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, 2006
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)
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 8, 2006, there were 3,794,956 shares of the Registrant's Common
Stock outstanding.
SigmaTron International, Inc.
Index
PART I. FINANCIAL INFORMATION: Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -- October 31, 2006 (Unaudited)
and April 30, 2006 3
Consolidated Statements of Operations (Unaudited) --
Three and Six Months Ended October 31, 2006 and 2005 4
Consolidated Statements of Cash Flows (Unaudited) --
Six Months Ended October 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 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,
2006 April 30,
(Unaudited) 2006
------------ ------------
CURRENT ASSETS:
Cash $ 2,666,361 $ 3,269,925
Accounts receivable, less allowance for doubtful
accounts of $268,920 at October 31, 2006
and April 30, 2006 22,715,126 17,747,414
Inventories, net 41,304,499 31,250,050
Income taxes refundable -- 476,000
Prepaid and other assets 1,067,700 1,329,774
Deferred income taxes 964,885 957,069
Other receivables 478,497 332,298
------------ ------------
Total current assets 69,197,068 55,362,530
Property, machinery and equipment, net 31,322,960 30,544,307
Other assets 1,233,116 1,548,240
Intangible assets, net of amortization $967,140 1,802,860 2,186,350
and $583,650
Goodwill 9,298,945 9,298,945
------------ ------------
Total assets $112,854,949 $ 98,940,372
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 20,484,545 $ 13,444,928
Accrued expenses 2,690,709 2,163,542
Accrued wages 1,735,650 1,743,076
Income taxes payable 270,574 839,438
Notes payable - bank 500,000 1,000,000
Notes payable - building 516,150 430,000
Capital lease obligations 1,372,300 1,408,485
------------ ------------
Total current liabilities 27,569,928 21,029,469
Notes payable - banks 28,128,218 21,161,900
Notes payable- building, less current portion 3,255,458 3,591,088
Capital lease obligations, less current portion 2,543,452 2,804,345
Deferred income taxes 2,458,759 2,458,759
------------ ------------
Total long-term liabilities 36,385,887 30,016,092
------------ ------------
Total liabilities 63,955,815 51,045,561
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, 3,794,956 and 3,786,956 shares issued
an outstanding at October 31, 2006 and April 30, 2006 37,950 37,870
Capital in excess of par value 19,204,860 19,167,289
Retained earnings 29,656,324 28,689,652
------------ ------------
Total stockholders' equity 48,899,134 47,894,811
------------ ------------
Total liabilities and stockholders' equity $112,854,949 $ 98,940,372
============ ============
See accompanying notes to financial statements.
3
SIGMATRON INTERNATIONAL, INC.
Consolidated Statements Of Operations
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
October 31, October 31, October 31, October 31,
2006 2005 2006 2005
(Unaudited) (Unaudited)
------------------ ------------------ ----------------- ----------------
Net sales $ 44,858,662 $ 34,893,265 $ 81,818,527 $ 56,205,958
Cost of products sold 40,002,612 29,874,320 73,103,828 48,645,328
------------ ------------ ------------ ------------
Gross profit 4,856,050 5,018,945 8,714,699 7,560,630
Selling and administrative expenses 3,098,733 2,946,861 6,116,686 5,083,142
------------ ------------ ------------ ------------
Operating income 1,757,317 2,072,084 2,598,013 2,477,488
Other income (97,449) (36,706) (148,784) (76,980)
Interest expense 651,095 365,316 1,162,040 499,830
------------ ------------ ------------ ------------
Income from continuing operations before
income tax expense 1,203,671 1,743,474 1,584,757 2,054,638
Income tax expense 495,660 519,581 618,076 640,947
------------ ------------ ------------ ------------
Income from continuing operations 708,011 1,223,893 966,681 1,413,691
Discontinued operations
(Loss) from operations of discontinued
Las Vegas location -- (4,199) -- (44,741)
Income tax (benefit) -- (1,638) -- (17,449)
------------ ------------ ------------ ------------
Loss on discontinued operation -- (2,561) -- (27,292)
Net income $ 708,011 $ 1,221,332 $ 966,681 $ 1,386,399
============ ============ ============ ============
Earnings (loss) per share - basic
Continuing operations $ 0.19 $ 0.33 $ 0.25 $ 0.38
Discontinuing operations -- -- -- (0.01)
------------ ------------ ------------ ------------
Total $ 0.19 $ 0.33 $ 0.25 $ 0.37
============ ============ ============ ============
