SIGMATRON INTERNATIONAL INC - 10-Q Quarterly Report

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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, 2002

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
- --------------------------------------------------------------------------------
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)

Indicate, by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---

On December 13, 2002 there were 2,881,227 shares of the Registrant's Common
Stock outstanding.

SigmaTron International, Inc.

Index

SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets

See accompanying notes.

3

SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited

See accompanying notes.

4

SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited

Noncash investing and financing activities:

A loan obligation of $1,950,000 was incurred in the first quarter of
fiscal 2003 when the Company acquired certain property under seller
financing.

See accompanying notes.

5

SigmaTron International, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

October 31, 2002

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements 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, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month and six month period ended
October 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending April 30, 2003. 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, 2002.

NOTE B - INVENTORIES

The components of inventory consist of the following:

NOTE C - LINE OF CREDIT

The Company has a loan and security agreement that provides for a revolving
line-of-credit facility. The maximum borrowing limit under the revolving
line-of-credit facility is limited to the lesser of: (i) $20,000,000; or (ii) an
amount equal to the sum of up to 85% of the receivables borrowing base and the
lesser of $9,000,000, or up to 50% of the inventory borrowing base, as defined
in the loan and security agreement. At October 31, 2002 there was approximately
$8,200,000 of unused credit under the terms of the agreement.

In October 2002 the revolving credit facility was amended and now matures in
September 2004. The outstanding loan balance of $5,392,509 has been classified
as a long-term liability

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in the Company's balance sheet at October 31, 2002. At October 31, 2002, the
Company was in compliance with its financial covenants under the revolving
credit facility.

CRITICAL ACCOUNTING POLICES

Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with generally accepted accounting principles
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. Actual results could materially differ
from these estimates.

Revenue Recognition - Revenues from sales of product including the Company's
contract manufacturing business are recognized when the product is shipped. In
general it is the Company's policy to recognize revenue and related costs when
the order has been shipped from our facilities, which is also the same point
that title passes under the terms of the purchase order. Periodically inventory
is held on consignment and revenue is recognized when the product is consumed by
the company's customer. Based on the Company's history of providing contract
manufacturing services, we believe that collectibility is reasonably assured.

Inventories - Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes labor, material and manufacturing overhead.
Provisions are based on assumptions about future product life cycles, product
demand and market conditions. When required, provisions are made to reduce
excess inventories to their estimated net realizable values. It is possible that
estimates of net realizable values can change in the near term.

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.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets, " which
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and APB Option No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions for
the Disposal of a Segment of a Business." The provisions of SFAS 144 are
effective in fiscal years beginning after December 15, 2001, with early adoption
permitted and, in general, are to

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be applied prospectively. The Company adopted SFAS No. 144 at May 1, 2002, and
has determined that adoption did not have a material effect on its results of
operations or financial position.

ITEM 2. 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 continued dependence on certain significant customers; the continued
market acceptance of products and services offered by the Company and its
customers; the activities of competitors, some of which may have greater
financial or other resources than the Company; the variability of the Company's
operating results; the availability and cost of necessary components; the
continued availability and sufficiency of the Company's credit arrangements;
changes in U.S. or Mexican regulations affecting the Company's business; the
continued stability of the Mexican economic, labor and political conditions and
the ability of the Company to manage its growth, expand manufacturing into China
and secure financing. 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.

RESULTS OF OPERATIONS:

Net sales decreased for the three month period ended October 31, 2002 to
$22,584,664 from $25,545,610 for the three month period ended October 31, 2001.
Net sales for the six months ended October 31, 2002 decreased to $41,821,380
from $42,659,968 for the same period in the prior fiscal year. Sales decreased
for the three and six months ended October 31, 2002 primarily due to price
reductions to some existing customers.

Sales can be misleading as an indication of the Company's financial performance.
Gross profit margins can vary considerably among customers and products
depending on the type of services rendered by the Company, specifically the
variation of orders for turnkey services versus consignment services. Variations
in the number of turnkey orders compared to consignment orders can lead to
significant fluctuations in the Company's revenue levels and margins. Further,
generally, customers' orders can be delayed, rescheduled or canceled at any
time, which can significantly impact the operating results of the Company. In
addition, the ability to replace such delayed or lost sales in a short period of
time cannot be assured.

