e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2011
OR
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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 0-23248
SIGMATRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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36-3918470
(I.R.S. Employer
Identification No.) |
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2201 Landmeier Road
Elk Grove Village, Illinois
(Address of principal executive offices)
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60007
(Zip Code) |
Registrant’s telephone number, including area code: (847) 956-8000
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 þ No o
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
þ No o
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 “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of
September 13, 2011: 3,864,274
SigmaTron International, Inc.
Index
2
Sigma Tron International, Inc.
Consolidated Balance Sheets
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July 31, |
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2011 |
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April 30, |
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(Unaudited) |
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2011 |
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Current assets: |
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Cash |
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$ |
3,286,021 |
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$ |
4,138,102 |
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Accounts receivable, less allowance for doubtful
accounts of $150,000 at July 31, 2011
and April 30, 2011 |
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25,135,955 |
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23,549,065 |
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Inventories, net |
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47,855,255 |
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45,021,840 |
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Prepaid expenses and other assets |
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948,207 |
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922,345 |
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Refundable income taxes |
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230,796 |
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427,512 |
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Deferred income taxes |
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1,500,857 |
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1,499,915 |
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Other receivables |
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303,391 |
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273,943 |
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Total current assets |
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79,260,482 |
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75,832,722 |
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Property, machinery and equipment, net |
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26,310,769 |
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26,189,150 |
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Customer relationships, net of amortization of $2,604,244
and $2,570,325 at July 31, 2011 and April 30, 2011 |
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165,756 |
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199,675 |
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Miscellaneous |
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657,126 |
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645,864 |
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Total other long-term assets |
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822,882 |
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845,539 |
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Total assets |
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$ |
106,394,133 |
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$ |
102,867,411 |
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Liabilities and stockholders’ equity: |
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Current liabilities: |
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Trade accounts payable |
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$ |
18,597,796 |
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$ |
18,830,629 |
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Bank overdraft |
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2,087,587 |
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— |
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Accrued expenses |
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1,038,818 |
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1,065,203 |
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Accrued wages |
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2,533,225 |
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3,266,766 |
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Current portion of long-term debt |
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247,573 |
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260,990 |
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Current portion of capital lease obligations |
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608,986 |
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832,262 |
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Total current liabilities |
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25,113,985 |
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24,255,850 |
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Long-term debt, less current portion |
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26,777,202 |
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24,301,841 |
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Capital lease obligations, less current portion |
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990,452 |
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1,044,181 |
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Deferred rent |
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726,139 |
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722,559 |
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Deferred income taxes |
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2,799,403 |
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2,799,403 |
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Total long-term liabilities |
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31,293,196 |
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28,867,984 |
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Total liabilities |
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56,407,181 |
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53,123,834 |
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Commitments and contingencies: |
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Stockholders’ equity: |
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Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding |
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— |
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Common stock, $.01 par value; 12,000,000 shares
authorized, 3,864,274 shares issued and outstanding
at July 31, 2011 and April 30, 2011 |
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38,643 |
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38,643 |
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Capital in excess of par value |
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19,751,693 |
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19,749,278 |
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Retained earnings |
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30,196,616 |
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29,955,656 |
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Total stockholders’ equity |
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49,986,952 |
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49,743,577 |
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Total liabilities and stockholders’ equity |
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$ |
106,394,133 |
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$ |
102,867,411 |
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The accompanying notes to financial statements are an integral part of these statements.
3
SigmaTron International, Inc.
Consolidated Statements Of Operations
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Three Months Ended |
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Three Months Ended |
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July 31, |
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July 31, |
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2011 |
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2010 |
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Unaudited |
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Unaudited |
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Net sales |
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$ |
38,892,011 |
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$ |
38,061,373 |
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Cost of products sold |
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35,349,503 |
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33,403,219 |
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Gross profit |
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3,542,508 |
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4,658,154 |
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Selling and administrative expenses |
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2,909,136 |
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3,053,186 |
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Operating income |
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633,372 |
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1,604,968 |
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Other (income) expense — net |
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(18,431 |
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(4,152 |
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Interest expense |
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269,316 |
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247,450 |
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Income from operations before income tax expense |
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382,487 |
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1,361,670 |
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Income tax expense |
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141,526 |
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503,681 |
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Net income |
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$ |
240,961 |
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$ |
857,989 |
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Earnings per share — basic |
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$ |
0.06 |
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$ |
0.22 |
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Earnings per share — diluted |
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$ |
0.06 |
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$ |
0.22 |
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Weighted average shares of common stock outstanding
Basic |
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3,864,274 |
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3,822,801 |
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Weighted average shares of common stock outstanding
Diluted |
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3,890,760 |
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3,877,079 |
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The accompanying notes to financial statements are an integral part of these statements.