Earnings (loss) per share - diluted
Continuing operations $ 0.18 $ 0.29 $ 0.25 $ 0.35
Discontinuing operations -- -- -- (0.01)
------------ ------------ ------------ ------------
Total $ 0.18 $ 0.29 $ 0.25 $ 0.34
============ ============ ============ ============
Weighted average shares of common
stock outstanding
Basic 3,787,251 3,755,420 3,791,098 3,755,420
============ ============ ============ ============
Weighted average shares of common
stock outstanding
Diluted 3,872,654 4,187,632 3,877,692 4,074,866
============ ============ ============ ============
See accompanying notes to financial statements
4
SIGMATRON INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
Six Six
Months Ended Months Ended
October 31, October 31,
2006 2005
(Unaudited)
------------- ------------
OPERATING ACTIVITIES:
Net income $ 966,681 $ 1,386,399
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation 1,972,547 2,106,626
Stock-based compensation 20,042 --
Provision for inventory obsolescence -- 160,000
Deferred income taxes (7,816) (236,142)
Amortization of intangible assets 383,490 --
Gain on sale of discontinued operation -- (310,731)
Changes in operating assets and liabilities, net of acquisition
Accounts receivable (4,967,712) 122,682
Inventories (10,054,449) (4,004,187)
Prepaid expenses and other assets 906,999 (48,417)
Trade accounts payable 7,039,617 1,240,823
Accrued expenses and wages 519,741 (1,059,772)
Income taxes payable (568,864) 678,397
------------ ------------
Net cash (used in) provided by operating activities (3,789,724) 35,678
INVESTING ACTIVITIES:
Acquisition of Able -- (16,771,755)
Sale of machinery and equipment -- 1,705,695
Purchases of machinery and equipment (2,284,795) (1,081,548)
------------ ------------
Net cash used in investing activities (2,284,795) (16,147,608)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 17,600 --
Proceeds under capital lease obligation -- 1,220,559
Payments under capital lease obligation (763,483) (581,256)
Payments other notes payable -- (300,000)
Payments under term loan (250,000) --
Proceeds under term loan 1,250,000 --
Proceeds under lines of credit 5,466,318 16,596,994
Payments under building notes payable (249,480) (238,729)
------------ ------------
Net cash provided by financing activities 5,470,955 16,697,568
CHANGE IN CASH (603,564) 585,638
Cash at beginning of period 3,269,925 184,014
------------ ------------
CASH AT END OF PERIOD $ 2,666,361 $ 769,652
============ ============
Supplementary disclosures of cash flow information
Cash paid for interest $ 830,228 $ 461,435
Cash paid for income taxes, net of refunds $ 1,054,045 $ 145,944
See accompanying notes to financial statements.
5
SigmaTron International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 2006
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SigmaTron
International, Inc. ("SigmaTron"), its wholly owned subsidiaries Standard
Components de Mexico S.A., Ablemex, S.A. de C.V., acquired in July 2005, and its
wholly-owned foreign enterprise Wujiang SigmaTron Electronics Co. Ltd.
("SigmaTron China"), and its procurement branch SigmaTron Taiwan (collectively,
the "Company"), have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.
Accordingly, the 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, 2006,
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2007. 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, 2006.
NOTE B -- INVENTORIES
The components of inventory consist of the following:
October 31, April 30,
2006 2006
----------- -----------
Finished products $ 8,741,436 $ 8,216,317
Work-in-process 2,686,926 2,563,334
Raw materials 29,876,137 20,470,399
----------- -----------
$41,304,499 $31,250,050
=========== ===========
NOTE C -- STOCK INCENTIVE PLANS
The Company adopted Financial Accounting Standards Board, Share-Based Payment
("SFAS 123(R)") 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. Compensation expense for which
the requisite service requirement that has not been rendered and are outstanding
as of the option grant date will be recognized over the remaining service
period. In July 2006, the Company granted 10,000 options to a non-executive
employee and the per share fair value of the options granted was $6.0125. The
Company recognized approximately $20,000 in stock
6
compensation expense associated with the grant and a tax benefit of
approximately $7,800 as of October 31, 2006. No options were granted during the
quarter 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.
