Back to GetFilings.com
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, 2005
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) (Zip Code)
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 March 7, 2005 there were 3,752,054 shares of the registrant's Common Stock
outstanding.
SigmaTron International, Inc.
Index
Page No.
--------
PART 1. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
January 31, 2005 and April 30, 2004 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended January 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended January 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits 18
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Balance Sheets
Unaudited
JANUARY 31, April 30,
2005 2004
----------- -----------
CURRENT ASSETS:
Cash $ 640,977 $ 5,145,814
Restricted cash 100,000 100,000
Accounts receivable, less allowance for doubtful
accounts of $120,000 at January 31, 2005 and
April 30, 2004 14,944,769 12,651,272
Inventories - net 20,595,224 14,168,357
Prepaid and other assets 968,730 1,315,127
Refundable taxes -- 275,583
Deferred income taxes 1,912,114 1,902,551
Other receivables 241,471 415,253
----------- -----------
Total current assets 39,403,285 35,973,957
Property, machinery and equipment, net 25,634,501 25,707,901
Goodwill 719,040 --
Other assets 1,650,271 1,316,814
----------- -----------
Total assets $67,407,097 $62,998,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,635,240 $ 7,475,026
Accrued expenses 4,006,153 4,540,744
Income taxes payable 2,262,579 --
Notes payable - buildings 430,000 430,000
Notes payable - other 665,000 --
Capital lease obligations 744,686 640,436
----------- -----------
Total current liabilities 15,743,658 13,086,206
Notes payable - banks -- 1,118,514
Notes payable -buildings, less current portion 4,191,269 4,536,159
Capital lease obligations, less current portion 1,359,624 299,536
Subordinated debenture payable -- 1,050,000
Deferred income taxes 1,265,714 1,265,714
----------- -----------
Total liabilities 22,560,265 21,356,129
MINORITY INTEREST IN AFFILIATE -- 439,787
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, 3,752,054 and 3,750,954 shares issued
and outstanding at January 31, 2005 and April 30, 2004, 37,521 37,510
respectively
Capital in excess of par value 19,062,945 19,056,525
Retained earnings 25,746,366 22,108,721
----------- -----------
Total stockholders' equity 44,846,832 41,202,756
----------- -----------
Total liabilities and stockholders' equity $67,407,097 $62,998,672
=========== ===========
See accompanying notes.
3
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements Of Operations
Unaudited
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
JANUARY 31, 2005 January 31, 2004 JANUARY 31, 2005 January 31, 2004
---------------- ---------------- ---------------- ----------------
Net sales $ 28,301,593 $ 23,906,176 $ 81,241,451 $ 75,266,852
Cost of products sold 23,518,837 19,459,181 66,639,964 60,547,366
------------ ------------ ------------ ------------
Gross profit 4,782,756 4,446,995 14,601,487 14,719,486
Selling and administrative expenses 2,788,060 2,432,844 8,553,938 7,461,515
------------ ------------ ------------ ------------
Operating income 1,994,696 2,014,151 6,047,549 7,257,971
Other (income) (444,074) (60,003) (548,105) (60,003)
Interest expense 82,533 16,458 202,846 69,044
------------ ------------ ------------ ------------
Income before taxes 2,356,237 2,057,696 6,392,808 7,248,930
Income tax expense 918,895 814,410 2,474,986 2,757,532
------------ ------------ ------------ ------------
Net income $ 1,437,342 $ 1,243,286 $ 3,917,822 $ 4,491,398
============ ============ ============ ============
Net income per common share - Basic $ 0.38 $ 0.34 $ 1.04 $ 1.35
============ ============ ============ ============
Net income per common share - Assuming dilution $ 0.38 $ 0.34 $ 1.02 $ 1.28
============ ============ ============ ============
Weighted average shares of common stock outstanding
Basic 3,752,054 3,621,451 3,751,707 3,317,420
============ ============ ============ ============
Diluted 3,822,157 3,655,200 3,832,121 3,521,565
============ ============ ============ ============
See accompanying notes.
4
SIGMATRON INTERNATIONAL, INC.
