SMTC Corporation (SMTX) CEO Eddie Smith on Q4 2019 Results – Earnings Call Transcript

SMTC Corporation (NASDAQ:SMTX) Q4 2019 Results Conference Call March 13, 2020 8:30 AM ET

Company Participants

Blair McInnis – VP, Finance

Eddie Smith – CEO

Rich Fitzgerald – COO

Steve Waszak – CFO

Conference Call Participants

Christian Schwab – Craig Hallum Capital Group

Mike Crawford – B. Riley FBR

Evan Greenberg – Legend Cap Opportunity

Steve Kohl – Mangrove


Good day. And welcome to the SMTC Corporation Fourth Quarter and Full Year 2019 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to, Blair McInnis, VP, Finance. Please go ahead.

Blair McInnis

Thank you. Before we begin the call, I’d like to remind everybody that the presentation will include statements about expected future events and financial results that are forward-looking in nature and subject to risks and uncertainties. The Company cautions that actual performance will be affected by a number of factors, many of which are beyond the Company’s control, and that future events and results may vary substantially from what the Company currently foresees. Discussion of the various factors that may affect future results is contained in the Company’s annual report on Form 10-K, Form 10-Q, and subsequent reports on Form 8-K and other filings with the Securities and Exchange Commission.

All forward-looking statements are made as of the date of this call, and except as required by law, we do not intend to update this information. The conference call will also be available for audio replay in the Investor Relations section of SMTC’s website at

I will now pass the call over to Eddie Smith, SMTC’s President and Chief Executive Officer. Sorry, Eddie, are you guys on mute?

Eddie Smith

Thank you, Blair. Welcome, and good morning ladies and gentlemen. I’m Eddie Smith, SMTC’s President and Chief Executive Officer. On this call with me today is Rich Fitzgerald, our Chief Operating Officer; and Steve Waszak, SMTC’s Chief Financial Officer.

I am pleased to report that we made significant progress in 2019, building a stronger Company that positions SMTC for long-term success. We expanded our customer base, including new business in several attractive, highly regulated high-growth markets. Through a number of initiatives, we improved our operational efficiencies to achieve best-of-breed margins that our industry can support. We successfully integrated MC Assembly within a year of the acquisition. We have completed closing down our Chinese manufacturing operations in Dongguan. And we strengthened our balance sheet, with numerous steps taken to reduce indebtedness and improve our terms.

Strong execution by the team resulted in an increase in our revenues to $373 million for the year, which was up 72% over reported 2018 revenues, and also up 8% on a pro forma basis which assumes MC Assembly had been part of SMTC for all of 2018. Our successful integration of MC Assembly resulted in higher economies of scale which can be seen at the bottom line, line, as the increases in our adjusted net income and EBITDA metrics outpaced our revenue growth. Our revenue growth combined with focus on operational efficiency resulted in a best-in-class fourth quarter Adjusted EBITDA of 7.7%, on revenues, and our full year adjusted net income increased by 162% to $6.9 million.

I will now turn over the call to Steve who will review the fourth quarter and full year numbers in more detail and provide our 2020 guidance. After Steve’s review and comments, I will come back and share some further thoughts about the state of the business, our markets, and our opportunities, before we open the call to questions. Steve?

Steve Waszak

Thank you, Eddie. Good morning, everyone, and thank you for taking time to join us this week.

First, let me clarify some terminology I will be using to discuss our financial results. I will be referencing numbers for 2019, which includes combined SMTC and MC Assembly results; 2018 year-over-year which includes as previously reported GAAP numbers by SMTC which as a reminder include MC Assembly from acquisition date of November 9, 2018; and finally, you’ll hear pro forma, which this includes SMTC and MC Assembly assuming MC was part of SMTC for the entire year of 2018.

Finally, I’ll also be referencing certain non-GAAP numbers, including adjusted gross margin, adjusted net income and adjusted EBITDA. Please refer to the press release we issued yesterday for reconciliation between GAAP and adjusted results as well as any pro forma numbers we reference on today’s call. With that let me proceed to the numbers.

