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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

 

For the quarterly period ended June 28, 2020

 

OR

 

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 000-31051

 

SMTC CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

Delaware

98-0197680

(STATE OR OTHER JURISDICTION OF 

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER IDENTIFICATION NO.)

 

7050 WOODBINE AVENUE

MARKHAM, Ontario, Canada L3R 4G8

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(905) 479-1810

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

SMTX

Nasdaq Global Select Market

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company”. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 6, 2020, SMTC Corporation had 28,214,800 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

 


 

SMTC CORPORATION

 

Table of Contents

 

PART I FINANCIAL INFORMATION

3

  

  

 

Item 1

Financial Statements

3

  

  

 

 

Interim Consolidated Balance Sheets (unaudited)

3

  

  

 

 

Interim Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)

4

  

  

 

 

Interim Consolidated Statements of Changes in Shareholders’ Equity (unaudited) 

5

  

  

 

 

Interim Consolidated Statements of Cash Flows (unaudited)

6

  

  

 

 

Notes to Interim Consolidated Financial Statements (unaudited)

7

  

  

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

  

  

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

35

  

  

 

Item 4

Controls and Procedures

36

  

 

PART II OTHER INFORMATION

37

  

  

 

Item 1A

 Risk factors

37

 

 

 

Item 6

Exhibits

38

 

2


 

Part I FINANCIAL INFORMATION

Item 1 Financial Statements

Interim Consolidated Balance Sheets:

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

311

 

 

$

1,368

 

Accounts receivable — net (note 3)

 

 

65,071

 

 

 

69,919

 

Unbilled contract assets (note 3)

 

 

38,647

 

 

 

26,271

 

Inventories (note 3)

 

 

50,125

 

 

 

47,826

 

Prepaid expenses and other assets

 

 

6,813

 

 

 

7,044

 

Derivative assets (note 9)

 

 

459

 

 

 

 

Income taxes receivable

 

 

160

 

 

 

 

Total current assets

 

 

161,586

 

 

 

152,428

 

Property, plant and equipment — net (note 3)

 

 

23,495

 

 

 

25,310

 

Operating lease right of use assets — net

 

 

6,419

 

 

 

3,330

 

Goodwill (note 3)

 

 

18,165

 

 

 

18,165

 

Intangible assets — net (note 3)

 

 

10,383

 

 

 

12,747

 

Deferred income taxes — net

 

 

473

 

 

 

540

 

Deferred financing costs — net

 

 

749

 

 

 

859

 

Total assets

 

$

221,270

 

 

$

213,379

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Revolving credit facility (note 4)

 

$

33,943

 

 

$

34,701

 

Accounts payable

 

 

70,591

 

 

 

74,126

 

Accrued liabilities (note 3)

 

 

20,039

 

 

 

11,164

 

Warrant liability (note 4)

 

 

1,612

 

 

 

1,730

 

Restructuring liability (note 10)

 

 

675

 

 

 

1,597

 

Income taxes payable

 

 

267

 

 

 

157

 

Current portion of long-term debt (note 4)

 

 

1,875

 

 

 

1,250

 

Current portion of operating lease obligations

 

 

1,494

 

 

 

1,128

 

Current portion of finance lease obligations

 

 

1,110

 

 

 

1,226

 

Total current liabilities

 

 

131,606

 

 

 

127,079

 

Long-term debt (note 4)

 

 

32,903

 

 

 

33,750

 

Operating lease obligations

 

 

5,339

 

 

 

2,615

 

Finance lease obligations

 

 

8,278

 

 

 

8,838

 

Total liabilities

 

 

178,126

 

 

 

172,282

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Capital stock (note 5)

 

 

508

 

 

 

508

 

Additional paid-in capital

 

 

293,706

 

 

 

293,389

 

Deficit

 

 

(251,070

)

 

 

(252,800

)

 

 

 

43,144

 

 

 

41,097

 

Total liabilities and shareholders’ equity

 

$

221,270

 

 

$

213,379

 

 

Commitments (note 11)

 

Subsequent event (note 12)

 

See accompanying notes to interim consolidated financial statements.

