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EX-31 - EXHIBIT 31.1 - SMTC CORPex31-1.htm
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EX-32 - EXHIBIT 32.1 - SMTC CORPex32-1.htm


 

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 September 29, 2013

 

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 0-31051

 _______________________

 

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.)

 

635 HOOD ROAD

MARKHAM, ONTARIO, CANADA L3R 4N6

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

 

(905) 479-1810

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 _______________________

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes  ☒    No  ☐

 

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

 

Large Accelerated Filer    ☐                Accelerated Filer    ☐                Non-accelerated Filer    ☐                Smaller reporting company    ☒

 

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 November 6, 2013, SMTC Corporation had 16,377,526 shares of common stock, par value $0.01 per share, and one share of special voting stock, par value $0.01 per share, outstanding.

 



 

 

 

SMTC CORPORATION

 

Table of Contents

 

PART I FINANCIAL INFORMATION

3

     

Item 1

Financial Statements

3

     

 

Consolidated Balance Sheets

3

     

 

Consolidated Statements of Operations and Comprehensive Income (Loss)

4

     

 

Consolidated Statements of Changes in Shareholders’ Equity 

5

     

 

Consolidated Statements of Cash Flows

6

     

 

Notes to Consolidated Financial Statements

7

     

Item 2

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

18

     

Item 3

Quantitative and Qualitative Disclosures about Market Risk

26

     

Item 4

Controls and Procedures

26

   

PART II OTHER INFORMATION

27

     

Item 1A

Risk factors

27

     

Item 6

Exhibits

28

 

 
2

 

  

Part I FINANCIAL INFORMATION

 

Item 1 Financial Statements

 

Consolidated Balance Sheets as of:

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

   

September 29,

2013

   

December 30,

2012

 

Assets

               

Current assets:

               

Cash

  $ 2,526     $ 2,203  

Accounts receivable—net (note 3)

    39,647       36,301  

Inventories (note 3)

    49,016       54,806  

Prepaid expenses

    1,104       2,431  

Income taxes receivable

    510       357  

Current portion of deferred income taxes (note 6)

    1,967       2,237  
      94,770       98,335  

Property, plant and equipment—net (note 3)

    18,840       19,410  

Deferred financing costs—net (note 3)

    378       564  

Deferred income taxes (note 6)

    3,684       3,398  
    $ 117,672     $ 121,707  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 42,452     $ 48,766  

Accrued liabilities (note 3)

    6,996       9,220  

Income taxes payable

    576       566  

Revolving credit facility (note 4a)

    25,470       12,896  

Term facility (note 4b)

    1,158       4,631  

Current portion of capital lease obligations

    1,513       1,628  
      78,165       77,707  

Capital lease obligations

    865       1,292  

Contingencies (note 10)

               

Subsequent events (note 4b)

               
                 

Shareholders’ equity:

               

Capital stock (note 5)

    389       389  

Additional paid-in capital

    263,575       263,424  

Deficit

    (225,322 )     (221,105 )
      38,642       42,708  
    $ 117,672     $ 121,707  

  

See accompanying notes to consolidated financial statements.

 

 
3

 

 

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

   

Nine months ended

 
   

September 29, 2013

   

September 30, 2012

   

September 29, 2013

   

September 30, 2012

 

Revenue

  $ 72,893     $ 75,575     $ 203,236     $ 223,149  

Cost of sales (note 11)

    67,055       69,567       189,203       202,335  

Gross profit

    5,838       6,008       14,033       20,814  

Selling, general and administrative expenses

    4,533       4,238       14,602       12,599  

Gain on sale of property, plant and equipment

                (101 )      

Contingent consideration (note 12)

                250       (650 )

Restructuring charges (note 9)

    289             1,443       451  

Operating earnings (loss)

    1,016       1,770       (2,161 )     8,414  

Interest expense (note 3)

    432       526       1,261       1,531  

Earnings (loss) before income taxes

    584       1,244       (3,422 )     6,883  

Income tax expense (recovery) (note 6)

                               

Current

    (35 )     (45 )     811       374  

Deferred

          (33 )     (16 )     (46 )
      (35 )     (78 )     795       328  
                                 

Net earnings (loss), also being comprehensive income (loss)

    619       1,322       (4,217 )     6,555  
                                 

Earnings (loss) per share of common stock:

                               

Basic

  $ 0.04     $ 0.08     $ (0.26 )   $ 0.40  

Diluted

  $ 0.04     $ 0.08     $ (0.26 )   $ 0.40  

Weighted average number of shares outstanding (note 7):

                               

Basic

    16,360,860       16,319,255       16,350,359       16,283,803  

Diluted

    16,390,378       16,444,053       16,350,359       16,419,272  

  

See accompanying notes to consolidated financial statements.

 

 
4

 

 

Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in thousands of U.S. dollars)

 

Nine months ended September 29, 2013 and September 30, 2012

(Unaudited)

 

   

Capital stock

   

Additional paid-in
capital

   

Deficit

   

Total Shareholders’
equity

 

Balance, December 30, 2012

  $ 389     $ 263,424     $ (221,105 )   $ 42,708  

Stock-based compensation

          140             140  

Exercise of stock options

          11             11  

Net loss

                (4,217 )     (4,217 )

Balance, September 29, 2013

  $ 389       263,575     $ (225,322 )     38,642  

 

   

Capital stock

   

Additional paid-in
capital

   

Deficit

   

Total Shareholders’
equity

 

Balance, January 1, 2012

  $ 5,631     $ 257,583     $ (228,647 )   $ 34,567  

Stock-based compensation

          257             257  

Conversion of shares from exchangeable to common stock

    (5,243 )     5,243              

Exercise of stock options

    1       219             220  

Net earnings

                6,555       6,555  

Balance, September 30, 2012

  $ 389     $ 263,302     $ (222,092 )   $ 41,599  

  

See accompanying notes to consolidated financial statements.