4
SigmaTron International, Inc.
Consolidated Statements of Cash Flows
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Three |
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Three |
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Months Ended |
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Months Ended |
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July 31, |
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July 31, |
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2011 |
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2010 |
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Operating activities: |
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Net income |
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$ |
240,961 |
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$ |
857,989 |
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Adjustments to reconcile net income
to net cash used in operating activities: |
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Depreciation and amortization |
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994,052 |
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1,126,979 |
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Stock-based compensation |
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2,414 |
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2,414 |
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Deferred income taxes |
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(942 |
) |
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(942 |
) |
Amortization of customer relationships |
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33,919 |
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50,776 |
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Loss from disposal or sale of machinery and equipment |
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747 |
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749 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(1,586,890 |
) |
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(340,006 |
) |
Inventories |
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(2,833,415 |
) |
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(7,758,729 |
) |
Prepaid expenses and other assets |
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(66,572 |
) |
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52,944 |
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Refundable Income taxes |
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196,716 |
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— |
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Trade accounts payable |
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(232,833 |
) |
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3,606,114 |
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Deferred rent |
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3,580 |
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— |
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Accrued expenses and payroll |
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(759,926 |
) |
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(549,464 |
) |
Income taxes payable |
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— |
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(442,178 |
) |
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Net cash used in operating activities |
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(4,008,189 |
) |
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(3,393,354 |
) |
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Investing activities: |
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Purchases of machinery and equipment |
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(1,116,418 |
) |
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(2,272,144 |
) |
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Net cash used in investing activities |
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(1,116,418 |
) |
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(2,272,144 |
) |
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Financing activities: |
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Proceeds from the issuance of common stock |
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— |
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|
2,000 |
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Payments under capital lease obligations |
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(277,005 |
) |
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(213,997 |
) |
Payments under other notes payable |
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(40,249 |
) |
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(49,047 |
) |
Net proceeds (payments) under lines of credit |
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2,527,192 |
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|
7,618,041 |
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Change in bank overdraft |
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2,087,587 |
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(1,407,572 |
) |
Payments under building notes payable |
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(24,999 |
) |
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(24,999 |
) |
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Net cash provided by financing activities |
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4,272,526 |
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5,924,426 |
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Change in cash |
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(852,081 |
) |
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|
258,928 |
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Cash at beginning of period |
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4,138,102 |
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4,052,572 |
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Cash at end of period |
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$ |
3,286,021 |
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$ |
4,311,500 |
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Supplementary disclosures of cash flow information |
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Cash paid for interest |
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$ |
235,596 |
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$ |
201,270 |
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Cash paid for income taxes, net of (refunds) |
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(115,516 |
) |
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|
832,979 |
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Non Cash Financing Activity: |
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Financed a licensing agreement
through a note payable |
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— |
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|
70,390 |
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The accompanying notes to financial statements are an integral part of these statements.
5
SigmaTron International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
July 31, 2011
Note A — Basis of Presentation:
The accompanying unaudited consolidated financial statements of SigmaTron International, Inc.
(“SigmaTron”), SigmaTron’s wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex,
S.A. de C.V., and SigmaTron International Trading Co., wholly-owned foreign enterprise Wujiang
SigmaTron Electronics Co., Ltd. (“SigmaTron China”) and international procurement office SigmaTron
Taiwan (collectively, the “Company”) have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the consolidated financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating
results for the three month period ended July 31, 2011 are not necessarily indicative of the
results that may be expected for the year ending April 30, 2012. For further information, refer to
the consolidated financial statements and footnotes thereto included in the Company’s Annual Report
on Form 10-K for the year ended April 30, 2011.