Our revenue in the fourth quarter 2019 was $90.2 million, up 11.6%, compared to $80.9 million as previously reported in the fourth quarter of 2018. On a pro forma basis, our revenues decreased 8.6%, assuming MC Assembly had been part of SMTC for the entire fourth quarter of 2018, in Q4 2019 compared to the fourth quarter of 2018. During the fourth quarter of 2019, we had one 10% customer.

For the full year, revenue was $372.5 million, which represented as Eddie said a year-over-year increase of 72.4%. On a pro forma basis, revenues increased 8% over 2018.

Included in our earnings release is a table that breaks down our sales by industry sector. This table shows our revenue growth in 2019 was driven by sales to our Test and Measurement customers which were up 159%, or $72.8 million from $45.8 million a year ago, followed by revenue growth in our Power and Clean Technology business which increased by 174% or $49.1 million from $28.3 million in 2018. Lastly, our Avionics, Aerospace and Defense business revenue increased by 384% or $19.6 million from $5.1 million in 2018; and then, lastly, our Medical revenues increased by 44.9% or $14.1 million — from $31.1 million (sic) $31.4 million in 2018.

Our GAAP gross profit for the fourth quarter of 2019 was $10.5 million or 11.6% of revenue, up from $8.3 million or 10.3% of revenue in 2018. Our Q4 2019 adjusted gross profit was $12.2 million or 13.5% of revenue, which excludes non-cash $1.7 million of amortization of intangibles recorded in connection with our acquisition of MC Assembly. In comparison, Q4 2018 adjusted gross profit was $9.3 million or 11.6% of revenue. This year-over-year increase in gross profit was primarily due to improved efficiencies and product mix.

For the full year, our GAAP gross profit was $37 million or 9.9% of revenue, compared to $21.7 million or 10% of revenue in 2018. Our 2019 adjusted gross profit was $44.2 million or 11.9% of revenue, up from $22.4 million or 10% of revenues in 2018. On a pro forma basis in 2018, our gross profit was $28.8 million or 8.3% of revenue and our pro forma adjusted gross profit was $35.8 million and 10.4% of revenues.

Selling, general and administrative expenses for fourth quarter of 2019 was $7.1 million, down from $7.2 million reported in the fourth quarter a year ago. As a percent of revenues, SG&A expenses decreased to 7.9% in Q4 2019 from 8.9% in the fourth quarter a year ago. SG&A on a pro forma basis in Q4 2018 was $9.9 million or 10% of revenues.

SG&A was $27 million or 7.3% of revenues for the full year of 2019. In comparison, SG&A in 2018 was $18.1 million or 8.4% of revenues; and on a pro-forma basis, SG&A was $28.3 million or 8.2% of revenues in 2018.

We reported a GAAP net income of $1 million in the fourth quarter of 2019 and adjusted net income of $2.9 million. In comparison, the Company reported net loss of $1.2 million in the same period a year ago.

For the full year, we reported a GAAP net loss of $6 million, or negative $0.23 a share, which included restructuring charges of $8 million, primarily related to the closure of China manufacturing operations, and $7.2 million related to amortization of intangibles related to our acquisition of MC Assembly. In comparison, we recorded a GAAP net loss of a $0.5 million a year ago.

Our adjusted net income in 2019 was $6.9 million, or $0.25 per share, which was a significant improvement compared to the $2.6 million in 2018 and a pro forma adjusted net loss of $183,000.

Adjusted EBITDA in Q4 2019 increased to $7 million or 7.7% of revenue as Eddie reported, from $5.3 million or 6.6% of revenues and $6.5 million or 6.6% of revenues on a pro-forma basis, compared to the fourth quarter a year ago. For the full year, adjusted EBITDA improved to $24.8 million or 6.7% of revenues from $10.2 million or 4.7% of revenues. On a pro forma basis, adjusted EBITDA increased from $18.1 million or 5.2% of revenues in 2018. The improvements in adjusted EBITDA was due to gains from operational efficiencies and synergies we achieved from the integration of MC Assembly.

