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 October 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]
On December 12, 2005 there were 3,755,420 shares of the Registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
Page No.
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PART 1. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2005
and April 30, 2005 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended October 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended October 31, 2005 and 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 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
Unaudited
OCTOBER 31, April 30,
2005 2005
----------- -----------
CURRENT ASSETS:
Cash $ 769,652 $ 184,014
Accounts receivable, less allowance for doubtful
accounts of $280,917 at October 31, 2005 and $120,000 at
April 30, 2005, respectively 17,362,475 14,275,308
Inventories, net 29,362,408 21,468,506
Prepaid and other assets 1,109,872 1,168,366
Deferred income taxes 1,170,397 429,528
Other receivables 443,765 183,666
----------- -----------
Total current assets 50,218,569 37,709,388
Property, machinery and equipment, net 27,291,694 26,689,940
Intangible assets 2,455,204 --
Other assets 2,034,500 1,386,770
Goodwill 9,298,945 756,959
----------- -----------
Total long-term assets 13,788,649 2,143,729
----------- -----------
Total assets $91,298,912 $66,543,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $11,954,411 $ 7,395,111
Accrued expenses 1,856,679 2,269,703
Accrued payroll 1,459,920 1,675,788
Income taxes payable 1,033,238 407,710
Notes payable - buildings 430,000 430,000
Notes payable - other -- 300,000
Capital lease obligations 1,140,927 637,766
----------- -----------
Total current liabilities 17,875,175 13,116,078
Notes payable - banks 17,109,951 512,958
Notes payable - buildings, less current portion 3,835,099 4,073,828
Capital lease obligations, less current portion 2,312,945 1,239,190
Deferred income taxes 2,847,249 1,668,909
----------- -----------
Total liabilities 43,980,419 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 outstanding at October 31, 2005 and April 30, 2005,
respectively 37,554 37,554
Capital in excess of par value 19,087,020 19,087,020
Retained earnings 28,193,919 26,807,520
----------- -----------
Total stockholders' equity 47,318,493 45,932,094
----------- -----------
Total liabilities and stockholders' equity $91,298,912 $66,543,057
=========== ===========
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months SIX MONTHS Six Months
ENDED Ended ENDED Ended
OCTOBER 31, 2005 October 31, 2004 OCTOBER 31, 2005 October 31, 2004
---------------- ---------------- ---------------- ----------------
Net sales $34,893,265 $24,660,390 $56,205,958 $46,121,248
Cost of products sold 29,874,320 19,640,637 48,645,328 36,758,487
----------- ----------- ----------- -----------
Gross profit 5,018,945 5,019,753 7,560,630 9,362,761
Selling and administrative expenses 2,946,861 2,949,772 5,083,142 5,661,847
----------- ----------- ----------- -----------
Operating income 2,072,084 2,069,981 2,477,488 3,700,914
Miscellaneous - (income) expense (36,706) -- (76,980) --
Interest expense - Banks and capital lease obligations 365,316 53,630 499,830 120,313
----------- ----------- ----------- -----------
Total other 328,610 53,630 422,850 120,313
Income from continuing operations before income tax
expense and interest of affiliate 1,743,474 2,016,351 2,054,638 3,580,601
Income tax expense 519,581 802,221 640,947 1,378,262
----------- ----------- ----------- -----------
Income from continuing operations before minority
interest of affiliate 1,223,893 1,214,130 1,413,691 2,202,339
Minority interest in income of affiliate -- 10,654 -- 134,334
----------- ----------- ----------- -----------
Income from continuing operations 1,223,893 1,203,476 1,413,691 2,068,005
Discontinued operations
(Loss) income from operations of discontinued
Las Vegas location (4,199) 173,280 (44,741) 455,971
Income tax (benefit) expense (1,638) 67,579 (17,449) 177,829
----------- ----------- ----------- -----------
Loss on discontinued operation (2,561) 105,701 (27,292) 278,142
----------- ----------- ----------- -----------
Net income $ 1,221,332 $ 1,309,177 $ 1,386,399 $ 2,346,147
Net income per common share - Basic $ 0.33 $ 0.35 $ 0.38 $ 0.63
=========== =========== =========== ===========
Net income per common share - Assuming dilution $ 0.29 $ 0.34 $ 0.34 $ 0.61
=========== =========== =========== ===========
Weighted average shares of common stock outstanding
Basic 3,755,420 3,752,054 3,755,420 3,751,534
=========== =========== =========== ===========
