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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended October 31, 1999
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, Address, or Fiscal Year, if Changed Since Last Reports)
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___
On December 10, 1999 there were 2,881,227 shares of the Registrant's Common
Stock outstanding.
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SigmaTron International, Inc.
Index
PART 1. FINANCIAL INFORMATION: Page No.
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Item 1. Consolidated Financial Statements
Consolidated Balance Sheets--October 31, 1999
and April 30, 1999 3
Consolidated Statements of Income--Six
Months Ended October 31, 1999 and 1998 4
Consolidated Statements of Cash Flows--Six
Months Ended October 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 11
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
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SIGMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
OCTOBER 31, April 30,
1999 1999
(UNAUDITED)
----------- -----------
ASSETS
Current assets:
Cash $151,457 $280,071
Accounts receivable, less allowance for doubtful
accounts of $650,000 and $575,000 at October 31, 1999 and
April 30, 1999, respectively 20,776,079 13,563,836
Inventories 18,665,666 16,240,502
Prepaid 431,013 498,675
Deferred income taxes 147,514 147,514
Receivable from insurance reimbursement - 2,453,235
Other receivables 374,036 1,013,982
Other assets 83,288 366,220
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Total current assets 40,629,053 34,564,035
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Machinery and equipment, net 13,457,071 13,434,789
Due from SMTU:
Investment and advances 523,532 448,545
Equipment receivable 4,204,038 4,201,823
Other receivable 1,140,376 1,511,372
Other assets 1,535,541 1,115,893
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Total assets $61,489,611 $55,276,457
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 9,943,437 8,003,377
Trade accounts payable - Related parties 2,163,203 1,256,000
Accrued expenses 1,594,861 1,721,932
Income tax payable 1,177,531 644,101
Capital lease obligations 1,846,226 2,271,693
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Total current liabilities 16,725,258 13,897,103
Notes payable - Bank, less current portion 20,706,258 17,382,681
Capital lease obligations, less current portion 2,621,789 3,538,721
Deferred income taxes 1,157,460 1,157,460
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Total liabilities 41,210,765 35,975,965
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value; 6,000,000 shares
authorized, 2,881,227 shares issued and outstanding 28,812 28,812
at October 31, 1999 and April 30, 1999
Capital in excess of par value 9,436,554 9,436,554
Retained earnings 10,813,480 9,835,126
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Total stockholders' equity 20,278,846 19,300,492
Total liabilities and stockholders' equity $61,489,611 $55,276,457
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See accompanying notes.
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SigmaTron International, Inc.
Consolidated Statements Of Income
Unaudited
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
October 31, 1999 October 31, 1998 October 31, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
Net sales $27,185,252 $23,036,784 $47,371,188 $41,564,216
Cost of products sold 23,788,357 20,621,519 41,908,359 37,490,389
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3,396,895 2,415,265 5,462,829 4,073,827
Selling and administrative expenses 1,664,853 1,339,574 3,023,295 2,593,828
----------- ----------- ----------- -----------
Operating income 1,732,042 1,075,691 2,439,534 1,479,999
Equity in net (income) loss of affiliate (48,356) 63,357 (74,987) 94,346
Interest expense - Banks and capital lease obligations 559,510 477,588 1,045,887 951,108
Interest income - Related parties (146,784) (162,819) (307,788) (300,773)
----------- ----------- ----------- -----------
Income before income tax expense and extraordinary item 1,367,672 697,565 1,776,422 735,318
Income tax expense 547,068 279,032 710,568 294,158
----------- ----------- ----------- -----------
Income before extraordinary item 820,604 418,533 1,065,854 441,160
Extraordinary item - extinguishment of debt, net of
taxes $58,333 87,500 - 87,500 -
----------- ------------ ------------ ------------
Net income 733,104 418,533 978,354 441,160
=========== ============ ============= ============
Net income per common share - Basic $0.25 $0.15 $0.34 $0.15
=========== ============ ============ ============
Net income per common share - diluted $0.25 $0.15 $0.34 $0.15
=========== ============ ============ ============
Weighted average number of common shares
outstanding - basic and diluted 2,881,227 2,881,227 2,881,227 2,881,227
=========== ============ ============ ============
See accompanying notes.
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SIGMATRON INTERNATIONAL, INC.