Note B — Inventories:
The components of inventory consist of the following:
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July 31, |
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April 30, |
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2011 |
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2011 |
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Finished products |
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$ |
14,220,391 |
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$ |
10,862,889 |
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Work-in-process |
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2,119,903 |
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|
2,280,209 |
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Raw materials |
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31,514,961 |
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|
31,878,742 |
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$ |
47,855,255 |
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$ |
45,021,840 |
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6
Note C — Earnings Per Share:
The following table sets forth the computation of basic and diluted earnings per share:
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Three Months Ended |
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July 31, |
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July 31, |
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| |
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2011 |
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2010 |
|
Net income |
|
$ |
240,961 |
|
|
$ |
857,989 |
|
|
|
|
|
|
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Weighted-average shares |
|
|
|
|
|
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Basic |
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3,864,274 |
|
|
|
3,822,801 |
|
Effect of dilutive stock options |
|
|
26,486 |
|
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|
54,278 |
|
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|
|
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|
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|
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|
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Diluted |
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3,890,760 |
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|
3,877,079 |
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Basic earnings per share |
|
$ |
0.06 |
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$ |
0.22 |
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Diluted earnings per share |
|
$ |
0.06 |
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$ |
0.22 |
|
Options to purchase 459,589 and 500,807 shares of common stock were outstanding at July 31, 2011
and 2010, respectively. There were no options granted during the quarters ended July 31, 2011 and
2010.
Note D — Financing Transaction:
The Company has a senior secured credit facility with Wells Fargo Bank (“Wells Fargo”), with a
credit limit up to $30 million. The term of the credit facility extends through September 30,
2013, and allows the Company to choose among interest rates at which it may borrow funds. The
interest rate can be the prime rate plus one half percent (effectively, 3.75% at July 31, 2011) or
LIBOR plus two and three quarter percent (effectively, 3.1% at July 31, 2011), which is paid
monthly. The LIBOR rate has a floor of .35%. The credit facility is collateralized by
substantially all of the domestically located assets of the Company and requires the Company to be
in compliance with several financial covenants. The Company was in compliance with its financial
covenants at July 31, 2011. As of July 31, 2011, there was a $24,527,192 outstanding balance
under the credit facility and $5,472,808 of unused availability.
Note E — Critical Accounting Policies:
Management Estimates and Uncertainties - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made in preparing the consolidated financial statements
include depreciation and amortization periods, the allowance for doubtful accounts, reserves for
inventory and valuation of long-lived assets. Actual results could materially differ from these
estimates.
Revenue Recognition - Revenues from sales of the Company’s electronic manufacturing services
business are recognized when the finished good product is shipped to the customer. In general, and
except for consignment inventory, it is the Company’s policy to recognize revenue and related costs
when the finished goods have been shipped from our facilities, which is also the same point that
title
7
passes under the terms of the purchase order. Finished good inventory for certain customers
is shipped from the Company to an independent warehouse for storage or shipped directly to the
customer and stored in a segregated part of the customer’s own facility. Upon the customer’s
request for finished goods inventory, the inventory is shipped to the customer if the inventory was
stored off-site, or transferred from the segregated part of the customer’s facility for consumption
or use by the customer. The Company recognizes revenue upon such shipment or transfer. The
Company does not earn a fee for such arrangements. The Company from time to time may ship finished
goods from its facilities, which is also the same point that title passes under the terms of the
purchase order, and invoice the customer at the end of the calendar month. This is done only in
special circumstances to accommodate a specific customer. Further, from time to time customers
request the Company hold finished goods after they have been invoiced to consolidate finished goods
for shipping purposes. The Company generally provides a 90 day warranty for workmanship only and
does not have any installation, acceptance or sales incentives (although the Company has negotiated
longer warranty terms in certain instances). The Company assembles and tests assemblies based on
customers’ specifications. Historically, the amount of returns for workmanship issues has been de
minimis under the Company’s standard or extended warranties.
Inventories - Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out method. In the event of an inventory write-down, the Company records expense
to record the inventory at lower of cost or market. The Company establishes inventory reserves for
valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for
inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual
results differing from these estimates could significantly affect the Company’s inventories and
cost of products sold. The Company records provisions for excess and obsolete inventories for the
difference between the cost of inventory and its estimated realizable value based on assumptions
about future product demand and market conditions. Actual product demand or market conditions
could be different than that projected by management.