Condensed Consolidated Statements of Cash Flows
Unaudited
NINE MONTHS Nine Months
ENDED Ended
JANUARY 31, 2005 January 31, 2004
---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 3,783,488 $ 4,313,074
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,404,584 1,965,458
Equity in net income of SMTU -- (110,440)
SMTU impairment (145,842) --
Changes in operating assets and liabilities:
Accounts receivable (2,293,497) 2,204,979
Inventories (6,426,867) 245,234
Prepaid expenses and other assets 346,397 (1,905,276)
Refundable taxes 275,583 (2,488,828)
Other receivables (159,675) --
Trade accounts payable 160,214 (885,285)
Income taxes payable 2,262,583 (1,422,212)
Tax benefit of option exercise 2,042 5,177,153
Deferred taxes (9,563) --
Accrued expenses 58,991 42,747
----------- -----------
Net cash provided by operating activities 258,438 7,136,604
INVESTING ACTIVITIES:
Purchases of machinery and equipment (2,024,949) (5,569,305)
Purchase of SMTU interest (1,338,858) --
SMTU impairment (145,845) --
----------- -----------
Net cash used in investing activities (3,509,652) (5,569,305)
FINANCING ACTIVITIES:
Proceeds from exercise of options 4,389 4,310,086
Minority interest (574,121) 178,326
Payment under note payable obligation-other (665,000) --
Proceeds under note payable obligation-building -- 3,600,000
Payment under note payable obligation-building (344,890) (225,739)
Proceeds under capital lease obligations 1,729,073 --
Payments under capital lease obligations (564,736) (795,212)
Payments under line of credit (1,118,514) (2,300,929)
----------- -----------
Net cash (used in) provided by financing activities (1,533,799) 4,766,532
----------- -----------
Change in cash (4,785,013) 6,333,831
Cash at beginning of period 5,145,814 424,844
----------- -----------
Cash at end of period $ 360,801 $ 6,758,675
=========== ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 307,666 $ 216,171
Cash paid for income taxes, net of (refunds) (223,379) 1,322,633
Acquisition of building financed under bank notes -- 3,600,000
Non Cash Investing activities
Acquisition of SMTU $ 2,668,858
Cash paid for acquisition $(1,338,858)
-----------
Notes issued for acquisition $ 1,330,000
Forgiveness of subordinated debenture 1,050,000
Forgiveness of accrued interest payable 525,000
Reduction of long lived assets from purchase of SMTU 306,236
Goodwill created 719,040
See accompanying notes.
5
SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
January 31, 2005
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SigmaTron International, Inc., its wholly owned subsidiary Standard Components
de Mexico S.A., its wholly owned foreign enterprise Wujiang SigmaTron
Electronics Co., Ltd., and its procurement branch SigmaTron Taiwan
(collectively, the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
Accordingly, the condensed consolidated financial statements do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month period ended January 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
April 30, 2005. 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, 2004.
NOTE B - INVENTORIES
The components of inventory consist of the following:
January 31, April 30,
2005 2004
----------- -----------
Finished products $ 5,018,040 $ 3,400,742
Work-in-process 2,232,922 1,221,160
Raw materials 13,344,262 9,546,455
----------- -----------
$20,595,224 $14,168,357
=========== ===========
NOTE C - PURCHASE OF AFFILIATE
On August 2, 2004 the Company acquired the interest of outside investors in its
affiliate SMT Unlimited L.P. ("SMTU") and the general partner of SMTU, SMT
Unlimited, Inc., thereby bringing the Company's interest in its affiliate SMTU
to approximately 80%. On September 2, 2004 the Company acquired the remaining
interests in its affiliate SMTU from its managers. The aggregate price paid for
all the interests was $2,668,858. This aggregate price
6
was paid with $1,338,858 in cash and $1,330,000 in notes with terms of up to 2
years. The acquisition was treated as a step acquisition and resulted in
goodwill of $719,040. On October 1, 2004 SMT Unlimited, Inc. was merged into the
Company, and SMTU was liquidated, thereby becoming an operating division of the
Company.
Prior to the Company's acquisition, SMTU was consolidated under FIN46, as such
the proforma revenue would have been the same for all periods presented assuming
the acquisition took place May 1, 2003. The unaudited proforma net earnings
would have been $3,906,086 and $4,313,074 for the nine months ended January 31,
2005 and 2004, respectively. The unaudited proforma dilutive earnings per share
would have been $1.02 and $1.22 for the nine months ended January 31, 2005 and
2004, respectively.
