UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 2005
Commission File Number 0-23248
SigmaTron International, Inc.
(Exact Name of Registrant, as Specified in its Charter)
Delaware 36-3918470
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2201 Landmeier Road, Elk Grove Village, Illinois 60007
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 956-8000
No Change
(Former Name, Former Address, and Former Fiscal Year, if
Changed Since Last Report)
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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [ ] No
On September 9, 2005 there were 3,755,420 shares of the Registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
Page No.
--------
PART 1. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2005
and April 30, 2005 3
Condensed Consolidated Statements of Operations - Three
Months Ended July 31, 2005 and July 31, 2004 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended July 31, 2005 and July 31, 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
2
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
JULY 31, April 30,
2005 2005
UNAUDITED Audited
----------- -----------
CURRENT ASSETS:
Cash $ 571,483 $ 184,014
Accounts receivable, less allowance for doubtful
accounts of $201,155 at July 31, 2005 and
$120,000 at April 30, 2005, respectively 14,697,993 14,275,308
Inventories, net 27,719,307 21,468,506
Prepaid and other assets 1,008,886 1,168,366
Deferred income taxes 1,117,528 429,528
Other receivables 197,619 183,666
----------- -----------
Total current assets 45,312,816 37,709,388
Property, machinery and equipment, net 26,682,238 26,689,940
Other assets 1,960,493 1,386,770
Goodwill 11,311,535 756,959
----------- -----------
Total long-term assets 13,272,028 2,143,729
----------- -----------
Total assets $85,267,082 $66,543,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $10,572,415 $ 7,395,111
Accrued expenses 1,717,075 2,269,703
Accrued payroll 1,291,814 1,675,788
Income taxes payable 441,370 407,710
Notes payable - buildings 430,000 430,000
Notes payable - other -- 300,000
Capital lease obligations 1,104,339 637,766
----------- -----------
Total current liabilities 15,557,013 13,116,078
Notes payable - banks 15,611,778 512,958
Notes payable - buildings, less current portion 3,955,113 4,073,828
Capital lease obligations, less current portion 2,377,109 1,239,190
Deferred income taxes 1,668,908 1,668,909
----------- -----------
Total liabilities 39,169,921 20,610,963
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 3,755,420 and 3,752,054 shares issued and 37,554 37,554
outstanding at July 31, 2005 and April 30, 2005,
respectively
Capital in excess of par value 19,087,020 19,087,020
Retained earnings 26,972,587 26,807,520
----------- -----------
Total stockholders' equity 46,097,161 45,932,094
----------- -----------
Total liabilities and stockholders' equity $85,267,082 $66,543,057
=========== ===========
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months
ENDED Ended
JULY 31, 2005 July 31, 2004
------------- -------------
Net sales $21,312,693 $21,460,858
Cost of products sold 18,771,008 17,117,850
----------- -----------
Gross profit 2,541,685 4,343,008
Selling and administrative expenses 2,136,281 2,712,075
----------- -----------
Operating income 405,404 1,630,933
Miscellaneous - (income) expense (40,274) 0
Interest expense - Banks and capital lease obligations 134,514 66,683
----------- -----------
Total other 94,240 66,683
Income from continuing operations before income tax
expense and interest of affiliate 311,164 1,564,250
Income tax expense 121,366 573,780
----------- -----------
Income from continuing operations before minority
interest of affiliate 189,798 990,470
Minority interest in income of affiliate -- 123,680
----------- -----------
Income from continuing operations 189,798 866,790
Discontinued operations (Note C)
(Loss) income from operations of discontinued
Las Vegas location (including gain on disposal
of $311,000) (40,542) 282,690
Income tax (benefit) expense (15,811) 112,511
----------- -----------
Loss on discontinued operation (24,731) 170,179
----------- -----------
Net income $ 165,067 $ 1,036,969
=========== ===========
Net income per common share - Basic $ 0.05 $ 0.28
=========== ===========
Net income per common share - Assuming dilution $ 0.04 $ 0.27
=========== ===========
Weighted average shares of common stock outstanding
Basic 3,755,420 3,751,014
=========== ===========
Diluted 3,822,577 3,787,597
=========== ===========
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
THREE MONTHS Three Months
ENDED Ended
07/31/05 07/31/04
------------ ------------
OPERATING ACTIVITIES:
Net income $ 165,067 $ 1,036,969
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 858,624 839,730
Provision for inventory 160,000 --
