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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended April 30, 1998
or
[X] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from __________to_______.
Commission file number 0-23248
SIGMATRON INTERNATIONAL, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3918470
-------- ----------
(State or other Jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2201 Landmeier Rd., Elk Grove Vlge., IL 60007
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-956-8000
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.01 par value per share
--------------------------------------
Title of each class
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K ( X ).
The aggregate market value of the voting and non-voting stock held by
nonaffiliates of the registrant as of June 30, 1998 (based on the closing sale
price as reported by Nasdaq National Market as of such date) was $14,467,478.
The number of outstanding shares of the registrant's Common Stock, as of June
30, 1998, was 2,881,227.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the definitive proxy statement of SigmaTron
International, Inc., for use in connection with its annual meeting of
stockholders to be held September 18, 1998, which will be filed within 120 days
of the fiscal year ended April 30, 1998, are incorporated by reference into
Part III of this Form 10-K.
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PART I
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ITEM 1. BUSINESS
CAUTIONARY NOTE:
In addition to historical financial information, this discussion of
SigmaTron International, Inc.'s ("Company") business and other Items in this
Annual Report on Form 10-K contain forward-looking statements concerning the
Company's business or results of operations. These 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, including Nighthawk Systems, Incorporated ("NSI"); 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. These and other factors
which may affect the Company's future business and results of operations are
identified throughout this Annual Report on Form 10-K and in the prospectus
issued in connection with the Company's February 1994 initial public offering
of securities (Registration No. 33-72100), and may be detailed from time to
time in the Company's filings with the Securities and Exchange Commission.
OVERVIEW
The Company is an independent contract manufacturer of electronic
components, printed circuit board assemblies and completely assembled
(box-build) electronic products. Included among the wide range of services the
Company offers its customers are (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 approvals from governmental and other
regulatory bodies. The Company provides these services through facilities
located in North America and the Far East.
The Company provides manufacturing and assembly services ranging from the
assembly of individual components to the assembly and testing of box-build
electronic products. The Company has the ability to produce assemblies
requiring mechanical as well as electronic capabilities. The products
assembled by the Company are then incorporated into finished products sold in
various marketplaces, particularly consumer electronics, gaming, fitness,
industrial electronics, telecommunications, home appliances and automotive.
The Company operates manufacturing facilities in Elk Grove Village,
Illinois; Las Vegas, Nevada; and Acuna, Mexico. The Company maintains
materials sourcing offices in Elk Grove Village, Illinois and Taipei, Taiwan.
The Company provides warehousing services in Del Rio, Texas and Huntsville,
Alabama. In addition, the Company's 42.5% owned affiliate, SMT Unlimited L.P.
(SMTU), provides contract manufacturing services in Fremont, California.
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The Company is a Delaware corporation which was organized on November 16,
1993 and commenced business when it became the successor to all of the assets
and liabilities of SigmaTron L.P., an Illinois limited partnership, through a
reorganization on February 8, 1994. On February 9, 1994, the Company and
certain stockholders commenced an initial public offering for the sale of
1,265,000 shares of common stock.
PRODUCTS AND SERVICES
The Company provides a broad range of manufacturing-related outsourcing
solutions for its customers on both a turnkey (material purchased by the
Company) and consignment basis (material provided by the customer). These
solutions incorporate the Company's knowledge and expertise in the electronic
manufacturing services industry to provide its customers with advanced
manufacturing technologies and high quality, responsive and flexible
manufacturing services. SigmaTron's outsourcing solutions provide services
from product inception through the ultimate delivery of a finished good. Such
technologies and services include the following:
Manufacturing and Related Services. As its customers experience greater
competition and shorter product life cycles in their respective industries, the
Company has responded by expanding its prototype services. The Company also
provides quick-turnaround, turnkey prototype services from dedicated resources
located within the Company's Elk Grove Village facility and through SMTU, its
affiliate that it makes available to customers which it believes will lead to
significant orders.
Materials Procurement. The Company is primarily a turnkey manufacturer
and directly sources all, or a substantial portion, of the components necessary
for its product assemblies, rather than receiving the raw materials from its
customers on consignment. Material procurement includes the purchasing,
management, storage and delivery of raw components required for the manufacture
or assembly of a customer's product based upon the customer's orders. The
Company procures components from a select group of vendors which meet its
standards for timely delivery, high quality and cost effectiveness, or as
directed by its customers. Raw material used in the assembly and manufacture
of printed circuit boards and electronic assemblies are generally available
from several suppliers, unless restricted by the customer.
The Company believes that its ability to source and procure competitively
priced, quality components is critical to its ability to effectively compete.
In addition to obtaining materials in North America, the Company utilizes its
Taiwanese procurement office and agents to source materials from the Far East.
SigmaTron believes this office allows the Company to more effectively manage
its relationships with key suppliers in the Far East by allowing the Company to
respond more quickly to changes in market dynamics, including fluctuations in
price, availability and quality.
