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 January 31, 2006
Commission File Number 0-23248
SigmaTron International, Inc.
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(Exact Name of Registrant, as Specified in its Charter)
Delaware 36-3918470
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2201 Landmeier Road, Elk Grove Village, Illinois 60007
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(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 956-8000
No Change
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(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated [X].
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
On March 13, 2006 there were 3,755,420 shares of the Registrant's Common Stock
outstanding.
SigmaTron International, Inc.
Index
PART 1. FINANCIAL INFORMATION: Page No.
--------
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - January 31, 2006
and April 30, 2005 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended January 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended January 31, 2006 and 2005 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 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits 18
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
Unaudited
JANUARY 31, April 30,
2006 2005
----------- -----------
CURRENT ASSETS:
Cash $ 2,211,180 $ 184,014
Accounts receivable, less allowance for doubtful
accounts of $280,917 at January 31, 2006 and $120,000 at
April 30, 2005, respectively 17,385,067 14,275,308
Inventories, net 29,567,146 21,468,506
Prepaid and other assets 2,284,117 1,168,366
Deferred income taxes 1,170,397 429,528
Other receivables 303,042 183,666
----------- -----------
Total current assets 52,920,949 37,709,388
Property, machinery and equipment, net 28,069,851 26,689,940
Intangible assets 2,269,945 --
Other assets 1,959,908 1,386,770
Goodwill 9,298,945 756,959
----------- -----------
Total long-term assets 13,528,798 2,143,729
----------- -----------
Total assets $94,519,598 $66,543,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $10,238,574 $ 7,395,111
Accrued expenses 1,908,024 2,269,703
Accrued payroll 1,659,608 1,675,788
Income taxes payable 506,465 407,710
Notes payable - buildings 430,000 430,000
Notes payable - other -- 300,000
Capital lease obligations 1,481,284 637,766
----------- -----------
Total current liabilities 16,223,955 13,116,078
Notes payable - banks 21,022,660 512,958
Notes payable -buildings, less current portion 3,713,766 4,073,828
Capital lease obligations, less current portion 3,115,299 1,239,190
Deferred income taxes 2,847,249 1,668,909
----------- -----------
Total liabilities 46,922,929 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 37,554 37,554
and outstanding at January 31, 2006 and April 30, 2005,
respectively
Capital in excess of par value 19,087,020 19,087,020
Retained earnings 28,472,095 26,807,520
----------- -----------
Total stockholders' equity 47,596,669 45,932,094
----------- -----------
Total liabilities and stockholders' equity $94,519,598 $66,543,057
=========== ===========
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
JANUARY 31, 2006 January 31, 2005 January 31, 2006 January 31, 2005
---------------- ---------------- ---------------- -----------------
Net sales $ 34,061,657 $ 25,085,493 $ 90,267,615 $ 71,206,740
Cost of products sold 30,381,859 20,528,342 79,027,187 57,286,829
------------ ------------ ------------ ------------
Gross profit 3,679,798 4,557,151 11,240,428 13,919,911
Selling and administrative expenses 2,886,874 2,788,060 7,970,016 8,553,938
------------ ------------ ------------ ------------
Operating income 792,924 1,769,091 3,270,412 5,365,973
Miscellaneous - (income) expense (80,927) (444,074) (157,907) (548,105)
Interest expense - Banks and capital lease obligations 435,888 82,533 935,718 202,846
------------ ------------ ------------ ------------
Total other 354,961 (361,541) 777,811 (345,259)
Income from continuing operations before income tax 437,963 2,130,632 2,492,601 5,711,232
Income tax expense 150,628 830,909 791,575 2,209,171
------------ ------------ ------------ ------------
Income from continuing operations 287,335 1,299,723 1,701,026 3,502,061
Discontinued operations
Gain on sale of Las Vegas operation -- -- (310,731) --
(Loss) income from operations of discontinued
Las Vegas location (15,014) 225,605 370,486 681,576
Income (benefit) tax expense (5,855) 87,986 (23,304) 265,815
------------ ------------ ------------ ------------
(Loss) income on discontinued operation (9,159) 137,619 (36,451) 415,761
------------ ------------ ------------ ------------
Net income $ 278,176 $ 1,437,342 $ 1,664,575 $ 3,917,822
============ ============ ============ ============
Net income per common share - Basic $ 0.08 $ 0.38 $ 0.45 $ 1.04
============ ============ ============ ============
Net income per common share - Assuming dilution $ 0.07 $ 0.38 $ 0.40 $ 1.02
============ ============ ============ ============
Weighted average shares of common stock outstanding