Impairment of Long-Lived Assets - The Company reviews long-lived assets, including amortizable
intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered impaired if its
carrying amount exceeds the future undiscounted net cash flow the asset is expected to generate.
If such asset is considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Income Tax - The Company accounts for income taxes in accordance with Accounting Standards
Codification (“ASC”) 740 — “Income Taxes”. Our income tax expense, deferred tax assets and
liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of
estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and
several foreign jurisdictions. Significant judgments and estimates by management are required in
determining the consolidated income tax expense assessment.
Deferred income taxes arise from temporary differences between the tax and financial statement
recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets
within the jurisdiction from which they arise, the Company considers all available positive and
negative evidence, including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and recent financial operations. In projecting future
taxable income, the Company begins with historical results adjusted for the results of discontinue
operations and changes in accounting policies, and incorporates assumptions including the amount of
future state, federal and
foreign pretax operating income, the reversal of temporary differences, and the implementation of
feasible and prudent tax planning strategies. These assumptions require significant judgment and
8
estimates by management about the forecasts of future taxable income and are consistent with the
plans and estimates the Company uses to manage the underlying businesses. In evaluating the
objective evidence that historical results provide, the Company considers three years of cumulative
operating income and/or loss.
The calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax laws and regulations in a multitude of jurisdictions across our global operations.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the
future. Management is not presently aware of any such changes that would have a material effect on
the Company’s results of operations, cash flows or financial position.
FASB ASC Topic 740, Income Taxes provides that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on the technical
merits. ASC Topic 740 also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition.
The Company recognizes tax liabilities in accordance with ASC Topic 740 and the Company adjusts
these liabilities when its judgment changes as a result of the evaluation of new information not
previously available. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from our current estimate of the
tax liabilities. These differences will be reflected as increases or decreases to income tax
expense in the period in which they are determined.
New Accounting Standards:
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) No. 2009-13 for updated revenue recognition guidance under the provisions of ASC
605-25, “Multiple-Element Arrangements”. The previous guidance has been retained for criteria to
determine when delivered items in a multiple-deliverable arrangements should be considered separate
units of accounting, however the updated guidance removes the previous separation criterion that
objective and reliable evidence of fair value of any undelivered items must exist for the delivered
items to be considered a separate unit or separate units of accounting. This guidance was
effective for fiscal years beginning on or after July 15, 2010. The adoption of this guidance is
not expected to have a material effect on the Company’s consolidated results of operations and
financial condition.
In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit
Derivatives” to address questions that have been raised in practice about the intended breadth of
the embedded credit derivative scope exception in paragraphs 815-15-15-8 through 815-15-15-9 of ASC
815, “Derivatives and Hedging”. The amended guidance clarifies that the scope exception applies to
contracts that contain an embedded credit derivative that is only in the form of subordination of
one financial instrument to another. This guidance was effective on August 1, 2010 for the
Company. The adoption of this guidance did not have a material impact on the Company’s
consolidated results of operations and financial condition.
In December 2010, the FASB issued authoritative guidance regarding ASC No. 805, “Business
Combinations,” on the disclosure of supplementary pro forma information for business combinations.
ASC No. 805 requires a public entity to disclose pro forma information for business combinations
that
occurred in the current reporting period. The disclosures include pro forma revenue and earnings
of the combined entity for the current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as of the beginning of the annual
reporting
9
period. The adoption of this guidance did not have a material impact on the Company’s
consolidated results of operations and financial condition.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRS,” which results in common fair value measurement and
disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording
used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements. ASU 2011-04 is effective for interim and annual periods
beginning after December 15, 2011, which will first be applicable to the Company’s fiscal quarter
beginning February 1, 2012. The adoption of this guidance is not expected to have a material
impact on the Company’s consolidated results of operations and financial condition.