Assembly and Manufacturing. The Company's core business is the assembly
of printed circuit boards through the automated and manual insertion of
components onto raw printed circuit boards. The Company offers its assembly
services using both pin-through-hole ("PTH") and surface mount ("SMT")
interconnect technologies. SMT is an assembly process which allows the
placement of a higher density of components directly on both sides of a printed
circuit board. The SMT process is a more recent advancement over the mature
PTH technology, which normally permits electronic components to be attached to
only one side of a printed circuit board by inserting the component into
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holes drilled through the board. The SMT process allows original equipment
manufacturers ("OEMs") to use advanced circuitry, while at the same time
permitting the placement of a greater number of components on a printed circuit
board without having to increase the size of the board. By allowing
increasingly complex circuits to be packaged with the components in closer
proximity to each other, SMT greatly enhances circuit processing speed, and
thus, board and system performance.
The Company performs PTH assembly both manually and with automated
component insertion and soldering equipment. Although SMT is a newer and more
sophisticated interconnect technology, the Company intends to continue
providing PTH assembly services for its customers because it believes that SMT
will not entirely eliminate the need for PTH technology. The Company believes
that OEMs with products not limited by internal space constraints will continue
to favor PTH over SMT. Through SMTU SigmaTron possesses ball grid array
("BGA") technology and fine pitch SMT, which is used for more complex circuit
boards required to perform at higher speeds.
In addition to printed circuit board assemblies, the Company also
manufactures DC-to-AC inverters, coils, transformers and cable and harness
assemblies. These products are manufactured using both automated and
semi-automated preparation and insertion equipment and manual assembly
techniques.
In response to the needs of its OEM customers, the Company also offers
"box-build" services which integrate its printed circuit board and other
manufacturing and assembly technologies into higher level sub-assemblies and
end products.
Product Testing. The Company has the ability to perform both in-circuit
and functional testing of its assemblies and finished products. In-circuit
testing verifies that the correct components have been properly inserted and
that the electrical circuits are complete. Functional testing determines if a
board or system assembly is performing to customer specifications. The
Company provides X-ray laminography services through its affiliate SMTU.
Generally, the Company either designs or procures test fixtures. The Company
seeks to provide customers with highly sophisticated testing services that are
at the forefront of current test technology.
Warehousing and Distribution. In response to the needs of select
customers, the Company has the ability to provide in-house warehousing,
shipping and receiving and customer brokerage services for goods manufactured
or assembled in Mexico and for goods manufactured for a customer in Huntsville,
Alabama. The Company also has the ability to provide custom-tailored delivery
schedules to fulfill the just-in-time inventory needs of its customers.
MARKETS AND CUSTOMERS
SigmaTron's customers are in the consumer electronics, gaming, industrial
electronics, fitness, telecommunications, automotive and home appliance
industries. As of April 30, 1998, the Company had approximately 125 active
customers ranging from Fortune 500 companies to small, privately held
enterprises.
The following table shows, for the periods indicated, the percentage of
net sales to the principal end-user markets it serves.
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PERCENT OF NET SALES
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TYPICAL FISCAL FISCAL FISCAL
MARKETS OEM APPLICATION 1996 1997 1998
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Consumer Electronics Carbon monoxide detectors 37.7% 38.0% 37.9%
dart board games
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Gaming Slot machines, 21.6 21.8 22.0
lighting displays
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Industrial Electronics Blower motors, elevators 20.1 18.3 14.2
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Fitness Treadmills, exercise bikes 11.0 12.1 13.3
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Telecommunications Pagers, microphones and 5.0 5.1 5.1
modems
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Appliances Irons, toasters, ranges and
dryers 3.2 2.1 5.1
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Automotive Automobile interior lighting 1.4 2.6 2.4
- ---------------------------------------------------------------------------------
Total 100% 100% 100%
=================================================================================
For the fiscal year ended April 30, 1998, NSI and Life Fitness accounted
for 29.4% and 13.3% respectively, of the Company's net sales. In fiscal 1997
NSI, Bally Gaming and Life Fitness accounted for 29.8%, 13.5% and 10.8%,
respectively, of net sales. In addition, NSI, Bally Gaming and Life Fitness
accounted for 28.2%, 15.0% and 10.4%, respectively, of the Company's net sales
for the fiscal year ended April 30, 1996. The Company expects that these
customers as a group will continue to account for a significant percentage of
the Company's net sales, although the individual percentages may vary from
period to period.
NSI is a leading U.S. manufacturer of residential carbon monoxide
detection systems. The Company's agreement with NSI calls for the Company to
function as the exclusive contract manufacturer for all models of NSI's
proprietary carbon monoxide detectors on a turnkey basis through June 1998.
The Company has agreed that during the term of the agreement and for three
months thereafter it will not produce carbon monoxide detectors for any other
customer. Although there has been no written extension of the agreement, the
parties continue to operate under its terms. The amount of sales to NSI beyond
fiscal 1999 remains unclear and if the relationship is not continued it could
significantly impact the Company's revenues and earnings. However, the Company
expects that sales to NSI will continue to account for a significant percentage
of the
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Company's net sales in fiscal 1999. Sales to NSI are seasonal due to the
nature of the product and the Company experiences stronger sales to NSI in the
second and third fiscal quarters. The NSI market is an emerging market which
could lead to volatility in NSI's forecast having the effect of causing the
Company's revenues to fluctuate significantly on a seasonal basis.