Basic 3,755,420 3,752,054 3,755,420 3,751,707
============ ============ ============ ============
Diluted 4,192,229 3,822,157 4,117,358 3,832,121
============ ============ ============ ============
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
NINE MONTHS Nine Months
ENDED Ended
JANUARY 31, January 31,
2006 2005
-------------- --------------
OPERATING ACTIVITIES:
Net income $ 1,664,575 $ 3,917,822
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,218,763 2,404,584
Provision for inventory 160,000 --
Provision for doubtful accounts 10,000
Gain of sale of discontinued operations (310,731) --
SMTU impairment -- (145,842)
Changes in operating assets and liabilities:
Accounts receivable 90,091 (2,293,497)
Inventories (4,208,925) (6,426,867)
Prepaid expenses and other assets (1,012,299) 186,722
Refundable taxes -- 275,583
Trade accounts payable (475,014) 160,214
Income taxes payable 98,755 2,262,583
Tax benefit of option exercise -- 2,042
Deferred taxes (183,273) (9,563)
Accrued expenses (808,739) 58,991
------------ ------------
Net cash (used in) provided by operating activities (1,756,797) 392,772
INVESTING ACTIVITIES:
Acquisition of Able, net of cash acquired (16,771,755) --
Purchase of SMTU interest -- (1,338,858)
Purchases of machinery and equipment (2,781,631) (2,024,949)
Proceeds from sale of Las Vegas operation 1,705,695 --
Net cash used in investing activities (17,847,691) (3,363,807)
FINANCING ACTIVITIES:
Proceeds from exercise of options -- 4,389
Minority interest -- (854,300)
Payments under building notes payable (360,062) (344,890)
Payments under capital lease obligations (938,401) (564,736)
Proceeds under capital lease obligations 2,720,415 1,729,073
Payments from other notes payable (300,000) (665,000)
Net borrowings (payments) under line of credit 20,509,702 (1,118,514)
------------ ------------
Net cash provided by (used in ) financing activities 21,631,654 (1,813,978)
------------ ------------
Change in cash 2,027,166 (4,785,013)
Cash at beginning of period 184,014 5,145,814
------------ ------------
Cash at end of period $ 2,211,180 $ 360,801
============ ============
Supplementary disclosures of cash flow information
Cash paid for interest $ 886,652 $ 307,666
Cash paid for income taxes, net of (refunds) 796,827 (223,379)
Non cash investing activities as reported for the nine months
ended January 31, 2005:
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)
January 31, 2006
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. Ltd. ("SigmaTron China"), 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 nine month periods ended January 31, 2006 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:
January 31, April 30,
2006 2005
------------- ------------
Finished products $ 8,441,827 $ 7,205,332
Work-in-process 2,639,070 1,007,594
Raw materials 18,486,249 13,255,580
------------ ------------
$ 29,567,146 $ 21,468,506
============ ============
NOTE C - 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 January 31, 2006 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 fair 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
6
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 Nine Months Ended
January 31, January 31, January 31, January 31,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Income, as reported $ 278,176 $ 1,437,342 $ 1,664,575 $ 3,917,822
----------- ----------- ----------- -----------
Deduct: total stock-based
employee compensation
expense determined under
fair based method for
awards granted, modified,
or settled, net of related
tax effects (291,206) (100,116) (873,617) (300,348)
----------- ----------- ----------- -----------
Pro forma net income $ (13,030) $ 1,337,226 $ 790,958 $ 3,617,474
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
2006 2005 2006 2005
------------ ------------ ------------ --------------
Earnings per share
Basic - as reported $ .08 $ .38 $ .45 $ 1.04
Basic - pro forma (.01) .36 .21 .96
Diluted - as reported .07 .38 .40 1.02
Diluted - pro forma (.01) .35 .19 .94
=========== =========== =========== ===========
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 January 31, 2006, 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 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
7
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 customer 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 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 of the Able acquisition 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. To date, the Company has not determined the impact of SFAS123(R) on the
Company.
8
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. The
impact on the Company has not been 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
addition, 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", 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 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 has adopted SFAS 154 at December 31, 2005 and
does not anticipate any material change to our operating results as a result of
this adoption.
