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 October 31, 2007
Commission File Number 0-23248
SigmaTron International, Inc.
(Exact Name of Registrant, as Specified in its Charter)
Delaware 36-3918470
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2201 Landmeier Road, Elk Grove Village, Illinois 60007
(Address of Principal Executive Offices) (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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated [X].
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
On December 12, 2007, there were 3,822,556 shares of the Registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
Page No.
--------
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets - October 31, 2007 (Unaudited)
and April 30, 2007 3
Consolidated Statements of Operations -
Three and Six Months Ended October 31, 2007 and 2006 4
Consolidated Statements of Cash Flows -
Six Months Ended October 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits 19
SIGMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
October 31,
2007 April 30,
(Unaudited) 2007
------------ ------------
CURRENT ASSETS:
Cash $ 3,160,161 $ 2,769,653
Accounts receivable, less allowance for doubtful
accounts of $194,800 at October 31, 2007
and $150,000 at April 30, 2007 24,983,368 20,279,874
Inventories, net 41,717,856 40,849,791
Refundable income taxes 26,179 --
Prepaid and other assets 859,398 1,289,207
Deferred income taxes 1,256,872 1,251,241
Other receivables 244,459 224,189
------------ ------------
Total current assets 72,248,293 66,663,956
Property, machinery and equipment, net 30,232,341 30,971,107
Other assets 982,475 1,006,126
Intangible assets, net of amortization $1,577,925 1,192,075 1,461,772
and $1,308,228
Goodwill 9,298,945 9,298,945
------------ ------------
Total assets $113,954,129 $109,401,906
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Trade accounts payable $ 18,066,396 $ 15,473,660
Accrued expenses 2,587,402 2,613,636
Accrued wages 1,920,303 2,241,287
Income taxes payable -- 243,596
Notes payable - bank 1,000,000 1,000,000
Notes payable - building 540,455 528,092
Capital lease obligations 1,756,577 1,690,437
------------ ------------
Total current liabilities 25,871,133 23,790,708
Notes payable - banks 29,071,381 27,219,015
Notes payable- building, less current portion 2,715,000 2,988,372
Capital lease obligations, less current portion 2,230,313 3,125,297
Deferred income taxes 2,691,393 2,537,493
------------ ------------
Total long-term liabilities 36,708,087 35,870,177
------------ ------------
Total liabilities 62,579,220 59,660,885
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 3,822,556 and 3,794,956 shares issued and 38,226 37,950
outstanding at October 31, 2007 and April 30, 2007
Capital in excess of par value 19,582,357 19,315,104
Retained earnings 31,754,326 30,387,967
------------ ------------
Total stockholders' equity 51,374,909 49,741,021
------------ ------------
Total liabilities and stockholders' equity $113,954,129 $109,401,906
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
3
SIGMATRON INTERNATIONAL, INC.
Consolidated Statements Of Operations
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
2007 2006 2007 2006
------------ ------------ ----------- -----------
Net sales $42,815,107 $ 44,858,662 $82,658,920 $ 81,818,527
Cost of products sold 38,356,972 40,002,612 72,984,124 73,103,828
----------- ------------ ----------- ------------
Gross profit 4,458,135 4,856,050 9,674,796 8,714,699
Selling and administrative expenses 2,677,805 3,098,733 5,895,175 6,116,686
----------- ------------ ----------- ------------
Operating income 1,780,330 1,757,317 3,779,621 2,598,013
Other expense (income) -net 1,887 (97,449) 12,024 (148,784)
Interest expense 708,429 651,095 1,421,487 1,162,040
----------- ------------ ----------- ------------
Income from operations before income tax expense 1,070,014 1,203,671 2,346,110 1,584,757
Income tax expense 376,740 495,660 825,852 618,076
----------- ------------ ----------- ------------
Net income $ 693,274 $ 708,011 $ 1,520,258 $ 966,681
=========== ============ =========== ============
Earnings per share - basic $ 0.18 $ 0.19 $ 0.40 $ 0.25
=========== ============ =========== ============
Earnings per share - diluted $ 0.18 $ 0.18 $ 0.39 $ 0.25
=========== ============ =========== ============
Weighted average shares of common stock outstanding
Basic 3,807,492 3,787,251 3,801,224 3,791,098
=========== ============ =========== ============
Weighted average shares of common stock outstanding
Diluted 3,962,531 3,872,654 3,927,979 3,877,692
=========== ============ =========== ============
The accompanying notes to financial statements are an integral part of these
statements.