SALES AND MARKETING
The Company markets its services through 24 independent manufacturers'
representative organizations, that currently employ approximately 75 sales
personnel in the United States and Canada. Independent manufacturers'
representative organizations receive variable commissions based on orders
received by the Company. The members of the Company's senior management are
actively involved in sales and marketing efforts. In addition, the Company
attends trade shows related to its industry and its major customer industries.
Sales volume and gross profit margins can vary considerably among
customers and products depending on the type of services rendered by the
Company. Specifically, variations in orders for turnkey services versus
consignment services and variations in the number of orders for products with
high raw material costs can lead to significant fluctuations in the Company's
operating results. Further, customers' orders can be delayed, rescheduled or
canceled at any time, which can significantly impact the operating results of
the Company. The ability to replace such delayed or lost sales in a short
period of time is not assured.
MEXICAN OPERATIONS
The Company's wholly-owned subsidiary, Standard Components de Mexico, S.A.
("Standard Components"), a Mexican corporation, is located in Acuna, Mexico, a
border town along the Rio Grande River next to Del Rio, Texas, which is 155
miles west of San Antonio. Standard Components was incorporated and commenced
operation in 1969. The Company believes that one of the key benefits to having
operations in Mexico is its access to cost effective labor resources.
Standard Components is a maquiladora, which is the status afforded a
corporation under a trade agreement between the United States of America and
Mexico. The Company believes economic events affecting the Mexican economy and
the implementation of NAFTA have not had a material effect on the Company or
its financial position.
In 1995 the Mexican Ministry of Finance and Public Credit (Hacienda)
adopted rules which require arms length pricing for transactions between
maquiladoras and their U.S. affiliated companies. The impact of these
regulations requires Standard Components to allocate costs and profits on an
arms length basis. Its operating results continue to be consolidated with the
Company's financial results. The effect of the rules had an immaterial impact
on the Company's consolidated results.
The Company provides funds for salaries, wages, overhead and capital
expenditure items as necessary to operate Standard Components. Since the
Company provides funding to Standard Components in U.S. dollars, which are
exchanged for pesos as needed, the devaluation of the peso from time to time,
without an equal or greater increase in Mexican inflation, has not had a
material
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impact on the financial results of the Company. In fiscal 1998 the Company
funded approximately $8,160,000.
COMPETITION
The electronic manufacturing services industry is highly competitive and
subject to rapid change. Furthermore, both large and small companies compete
in the industry, and many have significantly greater financial resources, more
extensive business experience and greater marketing and production capabilities
than the Company. Also, foreign companies, especially companies with
production operations in the Far East, have substantially lower costs and thus
are able to offer their services at lower prices. The significant competitive
factors in this industry include price, quality, service, timeliness,
reliability, the ability to source raw components, and manufacturing and
technological capabilities. The Company believes it can competitively provide
all of these services.
In addition, the Company may be operating at a cost disadvantage compared
to manufacturers who have greater direct buying power with component suppliers
or who have lower cost structures. Current and prospective customers
continually evaluate the merits of manufacturing products internally and will
from time to time offer manufacturing services to third parties in order to
utilize excess capacity. During downturns in the electronics industry, OEMs
may become more price sensitive.
There can be no assurance that competition from existing or potential
competitors will not have a material adverse effect on the Company's business,
financial condition, or results of operations. The introduction of lower
priced competitive products or significant price reductions by the Company's
competitors could result in price reductions that would adversely affect the
Company's business, financial condition, and results of operations, as would
the introduction of new technologies which render the Company's manufacturing
process technology less competitive or obsolete.
GOVERNMENTAL REGULATIONS
The Company's operations are subject to certain foreign, federal, state
and local regulatory requirements relating to environmental, waste management
and health and safety matters. Management believes that the Company's business
is operated in material compliance with all such regulations. The cost to the
Company of such compliance to date has not materially affected the Company's
business, financial condition or results of operations. However, there can be
no assurance that violations will not occur in the future as a result of human
error, equipment failure or other causes. The Company cannot predict the
nature, scope or effect of environmental legislation or regulatory requirements
that could be imposed or how existing or future laws or regulations will be
administered or interpreted. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could require substantial expenditures by the Company and could
adversely affect the Company's business, financial condition and results of
operations.
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BACKLOG
The Company's backlog as of April 30, 1998 was approximately $46,184,000.
Backlog consists of contracts or purchase orders with delivery dates scheduled
within the next twelve months. The Company currently expects to ship
substantially all of the April 30, 1998 backlog by the end of the 1999 fiscal
year. Backlog as of April 30, 1997 totaled $38,108,380. Variations in the
magnitude and duration of contracts and purchase orders received by the Company
and delivery requirements generally may result in substantial fluctuations in
backlog from period to period. Because customers may cancel or reschedule
deliveries, backlog may not be a meaningful indicator of future financial
results.
EMPLOYEES
The Company employed approximately 1,700 people as of April 30, 1998,
including 31 engaged in engineering, 1,554 in manufacturing and 115 in
administrative and marketing functions.
The Company has a labor contract with Production Workers Union Local No.
10, AFL-CIO, covering the Company's workers in Elk Grove Village, Illinois
which expires on November 30, 2000. The Company's Mexican subsidiary has a
labor contract with Sindicato De Trabajadores de la Industra Electronica,
Similares y Conexos del Estado de Coahuila, C.T.M. covering the Company's
workers in Acuna, Mexico which expires on January 15, 2000.