Changes in operating assets and liabilities:
Accounts receivable 2,618,969 413,702
Inventories (1,715,940) (4,307,017)
Prepaid expenses and other assets (117,941) 478,365
Minority interest in affiliate -- 123,682
Trade accounts payable (454,479) 1,756,376
Income taxes payable 33,660 632,829
Accrued expenses (1,420,692) (1,403,389)
------------ -----------
Net cash (used in) provided by operating activities 127,268 (428,753)
INVESTING ACTIVITIES:
Acquistion of Able (16,379,736) --
Purchases of machinery and equipment (127,993) (534,354)
Sale of machinery and equipment 1,705,695 --
Gain of sale of discontinued operations (310,731) --
------------ -----------
Net cash used in investing activities (15,112,765) (534,354)
FINANCING ACTIVITIES:
Proceeds from exercise of options -- 6,431
Payments under building notes payable (118,716) (113,747)
Payments under capital lease obligations (258,746) (157,385)
Proceeeds under capital lease obligations 951,609 --
Payments from other notes payable (300,000) --
Net (borrowings) payments under line of credit 15,098,820 222,752
------------ -----------
Net cash used in financing activities 15,372,967 (41,949)
------------ -----------
Change in cash 387,470 (1,005,056)
Cash at beginning of period 184,014 5,145,814
------------ -----------
Cash at end of period $ 571,484 $ 4,140,758
============ ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 99,232 $ 92,411
Cash paid for income taxes, net of (refunds) 32,440 171,931
See accompanying notes.
5
SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 2005
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SigmaTron International, Inc., its wholly owned subsidiaries Standard Components
de Mexico S.A., Able Electronics Corporation ("Able") (acquired July 2005) and
ABLEMEX, S.A. DE C.V., and its wholly-owned foreign enterprise Wujiang SigmaTron
Electronics Co., Ltd. and its procurement branch 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 condensed consolidated financial statements do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States 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, 2005 are not necessarily
indicative of the results that may be expected for the year ending April 30,
2006. 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, 2005.
NOTE B - INVENTORIES
The components of inventory consist of the following:
July 31, April 30,
2005 2005
----------- -----------
Finished products $ 7,918,628 $ 7,205,332
Work-in-process 1,973,079 1,007,594
Raw materials 17,827,600 13,255,580
----------- -----------
$27,719,307 $21,468,506
=========== ===========
NOTE C - STRATEGIC ACTIVITIES
On July 14, 2005, the Company closed on the purchase of all of the outstanding
stock of Able, a company headquartered in Hayward California, with an additional
manufacturing facility located in Tijuana, Mexico. Able is an ISO 9001:2000
certified electronic manufacturing services ("EMS") company serving Original
Equipment Manufacturers in the test and measurement, medical instruments,
telecommunications, computer peripherals, industrial controls and genetic
research industries. Able's long-term relationships with its customers
6
will give the Company a presence in a number of new markets, diversify its
current customer base and expand the number of industries it serves. The
effective date of the transaction was July 1, 2005. The purchase price was
$12,800,000 plus the assumption of approximately $3,800,000 in debt and was
recorded as a stock purchase transaction in the first quarter of fiscal 2006.
The transaction was financed by the Company's amended credit facility and
resulted in an increase of approximately $10,750,000 in goodwill. The Company is
currently evaluating the purchase price allocation of certain acquired tangible
and intangible assets related to the purchase of Able in accordance with the
Statement of Financial Accounting Standards 141 ("SFAS 141"). The Company
anticipates the outcome of the evaluation will be recorded in its second fiscal
quarter of 2006. Assuming the purchase was recorded as of the first period
reported, May 1, 2004, unaudited revenues would have been $29,858,316 compared
to $21,460,858 for the quarter ended July 31, 2004. Unaudited pro-forma net
income for the quarter ended July 31, 2004 would have been $1,401,707 compared
to $1,036,969. The unaudited pro-forma dilutive earnings per share would have
been $0.37 for the three month period ended July 31, 2004 compared to $0.27.
As part of the Able purchase an escrow account for contingent consideration was
established for potential uncollectible receivables in the amount of
approximately $415,000. As cash payments for the receivable are received by the
Company the payments will be reflected as an adjustment to the purchase price in
future periods.