Diluted 4,187,632 3,840,442 4,074,866 3,837,379
=========== =========== =========== ===========
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
SIX MONTHS Six Months
ENDED Ended
OCTOBER 31, October 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,386,399 $ 2,346,146
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,106,626 1,598,183
Provision for inventory 160,000 --
Gain of sale of discontinued operations (310,731) --
Changes in operating assets and liabilities:
Accounts receivable 122,682 (1,715,378)
Inventories (4,004,187) (6,023,280)
Prepaid expenses and other assets (48,417) 370,198
Refundable taxes -- 275,583
Trade accounts payable 1,240,823 940,015
Income taxes payable 678,397 1,444,555
Deferred taxes (236,142) (9,563)
Accrued expenses (1,059,772) (759,927)
------------ -----------
Net cash provided (used in) by operating activities 35,678 (1,533,468)
INVESTING ACTIVITIES:
Acquisition of Able (16,771,755) --
Purchase of SMTU interest -- (1,350,353)
Purchases of machinery and equipment (1,081,548) (1,210,087)
Sale of machinery and equipment 1,705,695 --
Net cash used in investing activities (16,147,608) (2,560,440)
FINANCING ACTIVITIES:
Proceeds from exercise of options -- 6,431
Repurchase of options -- 19,574
Payments under building notes payable (238,729) (228,703)
Payments under capital lease obligations (581,256) (338,322)
Proceeds under capital lease obligations 1,220,559 626,365
Payments from other notes payable (300,000) --
Net borrowings (payments) under line of credit 16,596,994 (884,254)
------------ -----------
Net cash used in financing activities 16,697,568 (798,909)
------------ -----------
Change in cash 585,638 (4,892,817)
Cash at beginning of period 184,014 5,145,814
------------ -----------
Cash at end of period $ 769,652 $ 252,997
============ ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 461,435 $ 202,009
Cash paid for income taxes, net of (refunds) 145,944 (265,910)
Non Cash Investing Activities:
Acquisition of SMTU $ 2,620,353
Cash paid for acquisition (1,350,353)
------------
Notes issued for acquisition 1,270,000
Forgiveness of subordinated debenture 1,050,000
Forgiveness of accrued interest payable 525,000
Reduction of long lived assets from purchase of SMTU 306,236
Goodwill created 719,040
See accompanying notes.
5
SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 2005
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SigmaTron International, Inc. ("SigmaTron"), its wholly owned subsidiaries
Standard Components de Mexico S.A., Able Electronics Corporation ("Able")
(acquired in July 2005) and ABLEMEX, S.A. DE C.V., and its wholly-owned foreign
enterprise Wujiang SigmaTron Electronics Co. ("SigmaTron China"), 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 and six month periods ended October 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:
October 31, April 30,
2005 2005
----------- -----------
Finished products $ 7,409,202 $ 7,205,332
Work-in-process 2,467,817 1,007,594
Raw materials 19,485,389 13,255,580
----------- -----------
$29,362,408 $21,468,506
=========== ===========
NOTE C - STRATEGIC TRANSACTIONS
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
6
measurement, medical instruments, telecommunications, computer peripherals,
industrial controls and genetic research industries. Able's long-term
relationships with its customers has diversified the Company's customer base and
expanded 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 $8,540,000 in goodwill. 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 ("SFAS No.141")
was recorded in the second quarter ended October 31, 2005. As a result of the
transaction $2,770,000 in intangible assets were recorded, including
non-competition agreements, internally developed software, backlog and customer
relationships. The intangible assets will be amortized over periods ranging from
six months to eight years.
Assuming the purchase was recorded as of the first period reported, May 1, 2004,
unaudited revenues would have been $32,114,197 and $61,972,513 for the three
month and six month periods ended October 31, 2004, respectively. Unaudited
pro-forma net income would have been $1,626,690 and $2,795,945 for the three and
six month periods ended October 31, 2004. The unaudited pro-forma dilutive
earnings per share would have been $0.42 and $0.73 for the three and six month
periods ended October 31, 2004, respectively.
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 in future periods as an adjustment to the
purchase price.
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 certain 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.