 

 
5

 

 

Consolidated Statements of Cash Flows

(Expressed in thousands of U.S. dollars)

(Unaudited)

 

   

Three months ended

   

Nine months ended

 
   

September 29,

2013

   

September 30,

2012

   

September 29,

2013

   

September 30,

2012

 

Cash provided by (used in):

                               

Operations:

                               

Net earnings (loss)

  $ 619     $ 1,322     $ (4,217 )   $ 6,555  

Items not involving cash:

                               

Depreciation

    901       786       2,818       2,310  

Unrealized (gain) loss on derivative financial instrument (note 11)

    (139 )     (1,119 )     965       (1,126 )

Gain on sale of property, plant and equipment

                (101 )      

Deferred income taxes

          (33 )     (16 )     (46 )

Non-cash interest

    101       98       286       303  

Stock-based compensation

    (41 )     55       140       257  

Contingent consideration

                250       (650 )

Change in non-cash operating working capital:

                               

Accounts receivable

    (7,317 )     (2,169 )     (3,346 )     (4,111 )

Inventories

    102       4,396       5,790       (3,656 )

Prepaid expenses

    131       867       813       (507 )

Income taxes receivable/payable

    (162 )     (266 )     (143 )     (525 )

Accounts payable

    4,870       (5,528 )     (6,314 )     (3,851 )

Accrued liabilities

    (1,817 )     (925 )     (2,127 )     (1,585 )
      (2,752 )     (2,516 )     (5,202 )     (6,632 )

Financing:

                               

Increase in revolving debt

    5,328       2,150       12,574       12,784  

Repayment of term facility

    (1,158 )           (3,473 )     (2,161 )

Principal payment of capital lease obligations

    (623 )     (391 )     (1,767 )     (1,295 )

Proceeds from sales leaseback

                988       170  

Payment of contingent consideration

    (234 )     (171 )     (798 )     (742 )

Payment of financing fees

    (50 )           (100 )      

Proceeds from issuance of common stock

          27       11       220  
      3,263       1,615       7,435       8,976  

Investing:

                               

Purchase of property, plant and equipment

    (974 )     (513 )     (2,316 )     (4,024 )

Proceeds from sale of property, plant and equipment

                406        
      (974 )     (513 )     (1,910 )     (4,024 )

Increase (decrease) in cash

    (463 )     (1,414 )     323       (1,680 )

Cash, beginning of period

    2,989       2,369       2,203       2,635  

Cash, end of the period

  $ 2,526     $ 955     $ 2,526     $ 955  
                                 

Supplemental Information

                               

Cash interest paid

  $ 325     $ 422     $ 990     $ 1,218  

Cash taxes paid – net

    185     $ 205       914     $ 833  

Property, plant and equipment acquired through capital lease

  $     $     $ 1,356     $ 1,048  

  

See accompanying notes to consolidated financial statements.

 

 
6

 

 

Notes to Consolidated Financial Statements

 

1.       Nature of the business

 

SMTC Corporation (the “Company”) is a worldwide provider of advanced electronics manufacturing services to original equipment manufacturers. The Company services its customers through manufacturing and technology centers located in the United States, Mexico and China. The Company ceased production at the Canadian facility at the end of the second quarter of 2013. All facilities provide a full suite of integrated manufacturing services including assembly, testing, box build, final product integration, and expanded supply chain capabilities. In addition, the Company operates an international sourcing and procurement office in Hong Kong.

 

The 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 30, 2012, (“Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2013, except as described in Note 2. 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 presentation 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 for the period ended December 30, 2012.

 

2.       Recent accounting pronouncements

 

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet” (Topic 210) – Disclosures about Offsetting Assets and Liabilities (ASU 2011-11).The amendments in this update require an entity that has financial instruments and derivative instruments that are either 1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or 2) subject to an enforceable master netting arrangement or similar agreement, to disclose information about offsetting and related arrangements. The amendments in this ASU will be required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Required disclosures should be presented retrospectively for all comparative periods. There is no material impact of the adoption of ASU 2011-11 on our consolidated financial statements.

 

 
7

 

 

3.       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:

 

   

September 29,

2013

   

December 30,

2012

 

Accounts receivable

  $ 39,717     $ 36,506  

Allowance for doubtful accounts

    (70 )     (205 )

Accounts receivable—net

  $ 39,647     $ 36,301  

 

Inventories:

 

   

September 29,

2013

   

December 30,

2012

 

Raw materials

  $ 34,771     $ 39,714  

Work in process

    9,657       9,717  

Finished goods

    2,989       3,894  

Parts

    1,599       1,481  

Inventories

  $ 49,016     $ 54,806  

 

 Property, plant and equipment – net:

 

   

September 29,

2013

   

December 30,
2012

 

Cost:

               

Land

  $ 1,648     $ 1,648  

Buildings

    9,878       9,878  

Machinery and equipment (a)

    29,310       41,050  

Office furniture and equipment

    1,646       2,770  

Computer hardware and software (b)

    5,020       10,226  

Leasehold improvements (c)

    2,284       3,967  
      49,786       69,539  

Less accumulated depreciation:

               

Land

           

Buildings

    (6,674 )     (6,303 )

Machinery and equipment (a)

    (17,811 )     (28,931 )

Office furniture and equipment

    (1,340 )     (2,414 )

Computer hardware and software (b)

    (3,964 )     (9,342 )

Leasehold improvements (c)

    (1,157 )     (3,139 )
      (30,946 )     (50,129 )

Property, plant and equipment—net

  $ 18,840     $ 19,410  

  


(a)

Included within machinery and equipment were assets under capital leases with costs of $5,431 and $5,114 as at September 29, 2013, and December 30, 2012, respectively and associated accumulated depreciation of $1,593 and $1,038 as of September 29, 2013 and December 30, 2012, respectively. The related depreciation expense for the three months ended September 29, 2013 and September 30, 2012 were $181 and $150, respectively. Related depreciation expense for the nine months ended September 29, 2013 and September 30, 2012 was $588 and $443, respectively.