Prior to the adoption of SFAS 123(R), the Company had elected to apply
Accounting Principles Board Opinion 25 to account for its stock-based
compensation plans, as permitted under SFAS No. 123, Accounting for Stock-Based
Compensation. This method applied the intrinsic value method for stock options
and other awards granted to employees. Had the fair value method been used
during the three and six months ended October 31, 2005, the following pro forma
net income would be as reported:
Three Months Ended Six Months Ended
October 31, October 31,
2005 2005
------------------ ----------------
Net Income, as reported $1,221,332 $1,386,399
Deduct: total stock-based employee compensation
expense determined under fair based method for
awards granted, modified, or settled, net of
related tax effects (298,189) (596,378)
---------- ----------
Pro forma net income $ 923,143 $ 790,021
========== ==========
Three Months Ended Six Months Ended
October 31, October 31,
2005 2005
------------------ ----------------
Earnings per share
Basic -- as reported $.33 $.38
Basic -- pro forma .25 .21
==== ====
Diluted -- as reported .29 .34
Diluted -- pro forma $.22 $.19
==== ====
7
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
October 31, October 31,
2006 2005
----------- ----------
Expected dividend yield .0% 0%
Expected stock price volatility .750 .800
Average risk-free interest rate 4.98% 2.20%
Weighted-average expected life of options 6.5 years 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. There is no
stock option granted on second quarter ended October 31, 2006.
The table below summarizes option activity from the beginning of fiscal year
2006 through October 31, 2006:
Weighted
Number Range of average
of options exercise prices exercise price
---------- -------------------- --------------
Low High
----- ------
Options outstanding at April 30, 2006 523,307 $2.20 $12.25 $7.87
Options granted 10,000 9.17 9.17 9.17
Exercised (8,000) 2.20 2.20 2.20
-------
Options outstanding at October 31, 2006 525,307 $2.20 $12.25 $7.98
======= ===== ====== =====
As of October 31, 2006, there was $40,100 total unrecognized compensation cost
related to nonvested share-based compensation arrangements, which is expected to
be recognized over an average period of the following two years.
Information with respect to stock options outstanding and stock options
exercisable at October 31, 2006, follows:
Options Outstanding
-------------------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices October 31, 2006 contractual life exercise price
------------------------ ---------------- ---------------- --------------
$2.20 -- 5.63 103,517 4.90 years $2.51
9.17 -- 12.25 421,790 7.85 years $9.32
-------
Total 525,307
=======
8
Options Exercisable
------------------------------------
Number Weighted-
exercisable at average
Range of exercise prices October 31, 2006 exercise price
------------------------ ---------------- --------------
$2.20 -- 5.63 103,515 $2.51
9.17 -- 12.25 399,188 $9.33
-------
Total 502,703
=======
NOTE D -- STRATEGIC TRANSACTION
In July 2005, the Company closed on the purchase of all of the outstanding
common stock of Able Electronics Corporation ("Able"), a company headquartered
in Hayward California, and its wholly owned subsidiary, Ablemex S.A. de C.V.,
located in Tijuana, Mexico. Able is an ISO 9001:2000 certified EMS company
serving Original Equipment Manufacturers in the life sciences,
telecommunications and industrial electronics industries. The acquisition of
Able has allowed the Company to make strides towards achieving four objectives:
(1) to further diversify its markets, capabilities and customer base, (2) adding
a third low-cost manufacturing facility in Tijuana, Mexico, (3) creating an
opportunity to consolidate the California operations into one facility, and (4)
to generate incremental revenue from Able's customers as they become familiar
with the Company's broader array of services. The effective date of the
transaction was July 1, 2005. Able was merged into the Company beginning in
November 1, 2005 and operates as a division of the Company. The purchase price
was approximately $16,800,000 and was recorded as a stock purchase transaction
in the first quarter of fiscal year 2006. The transaction was financed by the
Company's amended credit facility and resulted in an increase of approximately
$8,500,000 in goodwill. Assuming the purchase was recorded as of the first
period reported, May 1, 2005, unaudited revenues for the six months ended
October 31, 2005, would have been $59,470,073. The unaudited pro-forma dilutive
earnings per share would have been $0.13 for the six month period ended October
31, 2005.
NOTE E -- DISCONTINUED OPERATIONS
In June 2005, the Company closed on the sale of its Las Vegas, Nevada operation.
The Las Vegas facility operated as a complete EMS center specializing in the
assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006. A net loss of
approximately $4,000 and $45,000 was recorded in the three and six months ended
October 31, 2005, respectively.
