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TORONTO – SMTC Corp. plans to wind-down its Chinese manufacturing operations when its current Dongguan, China, lease expires in December, the company said Thursday.

“Customer concerns about uncertainties relating to the prolonged impact of tariffs and macro-economic factors have caused a number of our customers to begin to reevaluate demand for some of their products and reconsider where they outsource their manufacturing,” said SMTC president and CEO Ed Smith.

“Revenues attributable to production from SMTC’s manufacturing operations in China, which accounted for 5.3% of SMTC’s revenue in the first half of 2019, are projected to decline more than 30% for full-year 2019 compared to full-year 2018, with continued contraction in 2020, which would result in negative operating margins from our China site. As a result, after more than a decade in the Chinese market, we will use the end of our lease term later this year as an opportunity to exit manufacturing in China as we continue to augment our strong North American manufacturing footprint.

“Across our sites in North America, we are addressing our customers’ needs for a faster time-to-market for new product introductions by adding new capabilities and certifications in our Billerica, Massachusetts, location this quarter that provides our customers quick-turn manufacturing. This expansion follows our investment last quarter when we upgraded and expanded our capacity at our Fresnillo facility in Zacatecas, Mexico, enabling a 25% increase in capacity, contributing to continued efficiency and profitability gains. We believe our expanding North American operations provide a strong foundation for continued growth.”

SMTC expected to record charges of $5.4 million to $5.8 million related to the closure of its China manufacturing operations, restructuring and other charges, including up to $3.3 million of non-cash accelerated asset write-downs, and other cash-based expenses, including employee-related costs.

Most of these charges are expected to be incurred in the remainder of the third and fourth quarters of 2019, and the net cash required to wind down the Chinese manufacturing operation is not expected to exceed $1.5 million.

“In addition to the China closure, we are seeing softness in certain end-markets across semiconductor and data center expansions,” Smith said. “Accordingly, we are updating full-year 2019 revenue to range between $354 and $362 million, which excludes $16 million of revenues in 2019 attributable to SMTC’s operations in China, and adjusted EBITDA of $25 million to $26 million,” said Smith.

“With our integration of MC Assembly and bank refinancing completed last quarter, our collective focus is on growing our funnel of business, including recent awards of $15 million of new business and new programs during the current quarter, which we anticipate will begin shipping in the first quarter of next year. We expect our 2020 revenue and adjusted EBITDA, which will exclude any operations in China, to range between $390 million and $410 million and $29 million to $31 million, respectively. Finally, we expect to generate up to $14 million of cash flow from operating activities for the full year of 2020, which we anticipate will result in a debt-leverage ratio of 2.5, using outstanding revolving credit facility, term loans outstanding and financial capital lease obligations compared against adjusted EBITDA on a trailing twelve-month basis, exiting 2020.”

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