4
SigmaTron International, Inc.
Consolidated Statements of Cash Flows
Six Six
Months Ended Months Ended
October 31, October 31,
2007 2006
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,520,258 $ 966,681
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation 1,984,197 1,972,547
Stock-based compensation 14,438 20,042
Provision for doubtful accounts 44,800 --
Provision for inventory obsolescence (111,910) --
Deferred income taxes (5,631) (7,816)
Amortization of intangibles 269,697 383,490
Changes in operating assets and liabilities, net of acquisition
Accounts receivable (4,748,293) (4,967,712)
Inventories (756,155) (10,054,449)
Prepaid expenses and other assets 407,011 906,999
Trade accounts payable 2,592,736 7,039,617
Accrued expenses and wages (347,218) 519,741
Income taxes payable (243,596) (568,864)
----------- ------------
Net cash provided by (used in) operating activities 620,334 (3,789,724)
INVESTING ACTIVITIES:
Purchases of machinery and equipment (1,245,431) (2,284,795)
----------- ------------
Net cash used in investing activities (1,245,431) (2,284,795)
FINANCING ACTIVITIES:
Proceeds from exercise of options 253,092 17,600
Payments under capital lease obligations (828,844) (763,483)
Proceeds under term loan -- 1,250,000
Payments under term loan (500,000) (250,000)
Proceeds under lines of credit 2,352,366 5,466,318
Payments under building notes payable (261,009) (249,480)
----------- ------------
Net cash provided by financing activities 1,015,605 5,470,955
CHANGE IN CASH 390,508 (603,564)
Cash at beginning of period 2,769,653 3,269,925
----------- ------------
CASH AT END OF PERIOD $ 3,160,161 $ 2,666,361
=========== ============
Supplementary disclosures of cash flow information
Cash paid for interest $ 1,708,079 $ 830,228
Cash paid for income taxes, net of (refunds) 1,006,785 1,054,045
The accompanying notes to financial statements are an integral part of these
statements.
5
SigmaTron International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 2007
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SigmaTron
International, Inc. ("SigmaTron"), wholly-owned subsidiaries Standard Components
de Mexico S.A., and Ablemex, S.A. de C.V., which was acquired in July 2005, and
its wholly-owned foreign enterprise Wujiang SigmaTron Electronics Co. Ltd.
("SigmaTron China"), and procurement branch SigmaTron Taiwan (collectively, the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended October 31, 2007,
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2008. 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, 2007.
NOTE B - INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
2007 2007
----------- -----------
Finished products $19,323,499 $10,359,223
Work-in-process 3,207,693 3,002,970
Raw materials 19,186,664 27,487,598
----------- -----------
$41,717,856 $40,849,791
=========== ===========
NOTE C - STOCK INCENTIVE PLANS
The Company adopted Financial Accounting Standards Board, Share-Based Payment
("SFAS 123 (R)") Accounting for Stock Based Compensation on May 1, 2006, and
implemented the new standard utilizing the modified prospective application
transition method. SFAS 123 (R) requires the Company to measure the cost of
employee services received in exchange for an equity award based on the grant
date fair value. Options for which the requisite service requirement has not
been rendered and that were outstanding as of May 1, 2006 are valued in
accordance with SFAS 123 "Accounting for Stock Based Compensation" and
compensation expense will be recognized over the remaining service period. Stock
based compensation expense for all stock-based awards granted subsequent to May
1, 2006 was based on the grant date fair value estimated in accordance with the
provisions of SFAS No.
6
123 (R). In September 2007 the Company granted 2,500 options, and the per share
value of the options granted was $8.12. In the second quarter of fiscal 2008,
the Company recognized approximately $10,100 in stock option expense for options
that vested during the period and a tax benefit of approximately $3,900. The
Company recognized approximately $14,500 in stock compensation expense
associated with the grants and a tax benefit of approximately $5,600 for the six
months ended October 31, 2007.
The Company did not grant any stock options in the second quarter ending October
31, 2006. The Company recognized approximately $20,000 in stock compensation
expense and a tax benefit of approximately $7,800 for the six months ended
October 31, 2006.