Gross profit increased during the three month period ended October 31, 2002 to
$3,831,906 or 17.0% of net sales, compared to $3,464,521, or 13.6% of net sales
for the same period in the prior fiscal year. Gross profit increased for the six
month period ended October 31, 2002 to $6,650,075 or 15.9% of net sales,
compared to $4,601,625 or 10.8% of net sales for the same

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period in the prior fiscal year. The increase in the Company's gross margin for
the three month period is the result of a number of factors including labor cost
and overhead efficiencies, component pricing, increased capacity utilization and
product mix. Management continues to re-evaluate and align its overhead
structure with current customer requirements. While the Company's focus remains
on expanding its customer base and increasing gross margins, there can be no
assurance that gross margins will remain stable or increase in future quarters.

Selling and administrative expenses increased to $1,902,057 or 8.4% of net sales
for the three month period ended October 31, 2002 compared to $1,604,620 or 6.3%
of net sales in the same period last year. Selling and administrative expenses
increased to $3,655,869 or 8.7% of net sales for the six month period ended
October 31, 2002 compared to $2,998,938 or 7.0% of net sales in the same period
last year. The increase is primarily due to an increase in legal and bonus
expense for the three and six month period ended October 31, 2002.

Interest expense for bank debt and capital lease obligations for the three month
period ended October 31, 2002 was $173,519 compared to $428,993 for the same
period in the prior year. Interest expense for the six month period ended
October 31, 2002 decreased to $371,141 from $834,092 compared to the same period
in the prior year. This decrease was attributable to a decrease in interest
rates and the amount outstanding under the credit facility.

As a result of the factors described above, net income increased to $1,137,368
for the three month period ended October 31, 2002 compared to $923,849 for the
same period in the prior year. Basic and dilutive earnings per share for the
second fiscal quarter of 2002 were $0.39 and $0.34 respectively compared to
basic and dilutive earnings per share of $.32 for the same period in the prior
year. For the six months ended October 31, 2002, the Company recorded net income
of $1,753,567 compared to $653,007 for the same period in the prior fiscal year.
Basic and dilutive earnings per share for the six month period ended October 31,
2002 were $0.61 and $0.53 respectively compared to basic and dilutive earnings
per share of $0.23 for the same period in the prior year.

LIQUIDITY AND CAPITAL RESOURCES:

During the second quarter of fiscal 2003 the Company financed operations through
cash provided by operating activities. During the period, cash provided by
operating activities was primarily related to an increase in accounts payable
and an increase in net income to $1,753,569 in the six month period ended
October 31, 2002 compared to a net income of $653,007 in the prior fiscal year.

The Company used $3,050,782 in cash for investing activities in the six months
ended October 31, 2002. The Company anticipates additional machinery and
equipment will be purchased during fiscal 2003, which will result in additional
cash being used for investing activities.

9

The Company has a loan and security agreement that provides for a revolving
line-of-credit facility. The maximum borrowing limit under the revolving
line-of-credit facility is limited to the lesser of: (i) $20,000,000; or (ii) an
amount equal to the sum of up to 85% of the receivables borrowing base and the
lesser of $9,000,000, or up to 50% of the inventory borrowing base, as defined
in the loan and security agreement.

In October 2002 the revolving credit facility was amended and matures in
September 2004. The outstanding loan balance of $5,392,509 has been classified
as a long-term liability in the Company's balance sheet at October 31, 2002. At
October 31, 2002, the Company was in compliance with its financial covenants
under the revolving credit facility.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures that 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, as
amended ("Exchange Act"), is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. Within the 90 days
prior to the date of this report, the Company carried out an evaluation, under
the supervision of the Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Exchange Act. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.

There have been no significant changes in the Company's internal controls or
other factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit 99.1 - Certification by the Principal Executive Officer of
SigmaTron International, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

Exhibit 99.2 - Certification by the Principal Financial Officer of
SigmaTron International, Inc. Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

10

(b) Exhibit 10.27 - Amended Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle National Association, dated October 16,
2002.

11

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 12/13/02
- -------------------------------------- ------------------------
Gary R. Fairhead Date
President and CEO (Principal Executive
Officer)

/s/ Linda K. Blake 12/13/02
- -------------------------------------- ------------------------
Linda K. Blake Date
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)

CERTIFICATIONS

I, Gary R. Fairhead, President and Chief Executive of SigmaTron
International, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of SigmaTron
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made

known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: December 13, 2002

/s/ Gary R. Fairhead
----------------------------------------
Gary R. Fairhead
President and Chief Executive Officer of
SigmaTron International, Inc.

I, Linda K. Blake, Chief Financial Officer, Secretary and Treasurer of
SigmaTron International, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of SigmaTron
International, Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: December 13, 2002

/s/ Linda K. Blake
------------------------------------------
Linda K. Blake
Chief Financial Officer, Secretary and
Treasurer of SigmaTron International, Inc.