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, 2007
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 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 12, 2007, there were 3,794,956 shares of the Registrant's Common Stock
outstanding.
SigmaTron International, Inc.
Index
Page No.
--------
PART 1. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - January 31, 2007
(Unaudited) and April 30, 2006 3
Consolidated Statements of Operations - Three and Nine
Months Ended January 31, 2007 and 2006 4
Consolidated Statements of Cash Flows - Nine Months Ended
January 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
January 31,
2007 April 30,
(Unaudited) 2006
------------ -----------
CURRENT ASSETS:
Cash $ 2,369,154 $ 3,269,925
Accounts receivable, less allowance for doubtful
accounts of $268,920 at January 31, 2007
and April 30, 2006 21,512,929 17,747,414
Inventories, net 38,290,480 31,250,050
Income taxes refundable 114,776 476,000
Prepaid and other assets 1,565,222 1,329,774
Deferred income taxes 970,440 957,069
Other receivables 192,252 332,298
------------ -----------
Total current assets 65,015,253 55,362,530
Property, machinery and equipment, net 31,404,199 30,544,307
Other assets 945,196 1,548,240
Intangible assets, net of amortization $1,137,684
and $583,650 1,632,316 2,186,350
Goodwill 9,298,945 9,298,945
------------ -----------
Total assets $108,295,909 $98,940,372
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 15,714,231 $13,444,928
Accrued expenses 2,149,687 2,163,542
Accrued wages 2,318,423 1,743,076
Income taxes payable -- 839,438
Notes payable - bank 750,000 1,000,000
Notes payable - building 522,070 430,000
Capital lease obligations 1,655,224 1,408,485
------------ -----------
Total current liabilities 23,109,635 21,029,469
Notes payable - banks 27,054,611 21,161,900
Notes payable- building, less current portion 3,122,686 3,591,088
Capital lease obligations, less current portion 3,560,269 2,804,345
Deferred income taxes 2,458,759 2,458,759
------------ -----------
Total long-term liabilities 36,196,325 30,016,092
------------ -----------
Total liabilities 59,305,960 51,045,561
COMMITMENTS AND CONTINGENCIES:
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, 3,794,956 and 3,786,956 shares issued an
outstanding at January 31, 2007 and April 30, 2006 37,950 37,870
Capital in excess of par value 19,219,104 19,167,289
Retained earnings 29,732,895 28,689,652
------------ -----------
Total stockholders' equity 48,989,949 47,894,811
------------ -----------
Total liabilities and stockholders' equity $108,295,909 $98,940,372
============ ===========
See accompanying notes to financial statements.
3
SIGMATRON INTERNATIONAL, INC.
Consolidated Statements Of Operations
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 31, January 31, January 31, January 31,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales $44,584,513 $34,061,657 $126,403,040 $90,267,615
Cost of products sold 40,281,945 30,381,859 113,385,773 79,027,187
----------- ----------- ------------ -----------
Gross profit 4,302,568 3,679,798 13,017,267 11,240,428
Selling and administrative expenses 3,519,246 2,886,874 9,635,932 7,970,016
----------- ----------- ------------ -----------
Operating income 783,322 792,924 3,381,335 3,270,412
Other income (59,835) (80,927) (208,618) (157,907)
Interest expense 717,648 435,888 1,879,688 935,718
----------- ----------- ------------ -----------
Income from continuing operations before income tax expense 125,509 437,963 1,710,265 2,492,601
Income tax expense 48,937 150,628 667,013 791,575
----------- ----------- ------------ -----------
Income from continuing operations 76,572 287,335 1,043,252 1,701,026
Discontinued operations
Gain on sale of Las Vegas operation -- -- -- (310,731)
(Loss)income from operations of discontinued Las Vegas
location -- (15,014) -- 370,486
Income tax benefit -- (5,855) -- (23,304)
----------- ----------- ------------ -----------
Loss on discontinued operation -- (9,159) -- (36,451)
Net income $ 76,572 $ 278,176 $ 1,043,252 $ 1,664,575
=========== =========== ============ ===========
Earnings (loss) per share - basic
Continuing operations $ 0.02 $ 0.08 $ 0.28 $ 0.45
Discontinuing operations -- -- -- (0.01)
----------- ----------- ------------ -----------
Total $ 0.02 $ 0.08 $ 0.28 $ 0.44
=========== =========== ============ ===========
Earnings (loss) per share - diluted
Continuing operations $ 0.02 $ 0.07 $ 0.27 $ 0.41
Discontinuing operations -- -- -- (0.01)
----------- ----------- ------------ -----------
Total $ 0.02 $ 0.07 $ 0.27 $ 0.40
=========== =========== ============ ===========
Weighted average shares of common stock outstanding
Basic 3,794,956 3,755,420 3,789,836 3,755,420
=========== =========== ============ ===========
Weighted average shares of common stock outstanding
Diluted 3,895,939 4,192,229 3,877,564 4,117,358
=========== =========== ============ ===========
See accompanying notes to financial statements
4
SigmaTron International, Inc.