Under the Company's stock option plans, options to acquire shares of common
stock have been made available for grant to certain employees and directors.
Each option granted has an exercise price of not less than 100% of the market
value of the common stock on the date of grant. The contractual life of each
option is generally 10 years. The vesting of the grants varies according to the
individual options granted.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Six Months Ended Six Months Ended
October 31, 2007 October 31, 2006
---------------- ----------------
Expected dividend yield 0% 0%
Expected stock price volatility .750 .750
Average risk-free interest rate 3.91% 4.98%
Weighted-average expected life of options 6.5 years 6.5 years
Option-valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing method does not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options. The Company
used the U.S. Treasury yield in effect at the time of the option grant to
calculate the risk-free interest rate. The weighted-average expected life of
options was calculated using the simplified method. The Company granted 2,500
stock options in the second quarter ending October 31, 2007.
The table below summarizes option activity from the beginning of fiscal year
2008 through October 31, 2007:
Number of
Weighted- options
average exercisable
Number of exercise at end
options price of period
--------- --------- -----------
Outstanding at April 30, 2007 531,307 8.00 502,701
Options forfeited (1,000) 9.17
Options granted 2,500 11.56
Options exercised (27,600) 9.17
-------
Outstanding at October 31, 2007 505,207 478,964
=======
7
The following tables set forth information with respect to stock options
outstanding and stock options exercisable at October 31, 2007.
Options outstanding
----------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices October 31, 2007 contractual life exercise price
------------------------ ---------------- ---------------- --------------
$2.20 - 5.63 103,515 4.10 years $2.51
9.17 - 12.25 401,692 7.63 years 9.36
-------
505,207
=======
Options exercisable
---------------------------------
Number Weighted-
exercisable at average
Range of exercise prices October 31, 2007 exercise price
------------------------ ---------------- --------------
$2.20 - 5.63 103,515 $2.51
9.17 - 12.25 375,449 9.35
-------
478,964
=======
The following table summarizes the activity of the non-vested stock options from
the beginning of fiscal year 2008 through October 31, 2007.
Weighted-
average
fair value at
Options grant date
------- -------------
Non-vested at April 30, 2007 23,354 9.37
Forfeited (1,000) 9.17
Vested (7,270) 9.17
------
Non-vested at July 31, 2007 15,084
======
Granted 2,500 11.56
Vested (625) 11.56
------
Non-vested at October 31, 2007 16,959 9.71
======
8
The aggregate intrinsic value is calculated as the difference between the market
price of the Company's common stock as of October 31, 2007 and the exercise
price of the underlying options. There were 27,600 and 8,000 options exercised
during the second quarter ending October 31, 2007 and 2006, respectively. The
aggregate intrinsic value of options outstanding was $1,854,061 and $886,440 for
the second quarter ending October 31, 2007 and 2006, respectively.
As of October 31, 2007, there was approximately $78,800 of unrecognized
compensation cost related to the Company's stock option plans. Compensation cost
of $63,500 is being amortized over a three year vesting period using a
straight-line basis, and compensation cost of $15,300 is being amortized over a
four year vesting period using a straight-line basis.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
------------------------- -------------------------
October 31, October 31, October 31, October 31,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net income $ 693,274 $ 708,011 $1,520,258 $ 966,681
========== ========== ========== ==========
Weighted-average shares
Basic 3,807,492 3,787,251 3,801,224 3,791,098
Effect of dilutive stock options 155,039 85,403 126,755 86,594
---------- ---------- ---------- ----------
Diluted 3,962,531 3,872,654 3,927,979 3,877,692
========== ========== ========== ==========
Basic earnings per share $ 0.18 $ 0.19 $ 0.40 $ 0.25
Diluted earnings per share $ 0.18 $ 0.18 $ 0.39 $ 0.25
Options to purchase 505,207 and 525,307 shares of common stock were outstanding
at October 31, 2007 and 2006, respectively.
NOTE D - FIN 48 (INCOME TAXES)
The Company adopted the provisions of FIN 48, on May 1, 2007. As a result of
this adoption, the Company recognized an increase to its unrecognized tax
positions of $153,900, which was recorded as a cumulative effect adjustment to
retained earnings. As a result of implementing FIN 48, the Company had $197,978
of unrecognized tax benefits, of which $197,978, if recognized, would affect the
Company's effective tax rate.