Now, I’d like to comment on the balance sheet and other key financial metrics that we reported for the fourth quarter. Our cash-to-cash cycles over the quarter averaged 80 days, with DSOs at 63 days and DPOs at 74 days. Inventory turns were 4.0 in the fourth quarter of 2019.

Our balance sheet, deleveraging strategy is progressing on track. Net debt at the end of the fourth quarter was $82.1 million, down $10.2 million from the fourth quarter a year ago and down $2.3 million from the prior quarter. Net debt, excluding our finance and operating lease obligations, was $68.3 million at the end of the year, as compared to $80.8 million at the end of 2018.

We remain focused on reducing our debt-to-EBITDA ratio. Since the MC Assembly acquisition, we have reduced our debt-to-EBITDA ratio, excluding leases, to 2.82 from 4.67 with proceeds from our rights offerings and direct register offerings, both completed in June 2019, as well as from our improved performance in 2019. Based on our current projections, we are targeting to achieve a debt-to-EBITDA ratio less than 2.25, excluding leases, by the end of 2020.

Now, since our market capitalization exceeded $75 million at June 30, 2019, we were required to initiate compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002 and our external auditor opine on our internal accounting controls over financial reporting as of December 29, 2019. Management is required to certify that we have designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the reporting of our 10-K for external purposes in accordance with generally accepted accounting principles in the United States of America.

Included in our 2019 annual report on 10-K, to be filed today, we will report a material weakness in internal control related to information technology general controls in the areas of user access and program change-management over the systems that support the Company’s financial reporting processes. There has been no misstatement identified in the financial statements as a result of these deficiencies. PricewaterhouseCoopers LLP, our independent registered public accounting firm, is responsible for auditing the Company’s financial statements and auditing our internal controls over financial reporting. PricewaterhouseCoopers LLP did not identify any material misstatements in our audit of the Company’s 2019 financial statements and has issued an unqualified opinion on the financial statements, and an adverse opinion on our internal controls over financial reporting due to the aforementioned material weaknesses in their auditor report.

Remediation efforts have begun. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects that the remediation of this material weakness will be completed prior to the end of fiscal year 2020.

Finally, recognizing customer demand can change due to additional supply chain interruptions, at this time, we have low impact on our business as a result of the coronavirus. Based on the current forecast, we are reaffirming the guidance we previously provided on September 19, 2019 for the full year of 2020 and projecting revenue in the range between $390 million to $410 million.

As was the case 2019, we expect our adjusted EBITDA to accelerate faster than our revenue growth. Our current outlook for 2020 for our adjusted EBITDA is to range between $29 and $31 million, an improvement of 17% to 25% compared to 2019.

With that, here’s Eddie for some additional comments on our business. Thank you.

Eddie Smith

Thank you, Steve.

While 2019 presented a number of macroeconomic challenges, our supply chain team anticipated and proactively addressed a number of issues, including component shortages and uncertainties about tariffs during the first half of the year with component lead-times collapsing and inventory balancing across the supply chain during second half of the year. We believe inventory reductions programs by our customers to balance against decreased component lead-times are coming to an end.

As we enter 2020, let me quickly report that we are carefully monitoring the impact of COVID-19 or the coronavirus. Just as we did last year, we remain committed on supporting our customers and keeping them abreast of the evolving conditions. Through proactive and creative solutions, including in some cases setting up alternative sources to our China supply chain, our global supply chain led by Phil Wehrli, our Senior VP of Supply Chain, has thus far mitigated, as Steve’s comments indicate, the impact from the coronavirus. As we look forward ahead, we are working closely with our suppliers to ensure continuity of components, including multilayer ceramic capacitor or MLCC, where lead times may increase in the second half of 2020 due to raw material challenges.