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 October
7
31, 2005 there were no restricted shares or restricted stock units issued. No
compensation 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 Six Months Ended
------------------------- -------------------------
October 31, October 31, October 31, October 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net Income, as reported $1,221,332 $1,309,177 $1,386,399 $2,346,146
Deduct: total stock-based employee
compensation expense determined under
fair based method for awards granted,
modified, or settled, net of related
tax effects (298,189) (100,116) (596,378) (200,232)
---------- ---------- ---------- ----------
Pro forma net income $ 923,143 $1,209,061 $ 790,021 $2,145,914
========== ========== ========== ==========
Three Months Ended Six Months Ended
------------------------- -------------------------
October 31, October 31, October 31, October 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Earnings per share
Basic - as reported $.33 $.35 $.38 $.63
Basic - pro forma .25 .32 .21 .57
Diluted - as reported .29 .34 .34 .61
Diluted - pro forma .22 .32 .19 .56
==== ==== ==== ====
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 October 31, 2005, 3,100 options were
anti-dilutive and not included in the diluted income per share calculations.
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
8
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 to the customer. 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 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
9
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 No. 141 "Business Combinations". Under SFAS
No. 141, a 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 recorded the purchase price allocation in its second fiscal
quarter of 2006.
NEW ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based Payment ("SFAS 123(R)"). The Company is required to
adopt SFAS 123(R) on May 1, 2006. SFAS 123(R) 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 of SFAS123(R)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 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.
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 the Company's analysis of the
repatriation provision of the Act, although not yet finalized, it is
10
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 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 June 1, 2005, the FASB issues Statement No. 154, Accounting changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS
154). The statement applies to all voluntary changes in accounting principle,
and changes the requirements for accounting for and reporting of a change in
accounting principle. The Company will adopt SFAS 154 at December 31, 2005 and
do not anticipate any material change to our operating results as a result of
this adoption.
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, 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 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 The Company; the variability of our operating
results; the variability of our customers' requirements; the availability and
cost of necessary components and materials; The Company's ability to produce
products that are in compliance with the European Standard of "Restriction of
Use of Hazardous Substance "RoHS" by mid-2006; 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 continue stability of the U.S., Mexican,
Chinese and Taiwanese economic systems, labor and political conditions; and the
ability of The Company to manage its growth, including its expansion into China
and its integration of the Able operation acquired in July
11
2005. 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 risk factors contained therein 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 this report and The Company 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
12
Company receives a qualified opinion on the adequacy of its internal control
over financial 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 October 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 increased for the three month period ended October 31, 2005 to
$34,893,265 from $24,660,390 for the three month period ended October 31, 2004.
Net sales for the six months ended October 31, 2005 increased to $56,205,958
from $46,121,248 for the same period in the prior fiscal year. Sales volume
increased for the three and six month periods ended October 31, 2005 as compared
to the same periods in the prior year in the appliance, fitness, industrial
electronics, life sciences and semiconductor marketplaces. Volume increases in
the appliance and fitness marketplaces were partially offset by price reductions
for the three and six month periods ended October 31, 2005. The increase in the
industrial electronics and life sciences industries is due to sales to new
customers and the result of the July 14, 2005 acquisition of Able. Able's
long-term relationship with its customer base has given the Company presence in
new marketplaces and has diversified its customer base.
Gross profit decreased during the three month period ended October 31, 2005 to
$5,018,945 or 14.4% of net sales, compared to $5,019,753 or 20.4% of net sales
for the same period in the prior fiscal year. Gross profit decreased for the six
month period ended October 31, 2005 to $7,560,630 or 13.5% of net sales,
compared to $ 9,362,761 or 20.3% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross margin for the three and six
month periods is the result of pricing pressures within the EMS industry, an
increase in manufacturing supplies and component pricing. There can be no
assurance that sales levels or gross margins will not continue to decrease in
future quarters.
13
Selling and administrative expenses decreased to $2,946,861 or 8.4% of net sales
for the three month period ended October 31, 2005 compared to $2,949,772 or 12%
of net sales in the same period last year. Selling and administrative expenses
decreased to $5,083,142 or 9% of net sales for the six month period ended
October 31, 2005 compared to $5,661,847 or 12.3% of net sales in the same period
last year. The decrease 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 October 31, 2005 was $365,316 compared to $53,630 for the same
period in the prior year. Interest expense increased to $499,830 for the six
month period ended October 31, 2005 as compared to $120,313 for the same period
in the prior year. This change was attributable to the Company's significant
increased borrowings under its revolving credit facility to finance the
acquisition of Able, increased capital lease obligations and higher interest
rates.