On June 3, 2005 the Company closed on the sale of its Las Vegas, Nevada
operation. The Las Vegas facility operated as a complete EMS center specializing
in the assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset purchase, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal 2006 and
included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $351,000 on discontinued operations for the
Las Vegas operation for the period ended July 31, 2005. The loss included
$170,000 in reserves for potential inventory obsolescence on remaining inventory
balances and warranty claims. The Company continues to be obligated until
October 31, 2009 under the primary lease agreement for the Las Vegas facility
and subleases the facility in part to Grand Products, Inc., the buyer of the
Company's Las Vegas operation and in part to an unrelated third party.
The Company expects its strategic decisions, the sale of our Las Vegas operation
and the acquisition of Able, will be critically important to the Company's
future. In particular, the Able acquisition directly achieves the Company's
strategic goals of diversifying our markets served, diversifying our customer
base and expanding the range of services we offer.
NOTE D - STOCK INCENTIVE PLANS
The Company maintains various stock incentive plans. The Company accounts for
these plans under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. The
Company recognizes compensation cost for restricted shares and restricted stock
units to employees. As of July 31, 2005 there were no issued restricted shares
or restricted stock units issued. No compensation
7
cost is recognized for stock option grants. All options granted under the
Company's plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net earnings and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation. The following table also provides
the amount of stock-based compensation cost included in net earnings as
reported.
Three Months Ended
-----------------------------
July 31, 2005 July 31, 2004
------------- -------------
Net Income, as reported $165,067 $1,036,969
Deduct: total stock-based
employee compensation
expense determined under
fair based method for
awards granted, modified,
or settled, net of related
tax effects (12,198) (66,632)
-------- ----------
Pro forma net income $152,869 $ 970,337
======== ==========
Three Months Ended
-----------------------------
July 31, 2005 July 31, 2004
------------- -------------
Earnings per share
Basic - as reported $.05 $.28
Basic - pro forma .04 .26
Diluted - as reported .05 .27
Diluted - pro forma .04 .26
Options to purchase stock at exercise prices greater than the average fair
market value of the Company's stock for periods presented are excluded from the
calculation of diluted income because their inclusion would be anti-dilutive.
For the three month period ended July 31, 2004 and 2005, 3,100 options were
anti-dilutive and not included in the diluted income per share calculations.
8
CRITICAL ACCOUNTING POLICES
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America 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 and reserves for inventory and valuation of
goodwill. Actual results could materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing service business are recognized when the product is
shipped. In general it is the Company's policy to recognize revenue and related
costs when the order has been shipped from our facilities, which is also the
same point that title passes under the terms of the purchase order except for
consignment inventory. Consignment inventory 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 inventory, the consignment inventory is shipped to the customer if the
inventory was stored offsite or transferred from the segregated part of the
customer's facility for consumption, or use, by the customer. The Company
recognizes revenue upon such transfer. The Company does not earn a fee for
storing the consignment inventory. The Company provides a ninety (90) day
warranty for workmanship only and does not have any installation, acceptance or
sales incentives, although the Company has negotiated extended 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 minimus under the Company's standard or extended warranties.
Any returns for workmanship issues received after each period end are accrued in
the respective financial statements.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. 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 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 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, if any, exceeds its fair market value. The Company has adopted SFAS
9
No. 144, which establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations.
Goodwill and Other Intangibles - The Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" effective January 1, 2002. Under SFAS No. 142, goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized,
but rather tested for impairment on an annual basis and more often if
circumstances require. Impairment losses are recognized whenever the implied
fair value of goodwill is less than its carrying value. The Company adopted on
June 1, 2001 SFAS 141 "Business Combinations". Under SFAS No. 141 the purchaser
must allocate the total consideration paid in a business combination to the
acquired tangible and intangible assets based on their fair value. The Company
anticipates the purchase price allocation will be recorded in its second fiscal
quarter of 2006.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
("SFAS 123R"). The Company is required to adopt SFAS 123R on May 1, 2006. SFAS
123R requires the Company to measure the cost of employee services received in
exchange for an equity award based on the grant date fair value. The cost will
be recognized in financial statements as an expense over the period during which
an employee is required to provide service. The Company has not been able to
determine the impact on the Company.