Since the time the Company commenced operations, it has not experienced
any work stoppages. The Company believes its relations with both unions and
its other employees are good.
ITEM 2. PROPERTIES
The Company, in combination with its wholly-owned subsidiary and
affiliate, has manufacturing facilities located in Elk Grove Village, Illinois,
Las Vegas, Nevada, Fremont, California and Acuna, Mexico. In addition, the
Company provides inventory management services through its Del Rio, Texas,
warehouse facilities and materials procurement services through its Taipei,
Taiwan office.
Certain information about the Company's manufacturing, warehouse and
purchasing facilities is set forth below:
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===========================================================
LOCATION SQUARE FEET SERVICES OFFERED
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Elk Grove Village, IL 61,000 Corporate
Headquarters, assembly
and testing of PTH and
SMT, box-build,
prototyping
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Acuna, Mexico 156,000 High volume assembly,
and testing of PTH and
SMT, box-build,
transformers
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Las Vegas, NV 33,360 Automatic insertion
and cable assembly
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Del Rio, TX 25,000 Warehouse, portion of
which is bonded
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Fremont, CA 24,030 High volume assembly
and testing of both
PTH and SMT and ball
grid array ("BGA")
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Taipei, Taiwan 2,900 Materials procurement,
alternative sourcing
assistance and quality
control
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Huntsville, AL * Just-in-time inventory
management and delivery
===========================================================
* There is no lease for this facility. The Company has entered into a
service agreement whereby contracted warehouse personnel provide services for
the Company and its customer.
The Company leases its executive offices and manufacturing facility in Elk
Grove Village, Illinois from Circuit Systems, Inc. ("CSI"), a significant
shareholder of the Company. The Company, through an agent, maintains the
purchasing and engineering office in Taipei, Taiwan to coordinate Far East
purchasing and design activities. In addition, the Company's affiliate, SMTU,
leases the facility in Fremont, California. The Company has guaranteed lease
payments of approximately $1.63 million for SMTU, and has been indemnified by
one of the SMTU limited partners to the extent of 50% of the lease payment
guaranty.
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings to
which it is a party or to which any of its property is subject.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of fiscal 1998.
ITEM 4.(A) EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---- --- ---------
Gary R. Fairhead 46 President and Chief Executive Officer
Gary R. Fairhead has been the President
of the Company since January 1990.
Linda K. Blake 37 Chief Financial Officer, Vice President-
Finance, Treasurer and Secretary
Linda K. Blake is the Company's Vice
President of Finance, Treasurer,
Secretary and Chief Financial Officer
and was Controller of the Company from
June 1991 to February 1994.
Nunzio A. Truppa 60 Vice President -- Domestic Operations
Nunzio A. Truppa has been Vice President
-- Domestic Operations for the Company,
or held equivalent management positions
with the Company's predecessor, since
January 1987.
Gregory A. Fairhead 42 Vice President Mexican Operations and
Assistant Secretary
Gregory A. Fairhead has been Vice
President -- Mexican Operations for the
Company since February 1990 and is
Assistant Secretary.
John P. Sheehan 37 Vice President -- Director of Materials
and Assistant Secretary
John P. Sheehan has been Vice President
--Director of Materials of the Company
since April, 1990 and is Assistant
Secretary.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol SGMA. The following table sets forth the range of quarterly
high and low bid information for the Common Stock for the periods ended April
30, 1997 and 1998.
Common Stock as Reported
by Nasdaq
Period High Low
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Fiscal 1998:
Fourth Quarter 10-7/8 7-3/4
Third Quarter 13-7/8 9-1/4
Second Quarter 17-1/2 11-5/8
First Quarter 17-1/8 11-57/64
Fiscal 1997:
Fourth Quarter 25-3/8 14
Third Quarter 23-1/8 10-3/4
Second Quarter 12-1/2 8-3/4
First Quarter 17-1/2 7-1/2
As of June 30, 1998, there were approximately 145 holders of record of
the Company's common stock, which does not include shareholders whose stock is
held through securities position listings.
The Company has not paid cash dividends on its Common Stock since
completing its February 1994 initial public offering and does not intend to pay
any dividends in the foreseeable future. So long as any indebtedness remains
unpaid under the Company's revolving loan facility, the Company is prohibited
from paying or declaring any cash or other dividends on any of its capital
stock, except stock dividends, without the written consent of the lender under
the facility.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended April 30
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1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands except per share data)
Net Sales $36,690 $45,345 $69,558 $87,216 $85,651
Income before income tax
expense 2,389 3,032 3,752 5,161 837
Net Income (1) 1,862 1,891 2,367 3,255 526
Total Assets 17,838 28,235 38,378 42,088 48,641
Long-term debt and capital
lease obligations (including
current maturities) 4,716 12,763 16,528 18,593 20,975
Pro Forma Net income per
common equivalent share
(unaudited) - basic
and assuming dilution (2) 0.59 - - - -
Net income per common and
common equivalent share for
the period from February 9,
1994 to April 30, 1994 - basic
and assuming dilution $0.04 - - - -
Net income per common share-
basic - $0.69 $0.86 $1.16 $0.18
Net income per common share-
assuming dilution - $0.69 $0.86 $1.11 $0.18
(1) Net income for the fiscal year 1994 reflects a charge of $527,000 for
income tax expense. Income tax expense includes a charge of approximately
$262,000 to recognize the initial effect of adopting Financial Accounting
Standards Board Statement No. 109 "Accounting for Income Taxes" (FAS No.