Upon adoption of FIN 48, the Company elected a new accounting policy to classify
interest and penalties related to unrecognized tax benefits as a component of
income tax expense. Interest was computed on the difference between the tax
position recognized in accordance with FIN 48 and the amount previously taken or
expected to be taken in the Company's tax returns. As of the adoption date, the
Company has $25,690 of accrued interest expense, net of taxes related to
unrecognized tax benefits. Penalties, if incurred, would be accounted for as a
component of tax expense.
No statutes have been extended on any of the Company's federal income tax
filings. The statute of limitations on the Company's fiscal year 2004, 2005 and
2006 federal income tax returns will expire on January 15, 2008, 2009 and 2010,
respectively. The IRS concluded an examination of the
9
Company's fiscal 2005 federal income tax returns during the fourth quarter of
2007. This examination resulted in no changes to the previously reported tax
liability.
The Company's state income tax returns for the fiscal years 2003 through 2006
remain subject to examination by various state authorities with the latest
closing period on November 15, 2011. The Company recently concluded an
examination with Texas for the fiscal 2003-2005 tax years. This examination
resulted in no changes to the previously reported tax liability. The Company is
currently not under examination by any state authority for income tax purposes
and no statutes for state income tax filings have been extended.
The Company's foreign subsidiary, Wujiang SigmaTron Electronics Co., Ltd filed
income tax returns for the 2005 and 2006 tax years, which remain subject to
examination by China. The subsidiary is currently not under examination and no
statutes have been extended.
The Company's foreign subsidiary, Standard Components de Mexico S.A., filed
income tax returns for the 2002 through 2006 tax years, which remain subject to
examination by Mexico. Standard Components de Mexico S.A. is currently not under
examination and no statutes have been extended.
Additionally, the Company's foreign subsidiary, AbleMex, S.A. de C.V. filed
income tax returns for the 2002 through 2006 tax years, which remain subject to
examination by Mexico. AbleMex S.A. de C.V. is currently not under examination
and no statutes have been extended.
CRITICAL ACCOUNTING POLICIES:
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made in preparing the consolidated
financial statements include depreciation and amortization periods, the
allowance for doubtful accounts, reserves for inventory and valuation of
goodwill. Actual results could materially differ from these estimates.
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing services business are recognized when the product is
shipped to the customer. In general, it is the Company's policy to recognize
revenue and related costs when the order has been shipped from our facilities,
which is also the same point that title passes under the terms of the purchase
order except for consignment inventory. Consignment inventory is shipped from
the Company to an independent warehouse for storage or shipped directly to the
customer and stored in a segregated part of the customer's own facility. Upon
the customer's request for inventory, the consignment inventory is shipped to
the customer if the inventory was stored offsite or transferred from the
segregated part of the customer's facility for consumption, or use, by the
customer. The Company recognizes revenue upon such transfer. The Company does
not earn a fee for storing the consignment inventory. The Company generally
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 minimis 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.
10
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. The Company establishes inventory
reserves for valuation, shrinkage, and excess and obsolete inventory. The
Company records provisions for inventory shrinkage based on historical
experience to account for unmeasured usage or loss. Actual results differing
from these estimates could significantly affect the Company's inventories and
cost of products sold. The Company records provisions for excess and obsolete
inventories for the difference between the cost of inventory and its estimated
realizable value based on assumptions about future product demand and market
conditions. Actual product demand or market conditions could be different than
that projected by management.
Impairment of Long-Lived Assets - The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An asset is considered
impaired if its carrying amount exceeds the future net cash flow the asset is
expected to generate. If such asset is considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
asset, if any, exceeds its fair market value. The Company has adopted SFAS No.
144, which establishes a single accounting model for the impairment or disposal
of long-lived assets, including discontinued operations.
Goodwill and Other Intangibles - The Company adopted on June 1, 2001, SFAS No.
141 "Business Combinations". Under SFAS No. 141, a purchaser must allocate the
total consideration paid in a business combination to the acquired tangible and
intangible assets based on their fair value. The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. Goodwill
represents the purchase price in excess of the fair value of assets acquired in
business combinations. Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets", requires the Company to assess
goodwill for impairment at least annually in the absence of an indicator of
possible impairment and immediately upon an indicator of possible impairment.