(b)

Included within computer hardware and software were assets under capital leases with costs of $446 and $400 as at September 29, 2013 and December 30, 2012, respectively and associated accumulated depreciation of $226 and $122 as at September 29, 2013, and December 30, 2012, respectively. The related depreciation expense for the three months ended September 29, 2013 and September 30, 2012 was $37 and $33, respectively. Related depreciation for the nine months ended September 29, 2013 and September 30, 2012 was $104 and $89, respectively.

(c)

Included within leasehold improvements were assets under capital leases with costs of $73 and $73 as at September 29, 2013 and December 30, 2012, respectively and associated accumulated depreciation of $23 and $12 as at September 29, 2013, and December 30, 2012, respectively. The related depreciation expense for the three months ended September 29, 2013 and September 30, 2012 was $4 and $2, respectively. Related depreciation for the nine months ended September 29, 2013 and September 30, 2012 was $11 and $5, respectively.

  

 
8

 

 

Deferred financing costs:

 

   

September 29,

2013

   

December 30,
2012

 

Deferred financing costs

  $ 1,496     $ 1,396  

Accumulated amortization

    (1,118 )     (832 )
    $ 378     $ 564  

 

Accrued liabilities:

 

   

September 29,

2013

   

December 30,

2012

 

Customer related

  $ 998     $ 1,374  

Payroll

    3,383       3,968  

Professional services

    680       597  

Vendor related

    226       95  

Miscellaneous taxes

    28       45  

Restructuring (note 9)

    681       1,727  

Acquisition related

    236       785  

Other

    764       629  

Accrued liabilities

  $ 6,996     $ 9,220  

 

Consolidated statements of operations and comprehensive income (loss)

 

Interest expense:

 

   

Three months ended

   

Nine months ended

 
   

September

29, 2013

   

September

30, 2012

   

September

29, 2013

   

September

30, 2012

 

Term facility

  $ 15     $ 73     $ 76     $ 192  

Revolving credit facility

    368       382       1,032       1,151  

Obligations under capital leases

    49       71       153       188  

Interest expense

  $ 432     $ 526     $ 1,261     $ 1,531  

 

4.       Debt

 

(a) Revolving credit facility 

 

On September 22, 2011, the Company signed a Revolving Credit and Security Agreement with PNC Bank, National Association and its Canadian branch (collectively, “PNC”). This revolving credit facility, in both the United States and Canada (collectively, the “PNC Facility”), has a term of three years expiring in September 2014. Advances made under the revolving credit facility bear interest at the base commercial lending rate of PNC in the respective country plus 0.75 percent. The base commercial lending rate of each respective country of borrowing should approximate prime rate. The previous revolving loan agreement with Wells Fargo Capital Finance Corporation (“Wells Fargo”) was repaid on September 22, 2011.

 

 
9

 

 

At September 29, 2013 there was a Canadian dollar denominated credit balance of $378. At December 30, 2012, there was a Canadian dollar denominated debt balance of $1,245.

 

The maximum amount of funds available under the PNC Facility is $45 million. Availability under the revolving credit facility is subject to certain conditions, including borrowing base conditions based on the eligible inventory and accounts receivable, and certain conditions which are not objectively determinable. The Company is required to use a “lock-box” arrangement for the PNC Facility, whereby remittances from customers are swept daily to reduce the borrowings under the revolving credit facility.

 

The PNC Facility is jointly and severally guaranteed by the Company and secured by the assets and capital stock of each of the Company’s subsidiaries and its future subsidiaries.

 

The PNC agreement contains certain financial and non-financial covenants (note 4(c)).

 

(b) Term facility

 

The Company had a term debt facility with Export Development Canada that expired in October, 2013 (“EDC”, and the “EDC Facility”). The last remaining principal payment of the term loan to EDC of $1,158 was paid on October 1, 2013. The EDC Facility bore interest at LIBOR plus 2.5% to 3.5% depending on the achievement of financial performance levels as specified in the amended debt agreement.

 

The EDC Facility was jointly and severally guaranteed by the Company and secured by the assets and capital stock of each of the Company’s subsidiaries and its future subsidiaries.

 

(c) Covenants

 

The PNC agreement contains certain financial and non-financial covenants, including certain cross-default provisions.

 

The Company is in compliance with the financial covenants included in the PNC Facility as at September 29, 2013 and management believes that the Company will be in compliance with these covenants for the foreseeable future.

 

Under the amended PNC Facility, the financial covenants require the Company to maintain minimum amounts of earnings before interest, taxes and depreciation and amortization, limit unfunded capital expenditures and a minimum fixed charge coverage ratio (all as defined in the PNC agreement). The fixed charge coverage ratio will commence in the fiscal quarter ending June 30, 2014. Market conditions have been difficult to predict and there is no assurance that the Company will achieve its forecasts. A failure to comply with covenants could result in an event of default. If an event of default occurs and is not cured or waived, it could result in all amounts outstanding, together with accrued interest, becoming immediately due and payable.

 

 
10

 

 

5.       Capital stock

 

Common shares

 

Authorized share capital:

 

The authorized share capital of the Company at September 29, 2013 and December 30, 2012 consisted of:

 

 

(i)

26,000,000 shares of common stock, par value $0.01 per share: Holders are entitled to one vote per share and the right to share in dividends pro rata subject to any preferential dividend rights of any then outstanding preferred stock.

 

 

(ii)

5,000,000 shares of special voting stock, par value $0.01 per share: From time to time the Company may issue special voting stock in one or more series and will fix the terms of that series at the time it is created.