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 January 31, 2005 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 income as reported.
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income, as reported $ 1,437,342 $ 1,243,286 $ 3,917,822 $ 4,491,398
Deduct: total stock-based
employee compensation expense
determined under fair based
method for awards granted,
modified, or settled, net of
related tax effects (100,116) (66,632) (300,348) (199,896)
----------- ----------- ----------- -----------
Pro forma net income $ 1,337,226 $ 1,176,654 $ 3,617,474 $ 4,291,502
=========== =========== =========== ===========
7
Three Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Earnings per share
Basic - as reported $ .38 $ .34 $ 1.04 $ 1.35
Basic - pro forma .36 .33 .96 1.29
Diluted - as reported .38 .34 1.02 1.28
Diluted - pro forma .35 .32 .94 1.22
=========== =========== =========== ===========
Options to purchase stock at exercise prices greater than the average fair
market value of the Company's stock for periods presented are excluded from the
calculation of diluted income because their inclusion would be anti-dilutive.
For the three month period ended January 31, 2005, 3,100 options were
anti-dilutive and not included in the diluted income per share calculations.
NOTE E - BLOCK SHIELD WARRANTS
The Company expended $25,000 to investigate the feasibility of manufacturing a
product for WaveZero, Inc., the owner of design rights to certain shielding
products. In exchange the Company received warrants convertible into 153,781
shares of common stock of Block Shield Corporation, PLC (BLS; London Stock
Exchange), the parent of WaveZero, Inc. Those warrants were subject to
forfeiture upon the occurrence of certain events. During the quarter ending
January 31, 2005, the risk of forfeiture terminated. Upon such termination SFAS
No. 138 provides that this security be marked to market. Accordingly, the
Company has recognized a gain of $350,882 to reflect the increase in the fair
market value of said warrants since the date of acquisition through January 31,
2005.
NOTE F - CHINA LAND USE ISSUE
On July 16, 2003, the Company signed a land use rights contract with the Wujiang
Land Administration Bureau to obtain the use rights of land in Yao Jiazhuang
Village. This particular contract covered the 40 Chinese acres of land that was
adjacent to 60 Chinese acres of land for which the Company had already signed a
separate land use rights contract. For the 40 acre parcel, the Company paid the
transfer fee for the land and subsequently built a dormitory, canteen and power
station on the land. In December 2004, the Company received an administration
penalty notice of approximately $16,000 from the Wujiang Land Resources Bureau
which stated that the Company was occupying the 40 acres without its permission.
Under Chinese law the Wujiang Land Resources Bureau may seek penalties for this
violation, which includes one or more of the following: 1) levying a fine, 2)
confiscating any Company property on the land and 3) requiring the land to be
returned. The Company has not received any other administrative notifications
other than the penalty notice. The Company estimates the value of the land and
building to be $1,100,000 to $1,200,000. The Company received a letter from the
Business Development Department of Wujiang Developing District under the
Management Committee of Wujiang Developing District which stated that the
Company acted properly and that it will indemnify the Company against any
penalties assessed against it by the Wujiang Land Resources Bureau. On January
5, 2005 the Company paid the penalty which was assessed against it by
8
the Wujiang Land Resources Bureau. Prior to its payment, the Wujiang Financial
Bureau paid the Company the amount of the fine, which is consistent with the
terms of the indemnity letter. The Company anticipates the issue will be
resolved with the Wujiang Land Resources Bureau without any liability to the
Company prior to April 30, 2005.
CRITICAL ACCOUNTING POLICES
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts and reserves for inventory. Actual results could
materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing service business are recognized when the product is
shipped. 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 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.
9
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.
Impairment of Goodwill - The Company assesses the recoverability of goodwill on
an annual basis or whenever adverse events or changes in circumstances or
business climate indicate that expected future undiscounted cash flows may be
sufficient to support recorded goodwill. If impairment exists, the carry amount
of goodwill would be reduced by the estimated shortfall of discounted cash
flows.
