Annual report pursuant to Section 13 and 15(d)

Note 16 - Acquisition of MC Assembly

v3.20.1
Note 16 - Acquisition of MC Assembly
12 Months Ended
Dec. 29, 2019
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
16.
Acquisition of MC Assembly
 
On
November 8, 2018 (
the “Acquisition Date”), SMTC entered a Stock Purchase Agreement (the “Purchase Agreement”), to purchase all of the issued and outstanding shares of capital stock of MC Assembly Holdings, Inc. (“MC Assembly” or “MC”). The MC acquisition includes an initial purchase price of
$63,498
plus contingent consideration payable of up to
$5,000
by the Company upon the achievement of certain performance milestones. The Purchase Agreement and the MC acquisition were unanimously approved by the Board of Directors of the Company, and closed on
November 8, 2018.
 
The table below represents the fair value of the total purchase price consideration:
 
Purchase price – cash
  $
63,498
 
Contingent consideration payable
   
3,050
 
Working capital adjustment - cash
   
1,052
 
Total purchase consideration
  $
67,600
 
 
The contingent consideration is based upon the achievement of certain performance milestones determined after the completion of the Company’s
first
fiscal quarter of
2019.
The contingent consideration is estimated based on forecasted results, and
may
change upon the resolution of the contingency at the end of the Company’s
first
quarter of
2019.
The key assumptions in valuing the contingent consideration include: estimated projected adjusted earnings before interest, depreciation and taxes for MC Assembly on a trailing
twelve
months ended
March 31, 2019
and a discount rate of
13.5%.
As at
December 30, 2018,
there was
no
change in the fair value of the contingent consideration, based on the forecasted results for the
first
quarter of
2019.
The contingent consideration fair value is sensitive to adjustments in results as it is based on a formula which includes a multiple of earnings. The initial working capital adjustment of
$1,052
was cash settled on the Acquisition Date.
 
During the
third
quarter of
2019,
the fair value of the contingent consideration liability was determined to be
nil
resulting in the recognition of a gain of
$3,050.
The contingent consideration liability was initially recognized at fair value in the
fourth
quarter and relates to a contingent earn-out payment associated with the acquisition of MC Assembly. Fair value estimate under purchase accounting of
$3,050
was derived from a multiple of earnings based on MC Assembly’s forecasted
twelve
month earnings for the period ended
March 31, 2019.
Based on actual earnings, the contingent consideration liability was considered resolved and
no
longer payable as at
March 31, 2019.
 
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Acquisition Date:
 
   
Fair Value
 
Fair value consideration transferred
  $
67,600
 
         
Assets
 
 
 
 
Accounts receivable
   
19,863
 
Inventories
   
22,813
 
Unbilled contract assets
   
12,136
 
Prepaids and other assets
   
2,523
 
Property, plant and equipment
   
16,030
 
Intangible assets
   
21,000
 
Goodwill
   
18,165
 
Total assets
   
112,530
 
         
Liabilities
 
 
 
 
Accounts payable
   
27,795
 
Accrued liabilities
   
3,297
 
Contingent consideration
   
3,050
 
Capital lease obligation
   
10,788
 
         
Total liabilities
   
44,930
 
         
         
Net assets acquired
   
67,600
 
 
The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of MC Assembly and was allocated to the Mexico and US operating segments of the combined SMTC and MC Assembly business.
None
of the goodwill is expected to be deductible for tax purposes. Changes to SMTC and MC Assembly combined deferred tax assets and liabilities as a result of the purchase price allocation is fully offset by a corresponding net reduction to its valuation allowance.
 
The Company recognized
$1,676
 of acquisition related costs that were expensed during the period and included in selling, general and administrative expenses in the consolidated statement of operations and comprehensive loss. The Company also incurred
$3,519
costs related to financing the transaction. Fees incurred for the long-term debt facility (note
6
) were
$2,831
and have been recorded as a contra debt amount against the long-term debt balance on the consolidated balance sheet. Fees incurred for the PNC Revolving Credit Facility were
$688
and have been recorded as a deferred financing cost asset on the consolidated balance sheet. These costs are amortized to interest expense over the term of the debt and included in interest expense in the consolidated statement of operations and comprehensive loss.
 
The Company identified the following intangible assets and corresponding useful lives:
 
Intangible Assets
       
Estimated
useful life
(years)
 
             
Customer relationships
 
12,350
   
10
 
Order backlog
 
6,990
   
1.5
 
Trade name
 
1,300
   
1
 
Non-compete agreements
 
360
   
2
 
             
Total intangible assets
 
21,000
   
 
 
 
Amortization expense of
$1,065
has been included in the cost of sales in the consolidated statement of operations and comprehensive loss pertaining to the acquired intangible assets for the period ended
December 30, 2018.
 
The following summary of MC Assembly’s select financial results included in the Company’s consolidated statement of operations and comprehensive loss from the Acquisition Date to
December 30, 2018
are as follows:
 
   
Period ended
December 30, 2018
 
Revenue
  $
23,530
 
Net income
   
1,667
 
 
The following summary of unaudited select pro forma financial results as if MC Assembly had been included in the consolidated results of the Company for the years ended
December 30, 2018
and
December 31, 2017:
 
   
Year ended
December 30, 2018
   
Year ended
December 31, 2017
 
Pro forma revenue
  $
345,194
    $
281,493
 
Pro forma net loss
   
(11,044
)    
(16,682
)
 
These amounts have been calculated after applying the Company’s accounting policies and including the impacts of the purchase price adjustments.