On December 21, 2004, the Financial Accounting Standards Board ("FASB") Staff
Position ("FSP") FAS 109-I, "Application of FASB Statement No. 109, Accounting
for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004" was issued. FSP FAS 109-I
clarifies that this tax deduction must be accounted for as a special deduction
in accordance with Statement 109. As such, the special deduction has no effect
on deferred tax assets and liabilities existing at the date of enactment.
Rather, the impact of this deduction would be reported in the period in which
the deduction is claimed on the Company's tax return beginning in 2005. As
regulations are still pending, the Company has not been able to determine
whether the impact will be material.
On December 21, 2004, FSP FAS 109-2, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 ("Act")," was issued. FSP FAS 109-2 provides companies additional time,
beyond the financial reporting period during which the Act took effect, to
evaluate the Act's impact on a company's plan for reinvestment or repatriation
of certain foreign earnings for purposes of applying Statement 109. FSP FAS
109-2 was effective upon issuance. Based on management's analysis of the
repatriation provision of the Act, although not yet finalized, it is unlikely
that the Company had any foreign earnings to repatriate, and accordingly, the
financial statements do not reflect any provisions for taxes on unremitted
foreign earnings. The Company does not believe the impact of the Act will be
material.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in Accounting
Research
10
Bulletin (ARB) No. 43, Charter 4, "Inventory Pricing," to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) and requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of
"abnormal." The statement also requires that allocation of fixed production
overheads to the cost of conversion be based on the normal capacity of the
production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005 (as
of February 1, 2006 for the Company) and are to be applied prospectively. The
Company does not believe the impact will be material.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
("the Act"). The Act provides a deduction from income from qualified domestic
production activities, which will be phased in from 2005 through 2010. In
return, the Act also provides for a two-year phase-out (except for certain
pre-existing binding contracts) of the existing Extraterritorial Income ("ETI")
exclusion tax benefit for foreign sales which the World Trade Organization
("WTO") ruled was an illegal export subsidy. The European Union ("EU") believes
that the Act fails to adequately repeal the illegal export subsidies because of
the transitional provisions and has asked the WTO to review whether these
transitional provisions are in compliance with their prior ruling. Additionally,
the Act creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividend received deduction
for certain dividends from controlled foreign corporations. The Company
anticipates the impact will not be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE: This quarterly statement contains forward-looking statements. Words such
as "continue," "will," "expects," "believe," "plans," and similar expressions
identify forward-looking statements. These forward-looking statements are based
on the current expectations of SigmaTron (including its subsidiaries). Because
these forward-looking statements involve risks and uncertainties, SigmaTron's
plans, actions and actual results could differ materially. Such statements
should be evaluated in the context of the risks and uncertainties inherent in
SigmaTron's business, including our 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 and the
market; the activities of competitors, some of which may have greater financial
or other resources than SigmaTron; the variability of our operating results; the
variability of our customers' requirements; the availability and cost of
necessary components and materials; SigmaTron's ability to be in compliance with
the European Standard of "Restriction of Use of Hazardous Substance "RoHS" by
mid-2006; the ability of SigmaTron 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 SigmaTron's business;
the continue stability of the Mexican, Chinese and Taiwanese economic systems,
labor and political conditions; and the ability of SigmaTron to manage its
growth, including its expansion into China and its integration of the Able
operation acquired in July 2005. These and other factors which may affect
SigmaTron's future business and results of operations are identified throughout
the Company's Annual Report on Form 10-K
11
and risk factors contained therein and may be detailed from time to time in
SigmaTron's filings with the Securities and Exchange Commission. These
statements speak as of the date of this report and SigmaTron undertakes no
obligation to update such statements in light of future events or otherwise.
OVERVIEW:
The Company operates in one business segment as an independent provider of 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.
As the demand for electronic products has continued to increase over the past
several months, the lead-time for many components has increased. Pricing for
some components and related commodities has escalated due to the increased
demand and the transition to RoHS components and may continue to increase in the
future periods. The impact of these price increases could have a negative effect
on the Company's gross margins and operating results.