Consolidated Statements of Cash Flows
Nine Nine
Months Ended Months Ended
January 31, January 31,
2007 2006
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,043,252 $ 1,664,575
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 3,031,122 3,218,763
Stock-based compensation 34,286 --
Provision for inventory obsolescence -- 160,000
Provision for doubtful accounts -- 10,000
Deferred income taxes (13,371) (183,273)
Amortization of intangible assets 554,034 --
Gain on sale of discontinued operation -- (310,731)
Changes in operating assets and liabilities, net
of acquisition
Accounts receivable (3,765,515) 90,091
Inventories (7,040,430) (4,208,925)
Prepaid expenses and other assets 868,866 (1,012,299)
Trade accounts payable 2,269,303 (475,014)
Accrued expenses and wages 561,492 (808,739)
Income taxes payable (839,438) 98,755
----------- ------------
Net cash used in operating activities (3,296,399) (1,756,797)
INVESTING ACTIVITIES:
Acquisition of Able -- (16,771,755)
Purchases of machinery and equipment (1,728,839) (2,781,631)
Proceeds from sale of Las Vegas operation -- 1,705,695
----------- ------------
Net cash used in investing activities (1,728,839) (17,847,691)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 17,600 2,720,415
Payments under capital lease obligation (1,159,512) (938,401)
Payments other notes payable -- (300,000)
Payments under term loan (250,000)
Proceeds under term loan 1,250,000 --
Proceeds under lines of credit 4,642,711 20,509,702
Payments under building notes payable (376,332) (360,062)
----------- ------------
Net cash provided by financing activities 4,124,467 21,631,654
CHANGE IN CASH (900,771) 2,027,166
Cash at beginning of period 3,269,925 184,014
----------- ------------
CASH AT END OF PERIOD $ 2,369,154 $ 2,211,180
=========== ============
Supplementary disclosures of cash flow
information
Cash paid for interest $ 1,890,947 $ 886,652
Cash paid for income taxes, net of (refunds) 1,415,033 796,827
See accompanying notes to financial statements.
5
SigmaTron International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
January 31, 2007
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SigmaTron
International, Inc. ("SigmaTron"), its wholly owned subsidiaries Standard
Components de Mexico S.A., Ablemex, S.A. de C.V., acquired in July 2005, 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 consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended January 31, 2007,
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2007. 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, 2006.
NOTE B - INVENTORIES
The components of inventory consist of the following:
January 31, April 30,
2007 2006
----------- -----------
Finished products $ 8,959,564 $ 8,216,317
Work-in-process 3,687,303 2,563,334
Raw materials 25,643,613 20,470,399
----------- -----------
$38,290,480 $31,250,050
=========== ===========
NOTE C - STOCK INCENTIVE PLANS
The Company adopted Financial Accounting Standards Board, Share-Based Payment
("SFAS 123(R)") on May 1, 2006, and implemented the new standard utilizing the
modified prospective application transition method. 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. Compensation expense for which
the requisite service requirement that has not been rendered and are outstanding
as of the option grant date will be recognized over the remaining service
period. In July 2006, the Company granted 10,000 options to a non-executive
employee and the per share fair value of the options granted was $6.0125. The
Company recognized approximately $20,000 in stock compensation expense
associated with the grant and a tax benefit of approximately $7,800 as of
6
October 31, 2006. In the third quarter of fiscal 2007, the Company granted 6,000
options to non-executive employees and the fair value of the option grants were
$6.57 and $7.23. The Company recognized approximately $14,245 in stock
compensation expense associated with the grants and a tax benefit of
approximately $5,550 as of January 31, 2007.
