was 5 times for the first quarter of 2019 and 2018. Accounts receivable days sales outstanding decreased to 58 days from 64 days for the first quarter of 2019 compared to the first quarter of 2018 primarily the result of improved cash cycle days compared to the same period in the prior year in addition to higher collections in the final month of the quarter.
Net cash used in financing activities during the first quarter of 2019 was $2.1 million compared to net cash used by $2.7 million for the first quarter of 2018. During the first quarter of 2019, the Company made net repayments to the revolving debt of $1.4 million compared to net repayments of $2.1 million for the same period in 2018. The Company also paid down its long-term debt in the amount of $0.3 million and $0.5 million, respectively in the first quarters of 2019 and 2018. Principal repayments on capital lease obligations were $0.4 million in the first quarter of 2019 compared to $0.04 million in the same period in prior year.
Net cash used in investing activities during the first quarter of 2019 was $0.7 million compared to $0.1 million in the first quarter of 2018, related to capital asset purchases.
Capital Resources
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) which governs the PNC Revolving Credit Facility (“PNC Facility”). The PNC Facility have a term ending on November 8, 2023. Advances made under the PNC Revolving Credit Facility bear interest at the U.S. base rate plus a grid ranging from 0.50% to 1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus a grid ranging from 1.50% to 2.00%. The base commercial lending rate should approximate U.S. prime rate.
The Company also borrows money under a Financing Agreement with TCW Asset Management Company, LLC, as collateral agent, and lenders from time to time party thereto (collectively, “TCW”), which governs a term loan A facility (“Term A Loan Facility”) and a term loan B facility (“Term Loan B Facility” and, together with the Term Loan A Facility, the “TCW Facilities” and, together with the PNC Facility, the “Credit Facilities”). The TCW Facilities mature on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 5.00%The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 8.50%.The base rate should approximate U.S. prime rate. Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i) 3.00% in the event that such payment occurs before the first anniversary of the closing date, (ii) 2.00% in the event that such payment occurs after the first anniversary of the closing date and on or before the second anniversary of the closing date and (iii) 1.00% in the event that such payment occurs after the second anniversary of the closing date and on or before the third anniversary of the closing date. No such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after the third anniversary of the Closing Date.
We believe that cash we expect to generate from operations, available cash and amounts available under our Credit Facilities will be adequate to meet our debt service requirements, capital expenditures and working capital needs at our current level of operations for the next twelve months, although no assurance can be given in this regard, particularly with respect to amounts available from lenders. We have agreed to a borrowing base formula under which the amount we are permitted to borrow under the PNC Facilities is based on our accounts receivable and inventory. Further, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to enable us to service our indebtedness. Our future operating performance and ability to service indebtedness will be subject to future economic conditions and to financial, business and other factors, certain of which are beyond our control.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”) which governs the PNC Revolving Credit Facility (“PNC Facility”). The PNC Facility have a term ending on November 8, 2023. Advances made under the PNC Revolving Credit Facility bear interest at the U.S. base rate plus a grid ranging from 0.50% to 1.00% or 1, 2 or 3-month fully-absorbed PNC LIBOR plus a grid ranging from 1.50% to 2.00%. The base commercial lending rate should approximate U.S. prime rate.
The Company also borrows money under a Financing Agreement with TCW Asset Management Company, LLC, as collateral agent, and lenders from time to time party thereto (collectively, “TCW”), which governs a term loan A facility (“Term A Loan Facility”) and a term loan B facility (“Term Loan B Facility” and, together with the Term Loan A Facility, the “TCW Facilities” and, together with the PNC Facility, the “Credit Facilities”). The TCW Facilities mature on November 8, 2023 (the “Maturity Date”). The Term Loan A Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 5.00%The Term Loan B Facility bears interest, as selected by the Company at the time of borrowing, at the base rate plus 8.50%.The base rate should approximate U.S. prime rate.
The impact of a 10% change in interest rates would have a material impact on our reported earnings.
10% increase in interest rate (million)
|
|
$
|
0.8
|
|
10% decrease in interest rate (million)
|
|
$
|
(0.8
|
)
|
Foreign Currency Exchange Risk
Given our global business operations, we are exposed to exchange rate fluctuations on expenditures denominated in foreign currencies. However, most of our sales and component purchases are denominated in U.S. dollars, which limits our foreign currency risk. Our foreign exchange risk relates primarily to our Canadian, Mexican and Asian payroll, Euro based component purchases and other operating expenses denominated in local currencies in our geographic locations. To mitigate this risk, the Company enters into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar and Mexican peso. The strengthening of the Canadian dollar and Mexican peso would result in an increase in costs to the organization and may lead to a reduction in reported earnings.
The impact of a 10% change in exchange rates would be estimated to have the following impact on cost of sales for the Company:
10% increase in both the CAD and PESO foreign exchange rates (million)
|
|
$
|
2.2
|
|
10% decrease in both the CAD and PESO foreign exchange rates (million)
|
|
$
|
(2.7
|
)
|
Credit Risk
In the normal course of operations, there is a risk that a counterparty may default on its contractual obligations to us which would result in a financial loss that could impact our reported earnings. In order to mitigate this risk, we complete credit approval procedures for new and existing customers and obtain credit insurance where it is financially viable to do so given anticipated revenue volumes, in addition to monitoring our customers’ financial performance. We believe our procedures in place to mitigate customer credit risk and the respective allowance for doubtful accounts are adequate. The Company takes measures to reduce credit risk, these charges can have a material impact on our financial performance.
There is limited risk of financial loss of defaults on our outstanding forward currency contracts as the counterparty to the transactions had a Standard and Poor’s rating of A- or above as at March 30, 2019.
Liquidity Risk
There is a risk that we may not have sufficient cash available to satisfy our financial obligations as they come due. The financial liabilities we have recorded in the form of accounts payable, accrued liabilities and other current liabilities are primarily due within 90 days with the exception of the current portion of capital lease obligations which could exceed 90 days and our PNC Revolving Credit Facility which utilizes a lock-box to pay down the obligation effectively daily. As at March 31, 2019, the Company’s liquidity is comprised of $1.6 million in cash on hand and $16.6 million of funds available to borrow under the PNC Revolving Credit Facility. We believe that cash flow from operations, together with cash on hand and our PNC Revolving Credit Facility, which has a maximum credit limit of $45.0 million of which $16.6 million of funds were available as at March 31, 2019 is sufficient to fund our financial obligations. However, availability under the PNC Revolving Credit Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, as determined by the lender.
Fair Value Measurement
The carrying values of the Company’s cash, accounts receivable, accounts payable and accrued liabilities due within one-year approximate fair values due to the short-term maturity of these instruments. The Company’s financial instruments at March 31, 2019, are comprised of the following:
|
|
As at
March 31, 2019
|
|
|
As at December 30, 2018
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Level 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,596
|
|
|
$
|
1,596
|
|
|
$
|
1,601
|
|
|
$
|
1,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
23,636
|
|
|
|
23,636
|
|
|
|
25,020
|
|
|
|
25,020
|
|
Current and long term debt
|
|
|
57,331
|
|
|
|
61,687
|
|
|
|
57,407
|
|
|
|
62,000
|
|
Warrant liability
|
|
|
1,797
|
|
|
|
1,797
|
|
|
|
2,009
|
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
3,050
|
|
|
|
3,050
|
|