 

Issued and outstanding:

 

The issued and outstanding number of common shares included in shareholders’ equity consisted of the following as of September 29, 2013:

 

   

Number
of shares

    $  

Common Stock

               
                 

Common shares:

               

Balance at beginning of the nine month period

    16,344,193     $ 389  

Shares issued pursuant to:

               

Exercise of stock options

    16,667        

Balance at end of the period

    16,360,860     $ 389  
                 

Total Common stock

    16,360,860     $ 389  

 

Stock options

 

For information regarding the Company’s stock option arrangements, see Note 6 of the consolidated financial statements included in the Form 10-K. During the nine month period ended September 29, 2013, 235,000 options were granted to employees. The Company generally issues new shares when options are exercised. A summary of stock option activity for the nine month period ended September 29, 2013 is as follows:

 

   

Number
of options

   

Weighted
average
exercise
price

   

Aggregate
intrinsic
value

   

Weighted
average
remaining
contractual
term (years)

 

Outstanding at December 30, 2012

    1,400,807     $ 2.82                  

Options granted

    235,000     $ 2.06                  

Options exercised

    (16,667 )   $ 0.70                  

Options forfeited or cancelled

    (705,744 )   $ 3.01                  

Outstanding at September 29, 2013

    913,396     $ 2.50     $ 58       3.7  

Exercisable at September 29, 2013

    582,562     $ 2.03     $ 58       3.1  

 

During the three month periods ended September 29, 2013 and September 30, 2012, the Company recorded stock-based compensation expense (recovery) and a corresponding increase (decrease) in additional paid-in capital of ($41) and $55, respectively. During the nine month periods ended September 29, 2013 and September 30, 2012, the Company recorded stock-based compensation expense and a corresponding increase in additional paid-in capital of $140 and $257, respectively. At September 29, 2013, compensation expense of $401 related to non-vested stock options had not been recognized.

 

 
11

 

  

 6.       Income taxes

 

During the three months ended September 29, 2013 the Company recorded a net income tax recovery of $35, primarily related to minimum taxes and taxes on profits in certain jurisdictions, combined with foreign exchange revaluation which was offset by an expected refund of prior year’s minimum taxes. For the three months ended September 30, 2012 the Company recorded a net income tax recoverable of $78 related to a recovery of $360 due to a revision of prior period estimates for US alternative minimum taxes offset by taxes on profits and foreign exchange in certain jurisdictions of $282. During the nine months ended September 29, 2013, the Company recorded a net income tax expense of $795, primarily related to minimum taxes and taxes on profits in certain jurisdictions, combined with foreign exchange revaluation offset by an expected refund of prior year’s minimum taxes. During the nine months ended September 30, 2012 the Company recorded a recovery of $210 due to a revision of prior year estimates for US alternative minimum tax offset by taxes on profits in certain jurisdictions of $538.

 

At December 30, 2012, the Company had total net operating loss (“NOL”) carry forwards of $83,465 related to multiple tax jurisdictions, which will expire in the years presented below:

 

2013

  $ 1,580  

2014

    10,278  

2015

    4,154  

2017

    1,260  

2018

    1,078  

2019

    60  

2020

    30  

2023

    20,650  
2026 - 2032     44,375  
    $ 83,465  

 

At September 29, 2013 and December 30, 2012, the Company had gross unrecognized tax benefits of $266 and $274, respectively, which if recognized, would favorably impact the Company’s effective tax rate in future periods. The change during the period relates to foreign exchange revaluation of existing uncertain tax positions. The Company does not expect any of these unrecognized tax benefits to reverse in the next twelve months.

 

Tax years 2008 to 2012 remain open for review by the tax authorities in Canada. Tax years 2004 and 2008 to 2012 remain open in the United States.

 

The Company accounts for interest and penalties related to unrecognized tax benefits in income tax expense based on the likelihood of the event and its ability to reasonably estimate such amounts. The Company has approximately $74 and $64 accrued for interest and penalties as of September 29, 2013 and December 30, 2012, respectively. The change is primarily due to the recording of incremental interest on existing uncertain positions for the period net of foreign exchange revaluation.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC 740, “Income Taxes”, states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. At the end of the second quarter of 2003, the Company concluded that given the weakness and uncertainty in the economic environment at that time, it was appropriate to establish a full valuation allowance for the deferred tax assets. Commencing in 2004, it was determined by management that it was more likely than not that the deferred tax assets associated with the Mexican jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets since 2004. In 2010 and 2012, it was determined by management that it was more likely than not that certain deferred tax assets associated with the U.S. jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets. The Canadian jurisdiction continues to have a full valuation allowance recorded against the deferred tax assets.

 

 
12

 

 

7.     Earnings (loss) per common share

 

The following table details the weighted average number of common shares outstanding for the purposes of computing basic and diluted earnings per common share for the following periods:

 

   

Three months ended

   

Nine months ended

 

(Number of common shares)

 

September

29, 2013

   

September

30, 2012

   

September

29, 2013

   

September

30, 2012

 

Basic weighted average shares outstanding

    16,360,860       16,319,255       16,350,359       16,283,803  

Dilutive stock options (a) (b)

    29,518       124,798       -       135,469  

Diluted weighted average shares outstanding

    16,390,378       16,444,053       16,350,359       16,419,272  

 

(a)

For the three months ended September 30, 2013, as a result of net earnings from continuing operations, dilutive options were determined using the treasury stock method, using an average share price of $1.91 per share. As a result of the net loss for the nine months ended September 29, 2013, diluted earnings per share was calculated using the basic weighted average shares outstanding as the effect of potential common shares would have been anti-dilutive. Had there been net earnings, the impact of dilutive stock options would have been calculated as 45,088 for the nine months ended September 29, 2013.

 

(b)

For the three and nine months ended September 30, 2012, as a result of net earnings from continuing operations, dilutive options were determined using the treasury stock method, using an average share price of $3.08 and $3.24 per share, respectively. For the three and nine months ended September 30, 2012, the calculation did not include 590,600 and 408,267 stock options, respectively, as the effect would have been anti-dilutive.