Under the Company's stock option plans, options to acquire shares of common
stock have been made available for grant to certain employees and directors.
Each option granted has an exercise price of not less than 100% of the market
value of the common stock on the date of grant. The contractual life of each
option is generally 10 years. The vesting of the grants varies according to the
individual options granted.
Prior to the adoption of SFAS 123(R), the Company had elected to apply
Accounting Principles Board Opinion 25 to account for its stock-based
compensation plans, as permitted under SFAS No. 123, Accounting for Stock-Based
Compensation. This method applied the intrinsic value method for stock options
and other awards granted to employees. Had the fair value method been used
during the three and nine months ended January 31, 2006, the following pro forma
net income would be as reported:
Three Months Ended Nine Months Ended
January 31, January 31,
2006 2006
------------------ -----------------
Net Income, as reported $ 278,176 $1,664,575
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) (873,617)
--------- ----------
Pro forma net income $ (13,030) $ 790,958
========= ==========
Three Months Ended Nine Months Ended
January 31, January 31,
2006 2006
------------------ -----------------
Earnings per share
Basic - as reported $ .08 $.45
Basic - pro forma (.01) .21
===== ====
Diluted - as reported .07 .40
Diluted - pro forma $(.01) $.19
===== ====
7
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Nine Months Ended
-------------------------
January 31, January 31,
2007 2006
----------- -----------
Expected dividend yield .0% 0%
Expected stock price volatility .750 .800
Average risk-free interest rate 4.98% 2.20%
Weighted-average expected life of options 6.5 years 5 years
Option-valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing method does not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options. There were
6,000 stock options granted in the third quarter ended January 31, 2007.
The table below summarizes option activity from the beginning of fiscal year
2007 through January 31, 2007:
Range of
exercise prices Weighted
Number --------------- average
of options Low High exercise price
---------- ----- ------ --------------
Options outstanding at May 1, 2006 523,307 $2.20 $12.25 $7.87
Options granted 16,000 9.17 10.12 9.47
Exercised (8,000) 2.20 2.20 2.20
------- ----- ------ -----
Options outstanding at January 31, 2007 531,307 $2.20 $12.25 $8.00
======= ===== ====== =====
As of January 31, 2007, there was approximately $68,570 of unrecognized
compensation cost related to nonvested share-based compensation arrangements,
which is expected to be recognized over an average period of 2.67 years.
Information with respect to stock options outstanding and stock options
exercisable at January 31, 2007, follows:
Options Outstanding
----------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices January 31, 2007 contractual life exercise price
------------------------ ---------------- ---------------- --------------
$2.20 - 5.63 103,515 4.65 years $2.51
9.17 - 12.25 427,792 8.06 years $9.33
-------
Total 531,307
=======
8
Options Exercisable
---------------------------------
Number Weighted-
exercisable at average
Range of exercise prices January 31, 2007 exercise price
------------------------ ---------------- --------------
$2.20 - 5.63 103,515 $2.51
9.17 - 12.25 399,186 $9.33
-------
Total 502,701
=======
NOTE D - STRATEGIC TRANSACTION
In July 2005, the Company closed on the purchase of all of the outstanding
common stock of Able Electronics Corporation ("Able"), a company headquartered
in Hayward California, and its wholly owned subsidiary, Ablemex S.A. de C.V.,
located in Tijuana, Mexico. Able was an ISO 9001:2000 certified EMS company
serving Original Equipment Manufacturers in the life sciences,
telecommunications and industrial electronics industries. The acquisition of
Able has allowed the Company to make strides towards achieving four objectives:
(1) to further diversify its markets, capabilities and customer base, (2) adding
a third low-cost manufacturing facility in Tijuana, Mexico, (3) creating an
opportunity to consolidate the California operations into one facility, and (4)
to generate incremental revenue from Able's customers as they become familiar
with the Company's broader array of services. The effective date of the
transaction was July 1, 2005. Able was merged into the Company beginning
November 1, 2005 and operates as a division of the Company. The purchase price
was approximately $16,800,000 and was recorded as a stock purchase transaction
in the first quarter of fiscal year 2006. The transaction was financed by the
Company's amended credit facility and resulted in an increase of approximately
$8,500,000 in goodwill. Assuming the purchase was recorded as of the first
period reported, May 1, 2005, unaudited revenues for the three and nine months
ended January 31, 2006, would have been $24,576,808 and $93,531,730,
respectively. The unaudited pro-forma dilutive earnings per share for the three
and nine month period ended January 31, 2006, would have been ($.27) and $.13,
respectively.