During the fourth quarter of fiscal 2007, the Company completed its annual
assessment of impairment regarding the goodwill recorded. The Company calculates
fair value of the reporting unit utilizing a combination of a discounted cash
flow approach and certain market approaches which considered both the Company's
market capitalization and trading multiples of comparable companies. The
calculations of fair value of the reporting unit involve significant judgment
and different underlying assumptions could result in different calculated fair
values. The goodwill impairment analysis indicated there was no goodwill
impairment for the year ended April 30, 2007 as the fair value of the reporting
unit exceeded the carrying value of the reporting unity by approximately 1%.
However, in the event the Company does not achieve projected performance or
there is a decline in the market price of the Company's stock, we may be
required to record an impairment charge for goodwill in the future, which charge
would reduce net income and earnings per share.
NEW ACCOUNTING STANDARDS:
In February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, "Accounting for Certain Hybrid Instruments" (SFAS 155). FASB 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financials instruments acquired or issued after
the beginning of the entity's first fiscal year that begins after September 15,
2006. The adoption of SFAS 155 did not have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes" to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance and
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48
11
is effective for fiscal years beginning after December 15, 2006. The Company
adopted FIN 48 as of May 1, 2007, as required. During the first quarter ended
July 31, 2007, the Company recorded a cumulative effect adjustment of $153,900
to retained earnings as a result of the impact of FIN 48.
In September 2006, FASB issued SFAS No. 157 (SFAS 157), "Fair Value
Measurements". SFAS 157 establishes a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently assessing the impact SFAS 157 may have on its
financial statements.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Options for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS 159 permits
entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the
impact of SFAS 159 may have on financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical financial information, this discussion of the business
of SigmaTron International, Inc., its wholly-owned subsidiaries Standard
Components de Mexico S.A., and AbleMex, S.A. de C.V., and its wholly-owned
foreign enterprise Wujiang SigmaTron Electronics Co., Ltd. ("SigmaTron China"),
and its procurement branch SigmaTron Taiwan (collectively the "Company") and
other Items in this Report on Form 10-Q contain forward-looking statements
concerning the Company's business or results of operations. Words such as
"continue," "anticipate," "will," "expects," "believe," "plans," and similar
expressions identify forward-looking statements. These forward-looking
statements are based on the current expectations of SigmaTron (including its
subsidiaries). Because these forward-looking statements involve risks and
uncertainties, the Company's plans, actions and actual results could differ
materially. Such statements should be evaluated in the context of the risks and
uncertainties inherent in the Company's business including our continued
dependence on certain significant customers; the continued market acceptance of
products and services offered by the Company and its customers; pricing
pressures from our customers, suppliers and the market; the activities of
competitors, some of which may have greater financial or other resources than
the Company; the variability of our operating results; the results of goodwill
impairment testing; the variability of our customers' requirements; the
availability and cost of necessary components and materials; the ability of the
Company and our customers to keep current with technological changes within our
industries; regulatory compliance; the continued availability and sufficiency of
our credit arrangements; changes in U.S., Mexican, Chinese or Taiwanese
regulations affecting the Company's business; the continued stability of the
U.S., Mexican, Chinese and Taiwanese economic systems, labor and political
conditions; and the ability of the Company to manage its growth, including its
expansion into China. These and other factors which may affect the Company's
future business and results of operations are identified throughout the
Company's Annual Report on Form 10-K and risk factors and may be detailed from
time to time in the Company's filings with the Securities and Exchange
Commission. These statements speak as of the date of this report and the Company
undertakes no obligation to update such statements in light of future events or
otherwise.
12
OVERVIEW:
The Company operates in one business segment as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (box-build) electronic products. In
connection with the production of assembled products, the Company also provides
services to its customers, including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in the United States,
Mexico, China and Taiwan.
Pricing for some components and related commodities has escalated due to the
increased demand for European Union's Restriction of Hazardous Substances
Directive, RoHS 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.
Sarbanes-Oxley, as well as rules subsequently implemented by the Securities and
Exchange Commission and listing requirements subsequently adopted by Nasdaq in
response to Sarbanes-Oxley, have required changes in corporate governance
practices, internal control policies and audit committee practices of public
companies. These rules, regulations, and requirements have increased the
Company's legal expenses, financial compliance and administrative costs, made
many other activities more time consuming and costly and diverted the attention
of senior management. These rules and regulations could also make it more
difficult for us to attract and retain qualified members for our board of
directors, particularly to serve on our audit committee. In addition, if the
Company were to receive a qualified opinion on the adequacy of its internal
control over financial reporting, shareholders could lose confidence in the
reliability of the Company's financial statements, which could have a material
adverse impact on the value of the Company's stock.