109) and has been calculated based on earnings of the Company since
February 8, 1994, the date of its reorganization from a limited
partnership to a C-Corporation. Prior to the reorganization, income was
passed through to the partners of SigmaTron L.P., who were responsible for
any federal and state income taxes due.
(2) Pro-forma net income per share was determined assuming the reorganization
from a limited partnership to a C-Corporation had occurred on May 1, 1993,
resulting in the Company being a C- Corporation for tax purposes as of
that date and to reflect the use of proceeds of the public offering to
retire debt.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY NOTE:
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements
of the Company, and the Notes thereto, appearing in this Annual Report on Form
10-K, as well as in conjunction with the cautionary note concerning
forward-looking information which appears at the beginning of Item 1.
OVERVIEW
The Company is an independent contract manufacturer of electronic
components, printed circuit board assemblies, and box-build (completely
assembled) electronic products. Included among the wide range of services the
Company offers its customers are (1) automatic and manual assembly and testing
of customer products, (2) material sourcing, procurement and control, (3)
design, manufacturing and test engineering support, (4) warehousing and
shipment services, and (5) assistance in obtaining product approvals from
governmental and other regulatory bodies. The Company provides these services
through facilities located in North America and the Far East.
Sales volume and gross profit margins can vary considerably among
customers and products depending on the type of services rendered by the
Company. Specifically, variations in orders for turnkey services versus
consignment services and variations in the number of orders for products with
high raw material costs can lead to significant fluctuations in the Company's
operating results. Further, 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.
As a manufacturing company, the Company includes all fixed manufacturing
overhead in cost of goods sold. The inclusion of fixed manufacturing overhead
in cost of goods sold magnifies the fluctuations in gross profit margin
percentages caused by fluctuations in net sales and capital expenditures.
Specifically, fluctuations in the mix of consignment and turnkey contracts
could have an effect on the cost of goods sold and the resulting gross profit
as a percentage of net sales. Consignment orders require the Company to
perform manufacturing services on components and other materials supplied by a
customer, and the Company charges only for its labor, overhead and
manufacturing costs plus a profit. In the case of turnkey orders, the Company
provides, in addition to manufacturing services, the components and other
materials used in assembly. Turnkey contracts, in general, have a higher
dollar volume of sales for each given assembly, owing to inclusion of the cost
of components and other materials in net sales and cost of goods sold.
However, turnkey contracts typically have lower gross margins due to the large
material content. Historically, more than 90% of the Company's sales have been
from turnkey orders.
In June 1995, the Company signed a three-year exclusive manufacturing
agreement with NSI relating to the production of carbon monoxide detection
systems. Sales to NSI have accounted for a significant percentage of the
Company's net sales in fiscal 1996 through 1998. Although there has been no
written extension of the agreement, the parties continue to operate under its
terms, however,
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the Company expects sales to NSI will be significant in fiscal 1999. The
amount of sales to NSI beyond fiscal 1999 remains unclear and if the
relationship is not continued it could significantly impact the Company's
revenues and earnings.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED APRIL 30, 1998 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 1997
Net sales for fiscal 1998 were $85,650,598 compared to $87,216,343 for
fiscal 1997. The 2% decrease in net sales was due to softer sales to some of
the Company's key customers. NSI accounted for approximately $25,191,000 or
29.4% of the Company's fiscal 1998 net sales compared to $25,952,000 or 29.8%
in fiscal 1997. 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. In addition, the Company's
fourth and first quarters have historically been the weakest periods and the
Company expects the first quarter of fiscal 1999 to be soft.
Gross profit decreased to $8,456,834 in fiscal 1998 from $12,639,082 in
fiscal 1997. Gross profit as a percent of net sales was 9.9% and 14.5% for
fiscal 1998 and 1997, respectively. The decrease is partly due to the
increase in the Company's overhead structure over the past 18 months and partly
due to the lower sale volume. This expansion included increased manufacturing
space, manufacturing personnel and equipment which was necessary in order to
competitively position the Company for the future. The Company's short term
objective is to increase sales to take advantage of the structure put in place,
which may lead to a stronger fiscal 1999.
Selling and administrative expenses decreased from $5,624,346 in fiscal
1998 to $5,961,184 in fiscal 1998. The decrease is due to a reduction in bonus
accruals and a decrease in commission expense related to the lower sales
volume. Selling and administrative expenses as a percent of net sales
decreased for fiscal 1998 to 6.6% from 6.8% for fiscal 1997.
Interest expense increased in fiscal 1998 to $1,898,488 from $1,836,967 in
fiscal 1997. The overall increase was primarily due to the higher outstanding
balance on the Company's line of credit due to the Companys increased working
capital requirements. Interest expense as a percent of net sales increased
from 2.1% in fiscal 1997 to 2.2% in fiscal 1998.