NOTE E - DISCONTINUED OPERATIONS
In June 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 sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006. A net loss of
approximately $9,000 and $36,000 was recorded in the three and nine months ended
January 31, 2006, respectively.
NOTE F - FINANCING TRANSACTION
The Company entered into an Amended Loan and Security Agreement in July 2005,
which provided for a revolving credit facility. The maximum borrowing limit
under the amended revolving credit
9
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
a percentage 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 includes a four year term loan in the amount of
$3,000,000.
On July 31, 2006, the Company amended the credit facility to increase the
revolving credit facility from $22,000,000 to $27,000,000. The amended revolving
credit facility is limited to the lesser of: (i) $27,000,000 or (ii) an amount
equal to the sum of 85% of the receivable borrowing base and the lesser of
$13,500,000 or a percentage of the inventory base. The revolving credit facility
expires June 30, 2009. The term loan was increased to $4,000,000 from
$2,750,000. Interest payments only are due through June 30, 2007 and quarterly
principal payments of $250,000 are due each quarter beginning with the quarter
ending June 30, 2007, through the quarter ending June 30, 2011. In October 2006,
the Company further amended the credit facility to increase the revolving credit
facility from $27,000,000 to $32,000,000. The increase of $5,000,000 is for a
term of six months. At January 31, 2007, the Company was in compliance with its
financial covenants and in the third quarter of fiscal year 2007 the interest
coverage covenant was amended. At January 31, 2007 $27,804,611 was outstanding
under the revolving credit facility and term loan. There was approximately
$3,158,000 of unused credit available as of January 31, 2007.
The loan and security agreement 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.
CRITICAL ACCOUNTING POLICIES:
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts, reserves for inventory and valuation of
goodwill. Actual results could materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing services 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
10
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 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 adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. Goodwill
represents the purchase price in excess of the fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", requires the Company to assess
goodwill for impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
During the fourth quarter of fiscal 2006 the Company completed its annual
assessment of impairment regarding the goodwill recorded. That assessment,
supported by independent appraisals, did not identify any impairment as of April
30, 2006.
NEW ACCOUNTING STANDARDS:
In June 2006, FASB Interpretation 48 ("FASB 48") "Accounting for Uncertainty in
Income Taxes" was issued, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes. FASB 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FASB 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition.
FASB 48 is effective for fiscal years beginning after December 15, 2006, and
earlier application of the provisions of FASB 48 is encouraged if the enterprise
has not yet issued financial statements, including interim financial statements,
in the period that FASB 48 is adopted. The Company has not yet determined the
impact of FASB 48 on its financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
NOTE: This quarterly report 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, suppliers
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 continue to
produce products that are in compliance with the European Standard of
"Restriction of Use of Hazardous Substance ("RoHS"); 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 continued 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 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.
As the demand for electronic products has continued to increase over the past
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 European Union Restriction of Use of Hazardous Substances,
("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
12
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 rules subsequently
implemented by the Securities and Exchange Commission and 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 rules, regulations, and
requirements have 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 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 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
period ended January 31, 2007.
In the past, the timing and rescheduling of orders have caused the Company to
experience significant quarterly fluctuations in its revenues and earnings, and
the Company expects such fluctuations to continue. The Company has recently
experienced a general softening in customer demand across many of the markets it
serves. The softening has not been significant, but may effect the fourth
quarter of fiscal year 2007.
RESULTS OF OPERATIONS:
Net Sales
Net sales increased for the three month period ended January 31, 2007 to
$44,584,513 from $34,061,657 for the three month period ended January 31, 2006.
Net sales for the nine months ended January 31, 2007 increased to $126,403,040
from $90,267,615 for the same period in the prior fiscal year. Sales volume
increased for the three and nine month periods ended January 31, 2007 as
compared to the same periods in the prior year in the appliance, fitness,
gaming, industrial and life sciences marketplaces. The increase in sales volume
in the industrial and life sciences industries to customers is the result of the
July 1, 2005 acquisition of Able.