 

 
13

 

 

8.        Segmented information

 

General description

 

The Company derives its revenue from one dominant industry segment, the electronics manufacturing services industry. The Company is operated and managed geographically and has facilities in the United States, Canada, Mexico and China. The Company ceased production at the Canadian facility at the end of the second quarter of 2013. The Company monitors the performance of its geographic operating segments based on adjusted EBITDA (earnings before restructuring charges, loss on extinguishment of debt, acquisition costs, interest, taxes, depreciation and amortization). Intersegment adjustments reflect intersegment sales that are generally recorded at prices that approximate arm’s-length transactions. In assessing the performance of the operating segments management attributes revenue to the operating segment which ships the product to the customer. Information about the operating segments is as follows:

 

   

Three months ended

   

Nine months ended

 
   

September 29, 

2013

   

September 30,

2012

   

September 29,

2013

   

September 30,

2012

 

Revenues

                               

Mexico

  $ 48,701     $ 49,284     $ 140,375     $ 134,052  

Asia

    19,816       10,680       43,499       37,921  

Canada

    396       10,322       13,099       29,377  

U.S.

    13,327       16,078       35,553       41,690  

Total

  $ 82,240     $ 86,364     $ 232,526     $ 243,040  

Intersegment revenue

                               

Mexico

  $ (170 )   $ (235 )   $ (5,225 )   $ (2,483 )

Asia

    (1,745 )     (380 )     (5,230 )     (2,295 )

Canada

          (2,211 )     (2,539 )     (5,014 )

U.S.

    (7,432 )     (7,964 )     (16,296 )     (10,101 )

Total

  $ (9,347 )   $ (10,789 )   $ (29,290 )   $ (19,892 )

Net external revenue

                               

Mexico

  $ 48,531     $ 49,049     $ 135,150     $ 131,570  

Asia

    18,071       10,300       38,269       35,626  

Canada

    396       8,111       10,560       24,363  

U.S.

    5,895       8,114       19,257       31,589  

Total

  $ 72,893     $ 75,575     $ 203,236     $ 223,149  

Adjusted EBITDA

                               

Mexico

  $ 574     $ 3,214     $ 1,368     $ 10,154  

Asia

    1,632       101       2,502       1,522  

Canada

    (71 )     (1,560 )     (2,202 )     (3,222 )

U.S.

    71       801       432       2,721  

Total

  $ 2,206     $ 2,556     $ 2,100     $ 11,175  

Interest

    432       526       1,261       1,531  

Restructuring charges

    289             1,443       451  

Depreciation

    901       786       2,818       2,310  

Earnings (loss) before income taxes

  $ 584     $ 1,244     $ (3,422 )   $ 6,883  

 

Additions and Disposals to Property, Plant and Equipment

 

The following table contains additions and disposals to property, plant and equipment for the three and nine months ended September 29, 2013 and September 30, 2012:

 

   

Three months ended

   

Nine months ended

 
   

September

29, 2013

   

September

30, 2012

   

September

29, 2013

   

September

30, 2012

 

Mexico

  $ 892     $ 187     $ 1,813     $ 1,891  

Asia

    5       143       426       1,819  

Canada

    (21,021 )     43       (22,234 )     634  

U.S.

    51       140       242       558  
                                 

Total

  $ (20,073 )   $ 513     $ (19,753 )   $ 4,902  

 

 
14

 

 

Long-lived assets (a)

 

   

September

29, 2013

   

December

30, 2012

 

Mexico

  $ 12,545     $ 10,725  

Asia

    3,654       3,690  

Canada

    419       2,730  

U.S.

    2,222       2,265  

Total

  $ 18,840     $ 19,410  

 

 

(a)

Long-lived assets information is based on the principal location of the asset.

 

Geographic revenues

 

The following table contains geographic revenues based on the product shipment destination, for the three and nine months ended September 29, 2013 and September 30, 2012:

 

   

Three months ended

   

Nine months ended

 
   

September 29,

2013

   

September 30,
2012

   

September 29,

2013

   

September 30,
2012

 

U.S.

  $ 61,336     $ 53,341     $ 165,758     $ 158,542  

Canada

    8,981       20,539       27,759       53,546  

Europe

    47       1,576       2,852       10,560  

Asia

    2,524       115       6,832       449  

Mexico

    5       4       35       52  

Total

  $ 72,893     $ 75,575     $ 203,236     $ 223,149  

 

Significant customers and concentration of credit risk:

 

Sales of the Company’s products are concentrated in certain cases among specific customers in the same industry. The Company is subject to concentrations of credit risk in trade receivables. The Company considers concentrations of credit risk in establishing the allowance for doubtful accounts and believes the recorded allowances are adequate.

 

The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its revenue. In addition to having a limited number of customers, the Company manufactures a limited number of products for each customer. If the Company loses any of its larger customers or any product line manufactured for one of its larger customers, it could experience a significant reduction in revenue. Also, the insolvency of one or more of its larger customers or the inability of one or more of its larger customers to pay for its orders could decrease revenue. As many costs and operating expenses are relatively fixed, a reduction in net revenue can decrease profit margins and adversely affect the business, financial condition and results of operations.

 

During the three months ended September 29, 2013, two customers individually comprised 40.1% and 12.2% (September 30, 2012 – two customers individually comprised 36.6% and 11.1%) of total revenue across all geographic segments. During the nine months ended September 29, 2013 two customers individually comprised 38.4% and 10.8% (September 30, 2012 – two customers individually comprised 34.3% and 13.4%) of total revenue across all geographic segments. As of September 29, 2013, these customers represented 24.9%, and 13.6%, respectively, (as of December 30, 2012, these customers represented 29.4% and 9.9%, respectively) of the Company’s accounts receivable.

 

 
15

 

 

9.       Restructuring charges

 

During the first quarter of 2012 the Company executed its 2012 Plan to combine the operations of the San Jose and ZF Array Technologies (“ZF Array”) facilities into one facility. The Company recorded restructuring charges of $451, consisting of severance costs of $196 and facility exit costs of $255. Staff levels were reduced by approximately 16 full-time equivalents (“FTEs”).

 

During the fourth quarter of 2012, the Company announced that the closure of the Markham production facility would occur in the second quarter of 2013 and recorded severance restructuring charges of $1,729, impacting approximately 197 FTEs.

 

During the first quarter of 2013, the restructuring accrual related to the closure of the Markham production facility was increased by $452, impacting approximately 7 FTEs.