The Company recorded a $360,000 loss in investment and receivables for LC
in fiscal 1998. LC distributes a variety of electronic and molded plastic
components for use in the sign and lighting industries. The Company owns
approximately 12% of LC.
Income tax expense decreased to $310,962 in fiscal 1998 from $1,905,584
in fiscal 1997. The effective tax rate for fiscal 1998 and 1997 was 37.2% and
36.9%, respectively.
As a result of the foregoing, net income decreased to $525,892 in fiscal
1998 from $3,255,058 in fiscal 1997. Basic earnings per share for the year
ended April 30, 1998 was $.18 compared to $1.16 in fiscal 1997. Diluted
earnings per share for fiscal 1998 was $.18.
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FISCAL YEAR ENDED APRIL 30, 1997 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 1996
Net sales for fiscal year 1997 were $87,216,343 compared to $69,558,384
for fiscal year 1996. The 25% increase in net sales was due to sales to new
and existing customers primarily in the consumer electronics, gaming and
fitness industries. NSI accounted for approximately $25,952,000 or 29.8% of
the Company's fiscal 1997 net sales compared to $19,605,000 or 28.2% in fiscal
1996. The volatility of NSI orders may cause the Company's revenues and
earnings to fluctuate significantly on a seasonal basis.
Gross profit increased from $10,142,298 in fiscal year 1996 to
$12,639,082 in fiscal year 1997. Gross profit as a percent of net sales was
14.5% and 14.6% for fiscal 1997 and 1996, respectively.
Selling and administrative expenses increased from $4,943,478 in fiscal
year 1996 to $5,961,184 in fiscal year 1997. The increase is due to the
increase in sales commissions attributable to the increase in net sales. In
addition, insurance expense increased for general insurance requirements and
increased levels of product liability insurance. Additional customer service
and material procurement personnel were added to support the growth of the
Company. Selling and administrative expenses as a percent of net sales
decreased for the fiscal year ended April 30, 1997 to 6.8% from 7.1% for the
year ended 1996.
Interest expense increased in fiscal 1997 to $1,846,928 from $1,630,238 in
fiscal 1996. The overall increase was primarily due to the higher outstanding
balance on the Company's line of credit. Interest expense as a percent of net
sales decreased from 2.3% in fiscal 1996 to 2.1% in fiscal 1997.
Income tax expense increased from $1,385,000 in fiscal year 1996 to
$1,905,584 in fiscal year 1997. The effective tax rate for fiscal years 1997
and 1996 was 36.9%.
As a result of the foregoing, net income increased 37.5% from $2,366,822
in fiscal 1996 to $3,255,058 in fiscal 1997. Basic earnings per share for the
year ended April 30, 1997 was $1.16 compared to $ .86 in fiscal 1996. Diluted
earnings per share for fiscal 1997 was $1.11 compared to $.86 in fiscal 1996.
QUARTERLY RESULTS AND SEASONALITY
Historically, the Company's highest levels of sales are achieved in its
second and third quarters. This is due to the seasonal nature of the business
for several of the Company's customers. In particular, NSI's sales of carbon
monoxide detectors generally coincide with the heating season, and several
other customers have sales tied to the holidays. This trend has caused the
Company to experience generally stronger second and third quarters in each
fiscal year. However, regardless of seasonal fluctuations, there can be no
assurance that the Company will be profitable in any particular quarter.
The Company's results of operations have varied significantly and may
continue to fluctuate from quarter to quarter. Operating results are affected
by a number of factors, including timing of
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orders from and shipments to major customers, availability of materials and
components, the volume of orders as related to the Company's capacity, timing
of expenditures in anticipation of future sales, the gain or loss of
significant customers and variations in the demand for products in the
industries served by the Company. A significant portion of the Company's
expenses are relatively fixed in nature and planned expenditures are based in
part on anticipated orders. The inability to adjust expenditures to compensate
for a decline in net sales may magnify the adverse impact of such decline in
the Company's results of operations. The Company's customers generally require
short delivery cycles. In the absence of substantial backlog, quarterly sales
and operating results depend on the volume and timing of orders received during
the quarter which can be difficult to forecast. In addition, variations in the
size and delivery schedules of purchase orders received by the Company, as well
as changes in customers' delivery requirements or the rescheduling or
cancellations of orders and commitments, may result in substantial fluctuations
in backlog from period to period. Accordingly, the Company believes that
backlog cannot be considered a meaningful indicator of future operating
results.
LIQUIDITY AND CAPITAL RESOURCES:
In fiscal 1998 the Company financed its growth and operations through cash
flow generated from borrowings from its secured lender and cash provided by
operations and a sale/leaseback transaction. The Company had working capital
of $20,708,686 April 30, 1998 and $21,648,985 at April 30, 1997. This
represents a current ratio of 2.8 and 4.1 for the years ended April 30, 1998
and 1997, respectively.