NEW ACCOUNTING STANDARDS
Consolidation of variable interest entities - FIN 46R is an interpretation of
Accounting Research Bulletin No. 51 and revises the requirements for
consolidation by business enterprises of variable interest entities. FIN 46R
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 ending
after December 15, 2003, to variable interest entities in which an enterprise
holds a variable interest acquired before February 1, 2003. FIN 46R 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 adopted FIN 46R as
of November 1, 2003 as it relates to its former affiliate SMTU. On October 1,
2004 SMTU was liquidated, thereby becoming an operating division of the Company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in Accounting
Research Bulletin (ARB) No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage) and requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." The statement also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005 (as
of January 1, 2006 for the Company) and are to be applied prospectively. The
Company does not expect adoption of SFAS No. 151 to have a material effect on
its results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R). This statement requires that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. Compensation cost is to be
10
measured based on the estimated fair value of the equity-based compensation
awards issued as of the grant date. The related compensation expense will be
based on the estimated number of awards expected to vest and will be recognized
over the requisite service period (often the vesting period) for each grant. The
statement requires the use of assumptions and judgments about future events and
some of the inputs to the valuation models will require considerable judgment by
management. SFAS No. 123R replaces FASB Statement No. 123 (SFAS No. 123),
"Accounting for Share-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The provisions of SFAS No. 123R are
required to be applied by public companies as of the first interim or annual
reporting period that begins after June 15, 2005 (as of July 1, 2005 for the
Company). The Company intends to continue applying APB Opinion No. 25 to
equity-based compensation awards until the effective date of SFAS No. 123R. At
the effective date of SFAS No. 123R, the Company expects to use the modified
prospective application transition method without restatement of prior interim
periods in the year of adoption. This will result in the Company recognizing
compensation cost based on the requirements of SFAS No. 123R for all
equity-based compensation awards issued after July 1, 2005. For all equity-based
compensation awards that are unvested as of July 1, 2005, compensation cost will
be recognized for the unamortized portion of compensation cost not previously
included in the SFAS No. 123 pro forma footnote disclosure. The Company is
currently evaluating the impact that adoption of SFAS No. 123R may have on its
results of operations or financial position and expects that the adoption may
have a material effect on the Company's results of operations depending on the
level and form of future equity-based compensation awards issued.
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 services and products 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
Company's ability to manufacture lead-free assemblies by mid-2006; regulatory
compliance; the continued availability and sufficiency of the Company's credit
arrangements; changes in U.S., Mexican, Chinese or Taiwanese regulations
affecting the Company's business; the continued stability of the Mexico and
China's economic systems, labor and political conditions; currency fluctuations;
and the ability of the Company to manage its growth, including its recent
expansion into 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 or revise such statements in
light of new information, future events or otherwise.
11
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 (boxbuild) 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
several months, the lead-time for many components has increased. Pricing for
components and related commodities has escalated due to the increased demand and
the transition to lead free components and may continue to increase in the
future periods. The impact of these price increases could have a negative effect
on the Company's gross margins and operating results.
The Company relies on numerous third-party suppliers for components used in the
Company's production process. Certain of these components are available only
from single sources or a limited number of suppliers. In addition, a customer's
specifications may require the Company to obtain components from a single source
or a small number of suppliers. The loss of any such suppliers could have a
material impact on the Company's results of operations, and the Company may be
required to operate at a cost disadvantage compared to competitors who have
greater direct buying power from suppliers. The Company does not enter into
purchase agreements with major or single-source suppliers. The Company believes
that ad-hoc negotiations with its suppliers provides flexibility, given that the
Company's orders are based on the needs of its customers, which constantly
change.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), as well as new rules
subsequently implemented by the Securities and Exchange Commission and new
listing requirements subsequently adopted by Nasdaq in response to
Sarbanes-Oxley, have required changes in corporate governance practices,
internal control policies and audit committee practices of public companies.
These new rules, regulations, and requirements have significantly increased the
company's legal, financial compliance and administrative costs, made many other
activities more time consuming and costly and diverted the attention of senior
management. These new rules and regulations have also made it more difficult and
more expensive for the Company to obtain director and officer liability
insurance. These new rules and regulations could also make it more difficult for
us to attract and retain qualified members for our board of directors,
particularly to serve on our audit committee. In addition, if the Company
receives a qualified opinion on the adequacy of its internal control over
financial reporting, shareholders could lose confidence in the reliability of
the Company's financial statements, which could have a material adverse impact
on the value of the Company's stock.