Consolidated Statements of Cash Flow
(Unaudited)
SIX MONTHS ENDED OCTOBER 31,
1999 1998
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OPERATING ACTIVITIES:
Net income $ 978,354 $ 441,160
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 867,551 696,218
Equity in net (income) loss of affiliate (74,987) 94,346
Provision for doubtful accounts 75,000 -
Provision for inventory obsolescence 50,000 -
Changes in operating assets and liabilities:
Accounts receivable (7,287,243) (3,812,454)
Inventories (2,475,164) (1,749,489)
Prepaid expenses 67,662 (771,007)
Other assets 872,011 (919,515)
Trade accounts payable 1,940,060 5,016,054
Trade accounts payable - related parties 907,203 (416,065)
Accrued expenses (127,071) (145,873)
Receivable from flood insurance proceeds 2,453,235 -
Income tax payable 533,430 340,619
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Net cash used in operating activities (1,219,959) (1,226,006)
INVESTING ACTIVITIES:
Purchases of machinery and equipment (889,833) (430,381)
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Net cash used in investing activities (889,833) (430,381)
FINANCING ACTIVITIES:
Net payments under capital lease obligations (1,342,399) (1,071,993)
Net proceeds under line of credit 3,323,577 2,522,213
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Net cash provided by financing activities 1,981,178 1,450,220
Change in cash (128,614) (206,167)
Cash at beginning of period 280,071 284,679
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Cash at end of period $ 151,457 $ 78,512
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See accompanying notes.
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SigmaTron International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended October 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report for the year ended April 30, 1999.
NOTE B - INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
1999 1999
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Finished products $ 1,569,326 $ 1,359,207
Work-in-process 1,158,695 1,709,482
Raw materials 15,937,645 13,171,813
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$18,665,666 $16,240,502
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NOTE C - SMT UNLIMITED L.P.
The Company owns approximately 42.5% of SMT Unlimited L.P. ("SMTU"), an
affiliate located in Fremont, California. At October 31, 1999 the Company has
amounts due from SMTU of approximately $5,865,000. SMTU was profitable for the
year ended April 30, 1999 and for the six months ended October 31, 1999.
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NOTE D - LIGHTING COMPONENTS
The Company has an equity interest of 12% in Lighting Components L.P. The
Company has amounts due from Lighting Components of approximately $1,349,923 at
October 31, 1999. In prior periods the Company had reduced the carrying value of
the Lighting Components assets on its books leaving approximately $800,000 of
assets in the accompanying balance sheet at October 31, 1999. The Company has a
security interest in substantially all of Lighting Component's assets.
Lighting Components distributes a variety of electronic and molded plastic
components for use in the sign and lighting industries. Field trials for
Lighting Component's new product have been positive and the level of orders is
increasing, which is critical to a turnaround in its financial performance.
NOTE E - PATENTS AND TRADEMARKS
The Company generally does not produce its own proprietary products but
assembles custom products to the specifications of its customers. The Company
relies primarily upon the patents, confidential designs and proprietary know-how
of its customers and its own proprietary know-how in order to establish and
maintain its competitive advantage. The Company owns no patents or registered
trademarks. The Company relies on confidentiality agreements with its customers
and its employees as well as other incentives to its employees to maintain its
proprietary information. There can be no assurance that the steps taken by the
Company will be adequate to protect its proprietary rights or that a competitor
will not independently develop know-how or processes similar or superior to
those of the Company.
The Company has received a Notice of Patent Infringement from Lemelson Medical,
Education & Research Foundation, Limited Partnership (the "Lemelson
Partnership") alleging that the Company is infringing certain patents claimed by
the Lemelson Partnership.
The Company has retained patent counsel and is evaluating the merits of the
Lemelson Partnership claims. If appropriate, the Company will seek a license
from the Lemelson Partnership to permit the Company to continue to operate as it
has in the past. The Company believes that similar claims have been made to a
large number of companies in its industry, because the claims referred to in the
Notice involve processes standard to the Electronic Manufacturing Services
industry.
Should the Company be required to seek a license from the Lemelson Partnership
there can be no assurance that a license could be obtained on acceptable terms,
that litigation would not occur or that damages for the past infringement by the
Company, if any, would not be material. In addition litigation, could result in
substantial cost and diversion of resources of the Company. The failure to
obtain necessary licenses from the Lemelson Partnership or the advent of
litigation with the Lemelson Partnership could have a material adverse effect on
the Company's business, financial condition and results of operations.