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, and the Company may be
required to operate at a cost disadvantage compared to competitors who have
greater direct buying power from suppliers. The Company does not enter into
purchase agreements with major or single-source suppliers. The Company believes
that ad-hoc negotiations with its suppliers provides flexibility, given that the
Company's orders are based on the needs of its customers, which constantly
change.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as new rules
subsequently implemented by the Securities and Exchange Commission and new
listing requirements subsequently adopted by Nasdaq in response to
Sarbanes-Oxley, have required changes in corporate governance practices,
internal control policies and audit committee practices of public companies.
These new rules, regulations, and requirements have significantly increased the
company's legal expenses, financial compliance and administrative costs, made
many other activities more time consuming and costly and diverted the attention
of senior management. These new rules and regulations have also made it more
difficult and more expensive for the Company to obtain director and officer
liability insurance. These new rules and regulations could also make it more
difficult for us to attract and retain qualified members for our board of
directors, particularly to serve on our audit committee. In addition, if the
Company receives a qualified opinion on the adequacy of its internal control
over financial
12
reporting, shareholders could lose confidence in the reliability of the
Company's financial statements, which could have a material adverse impact on
the value of the Company's stock.
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 and 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 month period ended July 31, 2005.
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.
RESULTS OF OPERATIONS:
Net sales decreased for the three month period ended July 31, 2005 to
$21,312,693 from $21,460,858 for the three month period ended July 31, 2004.
Sales volume decreased in the fitness marketplace. The decrease in sales in the
fitness marketplace was primarily due to timing and scheduling of customers'
orders and price reductions. Sales increased in the appliance, industrial
electronics and life sciences marketplaces. The increase in the appliance
industry is the result of increasing customer orders, which was partially offset
by price reductions. The Company anticipates additional pricing concessions to
several customers in future periods. The increase in the industrial electronics
and life sciences marketplaces is due to sales to new customers, which is the
result of the July 14, 2005 acquisition of Able. Able's long-term relationship
with its customer base will give the Company a presence in a number of new
markets, diversify its customer base and expand the number of industries it
serves.
The Company's sales in a particular industry are driven by the fluctuating
forecasts and end-market demand of the customers within that industry. Sales to
customers are subject to variations from period to period depending on customer
order terminations, the life cycle of customer products and product transition.
There can be no assurance that sales levels or gross margins will remain stable
in future periods.
Gross profit in total dollars decreased during the three month period ended July
31, 2005 to $2,541,685 from $4,343,008 compared to the same period in the prior
fiscal year. Gross profit as a percentage of net sales decreased to 11.9% from
20.2% for three month period ended July 31, 2005 as compared to the same period
in the prior year. The decrease in total dollars is primarily attributable to
the decrease in sales volume. The decrease as a percentage is due to
13
an increase in the cost of manufacturing supplies and component pricing. There
can be no assurance gross margins will not continue to decrease in the future.
Selling and administrative expenses decreased to $2,136,281 or 10.0% of net
sales for the three month period ended July 31, 2005 compared to $2,712,075 or
12.6% of net sales in the same period last year. The decrease for the three
month period ended July 31, 2005 is primarily due to a reduction in bonus
expense, which was partially offset by an increase in selling expenses.
Interest expense for bank debt and capital lease obligations for the three month
period ended July 31, 2005 was $134,514 compared to $66,683 for the same period
in the prior fiscal year. This change was attributable to the Company's
significant increased borrowings under its revolving credit facility for the
acquisition of Able, increased capital lease obligations and higher interest
rates.
Income tax expense from continuing operations was $121,366, which resulted in an
effective tax rate of 39.0% for the quarter ended July 31, 2005 compared to
$573,780 in income tax expense and an effective rate of 39.8% in the same period
of the prior fiscal year. The income tax benefit from discontinuing operation
was $15,811 for the quarter ended July 31, 2005 compared to income tax expense
of $112,511 in the same period of the prior fiscal year.
Net income decreased to $165,067 for the three month period ended July 31, 2005
compared to $1,036,969 for the same period in the prior year. Basic earnings per
share and dilutive earnings per share for the first fiscal quarter of 2006 were
$0.05 and $0.04, respectively, compared to basic earnings per share of $0.28 and
dilutive earnings per share of $0.27, for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow provided by operating activities was $127,268 compared to cash used in
operating activities of $428,753 in the comparable period of the prior year.