3


 

Interim Consolidated Statements of Operations and Comprehensive Income (loss)

(Expressed in thousands of U.S. dollars, except number of shares and per share amounts)

(Unaudited)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 28,

2020

 

 

June 30,

2019

 

 

June 28,

2020

 

 

June 30,

2019

 

Revenue (note 3)

 

$

90,406

 

 

$

90,936

 

 

$

185,544

 

 

$

193,585

 

Cost of sales (note 9)

 

 

79,720

 

 

 

81,939

 

 

 

165,219

 

 

 

175,964

 

Gross profit

 

 

10,686

 

 

 

8,997

 

 

 

20,325

 

 

 

17,621

 

Selling, general and administrative expenses

 

 

7,107

 

 

 

6,560

 

 

 

14,326

 

 

 

13,359

 

Change in fair value of contingent consideration

 

 

 

 

 

 

 

 

 

 

 

(3,050

)

Restructuring charges (reversal) (notes 3 and 10)

 

 

(125

)

 

 

1,546

 

 

 

(346

)

 

 

2,170

 

Operating income

 

 

3,704

 

 

 

891

 

 

 

6,345

 

 

 

5,142

 

Fair value measurement loss (gain) on warrant liability (note 4)

 

 

399

 

 

 

40

 

 

 

(118

)

 

 

(61

)

Interest expense (note 3)

 

 

1,987

 

 

 

2,800

 

 

 

4,080

 

 

 

5,670

 

Net income (loss) before income taxes

 

 

1,318

 

 

 

(1,949

)

 

 

2,383

 

 

 

(467

)

Income tax expense (note 6):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

311

 

 

 

416

 

 

 

586

 

 

 

695

 

Deferred

 

 

52

 

 

 

103

 

 

 

67

 

 

 

95

 

 

 

 

363

 

 

 

519

 

 

 

653

 

 

 

790

 

Net income (loss) and comprehensive income (loss)

 

 

955

 

 

 

(2,468

)

 

 

1,730

 

 

 

(1,257

)

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

 

$

(0.10

)

 

$

0.06

 

 

$

(0.05

)

Diluted

 

$

0.03

 

 

$

(0.10

)

 

$

0.06

 

 

$

(0.05

)

Weighted average number of shares outstanding (note 7):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

28,213,729

 

 

 

23,557,944

 

 

 

28,204,514

 

 

 

23,403,431

 

Diluted

 

 

29,493,472

 

 

 

23,557,944

 

 

 

29,484,257

 

 

 

23,403,431

 

 

See accompanying notes to interim consolidated financial statements.

4


 

Interim Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

Three months ended June 28, 2020

(Unaudited)

 

 

 

Common

Shares

 

 

Capital

stock

 

 

Additional

paid-in

capital

 

 

Deficit

 

 

Total

Shareholders’

equity

 

Balance, March 29, 2020

 

 

28,195,300

 

 

$

508

 

 

$

293,551

 

 

$

(252,025

)

 

$

42,034

 

RSU vested and stock options exercised

 

 

19,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

155

 

 

 

 

 

 

155

 

Net income

 

 

 

 

 

 

 

 

 

 

 

955

 

 

 

955

 

Balance, June 28, 2020

 

 

28,214,800

 

 

 

508

 

 

 

293,706

 

 

 

(251,070

)

 

 

43,144

 

 

Three months ended June 30, 2019

(Unaudited)

 

 

 

Common

Shares

 

 

Capital

stock

 

 

Additional

paid-in

capital

 

 

Deficit

 

 

Total

Shareholders’

equity

 

Balance, March 31, 2019

 

 

23,350,558

 

 

$

460

 

 

$

278,734

 

 

$

(245,594

)

 

$

33,600

 

RSU vested and issued in common shares

 

 

18,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares from rights offering

 

 

4,642,030

 

 

 

46

 

 

 

13,998

 

 

 

 

 

 

14,044

 

Stock-based compensation

 

 

 

 

 

 

 

 

97

 

 

 

 

 

 

97

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,468

)

 

 

(2,468

)

Balance, June 30, 2019

 

 

28,011,088

 

 

$

506

 

 

$

292,829

 

 

$

(248,062

)

 

$

45,273

 

 

See accompanying notes to interim consolidated financial statements.