Now, let me share with you some comments on the progress we made last year and articulate the reasons for enthusiasm behind our expectations for another great year of growth and improving performance in 2020 as we remain focused on achieving leadership positions in each of the key metrics, those being revenues, gross margin, EBITDA margin, and net margin percentage.

First, we believe, we are continuing to gain market share and expect to grow faster than the overall EMS market. In the fourth quarter, we continued to expand our customer base with multiyear awards totaling in excess of $31 million from three global leading avionics, aerospace and defense technology companies which we announced on January 8. Thus far in the first quarter of 2020, we have added another four new customers and four programs from existing customers with potential revenue in excess of $20 million.

Second, during the fourth quarter, we successfully completed 32 new product introductions and prototypes at our new NPI and Manufacturing Design Center of Excellence in Billerica, Massachusetts, which opened in the third quarter in 2019. This capability, and a similar one we are expanding in Fremont, California, provides SMTC with a differentiator and offers our customers with a world-class Quick-turn manufacturing capability that can accelerate the launch of their products and the flexibility to scale production from our other low-cost sites.

Third, in order to develop even stronger relationships and capture a larger portion of our customers’ business, we are currently expanding our class 1000 clean room wire bonding capability at our Fremont facility.

Fourth, as I mentioned at the start of the call, we have completed the closure of our Chinese manufacturing operations in Dongguan. The transfer of manufacturing equipment from China to Florida, Fremont and Mexico is proceeding. While we are winding down the manufacturing function, we are maintaining a small team in China to support our global engineering, supply chain, and supplier quality engineering activities.

And finally, to further reduce costs and improve production efficiencies we have several ongoing global initiatives involving Lean Sigma programs.

Let me conclude by reiterating what I reported last quarter. We remain committed to further deleveraging our balance sheet, achieving industry-leading performance metrics, growing our business to become the premier Tier 3 EMS segment leader, making our Company an even stronger company that delights our customers with superior service, taking care of our employees, and rewarding our stockholders with enhanced shareholder value.

With that, Steve, Rich and I will take questions from those on the call today.

Question-and-Answer Session


We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Christian Schwab of Craig Hallum Capital Group. Please go ahead.

Christian Schwab

Great. Thanks for taking my question. Congratulations on doing a great job of navigating the coronavirus, supply chain issues and demand changes so far. When you’re looking at the rest of the year and the full year guidance, can you give us a little bit more clarity? Obviously, the Aerospace and Defense business is extremely strong, but can you highlight a few of the other areas where your visibility and confidence is high?

Eddie Smith

Yes. So, thank you, Christian, first of all, and thanks for joining us. The Aerospace and Defense business is an interesting one, right, because it’s government work, it’s long-term. And that’s why we’ve been growing that as fast as we can. It’s also very profitable business.

The other part of the business that we see coming back this year that last year wasn’t as strong is the capital equipment markets. The big pieces of machinery, or semiconductor equipment market, the test and measure market have been strong. And this is a — it’s always a very tricky time, right. The call couldn’t have been — and our earnings release couldn’t have been at a later time. We haven’t — we’ve seen no change by our customers in demand. And I use the word yet. Because, I also realized yesterday when I watched the media and the news, every hour, the situation was changing. I then wake up this morning, and everything’s closing. The NBA is closing, NHL is closing, Major League Baseball’s closing. And then, I wake up this morning and because I believe the stimulus package is working its way through Congress, the S&P limits on the upside now have been implemented because the market’s moving back up. I think, we’re in for a rough time, trying to — what’s really going to happen, is it positive? Is it negative? But right now, we’re in some pretty good markets, Christian. I think the capital equipment markets, the aerospace and defense market’s going to stay strong. I don’t see that changing in the short term.