Sales 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 rendered by the Company and the customers' demands. Consignment
orders require the Company to
12
perform manufacturing services on components and other materials supplied by a
customer, and the Company charges only for its labor, overhead and manufacturing
costs, plus a profit. In the case of turnkey orders, the Company provides, in
addition to manufacturing services, the components and other materials used in
assembly. Turnkey contracts, in general, have a higher dollar volume of sales
for each given assembly, owing to inclusion of the cost of components and other
materials in net sales and cost of goods sold. Variations in the number of
turnkey orders compared to consignment orders can lead to significant
fluctuations in the Company's revenue levels. However, the Company does not
believe that such variations are a meaningful indicator of the Company's gross
margins. Consignment orders accounted for less than 5% of the Company's revenues
for the nine month period ended January 31, 2005.
In the past, the timing and rescheduling of orders has caused the Company to
experience significant quarterly fluctuations in its revenues and earnings, and
the Company expects such fluctuations to continue.
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended January 31, 2005 to
$28,301,593 from $23,906,176 for the three month period ended January 31, 2004.
Net sales for the nine months ended January 31, 2005 increased to $81,241,451
from $75,266,852 for the same period in the prior fiscal year. Sales volume
increased in the appliance and fitness marketplace for the three and nine month
periods ended January 31, 2005 as compared to the same periods in the prior
year. The increase in sales volume in these marketplaces was partially offset by
price reduction to customers. The Company anticipates additional pricing
concessions in future periods. Sales to a specific marketplace are driven by our
customers' fluctuating forecasts and their end-market demand. Sales in the
consumer product marketplace decreased during the three and nine month period.
The decrease is primarily the result of lower sales volume to an existing
customer. The Company believes sales to this customer will cease in the fourth
quarter of fiscal 2005 due to the customer's decision to move production of its
product into a new company-owned facility in Mexico. For the nine month period
ended January 31, 2005 sales in the gaming marketplace decreased. The Company
anticipates sales in the gaming marketplace will continue to be soft for the
fourth quarter of fiscal 2005. The reduction in sales is attributed to a
softness in the end-market demand. Sales to customers vary from quarter to
quarter depending on customer order terminations, the customer's product life
cycle and product transitions. There can be no assurance that sales levels or
gross margins will remain stable in future quarters.
Gross profit in total dollars increased during the three month period ended
January 31, 2005 to $4,782,756 from $4,446,995 compared to the same period in
the prior fiscal year. Gross profit as a percentage of net sales decreased to
16.8% from 18.6% for the three month period ended January 31, 2005 as compared
to the same period in the prior year. The increase in total dollars is primarily
attributable to the increase in sales volume. The decrease as a percentage is
due to an increase in the cost of manufacturing supplies and component pricing.
Gross profit decreased in total dollars for the nine month period ended January
31, 2005 as compared to the same period in the prior fiscal year to $14,601,487
from $14,719,486. As a percentage of net sales gross profit decreased to 17.9%
from 19.5% for the nine month period ended January 31, 2005 and 2004,
respectively. The decrease in total dollars is the result of price
13
concessions. The decrease as a percent of net sales is the result of an increase
in the cost of manufacturing supplies and component pricing.
Selling and administrative expenses increased to $2,788,060 or 9.9% of net sales
for the three month period ended January 31, 2005 compared to $2,432,844 or
10.1% of net sales in the same period last year. Selling and administrative
expenses increased to $8,553,938 or 10.5% of net sales for the nine month period
ended January 31, 2005 compared to $7,461,515 or 9.9% of net sales in the same
period last year. The increase for the nine month period is primarily due to an
increase in legal, insurance and other professional fees.
Other income increased to $548,105 for the nine months ended January 31, 2005
from $60,003 in the same period in the prior year. The increase is primarily due
to a gain of $350,882 on warrants, as described in Note E of this report. The
warrants represent 153,781 of shares of common stock of Block Shield
Corporation, PLC and are recorded at their fair market value at January 31,
2005.
Interest expense for bank debt and capital lease obligations for the three month
period ended January 31, 2005 was $82,533 compared to $16,458 for the same
period in the prior year. Interest expense for the nine month period ended
January 31, 2005 increased to $202,846 from $69,044 compared to the same period
in the prior year. This change was attributable to the Company's increased
borrowings under its revolving credit facility, increased capital lease
obligations, interest for notes payable issued in connection with the
acquisition of SMTU and notes payable associated with the purchase of the
Company's corporate and manufacturing facility in Elk Grove Village, Illinois.