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NOTE F - LOAN AND SECURITY AGREEMENT
On August 25, 1999 the Company entered into a new credit arrangement, which is
comprised of a revolving loan facility and term loan. Under the terms of the
agreement with the prior bank a prepayment penalty was due for early
extinguishment of the debt. The prepayment penalty in the amount of $87,500, net
of taxes of $58,333 was recognized as an extraordinary expense in the second
quarter of fiscal 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE: To the extent any statements in this quarterly statement may be deemed to
be forward looking, such statements should be evaluated in the context of the
risks and uncertainties inherent in the Company's business, including the
Company's continuing dependence on certain major customers; the Company's
ability to obtain financing; the availability and cost of components; the
anticipated seasonality of its business; the possibility of patent infringement;
the timing and re-scheduling of customer orders for SigmaTron International,
Inc. and SMT Unlimited and other risks and uncertainties set forth in the
Company's periodic reports filed with the Securities and Exchange Commission
including but not limited to, its Annual Report on Form 10-K and cautionary note
contained therein for the fiscal year ended April 30, 1999. Any forward looking
statements speak as of the date of this report and the Company makes no
obligation to update such statements in light of future events or otherwise.
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended October 31, 1999 to
$27,185,252 from $23,036,784 for the three month period ended October 31, 1998.
The increase in net sales is primarily due to additional sales to some of the
Company's existing customers. The timing and rescheduling of orders has caused
the Company to experience significant quarterly fluctuations in its revenue and
earnings and the Company expects such fluctuations to continue. Historically,
the Company's highest level of sales are achieved in its second and third
quarters. During the first six months of fiscal 2000 net sales increased to
$47,371,188 from $41,564,216 compared to the same period in the prior year. In
the Electronic Manufacturing Services industry the sales level can be misleading
as to whether or not a company is profitable and to the extent of profitability.
Sales levels can fluctuate due to labor only orders compared to turnkey orders.
Turnkey orders require the Company to procure the necessary components for
assembly, which increases the selling price compared to labor only services. A
turnkey order may have a higher selling price but may not be as profitable as a
labor only order.
Gross profit increased during the three month period ended October 31, 1999 to
$3,396,895, or 12.5% of net sales, compared to $2,415,265 or 10.5% of net sales
for the same period in the prior fiscal year. For the six month period ended
October 31, 1999, gross profits increased from $4,073,827 or 9.8% of net sales,
to $5,462,829 or 11.5% of net sales. The variation in
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -con't
gross profit for the six months ended October 31, 1999 is primarily related to
the increase in net sales and product mix.
Selling and administrative expenses increased to $1,664,853 or 6.1% of net sales
for the three month period ended October 31, 1999 compared to $1,339,574 or 5.8%
of net sales in the second quarter of fiscal 1999. The increase is due to legal
fees in connection with securing a new credit facility, as well as an increase
in the allowance for doubtful account reserve and a bonus accrual. Selling and
administrative expense for the six month period ended October 31, 1999 increased
as a percent of net sales to 6.4% from 6.2% for the same period in the prior
fiscal year as result of the same factors.
Interest expense for bank debt and capital lease obligations for the three month
period ended October 31, 1999 was $559,510 compared to $477,588 for the same
period in the prior year. This increase is attributable to a higher outstanding
balance on the line of credit. For the six month period ended October 31, 1999
interest expense for bank and capital lease obligations increased to $1,045,887
compared to $951,108 for the same period in fiscal 1999. This increase was
attributable to a higher outstanding balance on the line of credit and interest
expense for increased capital lease obligations.
During the three month period ended October 31, 1999 an extraordinary item for
the early extinguishment of debt was recorded in the amount of $87,500, net of
taxes of $58,333.
As a result of the factors described above, net income increased to $733,104 for
the three month period ended October 31, 1999 from $418,533 for the same period
in the prior year. Basic and diluted earnings per share for the second fiscal
quarter of 2000 were $0.25 compared to $0.15 for the same period in the prior
year. For the first six months of fiscal 2000 net income increased $978,354
compared to $441,160 for the same period in the prior year. Basic and diluted
earnings per share for the six month period ended October 31, 1999 were $0.34
compared to $0.15 for the same period in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES:
For the six months ended October 31, 1999 the primary source of liquidity was
cash provided by borrowings from the Company's secured lender and net income
from operations. The net cash used in operations was $1,219,959 for the six
months ended October 31, 1999 compared $1,226,006 for the same period in the
prior year.