Other accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are not expected to have
a significant impact on our consolidated financial statements upon adoption.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In addition to historical financial information, this discussion of the business of SigmaTron
International, Inc., its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex,
S.A. de C.V., and SigmaTron International Trading Co., wholly-owned foreign enterprise Wujiang
SigmaTron Electronics Co., Ltd. (“SigmaTron China”) and international procurement office SigmaTron
Taiwan (collectively, the “Company”) and other Items in this Quarterly Report on Form 10-Q contain
forward-looking statements concerning the Company’s business or results of operations. Words such
as “continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify
forward-looking statements. These forward-looking statements are based on the current expectations
of the Company. Because these forward-looking statements involve risks and uncertainties, the
Company’s plans, actions and actual results could differ materially. Such statements should be
evaluated in the context of the risks and uncertainties inherent in the Company’s business
including, but not necessarily limited to, the Company’s continued dependence on certain
significant customers; the continued market acceptance of products and services offered by the
Company and its customers; pricing pressures from our customers, suppliers and the market; the
activities of competitors, some of which have greater financial or other resources than the
Company; the variability of our operating results; the results of long-lived assets impairment
testing; the variability of our customers’ requirements; the availability and cost of necessary
components and materials; the ability of the Company and our customers to keep current with
technological changes within our industries; regulatory compliance; the continued availability and
sufficiency of our credit arrangements; changes in U.S., Mexican, Chinese or Taiwanese regulations
affecting the Company’s business; the turmoil in the global economy and financial markets; the
stability of the U.S., Mexican, Chinese and Taiwanese economic, labor and political systems and
conditions; currency exchange fluctuations; and the ability of the Company to manage its growth.
These and other factors which may affect the Company’s future business and results of operations
are identified throughout the Company’s Annual Report on Form 10-K and as risk factors and may be
detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
These statements speak as of
the date of such filings, and the Company undertakes no obligation to update such statements in
light of future events or otherwise unless otherwise required by law.
10
Overview:
The Company operates in one business segment as an independent provider of electronic manufacturing
services (“EMS”), which includes printed circuit board assemblies and completely assembled
(box-build) electronic products. In connection with the production of assembled products, the
Company also provides services to its customers, including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design, manufacturing and test
engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product
approval from governmental and other regulatory bodies. The Company provides these manufacturing
services through an international network of facilities located in the United States, Mexico, China
and Taiwan.
The Company relies on numerous third-party suppliers for components used in the Company’s
production process. Certain of these components are available only from single sources or a
limited number of suppliers. In addition, a customer’s specifications may require the Company to
obtain components from a single source or a small number of suppliers. The loss of any such
suppliers could have a material impact on the Company’s results of operations. Further, the
Company could operate at a cost disadvantage compared to competitors who have greater direct buying
power from suppliers. Increased demands for components and rising commodity prices have resulted
in upward pricing pressure from the Company’s supply chain, which has affected and could continue
to affect our results of operations. The Company does not enter into long-term purchase agreements
with major or single-source suppliers. The Company believes that short-term purchase orders with
its suppliers provides flexibility, given that the Company’s orders are based on the changing needs
of its customers.
Sales can be a misleading indicator of the Company’s financial performance. Sales levels can vary
considerably among customers and products depending on the type of services (consignment versus
turnkey) rendered by the Company and the demand by customers. Consignment orders require the
Company to perform manufacturing services on components and other materials supplied by a customer,
and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In
the case of turnkey orders, the Company provides, in addition to manufacturing services, the
components and other materials used in assembly. Turnkey contracts, in general, have a higher
dollar volume of sales for each given assembly, owing to inclusion of the cost of components and
other materials in net sales and cost of goods sold. Variations in the number of turnkey orders
compared to consignment orders can lead to significant fluctuations in the Company’s revenue
levels. However, the Company does not believe that such variations are a meaningful indicator of
the Company’s gross margins. Consignment orders accounted for less than 5% of the Company’s
revenues for the three months ended July 31, 2011 and 2010.
In the past, the timing and rescheduling of orders have caused the Company to experience
significant quarterly fluctuations in its revenues and earnings, and the Company expects such
fluctuations to continue. The uncertainty associated with the worldwide economy in general, and
the United States economy specifically makes forecasting difficult, such difficulty is expected to
continue for the balance of fiscal year 2012. The Company has begun seeing a softening in demand.
The Company continues to experience pricing pressures from both its customers and vendors and it
has limited or delayed ability to pass along price increases to its customers. The Company is
addressing its pricing structures with various customers and is implementing inventory programs
with specific vendors.