13
Gross Profit
Gross profit increased during the three month period ended January 31, 2007 to
$4,302,568 or 9.6% of net sales, compared to $3,679,798 or 10.8% of net sales
for the same period in the prior fiscal year. Gross profit increased for the
nine month period ended January 31, 2007 to $13,017,267 or 10.3% of net sales,
compared to $ 11,240,428 or 12.5% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross margin as a percent of sales
for the three and nine month periods is the result of pricing pressures within
the EMS industry, increasing raw material costs driven primarily by increases in
commodities such as copper and oil and inefficiencies at its Hayward and Tijuana
operations. The Company is focused on correcting the problems at Hayward and
Tijuana and is slowly making progress. In addition, the Company has expanded its
Tijuana manufacturing operation and has transferred production from Hayward to
Tijuana. There can be no assurance that gross margins will not continue to
decrease in future quarters.
Selling and Administrative Expenses
Selling and administrative expenses increased to $3,519,246 or 7.9% of net sales
for the three month period ended January 31, 2007 compared to $2,886,874 or 8.5%
of net sales in the same period last year. Selling and administrative expenses
increased to $9,635,932 or 7.6% of net sales for the nine month period ended
January 31, 2007 compared to $7,970,016 or 8.8% of net sales in the same period
last year. The increase for the three and nine month periods ended January
31,2007, is primarily due to an increase in sales and purchasing salary
expenses, commissions, accounting and legal fees, IT salaries and an increase in
variable compensation. Selling and administrative expenses decreased as a
percentage of net sales for the three month and nine month periods ended January
31, 2007, due to the increase in sales volume.
Interest Expense
Interest expense for bank debt and capital lease obligations for the three month
period ended January 31, 2007 was $717,648 compared to $435,888 for the same
period in the prior year. Interest expense increased to $1,879,688 for the nine
month period ended January 31, 2007 as compared to $935,718 for the same period
in the prior year. This change was attributable to the Company's significant
increased borrowings under its revolving credit facility and term loan,
increased capital lease obligations and higher interest rates. The additional
working capital was necessary to support the increase in sales volume.
Taxes
The effective tax rate from continuing operations for the three and nine month
periods ended January 31, 2007 was 39.0%. The effective tax rate for the
comparable periods in fiscal 2006 was 34.4% and 31.8% for the three and nine
month periods ended, respectively. The effective tax rate in fiscal 2007 has
increased compared to prior periods due to the tax effects of the Company's
foreign operations.
In June 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 sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The
14
gain was offset by a loss of approximately $383,000 on discontinued operations
for the Las Vegas operation for the period ended April 30, 2006. A net loss of
approximately $9,000 and $36,000 was recorded in the three and nine months ended
January 31, 2006, respectively.
Net Income
Net income from continuing operations decreased to $76,572 for the three month
period ended January 31, 2007 compared to $278,176 for the same period in the
prior year. Basic and diluted earnings per share for the third fiscal quarter of
2007 were $0.02, compared to basic and diluted earnings per share of $0.08 and
$0.07, respectively, for the same period in the prior year. For the nine months
ended January 31, 2007, the Company recorded net income from continuing
operations of $1,043,252 compared to $1,701,026 for the same period in the prior
fiscal year. Basic and diluted earnings per share for the nine month period
ended January 31, 2007 were $0.28 and $0.27 respectively, compared to basic and
dilutive earnings per share of $0.44 and $0.40, respectively, for the same
period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
OPERATING ACTIVITIES.
Cash flow used in operating activities was $3,296,399 for the nine months ended
January 31, 2007, compared to $1,756,797 for the prior fiscal year. During the
first nine months of fiscal year 2007, cash used in operations was due to an
increase in accounts receivable and inventory. The increase in accounts
receivable is due to the increase in sales volume. The increase in inventory is
primarily attributable to an increase in customer orders and the addition of
RoHS compliant inventory. Cash used in operating activities was partially offset
by net income, the non-cash effect of depreciation and amortization and an
increase in trade payables.
INVESTING ACTIVITIES.