 

During the second quarter of 2013, the restructuring accrual related to the closure of the Markham production facility was increased by $702, resulting from the termination of one additional FTE which represented $258 of the increase and the remainder was the result of changes in estimate of the severance charges related to the Markham facility closure during the quarter.

 

During the third quarter of 2013, the restructuring accrual was increased by $289 which predominantly pertained to labor charges incurred in the month of July and August specifically relating to the closure of the Markham production facility.

 

The following table details the change in restructuring accrual for the period from December 30, 2012 to September 29, 2013, relating to the 2012 Plan:

 

   

Severance

   

Facility
exit costs

   

Total

 

2012 Plan

                       

Balance as at December 30, 2012

  $ 1,472     $ 255     $ 1,727  

Charges

    452             452  

Payments

    (475 )           (475 )
                         

Balance as at March 31, 2013

  $ 1,449     $ 255     $ 1,704  
                         

Charges

    702             702  

Payments

    (445 )           (445 )
                         

Balance as at June 30, 2013

  $ 1,706     $ 255     $ 1,961  
                         

Charges

    289             289  

Payments

    (1,569 )           (1,569 )
                         

Balance as at September 29, 2013

  $ 426     $ 255     $ 681  

 

Remaining accrued amounts relating to the 2012 Plan in the United States and Markham are expected to be paid out by the end of the second quarter of 2014 through a drawdown on the revolving credit facilities.

 

10.     Contingencies

 

In the normal course of business, the Company may be subject to litigation and claims from customers, suppliers and former employees. Management believes that adequate provisions have been recorded in the financial statements, as required. Although it is not possible to estimate the extent of potential costs, if any, management believes that ultimate resolution of such contingencies would not have a material adverse effect on the financial position, results of operations and cash flows of the Company.

 

 
16

 

 

11.     Derivative financial instruments

 

The Company entered into forward foreign exchange contracts to reduce its exposure to foreign exchange currency rate fluctuations related to forecasted Canadian dollar denominated payroll, rent and utility cash flows in the fiscal 2013 and fiscal 2014, and Mexican peso denominated payroll, rent and utility cash flows for fiscal 2013 and fiscal 2014. These contracts were effective as hedges from an economic perspective, but did not meet the requirements for hedge accounting under ASC 815 “Derivatives and Hedging”. Accordingly, changes in the fair value of these contracts were recognized into net earnings (loss) in the consolidated statement of operations and comprehensive income (loss). The Company does not enter into forward foreign exchange contracts for trading or speculative purposes.

 

The following table presents a summary of the outstanding foreign currency forward contracts as at September 29, 2013:

 

Currency

Buy/Sell

Foreign Currency Amount

 

Notional Contract

Value in USD

 

Canadian Dollar

Buy

CAD 13,100

  $ 12,686  

Mexican Peso

Buy

MXN 401,297

  $ 31,000  

 

The unrealized gain recognized in earnings for the three month period as a result of revaluing the instruments to fair value on September 29, 2013 was $139 (September 30, 2012 – $1,119), the unrealized loss for the nine month period ended September 29, 2013 was $965 and the unrealized gain for the nine month period ended September 30, 2012 was $1,126, which was included in cost of sales in the consolidated statement of operations and comprehensive income (loss). The realized gain on these contracts for the three month period ended September 29, 2013 was $19 (September 30, 2012 - $79 loss), and the realized gain for the nine month period ended September 29, 2013 was $655 (September 30, 2012 - $357), and is included as a component of cost of sales, in the consolidated statement of operations and comprehensive income (loss). Fair value was determined using the market approach with valuation based on market observables (Level 2 quantitative inputs in the hierarchy set forth under ASC 820 “Fair Value Measurements”).

 

The following table presents the fair value of the Company’s derivative instruments located on the consolidated balance sheet as at September 29, 2013:

 

   

September 29,

2013

   

December 30,

2012

 

Prepaid Expenses and Other Assets

  $ 34     $ 547  

Accrued Liabilities

  $ (451 )      

Net fair value of derivative financial instruments

  $ (417 )   $ 547  

 

12.    Contingent Consideration

 

Upon the acquisition of ZF Array on August 31, 2011, the Company accrued $2,400 for contingent consideration. Contingent consideration is based on financial performance of the acquired company’s operations for a 24-month period following the acquisition date, to a maximum of $2,400. Based on the results to date and anticipated future performance, the fair value of the contingent consideration liability was deemed to be appropriate and no change in the contingent consideration was recorded for the three months ended September 29, 2013 (September 30, 2012 – Nil). For the nine months period ended September 30, 2013, the contingent consideration was increased by $250 due to anticipated future performance which resulted in a $250 loss. For the nine months period ended September 30, 2012, the contingent consideration was reduced due to anticipated performance which resulted in a $650 gain and reduction of the contingent consideration.

 

13.    Comparative Consolidated Financial Statements

 

Certain prior quarter figures have been reclassified in the consolidated financial statements to comply with the presentation for the quarter ended September 29, 2013.

 

 
17

 

 

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 it may apply. 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 27, 2013. 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 That May Affect Future Results” section in the Annual Report on Form 10-K filed on March 27, 2013, 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. Although we believe expectations reflected in such forward-looking statements are reasonable based upon the assumptions in this MD&A, they may prove to be inaccurate and consequently our actual results could differ materially from our expectations set out in this MD&A. 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 unless specifically stated otherwise.

 

Background

 

SMTC Corporation is a mid-tier provider of end-to-end electronics manufacturing services, or EMS, including product design and sustaining engineering services, printed circuit board assembly, or PCBA, production, enclosure fabrication, systems integration and comprehensive testing services. SMTC facilities span a broad footprint in the United States, Mexico, and China, with approximately 2,220 full-time employees. SMTC’s services extend over the entire electronic product life cycle from the development and introduction of new products through to growth, maturity and end-of-life phases. SMTC offers fully integrated contract manufacturing services with a distinctive approach to global original equipment manufacturers, or OEMs, and technology companies primarily within the industrial, computing and networking, communications, and medical market segments.