 

 

 

Six months ended June 28, 2020

 

Common

Shares

 

 

Capital

stock

 

 

Additional

paid-in

capital

 

 

Deficit

 

 

Total

Shareholders’

equity

 

Balance, December 29, 2019

 

 

28,195,300

 

 

$

508

 

 

$

293,389

 

 

$

(252,800

)

 

$

41,097

 

RSU vested and stock options exercised

 

 

19,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

317

 

 

 

 

 

 

317

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,730

 

 

 

1,730

 

Balance, June 28, 2020

 

 

28,214,800

 

 

$

508

 

 

$

293,706

 

 

$

(251,070

)

 

$

43,144

 

 

 

Six months ended June 30, 2019

 

Common

Shares

 

 

Capital

stock

 

 

Additional

paid-in

capital

 

 

Deficit

 

 

Total

Shareholders’

equity

 

Balance, December 30, 2018

 

 

23,189,381

 

 

$

458

 

 

$

278,648

 

 

$

(246,805

)

 

$

32,301

 

RSU vested and issued in common shares

 

 

179,677

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

Issuance of common shares from rights offering

 

 

4,642,030

 

 

 

46

 

 

 

13,998

 

 

 

 

 

 

14,044

 

Stock-based compensation

 

 

 

 

 

 

 

 

185

 

 

 

 

 

 

185

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,257

)

 

 

(1,257

)

Balance, June 30, 2019

 

 

28,011,088

 

 

$

506

 

 

$

292,829

 

 

$

(248,062

)

 

$

45,273

 

 

5


 

Interim Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

 

 

Six months ended

 

 

 

June 28,

2020

 

 

June 30,

2019

 

Cash provided by (used in):

 

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

 

 

 

Net income(loss)

 

$

1,730

 

 

$

(1,257

)

Items not involving cash:

 

 

 

 

 

 

 

 

Depreciation of property, plant and equipment

 

 

3,222

 

 

 

3,253

 

Amortization of intangible assets

 

 

2,364

 

 

 

3,688

 

Unrealized foreign exchange gain on unsettled forward exchange contracts

 

 

(459

)

 

 

 

Deferred income taxes

 

 

67

 

 

 

95

 

Amortization of deferred financing fees and debt insurance costs

 

 

588

 

 

 

545

 

Stock-based compensation

 

 

317

 

 

 

185

 

Change in fair value of warrant liability

 

 

(118

)

 

 

(61

)

Change in fair value of contingent consideration

 

 

 

 

 

(3,050

)

Change in non-cash operating working capital:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,848

 

 

 

8,035

 

Unbilled contract assets

 

 

(12,376

)

 

 

(7,214

)

Inventories

 

 

(2,299

)

 

 

7,054

 

Prepaid expenses and other assets

 

 

231

 

 

 

(1,128

)

Income taxes receivable/payable

 

 

(50

)

 

 

203

 

Accounts payable

 

 

(3,377

)

 

 

(10,130

)

Accrued liabilities

 

 

8,875

 

 

 

(9

)

Restructuring liability

 

 

(919

)

 

 

(857

)

Net change in operating lease right of use asset and liability

 

 

1

 

 

 

465

 

 

 

 

2,645

 

 

 

(183

)

Financing:

 

 

 

 

 

 

 

 

Repayments of revolving credit facility

 

 

(758

)

 

 

(11,272

)

Repayment of long-term debt

 

 

(625

)

 

 

(625

)

Deferred financing fees

 

 

(75

)

 

 

(50

)

Principal repayments of finance lease obligations

 

 

(676

)

 

 

(809

)

Proceeds from issuance of common stock through rights offerings

 

 

 

 

 

14,044

 

 

 

 

(2,134

)

 

 

1,288

 

Investing:

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(1,568

)

 

 

(2,072

)

 

 

 

(1,568

)

 

 

(2,072

)

Decrease in cash

 

 

(1,057

)

 

 

(967

)

Cash, beginning of period

 

 

1,368

 

 

 

1,601

 

Cash, end of the period

 

$

311

 

 

$

634

 

 

 

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

 

 

 

Cash interest paid

 

$

3,946

 

 

$

2,363

 

Increase in operating right of use assets

 

$

3,840

 

 

$

5,559

 

Property, plant and equipment acquired that was unpaid in cash

   and included in accounts payable and accrued liabilities

 

$

71

 

 

$

260

 

 

See accompanying notes to interim consolidated financial statements.