In June 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 sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000.
In July 2005, the Company closed on the purchase of all of the outstanding stock
of Able, a company headquartered in Hayward, California and its wholly owned
subsidiary, Ablemex S.A. de C.V., located in Tijuana, Mexico. Able was merged
into the Company in November 2005 and currently operates as a division of the
Company. The purchase price was approximately $16,800,000 and was recorded as a
stock purchase transaction in the first quarter of fiscal year 2006. The
transaction was financed by the Company's amended credit facility and resulted
in an increase of approximately $8,500,000 in goodwill.
During the first nine months of fiscal 2007, the Company purchased approximately
$3,890,000 in machinery and equipment to be used in the ordinary course of
business.
15
FINANCING TRANSACTIONS.
The Company entered into an Amended Loan and Security Agreement in July 2005,
which provided 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 a percentage 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 includes a four year term loan in the amount of $3,000,000.
On July 31, 2006, the Company amended the credit facility to increase the
revolving credit facility from $22,000,000 to $27,000,000. The amended revolving
credit facility is limited to the lesser of: (i) $27,000,000 or (ii) an amount
equal to the sum of 85% of the receivable borrowing base and the lesser of
$13,500,000 or a percentage of the inventory base. The revolving credit facility
expires June 30, 2009. The term loan was increased to $4,000,000 from
$2,750,000. Interest payments only are due through June 30, 2007 and quarterly
principal payments of $250,000 are due each quarter beginning with the quarter
ending June 30, 2007, through the quarter ending June 30, 2011. In October 2006,
the Company further amended the credit facility to increase the revolving credit
facility from $27,000,000 to $32,000,000. The increase of $5,000,000 is for a
term of six months. At January 31, 2007, the Company was in compliance with its
financial covenants and in the third quarter of fiscal year 2007 the interest
coverage covenant was amended. At January 31, 2007 $27,804,611 was outstanding
under the revolving credit facility and term loan. There was approximately
$3,158,000 of unused credit available as of January 31, 2007.
The loan and security agreement 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.
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 was 5.76% and at April 30, 2006, $1,237,500 was 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.
The loan was paid in full in July 2006.
The Company anticipates its credit facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal year 2007. In the event the business grows rapidly or the Company
considers an acquisition, additional financing resources could be necessary in
the current or future fiscal years. There is no assurance that the Company will
be able to obtain equity or debt financing at acceptable terms 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. During
the first nine months of fiscal year 2007 the Company paid approximately
$15,374,000 to its subsidiaries for services provided.
16
In May 2002, the Company acquired a plant in Acuna, 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, 2007, approximately $614,750 was outstanding in connection with the
financing of that facility.
OFF-BALANCE SHEET TRANSACTIONS:
The Company has no off-balance sheet transactions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
Not applicable.
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
primarily to its short-term investments and borrowings under its credit
agreements. The Company's borrowings are at a variable rate and an increase in
interest rates of 1% would have resulted in interest expense increasing by
approximately $208,500 for the nine month period ended January 31, 2007. As of
January 31, 2007, the Company had no short-term investments and approximately
$27,800,000 of 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,
because these instruments are short-term.
ITEM 4. 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 15d-15(e)) as of January 31, 2007. 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 (the "Exchange Act") is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms and that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. 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, 2007.
There has been no change in our internal control over financial reporting during
the quarter ended January 31, 2007, that has materially affected or is
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material adverse effect on our financial condition or results of
operations.
ITEM 1A. RISK FACTORS.
There were no material changes from our risk factors as presented in the section
entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended April 30, 2006 as filed with the SEC on July 28, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Fourteen Amendment to Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle Bank National Association, dated January 2007.
The agreement was amended to change the interest ratio financial covenant.
ITEM 6. EXHIBITS.
(a) Exhibits:
Exhibit 10.23 - Fourteenth Amendment to Loan and Security Agreement between
SigmaTron International, Inc. and LaSalle Bank National Association, dated
January 2007, filed as Exhibit 10.23.
18
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).
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 14, 2007
------------------------------------- Date
Gary R. Fairhead
President and CEO (Principal
Executive Officer)
/s/ Linda K. Blake March 14, 2007
------------------------------------- Date
Linda K. Blake
Chief Financial Officer, Secretary
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)