During the first quarter of fiscal 2006 cash provided by operating activities
was the result of net income, the non-cash effect of depreciation and
amortization and a decrease in receivables, which was partially offset by an
increase in inventories and accrued expenses. Inventories increased primarily
due to the start up of new product programs and growth of the Company's China
location.
STRATEGIC ACTIVITIES.
On July 14, 2005, the Company closed on the purchase of all of the outstanding
stock of Able, a company headquartered in Hayward California, with an additional
manufacturing facility located in Tijuana, Mexico. Able is an ISO 9001:2000
certified EMS company serving Original Equipment Manufacturers in the test and
measurement, medical instruments, telecommunications, computer peripherals,
industrial controls and genetic research industries. Able's long-term
relationships with its customers will give the Company a presence in a number of
new markets, diversify its current customer base and expand the number of
industries it serves. The effective date of the transaction was July 1, 2005.
The purchase price was $12,800,000 plus the assumption of approximately
$3,800,000 in debt and was recorded
14
as stock purchase transaction in first quarter of fiscal 2006. The transaction
was financed by the Company's amended credit facility and resulted in an
increase of approximately $10,750,000 in goodwill. The Company is currently
evaluating the purchase price allocation of certain acquired tangible and
intangible assets related to the purchase of Able in accordance with the
Statement of Financial Accounting Standards 141 ("SFAS 141"). This Company
anticipates the outcome of the evaluation will be recorded in its second fiscal
quarter of 2006. Assuming the purchase was recorded as of the first period
reported, May 1, 2004, unaudited revenues would have been $29,858,316 compared
to $21,460,858 for the quarter ended July 31, 2004. Unaudited pro-forma net
income for the quarter ended July 31, 2004 would have been $1,401,707 compared
to $1,036,969. The unaudited pro-forma dilutive earnings per share would have
been $0.37 for the three month period ended July 31, 2004 compared to $0.27.
As part of the Able purchase an escrow account for contingent consideration was
established for potential uncollectible receivables in the amount of
approximately $415,000. As cash payments for the receivable are received by the
Company the payments will be reflected as an adjustment to the purchase price in
future periods.
On June 3, 2005 the Company closed on the sale of its Las Vegas, Nevada
operation. The Las Vegas facility operated as a complete EMS center specializing
in the assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset purchase, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal 2006 and
included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $351,000 on discontinued operations for the
Las Vegas operation for the period ended July 31, 2005. The loss included
$170,000 in reserves for potential inventory obsolescence on remaining inventory
balances and warranty claims. The Company continues to be obligated until
October 31, 2005 under the primary lease agreement for the Las Vegas facility
and subleases the facility in part to Grand Products, Inc., the buyer of the
Company's Las Vegas operation and in part to an unrelated party.
The Company expects its strategic decisions, the sale of our Las Vegas operation
and the acquisition of Able, will be critically important to the Company's
future. In particular, the Able acquisition directly achieves the Company's
strategic goals of diversifying our markets served, diversifying our customer
base and expanding the range of services we offer.
FINANCING TRANSACTIONS.
The Company entered into an Amended Loan and Security Agreement in July 2005,
which provides for a revolving credit facility. The maximum borrowing limit
under the amended revolving credit facility is limited to the lesser of: (i)
$17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or varying percentages of the
inventory base. The Amended Loan and Security Agreement expires on June 30, 2008
and is subject to certain financial covenants. The Amended Loan and Security
Agreement also provides a four year term loan in the amount of $3,000,000.
Interest on the term loan accrues at 5.75% and interest only is due each quarter
through June 30, 2006. Quarterly principal payments of $250,000 are due in years
two through four.
15
In September 2005 the Company further amended the above described credit
facility to increase the revolving credit facility from $17,000,000 to
$22,000,000. The amended revolving credit facility is limited to the lessor of:
(i) $22,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lessor of $11,000,000 or varying percentages of the
inventory base.
At July 31, 2005 the Company was in compliance with its financial covenants and
had borrowings of $12,120,950 outstanding under this line of credit and a
$3,000,000 term note.
The revolving credit facility is collateralized by substantially all of the
domestically located assets of the Company and contains certain financial
covenants, including specific covenants pertaining to the maintenance of minimum
tangible net worth and net income. The agreement also restricts annual lease
rentals and capital expenditures and the payment of dividends or distributions
of any cash or other property on any of its capital stock.