 

 

6


 

Unaudited Notes to Interim Consolidated Financial Statements

(in thousands)

1.

Business and Nature of Presentation

Background

SMTC Corporation (the “Company,” “we,” “our,” or “SMTC”) is 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”). SMTC has more than 50 manufacturing and assembly lines at strategically located facilities in the United States, Canada and Mexico that provide local support and manufacturing capabilities to our global customers. SMTC’s 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.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with the accounting principles and methods of application disclosed in the audited consolidated financial statements within the Company’s Form 10-K for the fiscal period ended December 29, 2019, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 13, 2020.  The accompanying unaudited interim consolidated financial statements include adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the consolidated financial statements under generally accepted accounting principles in the United States (“U.S. GAAP”). These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Form 10-K. The consolidated balance sheet at December 29, 2019 was derived from the audited annual consolidated financial statements, but does not contain all of the footnote disclosures from the annual consolidated financial statements.

Unless otherwise specified or the context requires otherwise, all statements in these notes to the interim consolidated financial statements regarding financial figures are expressed in thousands of U.S. dollars.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains, created significant volatility and disruption in financial markets and has resulted in an economic slowdown. In response to the impact of the COVID-19 pandemic, and given the uncertainty of its duration, the Company has initiated measures designed to protect our employees and will continue to adapt in order to maintain operations while providing a safe environment.

The Company is actively monitoring the global COVID-19 pandemic and continuously communicating with our customers, key suppliers, employees and union representatives, in addition to government and state representatives where our manufacturing facilities reside. We have experienced increased workplace absenteeism as illness, potential COVID-19 exposure for higher risk employees or personal commitments that restrict the ability of some employees to come to work.  The Company has modified shift schedules and hired temporary labor to help address this situation and meet our customers’ product shipping schedules.  During the three months ended June 28, 2020, the Company incurred additional costs of $1,185 that we have attributed to the COVID-19 pandemic, including additional temporary headcount as at risk employees are mandated to stay home in our Mexico locations as well as the purchase of personal protective equipment and costs to sanitize and clean facilities.

As at June 28, 2020, the additional funds available to borrow under our PNC Facility (as described and defined in note 4 below) after deducting the current borrowing base conditions and subject to debt covenants, should the Company require additional funding during the COVID-19 pandemic, was $30,875 (March 29, 2020 - $31,185).  In addition, during the quarter ended June 28, 2020, the Company entered into amendments to its lending agreements with PNC and TCW, as disclosed in note 4, that would allow for the addback of certain costs attributable to the COVID-19 pandemic.

7


 

Transition of China Manufacturing

During the fourth quarter of 2019, we ceased manufacturing in China and began to relocate the equipment used at our Chinese manufacturing facility to our other North American sites. During the first quarter of 2020, the Company completed final shipments for customers serviced at our Chinese manufacturing facility and completed the relocation of the equipment to our other North American sites. Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors 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 declined in 2019 as compared to 2018, but more significant declines were anticipated in 2020 which would have resulted in negative operating margins from our China site. This ultimately resulted in the decision to close the manufacturing facility.

 

 

2.

Accounting Pronouncements

Recent Accounting Pronouncements Adopted

In August 2018, the FASB published ASU 2018-13: Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment includes the removal, modification and addition of disclosure requirements under Topic 820. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The impact of the adoption of the standard expands the disclosure of certain assets and liabilities recorded at fair value.

In March 2020, the FASB published ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.  The amendments in this Update are effective for all entities as of March 12, 2020, through December 31, 2022.  An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The impact of the adoption of the standard is not material to the Company, as alternative reference rates are available under the agreements governing the financial instruments.

Recent Accounting Pronouncements Not Yet Adopted

In May 2016, the FASB published ASU 2016-13: Financial Instruments – Credit losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of Topic 326 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. In April 2019, the FASB published ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which made certain amendments and corrections to the original codification. In May 2019, the FASB published ASU 2019-05 Financial Instruments – Credit losses (Topic 326) which made transitional relief available, specifically allowing the option to elect a fair value option for financial instruments measured at amortized cost. In November 2019, the FASB published ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments – Credit losses, which made certain amendments and corrections to the original codification.  In November 2019, the FASB published ASU 2019-10 Financial Instruments – Credit losses (Topic 326), which made certain amendments to the effective dates of the new standard.  The amendment is effective for the Company for years beginning after December 15, 2022 including interim periods with those years. The Company is currently evaluating the impact of this accounting standard, but it is expected that the new standard may result in additional credit losses being recorded.