 

Developments in 2013

 

Revenue decreased by $2.7 million, or 3.6%, from $75.6 million for the third quarter of 2012 to $72.9 million for the third quarter of 2013. While revenue increased related to a number of customers, these were offset by decreases pertaining to two customers in addition to the disengagement with two customers.

 

For the quarter ended September 29, 2013, the Company recorded net earnings of $0.4 million compared to net earnings of $1.3 million for the comparative period in the prior year. This was due to a number of factors, namely less favorable foreign exchange fluctuations during the quarter when compared to prior year, which resulted in an unrealized gain of $0.1 million on outstanding forward contracts versus an unrealized gain of $1.1 million in prior year. There were also restructuring charges of $0.5 million incurred during the quarter related to the closure of the Markham production facility and lease exit costs that were not recognized in comparative period in prior year.

 

         Net cash used by operating activities during the third quarter of 2013 was $2.8 million compared to $2.5 million in the prior year primarily driven by an increase in accounts receivable of $7.3 million related to the timing of sales in the last month of the quarter offset by a $3.0 million source of cash due to timing on payments on accounts payable and accrued liabilities in the current quarter.         

 

 
18

 

 

Results of Operations

 

The consolidated financial statements of SMTC are prepared in accordance with U.S. GAAP.

 

Quarter ended September 29, 2013 compared with the quarter ended September 30, 2012:

 

The following table sets forth summarized operating results in millions of US$ for the periods indicated:

 

   

Three months ended
September 29, 2013

   

Three months ended
September 30, 2012

   

Change
2013 to 2012

 
    $    

%

    $    

%

    $    

%

 

Revenue

  $ 72.9       100.0 %   $ 75.6       100.0 %   $ (2.7 )     (3.6% )

Cost of sales

    67.1       92.0 %     69.6       92.1 %     (2.5 )     (3.6% )
                                                 

Gross profit

    5.8       8.0 %     6.0       7.9 %     (0.2 )     (3.3% )

Selling, general and administrative expenses

    4.6       6.3 %     4.2       5.6 %     0.4       9.5 %

Restructuring charges

    0.3       0.4 %                 0.3        
                                                 

Operating earnings

    0.9       1.2 %     1.8       2.4 %     (0.9 )     (50.0% )

Interest expense

    0.4       0.5 %     0.5       0.7 %     (0.1 )     (20.0% )
                                                 

Earnings before income taxes

    0.5       0.7 %     1.3       1.7 %     (0.8 )     (61.5% )

Income tax recovery

                                               

Current

    (0.1 )     (0.1% )     (0.1 )     (0.1% )            
                                                 

Net earnings

  $ 0.6       0.8 %   $ 1.4       1.9 %   $ (0.8 )     (57.1% )

 

Revenue

 

Revenue decreased by $2.7 million, or 3.6%, from $75.6 million for the third quarter of 2012 to $72.9 million for the third quarter of 2013. While revenue increased related to a number of customers, these were offset by decreases pertaining to two customers in addition to the disengagement with two customers.

 

During the third quarter of 2013, revenue from the industrial sector decreased to $55.8 million compared with $59.1 million for the same period in 2012, mainly due to reduced revenues related to two disengaged customers partially offset by increased revenue with continuing customers. Revenue from the industrial sector as a percentage of total revenue decreased to 76.5% in the third quarter of 2013 compared with 78.1% in the third quarter of 2012.

 

Revenue from the communications sector decreased in the third quarter of 2013 to $4.7 million compared to $5.6 million for the third quarter of 2012. The decrease was due to a decrease in volume pertaining to one customer, which was partially offset by revenue from three new customers. As a percentage of total revenue this sector decreased to 6.5% of revenue compared to 7.4% in the third quarter in 2012.

 

Revenue from the networking and enterprise computing sector increased to $8.8 million for the third quarter of 2013 compared with $7.4 million in 2012, which represented 12.1% of revenue in the third quarter of 2013, up from 9.9% of revenue in the third quarter of 2012. The increase was due to volume increases with two customers.

 

Revenue for the medical sector increased slightly to $3.6 million in the third quarter of 2013, compared to $3.5 million in the third quarter of 2012 due to the increase in demand from one customer. Revenue from the medical sector as a percentage of total revenue increased to 4.9% in the third quarter of 2013 compared with 4.6% in the third quarter of 2012.

 

During the third quarter of 2013, the Company recorded approximately $1.3 million of sales of raw materials inventory to customers, which carried no margin, compared with $1.9 million in the third quarter of 2012. 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, revenues from a particular customer typically varies from quarter to quarter and year to year. The Company’s ten largest customers represented 92.8% of revenue during the third quarter of 2013, compared with 89.5% in the third quarter of 2012. Revenue from the two largest customers during the third quarter of 2013 was $29.2 million and $8.9 million representing 40.1% and 12.2% respectively of total revenue for the third quarter of 2013. This compares with revenues from the two largest customers during the third quarter of 2012 which were $27.7 million and $8.4 million, representing 36.6% and 11.1 % respectively of total revenue for the third quarter of 2012. No other customers represented more than 10% of revenue in either period.

 

 
19

 

 

During the third quarter of 2013, 66.6% of our revenue was attributable to production from our operations in Mexico, 24.8% in Asia and 8.6% in the US. During the third quarter of 2012, 65.0% of our revenue was attributable to production from our operations in Mexico, 13.6% in Asia, 10.7% in the US and 10.7% in Canada.

 

The Company operates in a highly competitive and dynamic marketplace in which current and prospective customers from time to time seek to lower their costs through a competitive bidding process among EMS providers. This process creates an opportunity to increase revenue to the extent we are successful in the bidding process, however, there is also the potential for revenue to decline to the extent we are unsuccessful in this process. Furthermore, even if we are successful, there is potential for our margins to decline. If we lose any of our larger product lines manufactured for any one of our customers, we could experience declines in revenue.