11
Results of Operations:
Net Sales
Net sales increased for the three month period ended July 31, 2011 to $38,892,011 from $38,061,373
for the three month period ended July 31, 2010. Sales volume increased for the three month period
ended July 31, 2011 as compared to the same period in the prior fiscal year in the industrial and
consumer electronics, fitness and semiconductor equipment marketplaces. The increase in sales for
these marketplaces was partially offset by a decrease in sales in the appliance,
telecommunications, gaming and medical/life sciences marketplaces. The increase in revenue for the
three month period ended July 31, 2011 is a result of our existing customers’ increased demand for
product and the addition of some new customer programs ramping up compared to the previous fiscal
year.
Gross Profit
Gross profit decreased during the three month period ended July 31, 2011 to $3,542,508 or 9.1% of
net sales, compared to $4,658,154 or 12.2.% of net sales for the same period in the prior fiscal
year. The Company continues to experience pricing pressures from both its customers and vendors
and it has limited or delayed ability to pass along increases to its customers, which has
negatively affected its margins. The Company is addressing its pricing structures with various
customers and is implementing inventory programs with specific vendors. Gross profit was further
negatively affected by foreign currency losses of $57,363 due to the weakening dollar compared to a
foreign currency gain of $44,791 for the same period in the prior fiscal year. In the past, the
timing and rescheduling of orders have caused the Company to experience significant quarterly
fluctuations in its revenues and earnings, and the Company expects such fluctuations to continue.
The uncertainty associated with the worldwide economy in general, and the United States economy
specifically makes forecasting difficult, such difficulty is expected to continue for the balance
of fiscal year 2012. The Company has begun seeing a softening in demand from some of its
customers.
Selling and Administrative Expenses
Selling and administrative expenses decreased to $2,909,136, or 7.5% of net sales for the three
month period ended July 31, 2011 compared to $3,053,186, or 8.0% of net sales in the same period in
the prior fiscal year. The decrease in total dollars in specific categories of expenses for the
three month period ended July 31, 2011, was $328,758 and is primarily due to bonus expense, travel,
professional fees and other selling and administrative expenses decreasing. The decreases in the
foregoing selling and administrative expenses was partially offset by an increase of $184,708 in
commissions, legal fees, miscellaneous taxes and office salaries, resulting in selling and
administrative expenses decreasing by a net amount of $144,050.
Interest Expense
Interest expense increased to $269,316 for the three month period ended July 31, 2011 compared to
$247,450 for the same period in the prior fiscal year. The additional interest expense was
attributable to the Company’s increased borrowings under its banking agreements and capital lease
obligations, and higher interest rates under its senior secured credit facility. Interest expense
for future quarters may increase if interest rates or borrowings, or both, continue to increase.
12
Taxes
The income tax expense from operations was $141,526 for the three month period ended July 31, 2011
compared to $503,681 for the same period in the prior fiscal year. The Company’s effective tax
rate was 37% for the three month period ended July 31, 2011 and 2010.
Net Income
Net income decreased to $240,961 for the three month period ended July 31, 2011 compared to
$857,989 for the same period in the prior fiscal year. Basic and diluted earnings per share for
the first fiscal quarter of 2011 were both $0.06 compared to basic and diluted earnings per share
of $0.22 for the same period in the prior fiscal year.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $4,008,189 for the three months ended July 31, 2011,
compared to cash flow used in operating activities of $3,393,354 for the same period in the prior
fiscal year. During the first three months of fiscal year 2012, cash flow used in operating
activities was primarily the result of an increase in inventories of $2,833,415 due to rising
inventory levels for some customers delaying shipments and the start up of new customer programs.
Cash flow used in operating activities was further impacted by an increase in accounts receivable
of $1,586,890 due to increased sales volume and timing of cash receipts from a significant
customer. Net cash used in operating activities was partially offset by net income, the non-cash
effect of depreciation and amortization and a decrease in accounts payable. The decrease in
accounts payable of $232,833 is due to timing of payments in the ordinary course of business.
Cash flow used in operating activities was $3,393,354 for the three months ended July 31, 2010.
During the first three months of fiscal year 2011, cash flow used in operating activities was
primarily the result of an increase in inventories of $7,758,729 due to an increase in customer
demand and the start up of new customer programs. Net cash used in operating activities was
partially offset by net income, the non-cash effect of depreciation and amortization and an
increase in accounts payable. The change in accounts payable is due to timing of payments in the
ordinary course of business.
Investing Activities.