I think, the markets I keep an eye on, the 5G market, I think clearly is a market that is interesting. And then, we’re in the payment market. And that one I also keep an eye on because if people don’t leave their house and are not using credit cards in machines, then will they change those machines?

So, I think we’re in for a little bit of a turbulent time. And, I told somebody the other day, they said, you look very calm through this. And I said, listen, we’ve lived through 2001, the dotcom buzz; we lived through 2008-2009, the big recession; we lived through SARS; we lived through avian flu. I mean, what we need to do is react to the information we have as we get it and do that as quickly as possible. So, I look at it every day, we take a look at what’s going on. But so far, customers have not changed their demand. And that’s been one positive out of all this.

Christian Schwab

Thinking back on the previous disruptions in business, can you remind us just how long your lead times are and if there are changes in that, how quickly you’ve seen that in the past?

Eddie Smith

Yes. So, I’ve had a couple of different looks of this, right? In 2001, I was in the EMS business and then in 2008, 2009, I was on the distribution side of the business. And so, what I would say is, the last year lead times were way out. They were out average over 26 weeks, then tariffs hit and they collapsed to an average of 8 weeks. And I am hearing things that the MLCC market, and that’s why we in particular focused on that market in our notes here, is starting to move out again. But, with this flu thing that we have going on, MLCCs are going to be driven by the car market. And I’m reading reports that the car markets now we can back up. So, maybe that won’t be the problem. But, these things will happen pretty quickly, Christian, I would say within 30 days, you normally can get a good feel of where it’s headed and then you got to react as quickly as possible.

So, as soon as things happen, we’ve locked down our first quarter, we move things to other countries and we did what we had to do to lock down our first quarter. Then, we took a look and so — kind of walk you through, we took a look customer by customer, part by part, whether COC is, which is a certificate of origin. And we knew that we had problems with about 12 suppliers. We were let down to problems with two suppliers. And I once again told somebody the other day, interesting enough, the problem suppliers are the same suppliers we have problems with day in, day out anyway. This just gives them an excuse of why we have problems with them. So, we’re used to managing these suppliers. And I think we’re going to see the real — what is really going on probably in the next two or three weeks in terms of underlying demand and how much that changes. But, the stimulus will have some effect on it. So, I’m hoping that gets done as quickly as possible.


The next question comes from Mike Crawford of B. Riley FBR. Please go ahead.

Mike Crawford

Thanks for talking about the supply chain, Eddie. Could you talk about your factory capacity utilization, where you are in each of the facilities, and where you’d like to be at year end, if you hit this $390 million to $410 million targeted revenue range?

Eddie Smith

Yes. So, that’s actually a great question, Mike? So, first of all, thanks for being with us and thanks for the question, because it’s a question that I get asked a lot by our customers. As they see the growth, they always get nervous. Do you have enough capacity to take more products on from us? So, I’ll walk through the facilities real quick. Billerica, which we turned it into an NPI facility, today, we probably could double to triple that business with really limited, just adding people, limited equipment additions. Florida, we will probably, as we grow here, need to add some very specific equipment on. We’ve built that into our budget. So, we will need some capital equipment, but we expect that to grow 60% this year with the aerospace defense, and we probably have another 60% to 70% growth we could do the following year with just some capital equipment investments.

Chihuahua, we are moving our equipment from Dongguan, China to Mexico to our Zacatecas and Chihuahua plants with a little bit of that equipment going to our Freemont and Florida plant. And what I would say is — and I think there’s going to be more nearshoring. I think, the one thing that’s a positive for us long-term on this flu is people will be bringing more things back to Mexico. Our Mexico plant, particularly in Chihuahua used to do over $200 million. So, it has the capability to grow probably another 50% or 60% without us having to add any space and just add some equipment, which today is on a boat from China to Chihuahua. And so, today, they’re running probably about 60%, 70%, and they’re going to continue to grow.