 

Gross Profit

 

Gross profit for the third quarter of 2013 stayed relatively consistent only decreasing slightly by $0.2 million to $5.8 million compared to $6.0 million for the same period in 2012 representing a 3.3% reduction even though revenue decreased by 3.6%. The gross margin percentage improved slightly in the third quarter of 2013 representing 8.0% versus 7.9% in the same period of 2012. This was primarily due to the closure of the Markham production facility which had recorded a loss in prior year and improved margins earned in the Asian operations, partially offset by lower margins in Mexico and less favorable foreign exchange rates on Canadian dollar and Mexican peso outstanding forward exchange contracts compared to the same period in 2012.

 

The Company adjusts for estimated obsolete or excess inventory for the difference between the cost of inventory and estimated realizable value based upon customer forecasts, shrinkage, the aging and future demand of the inventory, past experience with specific customers and the ability to sell back inventory to customers or suppliers. If these estimates change, additional write-downs may be required.

 

The Company entered into forward foreign exchange contracts to reduce its exposure to foreign currency exchange rate fluctuations related to forecasted Canadian dollar and Mexican peso expenditures. These contracts were effective as hedges from an economic perspective, but did 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 (loss). Included in cost of sales for the third quarter of 2013 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $0.1 million, and a realized gain of $0.02 million. Included in cost of sales for the third quarter of 2012 was an unrealized gain recognized as a result of revaluing the instruments to fair value of $1.1 million, and a realized loss of $0.08 million.

 

Selling, General & Administrative Expenses

 

Selling, general and administrative expenses increased by $0.4 million during the third quarter of 2013 to $4.6 million compared to $4.2 million in 2012. As a percentage of sales this represented an increase to 6.3% from 5.6% in the third quarter of 2012. The increase was mainly due to interim management charges not incurred in prior year. In addition there were increased information technology charges, retention bonus amounts and severance charges for one FTE.

 

 
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Restructuring Charges

 

During the third quarter of 2013, the restructuring accrual was increased by $0.3 million relating predominantly to remaining labor charges incurred with respect to cleanup activities in the Markham facility incurred during the quarter.

 

There were no restructuring charges during the third quarter of 2012.

 

Interest Expense

 

Interest expense decreased from $0.5 million in the third quarter of 2012 to $0.4 million in the third quarter of 2013. The decrease of $0.1 million primarily resulted from lower average debt levels during the quarter for the EDC loan balance which was partially offset by increased interest rates. Interest expense in the third quarter of both 2013 and 2012 included amortization of deferred financing fees of $0.1 million. The weighted average interest rates with respect to the debt were 3.8% and 3.3% for each of the third quarters of 2013 and 2012, respectively.

 

Income Tax Recovery

 

The Company recorded income tax recovery of $0.1 million in the third quarter of 2013 due to minimum taxes and taxes on profits in certain jurisdictions combined with foreign exchange revaluation which was offset by an expected refund on prior year’s minimum taxes compared to income taxes recoverable of $0.1 million for the same period in 2012 due to a revision of prior period estimates for US alternative minimum taxes offset by taxes on profits and foreign exchange in certain jurisdictions.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management considers the scheduled reversal of deferred tax liabilities, change of control limitations, projected future taxable income and tax planning strategies in making this assessment. Guidance under ASC 740, “Income Taxes” states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence, such as cumulative losses in recent years in the jurisdictions to which the deferred tax assets relate. At the end of the third quarter of 2003, the Company concluded that given the weakness and uncertainty in the economic environment at that time, it was appropriate to establish a full valuation allowance for the deferred tax assets. Commencing in 2004, it was determined by management that it was more likely than not that the deferred tax assets associated with the Mexican jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets since 2004. In 2010 and 2012, it was determined by management that it was more likely than not that certain deferred tax assets associated with the U.S. jurisdiction would be realized and no valuation allowance has been recorded against these deferred tax assets. The Canadian jurisdiction continues to have a full valuation allowance recorded against the deferred tax assets.

 

At September 29, 2013, the Company had total net operating loss carry forwards of $83.5 million, of which $1.6 million will expire in 2013, $10.3 million will expire in 2014, $4.2 million will expire in 2015, $1.3 million will expire in 2017, $1.1 million will expire in 2018, $0.1 million will expire in 2019, $0.1 million will expire in 2020, $20.7 million will expire in 2023, and the remainder will expire between 2026 and 2032.

 

 
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Liquidity

 

         Net cash used by operating activities during the third quarter of 2013 was $2.8 million compared to $2.5 million in prior year primarily driven by an increase in accounts receivable of $7.3 million related primarily to the timing of sales in the last month of the quarter partially offset by a $3.0 million source of cash due to timing on payments on accounts payable and accrued liabilities in the current quarter. Accounts receivable days sales outstanding were consistent with prior year with a slight decrease from 50 days to 49 days. Inventory turnover, on an annualized basis remained consistent at 5 times for the three months ended September 29, 2013 and September 30, 2012. Accounts payable days outstanding were 58 days for the three months ended September 29, 2013 compared to 56 days for the same period in 2012 due to timing of payments.

 

        Net cash provided by financing activities during the three months ended September 29, 2013 was $3.3 million compared to $1.6 million in the three months ended September 30, 2012. During the three months ended September 29, 2013, the Company increased the revolving debt by $5.3 million, compared to an increase of $2.2 million during the same period in 2012. This was partially offset by the pay down of the EDC loan balance of $1.2 million during the quarter. There were no term loan payments in the third quarter of 2012. The Company repaid capital lease obligations of $0.6 million compared to $0.4 million in the same period in 2012. In addition the Company made contingent consideration payments of $0.2 million which was the same as the third quarter in prior year.

 

Net cash used in investing activities during the three months ended September 29, 2013 and September 30, 2012 was $1.0 million and $0.5 million, respectively, consisting of additions of property, plant and equipment.

 

 
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Nine months ended September 29, 2013 compared with nine months ended September 30, 2012:

 

The following table sets forth summarized operating results in millions of US$ for the periods indicated:

  

   

Nine months ended
September 29, 2013