8


 

In January 2017, the FASB published ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): Topic 350 seeks to simplify goodwill impairment testing requirements for public entities. Under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact of this accounting standard.  However, it is expected that this may reduce the complexity of evaluating goodwill for impairment.

In December 2019, the FASB published ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for income taxes. The purpose of this codification is to simplify the accounting for income taxes, which addresses a number of topics including but not limited to the removal of certain exceptions currently included in the standard related to intraperiod allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 740 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The impact of the adoption of the standard has not yet been determined and is being evaluated.

3.

Interim Consolidated financial statement details

The following consolidated financial statement details are presented as of the period ended for the consolidated balance sheets and for the periods ended for each of the consolidated statements of operations and comprehensive income (loss).

Consolidated Balance Sheets

Accounts receivable – net:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Trade accounts receivable

 

$

67,192

 

 

$

71,113

 

Other receivables

 

 

188

 

 

 

1,098

 

Allowance for doubtful accounts

 

 

(2,309

)

 

 

(2,292

)

Total

 

$

65,071

 

 

$

69,919

 

 

The allowance for doubtful accounts pertains primarily to one customer previously serviced out of Dongguan China. This was provisioned and included with the restructuring charges for the closure of the facility in 2019. Refer to note 10 for further details. To date, there has been no material impact of the COVID-19 pandemic on the allowance for doubtful accounts.

Unbilled contract assets

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Opening

 

$

26,271

 

 

$

20,405

 

Contract assets additions

 

 

172,217

 

 

 

350,709

 

Contract assets invoiced

 

 

(159,841

)

 

 

(344,843

)

Ending

 

$

38,647

 

 

$

26,271

 

 

Inventories:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Raw materials

 

$

50,251

 

 

$

48,067

 

Parts and other

 

 

383

 

 

 

586

 

Provision for obsolescence

 

 

(509

)

 

 

(827

)

Total

 

$

50,125

 

 

$

47,826

 

 

9


 

The provision for obsolescence primarily pertains to customers previously serviced out of the Dongguan facility. These have been provisioned and included with the restructuring charges for the closure of the facility in 2019. Refer to note 10 for further details.

Property, plant and equipment – net:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Cost:

 

 

 

 

 

 

 

 

Land

 

$

1,648

 

 

$

1,648

 

Buildings (b)

 

 

18,985

 

 

 

18,985

 

Machinery and equipment (a) (e)

 

 

43,192

 

 

 

42,732

 

Office furniture and equipment (c) (e)

 

 

836

 

 

 

1,005

 

Computer hardware and software (d) (e)

 

 

3,679

 

 

 

3,979

 

Leasehold improvements (e)

 

 

4,240

 

 

 

4,265

 

 

 

 

72,580

 

 

 

72,614

 

Less accumulated depreciation:

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

Buildings (b)

 

 

(10,944

)

 

 

(10,392

)

Machinery and equipment (a) (e)

 

 

(32,700

)

 

 

(31,192

)

Office furniture and equipment (c) (e)

 

 

(393

)

 

 

(546

)

Computer hardware and software (d) (e)

 

 

(3,082

)

 

 

(3,289

)

Leasehold improvements (e)

 

 

(1,966

)

 

 

(1,885

)

 

 

 

(49,085

)

 

 

(47,304

)

Property, plant and equipment—net

 

$

23,495

 

 

$

25,310

 

 

(a)

Included within machinery and equipment were assets under finance leases with costs of $2,275 and $2,275 and associated accumulated depreciation of $1,196 and $974 as of June 28, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended June 28, 2020 and June 30, 2019 was $109 and $142, respectively. The related depreciation expense for the six months ended March 29, 2020 and June 30, 2019 was $222 and $284, respectively.

 

(b)

Included within buildings are costs associated with Melbourne facility under finance leases of $9,082 and associated accumulated depreciation of $1,303 and $900 as of June 28, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended June 28, 2020 and June 30, 2019 was $201 and $201, respectively. The related depreciation expense for six months ended June 28, 2020 and June 30 29, 2019 was $403 and $402, respectively.  