Sales can be a misleading indicator of the Company's financial performance.
Sales levels can vary considerably among customers and products depending on the
type of services (consignment and turnkey) rendered by the Company and the
demand by customers. Consignment orders require the Company to perform
manufacturing services on components and other materials supplied by a customer,
and the Company charges only for its labor, overhead and manufacturing costs,
plus a profit. In the case of turnkey orders, the Company provides, in addition
to manufacturing services, the components and other materials used in assembly.
Turnkey contracts, in general, have a higher dollar volume of sales for each
given assembly, owing to inclusion of the cost of components and other materials
in net sales and cost of goods sold. Variations in the number of turnkey orders
compared to consignment orders can lead to significant fluctuations in the
Company's revenue levels. However, the Company does not believe that such
variations are a meaningful indicator of the Company's gross
13
margins. Consignment orders accounted for less than 5% of the Company's revenues
for the six months ended October 31, 2007.
In the past, the timing and rescheduling of orders have caused the Company to
experience significant quarterly fluctuations in its revenues and earnings, and
the Company expects such fluctuations to continue.
RESULTS OF OPERATIONS:
Net Sales
Net sales decreased for the three month period ended October 31, 2007 to
$42,815,107 from $44,858,662 for the three month period ended October 31, 2006.
Net sales for the six months ended October 31, 2007 increased to $82,658,920
from $81,818,527 for the same period in the prior fiscal year. Sales volume
decreased for the three and six month periods ended October 31, 2007 as compared
to the same period in the prior year in the gaming, consumer electronics, and
semiconductor marketplaces. Sales volume increased for the six month period
ending October 31, 2007 as compared to the same period in the prior year in the
fitness, industrial electronics and life sciences marketplaces. The overall
decrease in revenue for the three month period ended October 31, 2007 is a
result of our customers' demand for product based on their forecast and a slower
than anticipated startup of several new programs for certain customers.
Gross Profit
Gross profit decreased during the three month period ended October 31, 2007 to
$4,458,135 or 10.4% of net sales, compared to $4,856,050 or 10.8% of net sales
for the same period in the prior fiscal year. Gross profit increased for the six
month period ended October 31, 2007 to $9,674,796 or 11.7% of net sales,
compared to $8,714,699 or 10.7% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross margin for the three month
period is due to pricing pressures within the EMS industry and an increase in
the cost of manufacturing supplies. The gross profit increased for the six month
period ended October 31, 2007 due to net sales increasing and the mix of product
shipped to customers. There can be no assurance that gross margins will not
decrease in future quarters. Pricing pressures continue at all locations.
Selling and Administrative Expenses
Selling and administrative expenses decreased to $2,677,805 or 6.3% of net sales
for the three month period ended October 31, 2007 compared to $3,098,733 or 6.9%
of net sales in the same period in the prior fiscal year. Selling and
administrative expenses decreased to $5,895,175 or 7.1% of net sales for the six
month period ended October 31, 2007 compared to $6,116,686 or 7.5% of net sales
in the same period in the prior fiscal year. The decrease for the three and six
month periods ended October 31, 2007, is due to a decrease in sales commissions,
sales salaries, amortization expense and accounting and legal fees.
Interest Expense
Interest expense for bank debt and capital lease obligations for the three month
period ended October 31, 2007 was $708,429 compared to $651,095 for the same
period in the prior fiscal year. Interest expense increased to $1,421,487 for
the six month period ended October 31, 2007 as compared to $1,162,040 for the
same period in the prior fiscal year. This change was attributable to the
Company's increased borrowings under its revolving credit facility, increased
capital lease obligations and higher interest rates. The additional working
capital was necessary to support the start up of several new
14
programs for customers and to support the increased sales volume for the six
month period ended October 31, 2007.
Taxes
The effective tax rate from operations for the three and six month periods ended
October 31, 2007 was 35.2%. The effective tax rate for the comparable periods in
fiscal 2007 was 41.1% and 39.0% for the three and six month periods ended,
respectively. The effective tax rate in fiscal 2008 has decreased compared to
prior periods due to the tax effects of the Company's foreign operations.