The effective tax from continuing operations rate for the three and six month
periods ended October 31, 2005 was 29.8% and 31.2% respectively. The effective
tax rate for the comparable periods in fiscal 2005 was 39.8% and 38.5% for the
three and six month periods ended, respectively. The effective tax rate in
fiscal 2006 has decreased compared to prior periods due to income earned in
China. The Company plans to initiate a transfer pricing study by April 30, 2006
to determine the amount of profits taxed in China as compared to profits taxed
in the U.S. The Company is currently using an estimate.
Net income decreased to $1,221,332 for the three month period ended October 31,
2005 compared to $1,309,177 for the same period in the prior year. Basic and
dilutive earnings per share for the second fiscal quarter of 2006 were $0.33 and
$0.29, respectively, compared to basic and dilutive earnings per share of $0.35
and $0.34, respectively, for the same period in the prior year. For the six
months ended October 31, 2005, the Company recorded net income of $1,386,399
compared to $2,346,147 for the same period in the prior fiscal year. Basic and
dilutive earnings per share for the three and six month periods ended October
31, 2005 were $0.38 and $0.34, respectively, compared to basic and dilutive
earnings per share of $0.63 and $0.61, respectively, for the same period in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow provided by operating activities was $35,678 compared to cash used in
operating activities of $1,533,468 in the comparable period of the prior year.
During the first six months of fiscal 2006 cash provided by operating activities
was the result of net income, the non-cash effect of depreciation and
amortization and an increase in trade payables, which was partially offset by an
increase in inventories. Inventories increased primarily due to the Able
acquisition, the start up of new product programs, safety stock requirements and
growth of the Company's China location.
STRATEGIC TRANSACTIONS:
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
14
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
has diversified the Company's customer base and expanded 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 $8,540,000 in
goodwill. The purchase price allocation of certain acquired tangible and
intangible assets related to the purchase of Able in accordance with the SFAS
No. 141 was recorded in the second quarter ended October 31, 2005. As a result
of the transaction $2,770,000 in intangible assets were recorded, including
non-competition agreements, internally developed software, backlog and customer
relationships. The intangible assets will be amortized over periods ranging from
six months to eight years.
Assuming the purchase was recorded as of the first period reported, May 1, 2004,
unaudited revenues would have been $32,114,197 and $61,972,513 for the three
month and six month periods ended October 31, 2004, respectively. Unaudited
pro-forma net income would have been $1,626,690 and 2,795,945 for the three and
six month periods ended October 31, 2004. The unaudited pro-forma dilutive
earnings per share would have been $0.42 and $0.73 for the three and six month
periods ended October 31, 2004, respectively.
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 in future periods as an adjustment to the
purchase price.
During the quarter ended October 31, 2005, the Company focused on the
assimilation of Able Electronics into its operations. Effective November 1,
2005, Able Electronics was legally merged into the Company and became a
division. AbleMex S.A. de C.V. remains a wholly-owned subsidiary of the Company
operating in Tijuana, Mexico. The Company plans to combine its operation in
Fremont into the Hayward operation by the end of fiscal 2006. The Company
expects the consolidation of these two entities will bring improved operating
efficiencies.
The result of the Able Electronics acquisition has not generated positive bottom
line results to date. The Company remains optimistic and excited about the
opportunities. The Company expects revenues from the Able operations will
continue to grow, enhanced by the Company's international footprint. The Company
has experienced some incremental business opportunities from Able's existing
customer base and expects to see the full benefit from this acquisition in
fiscal 2007.
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
15
the machinery, equipment and certain 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 transaction, 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 it offers.
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 includes 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.
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 lesser of:
(i) $22,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $11,000,000 or varying percentages of the
inventory base.
At October 31, 2005 the Company was in compliance with its financial covenants
and had borrowings of $13,619,118 outstanding under this line of credit and a
term note of $3,000,000 outstanding.
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 interest rate under the
agreement is 5.76% and at October 31, 2005 SigmaTron China had $490,833
outstanding under the line of credit.
16
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.
