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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 July 31, 2003
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 [ ]
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 September 8, 2003 there were 3,211,904 shares of the Registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
PART 1. FINANCIAL INFORMATION: Page No.
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -- July 31, 2003
and April 30, 2003 3
Condensed Consolidated Statements of Operations -- Three
Months Ended July 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended July 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Item 4. Controls and Procedures 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
JULY 31, April 30,
2003 2003
UNAUDITED Audited
------------- -------------
Current assets:
Cash $ 714,419 $ 383,739
Accounts receivable, less allowance for doubtful
accounts of $70,000 at July 31, 2003 and
April 30, 2003 10,059,473 12,286,783
Inventories 11,547,494 12,883,496
Prepaid and other assets 902,977 775,776
Deferred income taxes 214,142 214,142
Other receivables 76,026 48,772
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Total current assets 23,514,531 26,592,708
Property, machinery and equipment, net 13,454,000 13,626,187
Due from SMTU:
Investment and advances 955,554 865,846
Equipment receivable 2,054,450 2,170,185
Other receivable 543,010 545,475
Other assets 1,241,295 1,305,593
------------- -------------
Total assets $ 41,762,840 $ 45,105,994
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 5,646,129 7,331,080
Accrued expenses 2,331,520 4,137,336
Income taxes payable 1,151,946 1,422,212
Notes payable - other 250,000 250,000
Capital lease obligations 732,790 802,431
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Total current liabilities 10,112,385 13,943,059
Notes payable - banks 77,910 1,653,963
Notes payable- other 1,390,342 1,454,454
Capital lease obligations, less current portion 755,582 905,995
Deferred income taxes 1,185,061 1,185,061
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Total liabilities 13,521,280 19,142,532
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, 3,140,127 and 2,933,984 shares issued 31,401 29,340
and outstanding at July 31, 2003 and April 30, 2003,
respectively
Capital in excess of par value 10,528,881 9,560,341
Retained earnings 17,681,278 16,373,781
------------- -------------
Total stockholders' equity 28,241,560 25,963,462
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Total liabilities and stockholders' equity $ 41,762,840 $ 45,105,994
============= =============
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months
ENDED Ended
JULY 31, 2003 July 31, 2002
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Net sales $ 22,115,372 $ 19,236,716
Cost of products sold 17,959,775 16,418,547
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4,155,597 2,818,169
Selling and administrative expenses 2,135,716 1,753,812
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Operating income 2,019,881 1,064,357
Equity in net income of SMTU (52,190) (55,639)
Interest expense - Banks and capital lease obligations 62,016 197,622
Interest income - SMTU and LC (82,804) (87,791)
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Income (loss) before income tax expense 2,092,859 1,010,165
Income tax expense 785,362 393,964
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Net income $ 1,307,497 $ 616,201
============== ==============
Net income per common share - Basic $ 0.44 $ 0.21
============== ==============
Net income per common share - Assuming dilution $ 0.38 $ 0.19
============== ==============
Weighted average shares of common stock outstanding
Basic 2,961,515 2,881,227
============== ==============
Diluted 3,425,499 3,275,227
============== ==============
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
THREE MONTHS Three Months
ENDED Ended
2003 2002
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OPERATING ACTIVITIES:
Net income $ 1,307,497 $ 616,201
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 506,816 504,537
Equity in net income of SMTU (89,708) (55,639)
Changes in operating assets and liabilities:
Accounts receivable 2,227,310 245,972
Inventories 1,336,002 184,146
Prepaid expenses and other assets (42,788) (216,621)
Trade accounts payable (1,684,951) (743,226)
Income taxes payable (270,266) 311,281
Accrued expenses (1,805,816) (145,266)
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Net cash provided by operating activities 1,484,096 701,385
INVESTING ACTIVITIES:
Purchases of machinery and equipment (263,798) (162,046)
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Net cash used in investing activities (263,798) (162,046)
FINANCING ACTIVITIES:
Proceeds from exercise of options 970,601 -
Net payments under note payable obligation (64,112) (64,979)
Net payments under capital lease obligations (220,054) (77,147)
Net payments under line of credit (1,576,053) (739,593)
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Net cash used in financing activities (889,618) (881,719)
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Change in cash 330,680 (342,380)
Cash at beginning of period 383,739 344,880
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Cash at end of period $ 714,419 $ 2,500
============= =============
Supplementary disclosures of cash flow information
Cash paid for interest $ 34,024 $ 141,470
Cash paid for income taxes, net of (refunds) 971,424 -
Acquisition of building financed under bank notes - 1,950,000
See accompanying notes.
5
SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 2003
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited 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 period ended July 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending April 30,
2004. 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, 2003.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
July 31, April 30,
2003 2003
------------ ------------
Finished products $ 2,945,685 $ 3,532,689
Work-in-process 1,401,289 1,072,298
Raw materials 7,200,520 8,278,509
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$ 11,547,494 $ 12,883,496
============ ============
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 July 31, 2003 there was approximately
$12,975,000 of unused credit under the terms of the agreement.
In October 2002 the revolving line-of-credit facility was amended. The revolving
line-of-credit facility matures in September 2004. The outstanding loan balance
of $77,910 has been
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classified as a long-term liability in the Company's balance sheet at July 31,
2003. At July 31, 2003, the Company was in compliance with its financial
covenants under the revolving credit facility.