In July, 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 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. The
transaction 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 $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 $33,716,650 and $95,689,163 for the three
month and nine month periods ended January 31, 2005, respectively. Unaudited
pro-forma net income would have been $1,468,829 and $4,264,773 for the three and
nine month periods ended January 31, 2005, respectively. The unaudited pro-forma
dilutive earnings per share would have been $0.38 and $1.11 for the three and
nine month periods ended January 31, 2005, 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 receivables 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 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 facilities will bring improved operating
efficiencies.
The result of the Able Electronics acquisition has not generated positive bottom
line results to date. Management is monitoring the performance of Able and
evaluating ways to improve its performance. In the event the performance of Able
cannot be enhanced in the next several months the goodwill resulting from the
purchase of Able may be subject to impairment losses. Impairment losses are
recognized whenever the implied fair value of goodwill is less than its carrying
value. The Company will test for impairment at the end of its fiscal year, April
30, 2006. 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 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 $294,000 on discontinued operations for the
Las Vegas
10
operation. 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 transactions, 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 increasing and diversifying our markets served,
diversifying our customer base and expanding the range of services it offers.
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 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
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (box-build) electronic products. In
connection with the production of assembled products, the Company also provides
services to its customers, including: (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in the United States,
Mexico, China and Taiwan.
11
As the demand for electronic products has continued to increase 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 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 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 may not be the best 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
nine month period ended January 31, 2006.
In the past, the timing and rescheduling of orders has caused the Company to
experience significant quarterly fluctuations in its revenues and earnings, and
the Company expects such fluctuations to continue.
12
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended January 31, 2006 to
$34,061,657 from $25,085,493 for the three month period ended January 31, 2005.
Net sales for the nine months ended January 31, 2006 increased to $90,267,615
from $71,206,740 for the same period in the prior fiscal year. Sales volume
increased for the three and nine month periods ended January 31, 2006 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 nine month periods ended January 31, 2006.
The increase in the industrial electronics, life sciences and semiconductor
industries is primarily due to sales to new customers as 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 January 31, 2006 to
$3,679,798, or 10.8% of net sales, compared to $4,557,151, or 18.2% of net sales
for the same period in the prior fiscal year. Gross profit decreased for the
nine month period ended January 31, 2006 to $11,240,428 or 12.5% of net sales,
compared to $13,919,911 or 19.5% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross profit for the three and nine
month periods is the result of pricing pressures within the EMS industry, an
increase in manufacturing supplies and component pricing and inefficiencies
related to the integration of Able operation acquired in July 2005. The Company
anticipates the consolidation of its Fremont and Able Hayward locations will be
completed by April 30, 2006. The Company believes operation efficiencies will
improve at both the Hayward and Tijuana manufacturing facilities within the
current fiscal year. There can be no assurance that sales levels or gross profit
will not continue to decrease in future quarters.
Selling and administrative expenses increased to $2,886,874 or 8.5% of net sales
for the three month period ended January 31, 2006 compared to $2,788,060 or
11.1% of net sales in the same period last year. Selling and administrative
expenses decreased to $7,970,016 or 8.8% of net sales for the nine month period
ended January 31, 2006 compared to $8,553,938 or 12.0% of net sales in the same
period last year. The increase for the three month period ended January 31, 2006
is primarily due to an increase in amortization expense for the intangibles that
resulted from the purchase of Able. The decrease in selling and administrative
expenses for the nine month period ended January 31, 2006 is due to a reduction
in bonus and legal expenses, which is partially off set by an increase in
amortization expense and sales salaries.
Interest expense for bank debt and capital lease obligations for the three month
period ended January 31, 2006 was $435,888 compared to $82,533 for the same
period in the prior year. Interest expense increased to $935,718 for the nine
month period ended January 31, 2006 as compared to $202,846 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 rate from continuing operations for the three and nine month
periods ended January 31, 2006 was 34.4% and 31.8% respectively. The effective
tax rate for the comparable periods in fiscal 2005 was 38.9% and 38.7% for the
three and nine 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 is currently using an estimate to calculate the amount of
profits generated 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.
13
Net income decreased to $278,176 for the three month period ended January 31,
2006 compared to $1,437,342 for the same period in the prior year. Basic and
diluted earnings per share for the third fiscal quarter of 2006 were $0.08 and
$0.07, respectively, compared to basic and diluted earnings per share of $0.38
for the same period in the prior year. For the nine months ended January 31,
2006, the Company recorded net income of $1,664,575 compared to $3,917,822 for
the same period in the prior fiscal year. Basic and diluted earnings per share
for the three and nine month periods ended January 31, 2006 were $0.45 and
$0.40, respectively, compared to basic and diluted earnings per share of $1.04
and $1.02, respectively, for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow used in operating activities was $1,756,797 compared to cash provided
by operating activities of $258,438 in the comparable period of the prior year.