During fiscal 2006, the Company has made machinery and equipment purchases of
approximately $1,080,000. The Company has executed 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
calendar 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 expects to make additional machinery
and equipment purchases in the third and fourth quarter of fiscal 2006.
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 and Chinese subsidiaries.
The Company provides funding to its Mexican and Chinese subsidiaries in U.S.
dollars, which are exchanged for pesos and RMB as needed. The fluctuation of
currencies from time to time, without an equal or greater increase in inflation,
has not had a material impact on the financial results of the Company. In fiscal
2006 the Company paid approximately $4,500,000 to its subsidiaries for services
provided.
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 that plant, the Company rented the facility. At October 31, 2005,
approximately $1,010,000 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 October
31, 2005 and the effect such obligations are expected to have on its liquidity
and cash flows in future periods.
17
Payment Obligations
Total 4/30/06 4/30/08 4/30/10
---------- -------- ---------- ----------
Notes Payable, including current maturities $4,265,100 $244,011 $1,032,717 $2,988,372
Capital Leases, including current maturities 3,453,872 577,079 1,904,412 972,381
---------- -------- ---------- ----------
Total contractual cash obligations $7,718,972 $821,090 $2,937,129 $3,960,753
========== ======== ========== ==========
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 October 31, 2005 the Company had no short-term investments and
approximately $17,100,000 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 October 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 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 October 31, 2005.
On December 10, 2005, prior to the Company's issuance of financial results as of
October 31, 2005, the Company's independent accountants, Grant Thornton LLP
("Grant Thornton"), provided notice to the members of the Company's audit
committee and management team that it had uncovered a control deficiency with
respect to the Company's recording of deferred tax liability in connection with
the valuation of intangible assets of Able. This deficiency did not result in a
restatement of any previously issued financial statements, and does not reduce
the fairness or reliability of the Company's financial statements issued in the
prior or current periods. Grant Thornton has advised the Company that it
believes that this deficiency constitutes a material weakness in the Company's
financial reporting controls. In order to remedy this weakness, the Company's
intends to engage an additional public accounting firm
18
to provide advice to management on reporting issues from time to time. The
Company expects this additional accounting firm to participate in the
preparation of the Company's third quarter 2006 financial statements before they
are reviewed by the Company's outside auditors.
(b) Changes in Internal Controls
There were no significant changes in our internal control over financial
reporting during the quarter ended October 31, 2005, that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 2005, the Company held its 2005 Annual Meeting of Stockholders.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and Regulation 14A thereunder for the purpose of
(i) electing three Class III directors to hold office until the 2008 Annual
Meeting of Stockholders and (ii) ratifying the selection of Grant Thornton LLP
as independent auditors of the Company. Each holder of common stock is entitled
to one vote for each share held on the record date.
The following persons were elected as directors to hold office until the 2008
Annual Meeting of Stockholders: Gary R. Fairhead, Franklin D. Sove and Dilip S.
Vyas. The number of shares cast for, withheld and abstained with respect to each
of the nominees were as follows:
Nominee For Against Abstain
------- --------- ------- -------
Gary R. Fairhead 3,638,656 13,408 0
Franklin D. Sove 3,637,356 14,708 0
Dilip S. Vyas 3,207,282 444,782 0
The following persons are directors of the Company whose current term extends
beyond the 2005 Annual Meeting of Stockholders: Thomas W. Rieck, William L.
McClelland, John P. Chen and Carl Zemenick. There was no solicitation in
opposition to management's nominees for directors.
The stockholders voted to approve the ratification of the selection of Grant
Thornton LLP as independent auditors for the Company for the fiscal year ended
April 30, 2006. A total of 3,611,576 shares were cast for such ratification,
38,288 shares were opposed and 2,200 shares abstained.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.18 - Tenth Amendment to Loan and Security Agreement between
SigmaTron International, Inc and LaSalle Bank National Association, dated
July 14, 2005, filed as Exhibit 10.18.
Exhibit 10.19 - Eleventh Amendment to Loan and Security Agreement between
SigmaTron International, Inc and LaSalle Bank National Association, dated
September 12, 2005, filed as Exhibit 10.19.
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).
20
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 December 15, 2005
- ------------------------------------- Date
Gary R. Fairhead
President and CEO
(Principal Executive Officer)
/s/ Linda K. Blake December 15, 2005
- ------------------------------------- Date
Linda K. Blake
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)