NOTE F -- FINANCING TRANSACTION
The Company entered into an Amended Loan and Security Agreement in July 2005,
which provided for a revolving credit facility. The maximum borrowing limit
under the amended revolving credit facility is limited to the lesser of: (i)
$17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or a percentage of the inventory
base. The Amended Loan and Security Agreement expires on June 30, 2008 and
includes certain financial
9
covenants. The Amended Loan and Security Agreement also includes a four year
term loan in the amount of $3,000,000.
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 amended revolving
credit facility is limited to the lesser of: (i) $27,000,000 or (ii) an amount
equal to the sum of 85% of the receivable borrowing base and the lesser of
$13,500,000 or a percentage of the inventory base. The revolving credit facility
expires June 30, 2009. The term loan was increased to $4,000,000 from
$2,750,000. Interest only is due through June 30, 2007 and quarterly payments of
$250,000 are due each quarter beginning with the quarter ending June 30, 2007,
through the quarter ending June 30, 2011. In October 2006 the Company further
amended the credit facility to increase the revolving credit facility from
$27,000,000 to $32,000,000. The increase of $5,000,000 is for a term of six
months. At October 31, 2006, the Company was in compliance with its financial
covenants and $28,628,218 was outstanding under the revolving credit facility
and term loan. There was approximately $4,763,000 of unused credit available as
of October 31, 2006.
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 the payment of dividends.
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 provides a
ninety (90) day warranty for workmanship only and does not have any
installation, acceptance or sales incentives, although the Company has
negotiated extended warranty terms in certain instances. The Company assembles
and tests assemblies based on customers' specifications. Historically, the
amount of returns for workmanship issues has been de minimus under the Company's
standard or extended warranties. Any returns for workmanship issues received
after each period end are accrued in the respective financial statements.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. The Company establishes inventory
reserves for valuation, shrinkage, and excess and obsolete inventory. The
Company records provisions for inventory shrinkage based on historical
10
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 2006 the Company completed its annual
assessment of impairment regarding the goodwill recorded. That assessment,
supported by independent appraisals, did not identify any impairment as of April
30, 2006.
NEW ACCOUNTING STANDARDS:
In June 2006, FASB Interpretation 48 ("FASB 48") "Accounting for Uncertainty in
Income Taxes" was issued, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes. FASB 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FASB 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition.
FASB 48 is effective for fiscal years beginning after December 15, 2006, and
earlier application of the provisions of FASB 48 is encouraged if the enterprise
has not yet issued financial statements, including interim financial statements,
in the period that FASB 48 is adopted. The Company has not yet determined the
impact of FASB 48 on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
NOTE: This quarterly report contains forward-looking statements. Words such as
"continue," "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
11
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 variability of our
customers' requirements; the availability and cost of necessary components and
materials; the Company's ability to continue to produce products that are in
compliance with the European Standard of "Restriction of Use of Hazardous
Substance ("RoHS"); 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 and its integration of
the Able operation acquired in July 2005. 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.
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.
As the demand for electronic products has continued to increase over the past
months, the lead-time for many components has increased. Pricing for some
components and related commodities has escalated due to the increased demand and
the transition to European Union Restriction of Use of Hazardous Substances,
("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.
The Sarbanes-Oxley Act of 2002 ("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
12
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 receives a
qualified opinion on the adequacy of its internal control over financial
reporting, shareholders could lose confidence in the reliability of the
Company's financial statements, which could have a material adverse impact on
the value of the Company's stock.
Sales can be a misleading indicator of the Company's financial performance.
Sales levels can vary considerably among customers and products depending on the
type of services (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 margins.
Consignment orders accounted for less than 5% of the Company's revenues for the
period ended October 31, 2006.
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 increased for the three month period ended October 31, 2006 to
$44,858,662 from $34,893,265 for the three month period ended October 31, 2005.
Net sales for the six months ended October 31, 2006 increased to $81,818,527
from $56,205,958 for the same period in the prior fiscal year. Sales volume
increased for the three and six month periods ended October 31, 2006 as compared
to the same periods in the prior year in the appliance, fitness, gaming,
industrial electronics, life sciences and semiconductor marketplaces. The
increase in the industrial electronics, life sciences and semiconductor
industries is due to sales to customers and the result of the July 1, 2005
acquisition of Able.