During the first quarter of fiscal year 2012, the Company purchased approximately $1,100,000 in
machinery and equipment to be used in the ordinary course of business. The Company expects to make
additional machinery and equipment purchases of approximately $2,800,000 during the balance of
fiscal year 2012. The Company anticipates the purchases will be funded by lease transactions and
its bank line of credit.
During the first quarter of fiscal year 2011, the Company purchased approximately $2,300,000 in
machinery and equipment in the ordinary course of business. Approximately $70,400 of the equipment
purchases was pursuant to a financed licensing agreement for software through a note payable.
13
Financing Activities.
Cash provided by financing activities was $4,272,526 for the three months ended July 31, 2011,
compared to cash provided by financing activities of $5,924,426 for the same period in the prior
fiscal year. Cash provided by financing activities was primarily the result of increased
borrowings of $2,527,192 under the credit facility. The additional borrowings were required to
support the increase in inventory and accounts receivable.
Financing Transactions.
The Company has a senior secured credit facility with Wells Fargo Bank (“Wells Fargo”), with a
credit limit up to $30 million. The term of the credit facility extends through September 30,
2013, and allows the Company to choose among interest rates at which it may borrow funds. The
interest rate can be the prime rate plus one half percent (effectively, 3.75% at July 31, 2011) or
LIBOR plus two and three quarter percent (effectively, 3.1% at July 31, 2011), which is paid
monthly. The LIBOR rate has a floor of .35%. The credit facility is collateralized by
substantially all of the domestically located assets of the Company and requires the Company to be
in compliance with several financial covenants. The Company was in compliance with its financial
covenants at July 31, 2011. As of July 31, 2011, there was a $24,527,192 outstanding balance
under the credit facility and $5,472,808 of unused availability.
The Company entered into a mortgage agreement on January 8, 2010, in the amount of $2,500,000 with
Wells Fargo to refinance the property that serves as the Company’s corporate headquarters and its
Illinois manufacturing facility. The Company repaid the prior Bank of America mortgage, which
equaled $2,565,413, as of January 8, 2010, using proceeds from the Wells Fargo mortgage and senior
secured credit facility. The Wells Fargo note bears interest at a fixed rate of 6.42% per year
and is amortized over a sixty month period. A final payment of approximately $2,000,000 is due on
or before January 8, 2015. The outstanding balance as of July 31, 2011 was $2,350,006.
On January 19, 2010, the Company entered into a leasing transaction with Wells Fargo Equipment
Finance, Inc. to refinance $1,287,407 of equipment. The term of the lease financing agreement
extends to January 18, 2012 with monthly payments of $55,872 and a fixed interest rate of 4.29%.
The balances outstanding under the lease agreement were $331,078 and $919,946 at July 31, 2011 and
2010, respectively. The net book value of the equipment was $1,602,571 at July 31, 2011.
On August 20, 2010 and October 26, 2010, the Company entered into two capital leasing transactions
(a lease finance agreement and a sale lease back agreement) with Wells Fargo Equipment Finance,
Inc., to purchase equipment totaling $1,150,582. The term of the lease finance agreement, with an
initial principal amount of $315,252, extends to September 2016 with monthly payments of $4,973
and a fixed interest rate of 4.28%. The term of the sale lease back agreement, with an initial
principal amount of $835,330, extends to August 2016 with monthly payments of $13,207 and a fixed
interest rate of 4.36%. At July 31, 2011, $279,220 and $719,094 was outstanding under the lease
finance and sale lease back agreements, respectively. The net book value at July 31, 2011 for the
equipment under the lease finance agreement and sale lease back agreement was $293,359 and
$748,610, respectively.
On November 29, 2010, the Company entered into a capital lease with Wells Fargo Equipment Finance,
Inc., to purchase equipment totaling $226,216. The term of the lease agreement extends to October
2016 with monthly payments of $3,627 and a fixed interest rate of 4.99%. At July 31, 2011,
the balance outstanding under the capital lease agreement was $203,441. The net book value of the
equipment under this lease at July 31, 2011 was $211,369.
14
The total amount outstanding at July 31, 2011 for the above four equipment lease transactions was
$1,532,833. The Company has two other capital leases. The outstanding balance at July 31, 2011
and 2010 was $66,605 and $309,413, respectively. The total net book value of the equipment under
these other leases at July 31, 2011 was $629,758.