NOTE D -- STOCK INCENTIVE PLANS
The Company maintains various stock incentive plans. The Company accounts for
these plans under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. The
Company recognizes compensation cost for restricted shares and restricted stock
units to employees. As of July 31, 2003 there are no issued restricted shares or
restricted stock units. No compensation cost is recognized for stock option
grants. All options granted under the Company's plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation.
The following table also provides the amount of stock-based compensation cost
included in net earnings as reported.
Three Months Ended
2003 2002
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Net Income, as reported $ 1,307,497 $ 616,201
Deduct: total stock-based employee compensation expense
determined under fair based method for awards granted,
modified, or settled, net of related tax effects
(66,632) (102,243)
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Pro forma net income $ 1,240,865 $ 513,958
=========== ===========
Three Months Ended
2003 2002
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Earnings per share
Basic -- as reported $ .44 $ .21
Basic -- pro forma .42 .18
Diluted -- as reported .38 .19
Diluted -- pro forma .36 .16
Options to purchase stock at exercise prices greater than the average fair
market value of the Company's stock for periods presented are excluded from the
calculation of diluted income because their inclusion would be anti-dilutive.
For the three month periods ended July 31,
7
2003 and 2002, options to purchase 66,200 and 743,993, respectively, were
excluded from the diluted income per share calculations.
CRITICAL ACCOUNTING POLICES
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with generally accepted accounting principles
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts, and reserves for inventory. 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, including its investment and assets related to its affiliate SMTU
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
8
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 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.
NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." It is an interpretation of
Accounting Research Bulletin No. 51 and revises the requirements for
consolidation by business enterprises of variable interest entities. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest acquired before February 1, 2003. FIN 46
applies to public enterprises as of the beginning of the applicable interim or
annual period and to nonpublic enterprises as of the end of the applicable
annual period. It may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. The
Company believes it is reasonably possible it will have to consolidate its SMTU
affiliate beginning August 1, 2003.
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., Mexican or Chinese regulations affecting the Company's
business; the continued stability of the Mexican and Chinese economic, labor and
political conditions; the ability of the Company to manage its growth; expansion
to include manufacturing in China; and securing financing for the operation in
China. 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.
9
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended July 31, 2003 to
$22,115,372 from $19,236,716 for the three month period ended July 31, 2002.
Sales increased for the three months ended July 31, 2003 primarily due to an
increase in orders from 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.
Gross profit increased during the three month period ended July 31, 2003 to
$4,155,597 or 18.8% of net sales, compared to $2,818,169 or 14.6 % of net sales
for the same period in the prior fiscal year. The increase in the Company's
gross margin for the three month period ended July 31, 2003 is the result of a
number of factors including, overhead efficiencies, component pricing, increased
capacity utilization and product mix. 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 $2,135,716 or 9.6% of net sales
for the three month period ended July 31, 2003 compared to $1,753,812 or 9.1% of
net sales in the same period last year. The increase is due to an increase in
general insurance, professional fees and bonus expenses for the three month
period ended July 31, 2003.
Interest expense for bank debt and capital lease obligations for the three month
period ended July 31, 2003 was $62,016 compared to $197,622 for the same period
in the prior year. This decrease was attributable to a decrease in the balance
outstanding on the Company's line of credit and a decrease in interest rates.
Income tax expense for the period ended July 31, 2003 was $785,362 or an
effective rate of 38% compared to an income tax expense of $393,964 or an effect
rate of 39% for the same period in the prior year.
As a result of the factors described above, net income increased to $1,307,497
for the three month period ended July 31, 2003 compared to a net income of
$616,201 for the same period in the prior year. Basic earnings per share for the
first fiscal quarter of 2004 were $0.44 compared to $0.21 for the same period in
the prior year. Diluted earnings per share for the first quarter of fiscal 2004
were $0.38 compared to $0.19 for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
In the first quarter of fiscal 2004 the Company financed operations through cash
provided by operating activities. During the period, cash provided by operating
activities was primarily related to net income of $1,307,497.
10
The Company used $263,798 in cash for investing activities in the first quarter
of fiscal 2004 to purchase machinery and equipment. The Company anticipates
additional machinery and equipment will be purchased during fiscal 2004, which
will result in additional cash being used for investing activities.
In conjunction with the Company's China expansion the Company may raise money
through a private subordinated debt placement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness, as of the end of the fiscal quarter covered by
this report, of the design and operation of the Company's "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Exchange Act). Based
upon that evaluation, the Company's CEO and CFO concluded that the Company's
disclosure controls and procedures, as of the end of such fiscal quarter, were
effective to ensure that the information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls During the period covered by this report, there
have been no changes to the Company's internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 31.1 -- Certification of Principal Executive Officer
of the Company Pursuant to Rule 13a-14(a) under the Exchange
Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
11
Exhibit 31.2 -- Certification of Principal Financial Officer
of the Company 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).
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on September 8, 2003 to announce
financial results for the quarter ended July 31, 2003.
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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 9/11/03
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Gary R. Fairhead Date
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake 9/11/03
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Linda K. Blake Date
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)