Gross profit decreased during the three month period ended October 31, 2006 to
$4,856,050 or 10.7% of net sales, compared to $5,018,945 or 14.4% of net sales
for the same period in the prior fiscal year. Gross profit increased for the six
month period ended October 31, 2006 to $8,714,699 or 10.7% of net sales,
compared to $ 7,560,630 or 13.5% of net sales for the same period in the prior
fiscal year. The decrease in the Company's gross margin as a percent of sales
for the three and six month periods is the result of pricing pressures within
the EMS industry, an increase in manufacturing supplies and component pricing
and inefficiencies at it's Tijuana and Hayward operations. The Company believes
operational efficiencies will improve at both the Hayward and Tijuana
manufacturing facilities during the third and fourth quarters of fiscal year
2007. In addition, the Company has expanded its Tijuana manufacturing operation
and will continue to transfer specific production from Hayward to Tijuana. There
can be no assurance that gross margins will not continue to decrease in future
quarters.
Selling and administrative expenses increased to $3,098,733 or 6.9% of net sales
for the three month period ended October 31, 2006 compared to $2,946,861 or 8.5%
of net sales in the same period last year. Selling and administrative expenses
increased to $6,116,686 or 7.5% of net sales for the six month period ended
October 31, 2006 compared to $5,083,142 or 9.0% of net sales in the same period
last year. The increase for the three and six month periods ended October
31,2006, is primarily due to
13
an increase in sales and purchasing salary expenses, accounting fees, legal
expenditures and an increase in amortization expense due to the Able
acquisition. Selling and administrative expenses decreased as a percentage of
net sales for the three month and six month periods ended October 31, 2006, due
to the increase in sales volume.
Interest expense for bank debt and capital lease obligations for the three month
period ended October 31, 2006 was $651,095 compared to $365,316 for the same
period in the prior year. Interest expense increased to $1,162,040 for the six
month period ended October 31, 2006 as compared to $499,830 for the same period
in the prior year. This change was attributable to the Company's significant
increased borrowings under its revolving credit facility and term loan,
increased capital lease obligations and higher interest rates. The additional
working capital was necessary to support the increase in sales volume.
The effective tax rate from continuing operations for the three and six month
periods ended October 31, 2006 was 41.1% and 39.0% respectively. The effective
tax rate for the comparable periods in fiscal 2005 was 29.8% and 31.2% for the
three and six month periods ended, respectively. The effective tax rate in
fiscal 2006 has increased compared to prior periods due to the tax effects of
the Company's foreign operations.
In June 2005, the Company closed on the sale of its Las Vegas, Nevada operation.
The Las Vegas facility operated as a complete EMS center specializing in the
assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000. The gain was
offset by a loss of approximately $383,000 on discontinued operations for the
Las Vegas operation for the period ended April 30, 2006. A net loss of
approximately $4,000 and $45,000 was recorded in the three and six months ended
October 31, 2005, respectively.
Net income decreased to $708,011 for the three month period ended October 31,
2006 compared to $1,221,332 for the same period in the prior year. Basic and
dilutive earnings per share for the second fiscal quarter of 2007 were $0.19 and
$0.18, respectively, compared to basic and dilutive earnings per share of $0.33
and $0.29, respectively, for the same period in the prior year. For the six
months ended October 31, 2006, the Company recorded net income of $966,681
compared to $1,386,399 for the same period in the prior fiscal year. Basic and
dilutive earnings per share for the three and six month periods ended October
31, 2006 were $0.25 compared to basic and dilutive earnings per share of $0.37
and $0.34, respectively, for the same period in the prior year.
14
LIQUIDITY AND CAPITAL RESOURCES:
OPERATING ACTIVITIES.
Cash flow used in operating activities was $3,789,724 for the six months ended
October 31, 2006, compared to cash provided by operations of $35,678 for the
prior fiscal year. During the first six months of fiscal year 2007, cash used in
operations was due to an increase in accounts receivable and inventory. The
increase in accounts receivable is due to the increase in sales volume. The
increase in inventory is primarily attributable to an increase in customer
orders and the addition of RoHS compliant inventory. Cash used in operating
activities was partially offset by net income, the non-cash effect of
depreciation and amortization and an increase in trade payables.
INVESTING ACTIVITIES.
In June 2005, the Company closed on the sale of its Las Vegas, Nevada operation.
The Las Vegas facility operated as a complete EMS center specializing in the
assembly of electronic products and cables for a broad range of customers
primarily in the gaming industry. The effective date of the transaction was May
30, 2005. The transaction was structured as an asset sale, and included a
$2,000,000 cash payment to the Company for the buyer's purchase of the
machinery, equipment and other assets of the Las Vegas operation. The
transaction was recorded by the Company in the first quarter of fiscal year 2006
and included a gain on the transaction of approximately $311,000.