During the first nine months of fiscal 2006 cash used in operating activities
was the result of a significant increase in inventories due to the Able
acquisition, the start up of new product programs, RoHS compliance, safety stock
requirements, growth of the Company's China location and increased prepaid
expenses. Net cash used in operating activities for the period ended January 31,
2006 was partially offset by net income, the non-cash effect of depreciation and
amortization and accrued expenses.
STRATEGIC TRANSACTIONS:
In July, 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 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. The transaction 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 $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 $33,716,650 and $95,689,163 for the three
month and nine month periods ended January 31, 2005, respectively. Unaudited
pro-forma net income would have been $1,468,829 and $4,264,773 for the three and
nine month periods ended January 31, 2005, respectively. The unaudited pro-forma
dilutive earnings per share would have been $0.38 and $1.11 for the three and
nine month periods ended January 31, 2005, 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 receivables 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 merged into the
14
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 facilities will bring
improved operating efficiencies.
The result of the Able Electronics acquisition has not generated positive bottom
line results to date. Management is monitoring the performance of Able and
evaluating ways to improve its performance. In the event the performance of Able
cannot be enhanced in the next several months the goodwill resulting from the
purchase of Able may be subject to impairment losses. Impairment losses are
recognized whenever the implied fair value of goodwill is less than its carrying
value. The Company will test for impairment at the end of its fiscal year, April
30, 2006. 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 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 $294,000 on discontinued operations for the
Las Vegas operation. 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 transactions, 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 increasing and 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.
15
At January 31, 2006 the Company was in compliance with its financial covenants
and had borrowings of $17,159,619 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 January 31, 2006 SigmaTron China had $863,041
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.
During fiscal 2006, the Company has made machinery and equipment purchases of
approximately $2,780,000. 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 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. The Company has experienced a decrease in cash availability in
recent quarters due to the acquisition of Able and significantly increased
inventory levels. 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 $12,040,000 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 January 31, 2006,
approximately $933,750 was outstanding in connection with the financing of that
facility.
The impact of inflation for the past three fiscal years has been minimal.
16
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
The following table summarizes the Company's contractual obligations at January
31, 2006 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 4/30/11
----------- --------- ---------- ---------- ---------
Notes Payable, including $4,143,766 $ 122,677 $1,032,717 $2,988,372 $ 0
current maturities
Capital Leases, including 4,596,583 383,752 2,714,723 1,392,618 105,490
current maturities
Total contractual cash $8,740,349 $ 506,429 $3,747,440 $4,380,990 $105,490
obligations ========== ========= ========== ========== ========
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 January 31, 2006 the Company had no short-term investments and
approximately $18,125,000 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 January 31, 2006. 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 January 31, 2006.
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 advised the
17
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 stated in its Form 10-Q for the quarter ended October 31, 2005 that
it intends to engage an additional public accounting firm to provide advice to
management on reporting issues from time to time and that the Company expected
this additional accounting firm to participate in the preparation of the
Company's third quarter 2006 financial statements before they were reviewed by
the Company's outside auditors.
In the third quarter of fiscal 2006 the Company reviewed further Grant Thornton
LLP's opinion that the Company has a material weakness in its internal financial
reporting controls, and the Company's decision to engage an additional public
accounting firm to provide advice to management on reporting issues for the
third quarter of 2006 financial statements before they are reviewed by the
Company's outside auditors. After further review the Company has concluded that
the Company did not need to engage an additional public accounting firm to
provide advice to management on reporting issues for the Company's third quarter
financial statements. The Company will continue to monitor this issue and will
from time to time obtain such additional expert review of its financial
statements to the extent it believes is appropriate
(b) Changes in Internal Controls
There were no significant changes in our internal control over financial
reporting during the quarter ended January 31, 2006 that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 6. EXHIBITS
(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 10.20 - Lease Agreement, Number 12, between SigmaTron
International, Inc. and General Electric Capital Corporation, dated
November 22, 2005, filed as Exhibit 10.20.
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).
18
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).
19
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 March 15, 2006
- ---------------------------------------- -------------------
Gary R. Fairhead Date
President and CEO
(Principal Executive Officer)
/s/ Linda K. Blake March 15, 2006
- ---------------------------------------- -------------------
Linda K. Blake Date
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)