Net income increased to $1,437,342 for the three month period ended January 31,
2005 compared to $1,243,286 for the same period in the prior year. Basic and
dilutive earnings per share for the third fiscal quarter of 2005 were $0.38,
compared to basic and dilutive earnings per share of $0.34, for the same period
in the prior year. For the nine months ended January 31, 2005, the Company
recorded net income of $3,917,822 compared to $4,491,398 for the same period in
the prior fiscal year. Basic and dilutive earnings per share for the nine month
period ended January 31, 2005 were $1.04 and $1.02, respectively, compared to
basic and dilutive earnings per share of $1.35 and $1.28, respectively, for the
same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow provided by operating activities was $258,438 for the nine months
ended January 31, 2005 compared to $7,136,604 for the nine months ended January
31, 2004. During fiscal 2005 cash provided by operations was the result of net
income, the non-cash effect of depreciation and amortization and an increase in
income taxes payable. The Company has applied its income tax receivable to
estimated tax payments due for fiscal 2004 and part of fiscal 2005. The balance
of income taxes due resulted in an accrual for income taxes for the nine month
period ended January 31, 2005. Cash provided by operating activities was
partially offset by an increase in receivables of approximately $2,200,000 and
an increase of approximately $6,400,000 in inventories. The increase in
inventories is primarily attributable
14
to an increase in customer required safety stock, the start up of the Company's
China facility and new product programs driven by customers.
Working capital at January 31, 2005 totaled $23,659,627 compared to $24,636,237
in the same period in the prior year. At January 31, 2005 the Company had no
borrowings outstanding under the $13,000,000 revolving credit facility. The
maximum borrowing limit under the revolving credit facility is limited to the
lesser of (i) $13,000,000 or (ii) an amount equal to the sum of up to 85% of the
receivables borrowing base and the lesser of $6,500,000 or up to 50% of the
inventory borrowing base. The current facility expires in September 2005. The
Company has recently negotiated a reduction in the base margin rate charged by
the bank and extended the term of the revolving credit facility to September
2006. The Company anticipates the amendment to the revolving credit facility
will be finalized in March 2005.
The revolving credit facility is collateralized by substantially all of the
assets of the Company and contains certain financial covenants, including
specific covenants pertaining to the maintenance of minimum tangible net worth
and net income. The agreement also restricts annual lease rentals and capital
expenditures and the payment of dividends or distributions of any cash or other
property on any of its capital stock, except that common stock dividends may be
distributed by stock splits or dividends pro rata to its stockholders. At
January 31, 2005 the Company was in compliance with all financial covenants
under the credit facility.
On August 2, 2004 the Company acquired the interest of outside investors in its
affiliate SMTU and the general partner of SMTU, SMT Unlimited, Inc., thereby
bringing the Company's interest in its affiliate SMTU to approximately 80%. On
September 2, 2004 the Company acquired the remaining interests in its affiliate
SMTU from its managers. The aggregate price paid for all the interests was
$2,668,858. This aggregate price was paid with $1,338,858 in cash and $1,330,000
in notes with terms of up to 2 years. The acquisition was treated as a step
acquisition and resulted in goodwill of $719,040. On October 1, 2004 SMT
Unlimited, Inc. was merged into the Company, and SMTU was liquidated, thereby
becoming an operating division of the Company.
Prior to the Company's acquisition, SMTU was consolidated under FIN46, as such
the proforma revenue would have been the same for all periods presented assuming
the acquisition took place May 1, 2003. The unaudited proforma net earnings
would have been $3,906,086 and $4,313,074 for the nine months ended January 31,
2005 and 2004, respectively. The unaudited proforma dilutive earnings per share
would have been $1.02 and $1.22 for the nine months ended January 31, 2005 and
2004, respectively.