In September 2010, the Company entered into a lease agreement in Union City, CA, to rent 116,993
square feet of manufacturing and office space. Under the terms of the lease agreement, the
Company receives incentives over the life of the lease, which extends through March 2021. The
amount of the deferred rent expense recorded for the three month period ended July 31, 2011 was
$3,580. In addition, the landlord provided the Company tenant incentives of $418,000, which is
being amortized over the life of the lease.
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary
to operate its wholly-owned Mexican and Chinese subsidiaries and the Taiwan IPO. The Company
provides funding in U.S. dollars, which are exchanged for Pesos, Renminbi, and New Taiwan Dollars
as needed. The fluctuation of currencies from time to time, without an equal or greater increase
in inflation, could have a material impact on the financial results of the Company. The impact of
currency fluctuation for the three months ended July 31, 2011, resulted in a foreign currency loss
of approximately $57,400. During the first quarter ended July 31, 2011, the Company’s U.S.
operations paid approximately $4,600,000 to its foreign subsidiaries for services provided. The
Company has not provided U.S. deferred taxes for a significant portion of undistributed earnings of
the Company’s subsidiaries, since these earnings have been, and under current plans will continue
to be, permanently reinvested in these subsidiaries. It is not practicable to estimate the amount
of additional taxes that may be payable upon distribution. Should the tax law to repatriate
dividends change, the Company may reconsider its plan.
The Company anticipates its credit facilities, cash flow from operations and leasing resources will
be adequate to meet its working capital requirements and capital expenditures for the next twelve
months. There is no assurance that the Company will be able to retain or renew its credit
agreements in the future, or that any retention or renewal will be on the same terms as currently
exist. In the event the business grows rapidly, the current economic climate deteriorates or the
Company considers an acquisition, additional financing resources could be necessary in the current
or future fiscal years. There is no assurance that the Company will be able to obtain equity or
debt financing at acceptable terms, or at all, in the future.
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
Contractual Obligations and Commercial Commitments:
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange
Act, we are not required to provide the information required by this item.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange
Act, we are not required to provide the information required by this item.
Item 4. Controls and Procedures.
Disclosure Controls:
Our management, including our President and Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures
(as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules
13a-15(e) an 15(d)-15(e)) as of July 31, 2011. Our disclosure controls and procedures are designed
to provide reasonable assurance of achieving their objectives and our President and Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures
were effective at the reasonable assurance level as of the end of the period covered by this
report.
Internal Controls:
There has been no change in our internal control over financial reporting during the quarter ended
July 31, 2011, that has materially affected or is reasonably likely to materially affect, our
internal control over financial reporting. Our internal controls over financial reporting are
designed to provide reasonable assurance regarding the reliability of financial reporting and
preparation of financial statements for external purposes in accordance with U.S. GAAP.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
As of July 31, 2011, the Company was not a party to any material legal proceedings.
From time to time the Company is involved in legal proceedings, claims or investigations that are
incidental to the conduct of the Company’s business. In future periods, the Company could be
subjected to cash cost or non-cash charges to earnings if any of these matters is resolved on
unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted
with certainty, based on present information, including management’s assessment of the merits of
any particular claim, the Company does not expect that these legal proceedings or claims will have
any material adverse impact on its future consolidated financial position or results of operations.
Item 1A. Risk Factors.
There have been no material changes to the description of the risk factors affecting our business
as previously disclosed in Item 1A. to Part 1 of our Annual Report on Form 10-K for the fiscal year
ended April 30, 2011.
16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Removed and Reserved.
Item 5. Other Information.
None.
Item 6. Exhibits.
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31.1
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Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under
the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). |
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31.2
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Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under
the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). |
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32.1
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Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to
Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). |
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32.2
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Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to
Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350). |
17
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SIGMATRON INTERNATIONAL, INC. |
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/s/ Gary R. Fairhead
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September 13, 2011 |
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Gary R. Fairhead
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Date |
President and CEO (Principal Executive Officer) |
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/s/ Linda K. Frauendorfer
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September 13, 2011 |
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Linda K. Frauendorfer
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Date |
Chief Financial Officer, Secretary and Treasurer |
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(Principal Financial Officer and Principal |
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Accounting Officer) |
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