Zacatecas, we probably are running closer to 70%, Mike. And we feel pretty comfortable because most of our Mexican growth is in Chihuahua, not in Zacatecas. Zacatecas, we have some availability of online because we wound down a couple projects for customers over the last couple of quarters. And we’ve got that more efficient from the MC side.

As far as Freemont, we’re moving a couple customers from Freemont to Chihuahua. We’re going to do that over Q1, Q2. And so, Freemont probably could double their size. So, they’re about 50% capacity today. But, the fact that we closed China, we took our CapEx budget down by 50% because we’re taking our equipment from China and moving it into our other plants. So, they have not had to invest in CapEx and it gave us capacity in growth market of China. I believe we’re going to see, because of this virus that people are not going to want to put their products as far away as things have gotten tougher. And I think, Mexico could become one of our highlights, and the fact that we’re there in a big presence, I think that’s pretty exciting for us long term.

Mike Crawford

Okay, great. Thank you. Just one other question. Maybe this one is better for Steve. With the leverage reduction targets you talked about, are there any of the term A or revolver covenants that we should watch more closely than others for Q1 or after in 2020?

Steve Waszak

Thanks, Mike. So, consistent with — as we’ve had in ’19, our closest ratio, our tightest ratio that we monitor is the debt to EBITDA ratio, and it’s a trailing 12-month calculation. So, we’ll continue to watch that one very, very closely as we go through the year. We are certainly in the midst of trying to move even further in our debt — debt leverage plans to loosen some of that up. But today, I would say that’s the one to keep an eye is the debt to EBITDA ratio.

Mike Crawford

All right. Thank you. Thank you very much.

Eddie Smith

Thanks, Mike. I appreciate it.


The next question comes from Alan Greenberg of Alan Greenberg of Legend Cap Opportunity. Please go ahead.

Evan Greenberg

It’s Evan Greenberg actually, but that’s okay. Hey, Ed. How are you?

Eddie Smith

Not bad. How are you, Evan?

Evan Greenberg

Good. You did terrific job navigating this environment. Number one, that’s already been said, this question’s kind of been asked. But I’ll ask it anyway. Digging a little deeper, I wanted to get an understanding. We know that defense area is really not impacted by this at all. Are there any specific — and I think 5G is going to be a very good area because people being more reliant on their phones now. Are there any specific areas of medical devices or any areas that this may be a countertrend for you, where you’ll see a pickup in business? And are there any specific areas where you’re expecting a falloff because of all of the stoppages, because of coronavirus, specifically, or have you seen any in any areas, or do you not have anything that’s that economically dependent?

Eddie Smith

Well, we do have a couple of customers in areas that touch the consumer. Our payment system, like I said on the call, I’m very concerned about the payment systems because people don’t want to touch things and putting credit cards into things is going to be a concern. I think, people don’t like to go to restaurants during these type of chaotic times. So, we’re keeping — we build some products for restaurants and we build some payment systems. Those are two areas I think are most likely to be negatively affected. But, I think, on the other hand that will outweigh that is I believe, because we’re in Mexico and we have capabilities and capacity that our Mexico facilities will continue to grow long-term, faster than the market. Because I think people are going to get out of China. But that’s a personal opinion. So we’re excited. But, we’ll keep an eye on those two other markets through the turbulent times.


The next question comes from Steve Kohl of Mangrove. Please go ahead.

Steve Kohl

Good morning, guys. I had a couple of questions. I wanted to chat a little bit about Aerospace and Defense and regulated markets. So, if you look at kind of — the roadmap and where you say that we’re picking up, let’s say $20 million to $40 million net from ‘19 to ‘20, Eddie you mentioned you may have some follow-up on retail, you mentioned capital equipment can be up. If I’m doing my math right, aren’t we just almost recapturing that entire delta just in aerospace, defense in Melbourne? And then that’s excluding kind of the pickup that we might get on the capital equipment side, beyond that or maybe you can fill me and us on medical, other opportunities or where we see that? So, I’m just trying to tie out, kind of bridging these numbers. I’m aware of the potential upsides. And you already talked about payment on the other side.