The Company has a credit arrangement in place which is comprised of a
revolving loan facility and a term loan. Under the revolving loan facility,
the Company may borrow certain percentages of the Company's accounts receivable
and inventory, up to a maximum of $25.0 million. At April 30, 1998, based upon
those percentages, there was approximately $2,334,000 of unused credit
available under the revolving loan facility. Outstanding borrowings under the
revolving loan facility bear interest at the Company's option of either the
London Interbank Offered Rate ("LIBOR") plus 2.0% or the bank's prime rate of
interest. The revolving loan facility is collateralized under a loan and
security agreement by substantially all of the domestically located assets of
the Company. The agreement contains certain financial covenants pertaining to
the maintenance of tangible net worth and net income. The revolving loan
facility matures on September 30, 2000. The maximum amount which could be
borrowed under the term loan was $111,108 which was the outstanding balance at
April 30, 1998. The amount outstanding under the term loan is collateralized
by some of the Company's machinery and equipment located in the United States
and is payable in 60 monthly installments of approximately $13,890 plus accrued
interest due December 1998. The outstanding principal under the term loan
bears interest at the bank's prime rate of interest.
To the extent that the Company provides funds for salaries, wages,
overhead and capital expenditure items necessary to operate its Mexican
operations, the amount of funds available for use in the Company's domestic
operations may be depleted. The funds, which ordinarily derive from the
Company's cash from operations and borrowings under its revolving credit
facility, is approximately $8,160,000 for a typical 12 month period. The
Company provides funding in U.S. dollars, which are exchanged for pesos as
needed.
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The Company is a 42.5% limited partner in SMTU, a California limited
partnership, based in Fremont, California. SMTU has negative working capital
of approximately $2,557,000 at April 30, 1998, and an accumulated deficit of
approximately $1,795,000. From the formation of SMTU in September 1994 until
January 1995, SMTU had no sales. Since fiscal 1995, sales have increased so
that SMTU was achieving operating income for the year ended April 30, 1998 .
While the management of SMTU expects sales to increase further in 1999 and also
expects these sales will lead to overall profitability, it is possible that
management's efforts in this regard will not be successful. In January 1998,
the Company entered into a guaranty agreement with SMTU's leader to guaranty
the obligation of SMTU under its revolving line of credit to a maximum of
$500,000 plus interest and related costs associated with the enforcement of the
guaranty. The Company has been indemnified by one of the limited partners for
50% of the obligation under this guaranty. The Company's investment and
advances to and receivables from SMTU totaled approximately $4,169,000 at
April 30, 1998, and has been classified as long -term assets in the Company's
April 30, 1998 balance sheet. SMTU was eleven months delinquent in their
equipment lease payments to the Company and therefore, due to the uncertainty
surrounding the timing of collection of these future minimum rental, the
Company has classified these equipment lease receivables as long-term at
April 30, 1998. At April 30, 1998, SMTU was in violation of various covenants
under its revolving line of credit. SMTU's management expects to be able to
renegotiate these covenants to prevent noncompliance and to obtain waivers for
all covenants violated in fiscal 1998.
On August 1, 1995 the Company entered into a limited partnership agreement
forming Lighting Components L.P. ("LC"). The Company owns approximately 12% of
LC , which distributes a variety of electronic and molded plastic components
for use in the sign and lighting industries. At April 30, 1998 the Company had
invested $280,000 in the venture. The initial investment, subordinated
debentures, promissory notes, and accrued interest totaling approximately
$335,000 are included in other long-term assets in the consolidated balance
sheet as of April 30, 1998. In addition, the Company also has miscellaneous
and trade receivables recorded in the consolidated balance sheet at April 30,
1998 from LC totaling approximately $491,000.
The Company's receivables from LC's are secured by a security interest in
substantially all of LC's assets. At April 30, 1998, the assets recorded in
the Company's balance sheet were written down by approximately $360,000 to net
realizable value leaving approximately $466,000 of assets in the consolidated
balance sheet at April 30, 1998.
The Company has formed a committee of Executive Officers and others to
examine Year 2000 compliance issues relating to the Company, and to plan for
implementation of changes appropriate to insure compliance in a timely manner.
The Company believes that its compliance with Year 2000 issues will not have
material impact on its business, operations or financial condition.
The impact of inflation for the past three fiscal years has been minimal.
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ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The response to this item is included in Item 14(a) of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's fiscal years
ended April 30, 1998 and 1997.
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement, filed with the
Commission not later than 120 days after the close of the Company's fiscal year
ended April 30, 1998.
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PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2)
The financial statements, including required supporting schedule, are
listed in the index to Consolidated Financial Statements and Financial Schedule
filed as part of the Form 10-K on Page F-1.
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INDEX TO EXHIBITS
(a)(3)
3.1 Certificate of Incorporation of the Company, incorporated herein by
reference to Exhibit 3.1 to Registration Statement on Form S-1, File No.
33-72100 dated February 9, 1994.
3.2 By-laws of the Company, incorporated herein by reference to Exhibit
3.2 to Registration Statement on Form S-1, File No. 33-72100 dated
February 9, 1994.
10.1 Lease Agreement dated as of February 13, 1990 between the Company
and CSI and amendments and addenda thereto - Filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 Reg. 33-72100 and hereby
incorporated by reference.
*
10.2 401(K) Retirement Savings Plan of the Company - Filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1 Reg. 33-72100 and hereby
incorporated by reference.
*
10.3 Form of 1993 Stock Option Plan - Filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1 Reg. 33-72100 and hereby incorporated
by reference.
*
10.4 Form of Incentive Stock Option Agreement for the Company's 1993
Stock Option Plan - Filed as Exhibit 10.5 to the Company's Registration
Statement on Form S- 1 Reg. 33-72100 and hereby incorporated by reference.