In fiscal 2005 the Company purchased approximately $2,300,000 in machinery and
equipment and it anticipates it will make additional machinery and equipment
purchases during fiscal 2005. The Company plans to execute three to five year
capital leases to fund such transactions, which it estimates will be
approximately $3,000,000 to $4,000,000 in the aggregate. The machinery and
equipment purchases are necessary to assist with capacity constraints. In
addition, the Company will commence its lead free manufacturing program in the
fourth quarter of fiscal 2005. Effective mid-2006 the Company's customers must
be in compliance with the European Standard: the "Restriction of Use of
Hazardous Substance"
15
directive for all of their products that ship to the European marketplace. The
Company's customers are also requesting that the Company have the lead free
manufacturing capability.
The Company anticipates its credit facility, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal 2005. 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.
Contractual Obligations and Commercial Commitments
The following summaries the Company's contractual obligations at January 31,
2005 and the effect such obligations are expected to have on its liquidity and
cash flows in future periods.
Payment Obligations
Payment Due By Period
----------------------------------------------------------------------------
Total 2005 2006-2007 2008-2009 2010 and Thereafter
---------- ---------- ---------- ---------- -------------------
Notes Payables, including
current maturities $4,621,269 $ 436,911 $1,017,246 $ 662,112 $2,505,000
Capital Leases, including
current maturities 2,104,310 677,168 956,421 470,721 0
SMTU purchase 665,000 300,000 365,000 0 0
---------- ---------- ---------- ---------- ----------
Total contractual cash
obligations $7,390,579 $1,414,079 $2,338,667 $1,132,833 $2,505,000
========== ========== ========== ========== ==========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates is due to
primarily to its short-term investments and borrowings under its revolving line
of credit. As of January 31, 2005 the Company had no short-term investments and
no borrowings under its revolving line of credit. The Company does not use
derivative financial investments. The Company's cash equivalents if any, are
invested in overnight commercial paper. The Company does not have any
significant cash flow exposure due to rate changes for its cash equivalents, as
these instruments are short-term.
16
The table below presents principal amounts and related interest rates for our
cash equivalents and our revolving credit facility as of January 31, 2005.
Carrying Fair
Value Value
-------- --------
Cash Equivalents:
Fixed rate 0 0
Average interest rate 1.9% --
Short-Term Debt:
Revolving line of credit 0 0
Average interest rate 5.1% --
Foreign Currency Exchange Risk
The Company transacts business in Taiwan, Mexico and China. Each of the
Company's location draw from a bank account in U.S. dollars and converts such
dollars to local currency as needed, so there is no long term exposure to
currency fluctuations. The Company does not employ a foreign currency hedging
program to mitigate its foreign currency exchange risks.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, including our President and Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15(d)-15(e)) as of January 31, 2005. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports filed by the Company under the Securities Exchange
Act of 1934, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Based on this evaluation, our President and Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of January 31, 2005.
(b) Changes in Internal Controls
There were no significant changes in our internal control over financial
reporting during the quarter ended January 31, 2005, that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 3, 2002, a lawsuit was filed by the liquidating trustee of Circuit
Systems, Inc. ("CSI") in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division, against Gary R. Fairhead, President and
Chief Executive Officer of the Company and a former director of CSI and other
former directors of CSI, alleging, in part, that Mr. Fairhead and the named
directors had breached their fiduciary duty to CSI and its stockholders in a
number of respects, and corporate counsel had committed malpractice. Although
the Complaint did not quantify the relief sought, the initial settlement demand
against all defendants was $12 million. On January 9, 2005, the parties to this
suit entered into a settlement agreement, which was approved by the court on
January 26, 2005 and was dismissed on February 15, 2005. The financial
settlement agreement which provides that the plaintiff will be paid $1,750,000
was satisfied, for the most part, from CSI's directors and officers liability
insurance and from legal malpractice insurance. Mr. Fairhead and the Company did
not contribute to the financial settlement. No defendant admitted to any
liability regarding the claims asserted in the complaint. The Company determined
that it has a duty under Delaware law to indemnify Mr. Fairhead for his expenses
not covered by CSI's directors and officers liability policy, which consisted of
immaterial advancements of legal costs.
ITEM 6. EXHIBITS
(a) Exhibits:
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).
18
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.
Date: March 14, 2005 By /s/ Gary R. Fairhead
------------------------------------------------
President and CEO (Principal Executive Officer)
Date: March 14, 2005 By /s/ Linda K. Blake
------------------------------------------------
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)