 

(c)

Included within office furniture and equipment were assets under finance leases with costs of $307 and associated accumulated depreciation of $85 and $52 as of June 28, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended June 28, 2020 and June 30, 2019 was $16 and $10, respectively. The related depreciation expense for the six months ended June 28, 2020 and June 30 29, 2019 was $33 and $20, respectively.

 

(d)

Included within computer hardware and software were assets under finance leases with costs of $91 and associated accumulated depreciation of $66 and $51 as of June 28, 2020 and December 29, 2019, respectively. The related depreciation expense for the three months ended June 28, 2020 and June 30, 2019 was $8 and $8, respectively. The related depreciation expense for the six months ended June 28, 2020 and June 30, 2019 was $15 and $15, respectively.

 

10


 

(e)

Fully depreciated machinery and equipment with cost of $636 and accumulated amortization of $636 was written off in the six months ended June 28, 2020. Fully depreciated office furniture and fixtures with cost of $209 and accumulated amortization of $209 was written off. Fully depreciated computer hardware and software with cost of $414 and accumulated amortization of $414 was written off. Write off charges of $3 were incurred on leasehold improvements with cost of $185 and accumulated amortization of $182.  These write off charges were incurred related to the closure of the Dongguan facility for those items not otherwise transferred to other manufacturing facilities.

Intangible assets:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Cost:

 

 

 

 

 

 

 

 

Customer relationships

 

$

12,350

 

 

$

12,350

 

Order backlog

 

 

6,990

 

 

 

6,990

 

Trade name

 

 

1,300

 

 

 

1,300

 

Non-compete agreements

 

 

360

 

 

 

360

 

 

 

 

21,000

 

 

 

21,000

 

Less accumulated amortization:

 

 

 

 

 

 

 

 

Customer relationships

 

 

(2,031

)

 

 

(1,414

)

Order backlog

 

 

(6,990

)

 

 

(5,333

)

Trade name

 

 

(1,300

)

 

 

(1,300

)

Non-compete agreements

 

 

(296

)

 

 

(206

)

 

 

 

(10,617

)

 

 

(8,253

)

Intangible assets—net

 

$

10,383

 

 

$

12,747

 

 

These intangible assets arose from the acquisition of MC Assembly Holdings Inc. (“MC Assembly”) in November 2018 and were allocated to the following operating segments:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

U.S.

 

$

3,115

 

 

$

3,824

 

Mexico

 

 

7,268

 

 

 

8,923

 

Total

 

$

10,383

 

 

$

12,747

 

 

Amortization expense of $2,364 is recorded in cost of sales in the consolidated statement of income and comprehensive income for the six months ended June 28, 2020, and $3,688 for the six months ended June 30, 2019.  Amortization expense for the next five years and thereafter is as follows:

 

2020

 

$

682

 

2021

 

 

1,235

 

2022

 

 

1,235

 

2023

 

 

1,235

 

2024

 

 

1,235

 

2025 and thereafter

 

 

4,761

 

Total amortization

 

$

10,383

 

 

Goodwill:

The carrying value of goodwill as at June 28, 2020 was $18,165 (December 29, 2019 – $18,165). This goodwill arose from the acquisition of MC Assembly in November 2018 and was allocated to the following operating segments that are expected to benefit from the synergies of this business combination and has not changed since the acquisition:

 

 

 

June 28,

2020

 

 

December 29,

2019

 

U.S.

 

$

5,449

 

 

$

5,449

 

Mexico

 

 

12,716

 

 

 

12,716

 

Total

 

$

18,165

 

 

$

18,165

 

 

11


 

The carrying value of goodwill is assessed annually at year-end and at each reporting period for impairment triggers to determine whether there exists any indicators of impairment.  The assessment is done at the operating segment level as the group of components (production facilities) within each operating segment all have similar economic characteristics. Our business operations have generally performed as expected during the first half of 2020.  While the COVID-19 pandemic creates significant uncertainty, in the near term, the Company did not identify any triggering events as at June 28, 2020.

Accrued liabilities: 

 

 

 

June 28,

2020

 

 

December 29,

2019

 

Payroll

 

$

6,029

 

 

$

5,504

 

Customer related

 

 

5,527

 

 

 

2,185

 

Deferred revenue

 

 

3,734

 

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