SigmaTron China entered into a loan agreement in April 2005, which provides for
a line of credit from the China Construction Bank. The agreement provides for
four draws on the line of credit of approximately $121,000, $362,750, $362,750
and $362,750, on April 15, 2005, July 1, 2005, October 8, 2005, and January 3,
2006, respectively. The interest rate under the agreement is 5.76% and at July
31, 2005 SigmaTron China had $490,833 outstanding under the line of credit. The
line of credit is collateralized by the Company's building in Suzhou-Wujiang
China and 60 of the 100 Chinese acres leased at the property.
In fiscal 2006, the Company anticipates it will make machinery and equipment
purchases of $4,000,000. The Company anticipates it will execute three to five
year capital lease agreements to finance the majority of the purchases. The
machinery and equipment purchases are necessary to assist with capacity
constraints at certain operations and the Company's lead-free manufacturing
program. Effective mid-2006 the Company's customers that provide products to the
European Union must be in compliance with the European Standard RoHS for all of
their products that ship to the European marketplace. Many of the Company's
customers are requesting that the Company have RoHS manufacturing capabilities
in order to support their European sales.
The Company anticipates its credit facility, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal 2006. In the event the business grows rapidly or the Company pursues 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 in the future.
The Company provides funds for salaries, wages, overhead and capital expenditure
items as necessary to operate its wholly-owned Mexican subsidiaries. The Company
provides funding to its Mexican subsidiaries in U.S. dollars, which are
exchanged for pesos as needed. The fluctuation of the peso from time to time,
without an equal or greater increase in Mexican inflation, has not had a
material impact on the financial results of the Company. In the first quarter of
fiscal 2006 the Company paid approximately $2,450,000 to Mexican subsidiaries
for services provided.
16
In May 2002, the Company acquired a plant in Mexico through seller financing.
The loan of $1,950,000 is payable in equal monthly installments of approximately
$31,000 over six and a half years at a rate of 7% interest per annum. Prior to
acquiring this the plant, the Company rented the facility. At July 31, 2005,
approximately $1,085,000 was outstanding in connection with the financing of
that facility.
The impact of inflation for the past three fiscal years has been minimal.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
The following table summarizes the Company's contractual obligations at July 31,
2005 and the effect such obligations are expected to have on its liquidity and
cash flows in future periods.
Payment Obligations
Total 4/30/06 4/30/08 4/30/10
---------- ---------- ---------- ----------
Notes Payable, including current maturities $4,385,113 $ 364,024 $1,032,717 $2,988,372
Capital Leases, including current maturities 3,481,444 836,921 1,781,190 863,333
---------- ---------- ---------- ----------
Total contractual cash obligations $7,866,557 $1,200,945 $2,813,907 $3,851,705
========== ========== ========== ==========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates is due to
primarily to its short-term investments and borrowings under its credit
agreements. As of July 31, 2005 the Company had no short-term investments and
approximately $15,610,000 in borrowings under its credit agreements. The Company
does not use derivative financial investments. The Company's cash equivalents if
any, are invested in overnight commercial paper. The Company does not have any
significant cash flow exposure due to rate changes for its cash equivalents, as
these instruments are short-term.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
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 in Exchange Act Rules
13a-15(e) and 15(d)-15(e)) as of July 31, 2005. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports filed by the Company under the Securities Exchange
Act of 1934, is recorded, processed, summarized and reported, within the time
periods
17
specified in the Securities and Exchange Commission's rules and forms. Based on
this evaluation, our President and Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of July 31, 2005.
(b) Changes in Internal Controls
There were no significant changes in our internal control over financial
reporting during the quarter ended July 31, 2005, that have materially affected
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 - Certification of Principal Executive Officer of SigmaTron
International, Inc. Pursuant to Rule 13a-14(a) under the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Principal Financial Officer of SigmaTron
International, Inc. Pursuant to Rule 13a-14(a) under the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - 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).
Exhibit 32.2 - 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).
18
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.
SIGMATRON INTERNATIONAL, INC.
/s/ Gary R. Fairhead September 14, 2005
- ------------------------------------- Date
Gary R. Fairhead
President and CEO
(Principal Executive Officer)
/s/ Linda K. Blake September 14, 2005
- ------------------------------------- Date
Linda K. Blake
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)