Eddie Smith

Yes. So, we announced the customers and we announced numbers. And obviously we don’t start a 100% the day we announce the numbers, right? And so, there’s a ramp-up period. Some of that’s not so good because it takes extra — you got to hire people first, you got to get supply chain in place. There’s cost to that. And then, eventually, you start doing revenue and then you start making money. And that space can be six months, nine months, a little bit longer, if things don’t go well. So, but at the same time, we’re doing that, Steve. There’s always some amount of churn in the business. And in unsure times, the churn always looks worse because you don’t get the customers up as fast as some of this goes down. And so, I would say, I do believe that the aerospace and defense is going to drive our overall growth this year of the Company. I think, medical has not grown as fast for us, as I would like. It’s an area — and we need to spend some time and get some focus. And then, I think, in some areas that have actually churned, have been some industrial products. So, we feel comfortable with the $390 million to $410 million today. I think, we’re pretty deep into the Q1. And so, my answer is, what’s going to happen long term? And I think, the reality is, I think Mexico is going to become a big manufacturing center for things that come into the U.S.

So, to not go through number by number, we do have a bridge, I’ll be more than happy to share that with you offline that shows the bridge between the numbers.

Steve Kohl

Do you feel — when you go back to the aerospace, defense stuff, Eddie, when does that — it starts to hit, what in the back half in Melbourne, as you guys are seeing it now? I mean, where are you in the testing process there and looking at the history, do you feel pretty comfortable on that ramp starting kind of in the June timeframe or when do you see that picking up on some of those programs you announced back at the first part of the year? And even last year, I think you had some in the fourth quarter.

Eddie Smith

Yes. So, some we’ve already started doing the qualification. So, this quarter, we will see some small ones. Q2, that will pick up. And then, Q3 and Q4, I would hope to be — everything — if everything goes well, to be in production in Q3, Q4 on every project we’ve announced. So, I’d say, qualifications and moving to some production is low in Q1, a little bit bigger in Q2, and then I would expect most of what we’ve already announced to be in production by Q3, Q4.

Steve Kohl

And turning to test and measurement, where are you at? What types of types of test and measurement are you doing there? Is it analytical test and measurement, is it test and measurement on the capital equipment side, or is it a mix?

Eddie Smith

Our test and measurement business, it goes all the way from oscillators and 5G test fixtures, all the way to image sensing and comparison. So, it goes across the whole — the whole broad market of test and measurement.

Steve Kohl

Okay. And last question, just looking at the plants in Mexico. When you look at this year, you mentioned I think they’re both around 70%, if I heard you, Eddie, about 60 or 70. How do you see that playing out? And I know you had some in Zacatecas. So, I can’t remember if Zacatecas or Chihuahua. I think, one of them had some — the labor situation is a little bit different. How is that working out and where are you at, in kind of base loading those facilities and moving stuff between them?

Eddie Smith

Yes. So, when I say 70%, it’s 70% the way it sits today, right? When we get our Chinese equipment to expand the capacity, it is easier for us to get labor in Chihuahua than in Zacatecas. So, obviously, that’s a place where we would put more business, where we can get more labor. Zacatecas in the middle of the country, it’s a small town. So, we’re actually in a little town called Fresnillo, about 35 miles outside of Zacatecas. But, the reality is, I think, we have plenty of capacity. I don’t think capacity is an issue for us. And with the new equipment, it actually has lowered our CapEx spend in growing that capacity. So, that will make us higher margin business. So, that part’s exciting to be honest with you.


This concludes our question-and-answer session. I would like to turn the conference back over to Edward Smith for any closing remarks.

Eddie Smith

Thank you. In closing, I want to once again thank our employees, leadership team, business partners, distributors, and our stockholders for their continued support and look forward to reporting our progress for our various stakeholders over the next several quarters. I want to thank you for taking time and spending your day with us. You have a great day.


The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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