*
10.5 Form of Non-Statutory Stock Option Agreement for the Company's 1993 stock
Option Plan - Filed as Exhibit 10.6 to the Company's Registration
Statement on Form S-1 Reg. 33-72100 and hereby incorporated by reference.
*
10.6 1994 Outside Directors Stock Option Plan - Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 Reg. 33-72100 and hereby
incorporated by reference.
10.7 The Company's 1997 Directors' Stock Option Plan - filed as Exhibit
A to the Company's 1997 Proxy Statement filed on August 18, 1997 and
hereby incorporated by reference.
10.8 Form of Director's Stock Option Agreement for the Company's 1997
Directors' Stock Option Plan and hereby incorporated by reference.
10.9 Organization Agreement between the Company and other Partners of SMT
Unlimited L.P. dated September 15, 1994 - Filed as Exhibit 10.23 to the
Company's Form 10-K for the fiscal year ended April 30, 1995 and hereby
incorporated by reference.
10.10 Agreement between SigmaTron International, Inc. and Nighthawk Systems,
Incorporated dated July 9, 1995 - Filed as Exhibit 10.33 to the Company's
Form
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10-Q for the quarter ended July 31, 1995 and hereby incorporated by
reference.
10.11 Putnam Flexible 401(K) and Profit Sharing Plan Agreement #001 dated
March 22, 1996 between SigmaTron International, Inc. and Putnam Defined
Contribution Plans - Filed as Exhibit 10.35 to the Company's Form 10-Q
for the quarter ended July 31, 1996 and hereby incorporated by reference.
10.12 Amended and Restated Agreement between SigmaTron International, Inc.
and Nighthawk Systems, Incorporated dated November 15, 1996 - filed
as Exhibit 10.41 to the Company's Form 10-Q for the quarter ended January
31, 1997 and hereby incorporated by reference.
10.13 Lease Agreement between SigmaTron International, Inc. and Industrias
Irvin DeMexico S.A. dated January 15, 1997 and filed as Exhibit 10.42
to the Company's Form 10-Q for the quarter ended January 31, 1997 and
hereby incorporated by reference.
10.14 Lease Agreement between SigmaTron International, Inc. and G E
Capital dated July 14, 1997 and hereby incorporated by reference.
10.15 Lease Agreement # 97-054 between SigmaTron International, Inc. and
International Financial Services dated June 6, 1997 and hereby
incorporated by reference.
10.16 Lease Agreement # 97-087 between SigmaTron International, Inc. and
International Financial Services dated June 26, 1997 and hereby
incorporated by reference.
10.17 Lease Agreement # 97-097 between SigmaTron International, Inc. and
International Financial Services dated August 11, 1997 and hereby
incorporated by reference.
10.18 Lease Agreement # 97-185 between SigmaTron International, Inc. and
International Financial Services dated December 22, 1997 and hereby
incorporated by reference.
10.19 Lease Agreement # E002 between SigmaTron International, Inc. and G
E Capital dated December 31, 1997 and hereby
incorporated by reference.
10.20 Guaranty and Surety Agreement between SigmaTron International,
Inc. and HSBC Business Loans Inc. dated January 31, 1998 and hereby
incorporated by reference.
10.21 Lease Agreement # 98-10 between SigmaTron International, Inc. and
International Financial Services dated February 2, 1998.
22.1 Subsidiaries of the Registrant - Filed as Exhibit 22.1 of the Company's
Registration Statement on Form S-1 Reg. 33-72100 and hereby incorporated
by reference.
23.1 Consent of Ernst & Young LLP.
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27.1 Financial Data Schedule (EDGAR only)
* Indicates management contract or compensatory plan.
(b) No reports on Form 8-K were filed during the 1998 fiscal year.
(c) Exhibits
The Company hereby files as exhibits to this Report the exhibits
listed in Item 14 (a) (3) above, which are attached hereto.
(d) Financial Statements Schedules
The Company hereby files a schedule to this Report the financial
schedule in Item 14, which are attached hereto.
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Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Gary R. Fairhead
---------------------------
Gary R. Fairhead, President
and Chief Executive Officer
Dated: July 22, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities, and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Franklin D. Sove Chairman of the Board of Directors July 22, 1998
- --------------------
Franklin D. Sove
/s/ Gary R. Fairhead President and Chief Executive Officer July 22, 1998
- --------------------
Gary R. Fairhead
/s/ Linda K. Blake Chief Financial Officer, Secretary and July 22, 1998
- ------------------ Treasurer (Principal Financial Officer and
Linda K. Blake Principal Accounting Officer)
/s/ D.S. Patel Director July 22, 1998
- --------------
D.S. Patel
/s/ John P. Chen Director July 22, 1998
- ----------------
John P. Chen
/s/ Dilip S. Vyas Director July 22, 1998
- -----------------
Dilip S. Vyas
/s/ William C. Mitchell Director July 22, 1998
- -----------------------
William C. Mitchell
/s/ Thomas W. Rieck Director July 22, 1998
- -------------------
Thomas W. Rieck
/s/ Steven Rothstein Director July 22, 1998
- --------------------
Steven Rothstein
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