Net cash used in financing activities was $889,833 for the six month period
ended October 31, 1999 compared to $430,381 in the prior year. Net proceeds
under the line of credit increased
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to $3,323,577 for the six months ended October 31, 1999 from $2,522,213 for the
six months ended October 31, 1998.
To the extent that the Company provides funds for salaries, wages, overhead and
capital expenditure items necessary to operate its Mexican operations, the
amount of funds available for use in the Company's domestic operations are
depleted. The funds, which ordinarily derive from the Company's cash from
operations and borrowings under its revolving credit facility, total
approximately $4,815,000 for the six month period. The Company provides funding
in U.S. dollars, which are exchanged to pesos as needed.
YEAR 2000 COMPLIANCE:
In early 1998 the Company formed a committee of executive officers and others to
examine Year 2000 compliance issues. The scope of the program is focused on the
Company's primary business applications, including both IT and non-IT
applications. This stage has been completed and management believes that these
systems are currently Year 2000 compliant. In addition, the Company has reviewed
other systems including production equipment, to determine possible risk. Based
on assurances received to date provided by vendors, the Company does not believe
significant modifications to production equipment or information systems is
required. However, the Company cannot verify assurances it has been provided by
third parties.
The Company has implemented a review process to ensure that the delivery of raw
material and services will not be disrupted due to non-compliance by a key third
party supplier. Communications with these suppliers have been favorable. The
Company is receiving assurances that no interruptions of delivery for product or
services will occur; however, the Company cannot ensure third parties will be
compliant. Non-compliance by any supplier of products or services for a
prolonged period could have an adverse effect on the Company and its results of
operations and financial condition.
The Company has developed a limited contingency plan. However, third party
suppliers for components are customer-mandated. There can be no assurance the
plan will fully mitigate any problems. Furthermore, there may be certain
suppliers, such as utilities, telecommunication companies, or material vendors
where alternative sources are limited or unavailable.
In addition, the Company cannot be certain whether or to what extent its key
customers or its banks will be Year 2000 compliant. The Company's customers'
inability to process timely payments or the inability of the Company's bank to
provide working capital could have an adverse effect on the Company's cash flow
and liquidity. The Company cannot verify assurances provided by its customers or
banks that they will be year 2000 compliant.
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Based on its internal review the Company does not anticipate that current or
future costs related to the Year 2000 issue will have a material impact on its
financial condition. To date the Company has incurred approximately $20,000 in
Year 2000 compliance costs.
The foregoing is a Year 2000 readiness disclosure entitled to protection as
provided in the Year 2000 Information and Readiness Disclosure Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Not applicable
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SIGMATRON INTERNATIONAL, INC.
PART II - OTHER INFORMATION
October 31, 1999
ITEM 5. OTHER INFORMATION
The Company has received Notice of Patent Infringement from the Lemelson
Medical, Education & Research Foundation, Limited Partnership ("Lemelson").
Lemelson is alleging that the Company is infringing on certain patents and
pending patent applications owned by Lemelson which cover machine vision,
automatic identification operations and flexible manufacturing systems which are
widely used in the manufacture of electronic assemblies and integrated circuits
and in general in modern manufacturing enterprises. Over the years Lemelson has
made similar claims against a large number of companies in SigmaTron's and other
industries, many of which have been resolved to Lemelson's advantage. The Notice
offers the Company a license which calls for certain royalty payments to be made
to Lemelson for the continued use of the patents that the Company is allegedly
infringing upon. Should the Company seek a license from Lemelson there can be no
assurance that a license could be obtained on acceptable terms. If the Company
does not seek a license Lemelson may file suit against the Company to enforce
the rights it asserts to those patents. Any litigation could result in
substantial cost and diversion of resources of the Company. The failure to
obtain necessary licenses from Lemelson or the advent of litigation with
Lemelson could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has retained patent
counsel, which is currently investigating Lemelson's claims and the appropriate
course of action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data schedule (EDGAR version only)
(b) Exhibit 10.26 - Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle National Bank dated August 25, 1999
filed as Exhibit 10.26 to the Company's Form 10-Q for the quarter ended
October 31, 1999.
(c) No report on Form 8-K was filed during the quarter ended October 31,
1999.
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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 12/14/99
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Gary R. Fairhead Date
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake 12/14/99
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Linda K. Blake Date
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)