Net Income
Net income from operations decreased to $693,274 for the three month period
ended October 31, 2007 compared to $708,011 for the same period in the prior
fiscal year. Basic and diluted earnings per share for the second fiscal quarter
of 2008 were $0.18 compared to basic and diluted earnings per share of $0.19 and
$0.18, respectively, for the same period in the prior fiscal year. For the six
months ended October 31, 2007, the Company recorded net income of $1,520,258
compared to $966,681 for the same period in the prior fiscal year. Basic and
diluted earnings per share for the six month period ended October 31, 2007 were
$0.40 and $0.39 compared to basic and diluted earnings per share of $0.25,
respectively, for the same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES:
OPERATING ACTIVITIES.
Cash flow provided by operating activities was $620,334 for the six months ended
October 31, 2007, compared to cash used in operations of $3,789,724 for the same
period in the prior year. During the first six months of fiscal year 2008, cash
provided by operations was due to net income, trade payables and the non-cash
effect of depreciation and amortization. Cash provided by operating activities
was partially offset by an increase in accounts receivable. The increase in
accounts receivable is due to the increase in sales volume.
For the six months ended October 31, 2006, cash used in operations increased due
to increases in accounts receivable and inventory. The increase in inventories
was primarily attributable to an increase in customer orders and safety stock
requirements. The increase in accounts receivable was due to an increase in
sales volume.
INVESTING ACTIVITIES.
During the first six months of fiscal 2008, the Company purchased approximately
$1,245,000 in machinery and equipment to be used in the ordinary course of
business. The Company expects to make additional machinery and equipment
purchases of approximately $1,500,000 during the balance of fiscal 2008. During
the first six months of fiscal 2007, the Company purchased approximately
$2,300,000 in machinery and equipment to be used in the ordinary course of
business.
FINANCING TRANSACTIONS.
On July 31, 2006, the Company amended the credit facility to increase the
revolving credit facility from $22,000,000 to $27,000,000. The Company also has
a term loan which was increased to $4,000,000 from $2,750,000 on July 31, 2006.
Interest payments only were due monthly through June 30, 2007 and quarterly
principal payments of $250,000 are due each quarter beginning with the quarter
ending June 30 2007, through the quarter ending June 30, 2011. Interest payments
continue
15
to be due monthly throughout the term. In October 2006, the Company amended the
credit facility to increase the revolving credit facility from $27,000,000 to
$32,000,000. The increase of $5,000,000 was for a term of six months and expired
on April 30, 2007. In April 2007, the amended revolving credit facility was
renewed in the amount of $32,000,000 and will expire on September 30, 2009. The
amended revolving credit facility is limited to the lesser of: (i) $32,000,000
or (ii) an amount equal to the sum of 85% of the receivable borrowing base and
the lesser of $16,000,000 or a percentage of the inventory base. In January and
April 2007, the Company's financial covenants were amended. At October 31, 2007,
the Company was in compliance with its financial covenants, and $30,071,381 was
outstanding under the revolving credit facility and term loan. There was
approximately $1,928,619 of unused credit available as of October 31, 2007.
The loan and security agreement is collateralized by substantially all of the
domestically-located assets of the Company and contains certain financial
covenants, including specific covenants pertaining to the maintenance of minimum
tangible net worth and net income. The agreement also restricts annual lease
rentals and capital expenditures and prohibits the payment of dividends.
The Company anticipates its credit facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements for
the remainder of fiscal year 2008. In the event the business grows rapidly or
the Company considers an acquisition, additional financing resources could be
necessary in the current or future fiscal years. There is no assurance that the
Company will be able to obtain equity or debt financing at acceptable terms in
the future.
The Company provides funds for salaries, wages, overhead and capital expenditure
items as necessary to operate its wholly-owned Mexican and Chinese subsidiaries
and the Taiwan procurement branch. The Company provides funding in U.S. dollars,
which are exchanged for pesos, RMB, and New Taiwan dollars as needed. The
fluctuation of currencies from time to time, without an equal or greater
increase in inflation, has not had a material impact on the financial results of
the Company. During the first six months of fiscal year 2008, the Company paid
approximately $9,596,725 to its subsidiaries for services provided.
In May 2002, the Company acquired a plant in Acuna, Mexico through seller
financing. The loan of $1,950,000 is payable in equal monthly installments of
approximately $31,000 over six and a half years at a rate of 7% interest per
annum. Prior to acquiring that plant, the Company rented the facility. At
October 31, 2007, approximately $360,455 was outstanding in connection with the
purchase of that facility.
Payments made under capital lease and building notes payable was $1,089,853 and
$1,012,963 for the first six months of fiscal 2008 and 2007, respectively.
The Company paid $500,000 under its term loan obligation and borrowed an
additional $2,352,366 under its revolving credit facility during the first six
months of fiscal 2008. The balance on October 31, 2007 under the term loan
obligation and revolving credit facility was $3,500,000 and $26,571,381,
respectively.
During the first six months of fiscal 2007 the Company paid $250,000 under its
term loan obligation and borrowed an additional $5,466,318 under its revolving
credit facility. At October 31, 2006, the Company had $4,000,000 and $24,628,218
outstanding under its term loan and revolving credit facility, respectively.
OFF-BALANCE SHEET TRANSACTIONS:
The Company has no off-balance sheet transactions.
16
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
There have been no material changes to the Company's contractual obligations and
commercial commitments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates is due
primarily to its short-term investments and borrowings under its credit
agreements. The Company's borrowings are at a variable rate and an increase in
interest rates of 1% would have resulted in interest expense increasing by
approximately $150,400 for the six month period ended October 31, 2007. As of
October 31, 2007, the Company had no short-term investments and approximately
$30,100,000 of borrowings under its credit agreements. The Company does not use
derivative financial investments. The Company's cash equivalents, if any, are
invested in overnight commercial paper. The Company does not have any
significant cash flow exposure due to rate changes for its cash equivalents,
because these instruments are short-term.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, including our President and Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of October 31, 2007. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports filed by the Company under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms and that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Based on this evaluation, our President and Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of October 31, 2007.
There has been no change in our internal control over financial reporting during
the quarter ended October 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
There were no material changes from our risk factors as presented in the section
entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended April 30, 2007 as filed with the SEC on July 24, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 21, 2007, the Company held its 2007 Annual Meeting of Stockholders.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and Regulation 14A thereunder for the purpose of
(i) electing two Class II Directors to hold office until the 2010 Annual Meeting
of Stockholders and (ii) ratifying the selection of BDO Seidman, LLP as
independent auditors of the Company. Each holder of common stock was entitled to
one vote for each share held on the record date.
The following individuals were elected as Class II directors to hold office
until the 2010 Annual Meeting of Stockholders: John P. Chen and Carl Zemenick.
The number of shares cast for, against and abstained with respect to the
nominees were as follows:
Nominee For Against Abstain
------- --- ------- -------
John P. Chen 3,191,116 39,450 0
Carl A. Zemenick 3,191,870 38,696 0
There were no broker non-votes with respect to the election of directors. The
following persons are directors of the Company whose current term extends beyond
the 2007 Annual Meeting of Stockholders: Thomas W. Rieck, Gary R. Fairhead,
Franklin D. Sove and Dilip S. Vyas. There was no solicitation in opposition to
management's nominees for directors.
18
The stockholders voted to approve the ratification of the selection of BDO
Seidman, LLP as independent auditors for the Company for the fiscal year ending
April 30, 2008. A total of 3,196,181 shares were cast for such ratification,
12,060 shares were opposed and 22,125 shares abstained.
William L. McClelland did not stand for reelection when his term as a Class I
director expired at the 2006 Annual Meeting of Stockholders. The Board of
Directors did not fill the vacancy left by the departure of Mr. McClelland. The
Board of Directors decided to reduce the number of directors from seven members
to six members and to re-designate as of the 2008 Annual Meeting of Stockholders
one of the Class III directors as a Class I director. Upon redesignation as a
Class I director in 2008, that director will hold office until the expiration of
the term of the current Class I director at the 2009 Annual Meeting of
Stockholders.
ITEM 5. OTHER INFORMATION.
None.
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).
19
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGMATRON INTERNATIONAL, INC.
/s/ Gary R. Fairhead December 13, 2007
------------------------------------------------ Date
Gary R. Fairhead
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake December 13, 2007
------------------------------------------------ Date
Linda K. Blake
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)