In July 2005, the Company closed on the purchase of all of the outstanding stock
of Able, a company headquartered in Hayward, California and its wholly owned
subsidiary, Ablemex S.A. de C.V., located in Tijuana, Mexico. Able was merged
into the Company in November 2005 and operates as a division of the Company. The
purchase price was approximately $16,800,000 and was recorded as a stock
purchase transaction in the first quarter of fiscal year 2006. The transaction
was financed by the Company's amended credit facility and resulted in an
increase of approximately $8,500,000 in goodwill.
During the 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.
The Company entered into an Amended Loan and Security Agreement in July 2005,
which provided for a revolving credit facility. The maximum borrowing limit
under the amended revolving credit facility is limited to the lesser of: (i)
$17,000,000 or (ii) an amount equal to the sum of 85% of the receivable
borrowing base and the lesser of $8,500,000 or a percentage of the inventory
base. The Amended Loan and Security Agreement expires on June 30, 2008 and
includes certain financial covenants. The Amended Loan and Security Agreement
also includes a four year term loan in the amount of $3,000,000.
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 amended revolving
credit facility is limited to the lesser of: (i) $27,000,000 or (ii) an amount
equal to the sum of 85% of the receivable borrowing base and the lesser of
$13,500,000 or a percentage of the inventory base. The revolving credit facility
expires June 30, 2009. The term loan was increased to $4,000,000 from
$2,750,000. Interest only is due through June 30, 2007 and quarterly payments of
$250,000 are due each quarter beginning with the quarter ending June 30, 2007,
through the quarter ending June 30, 2011. In October 2006 the Company further
amended the credit facility to increase the revolving credit facility from
$27,000,000 to $32,000,000.
15
The increase of $5,000,000 is for a term of six months. At October 31, 2006, the
Company was in compliance with its financial covenants and $28,628,218 was
outstanding under the amended revolving credit facility and term loan. There was
approximately $4,763,000 of unused credit available as of October 31, 2006.
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 the payment of dividends.
SigmaTron China entered into a loan agreement in April 2005, which provides for
a line of credit from the China Construction Bank. The interest rate under the
agreement was 5.76% and at April 30, 2006, $1,237,500 was outstanding under the
line of credit. The line of credit is collateralized by the Company's building
in Suzhou-Wujiang, China and 60 of the 100 Chinese acres leased at the property.
The loan was paid in full in July 2006.
The Company anticipates its credit facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements in
fiscal year 2007. 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.
The Company provides funding to its Mexican and Chinese subsidiaries in U.S.
dollars, which are exchanged for pesos and RMB 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 2007 the Company paid approximately
$10,200,000 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, 2006, approximately $697,000 was outstanding in connection with the
financing of that facility.
The impact of inflation for the past three fiscal years has been minimal.
OFF-BALANCE SHEET TRANSACTIONS:
The Company has no off-balance sheet transactions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
The following table summarizes the Company's contractual obligations at October
31, 2006, and the effect such obligations are expected to have on its liquidity
and cash flows in future periods.
16
PAYMENT OBLIGATIONS (INCLUDING INTEREST)
Less than After 5
Total 1 Year 1-3 Years 3-5 Years Years
--------- ---------- --------- --------- --------
Notes Payable, including
current maturities 4,157,224 719,713 3,437,511 0 0
Capital Leases, including
current maturities 4,408,738 1,630,630 2,636,168 141,940 0
Operating leases 4,606,546 1,291,797 3,252,649 62,100 0
Bank debt 33,348,638 3,795,694 29,541,875 11,069 0
---------- --------- ---------- ------- ----
Total contractual cash
obligations 46,521,146 7,437,834 38,868,203 215,109 0
========== ========= ========== ======= ====
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 $374,000 for the period ended October 31, 2006. As of October 31,
2006, the Company had no short-term investments and approximately $28,625,000
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, 2006. 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, 2006.
There has been no change in our internal control over financial reporting during
the quarter ended October 31, 2006, 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 adverse effect on our financial condition or results of
operations.
ITEM 1A. RISK FACTORS.
There were no material changes, additions or deletions from our risk factors as
presented in the section entitled "Risk Factors" in our Annual Report on Form
10-K for the year ended April 30, 2006 as filed with the SEC on July 28, 2006.
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 15, 2006, the Company held its 2006 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 one Class I Director to hold office until the 2009 Annual Meeting
of Stockholders and (ii) ratifying the selection of BDO Seidman, LLP as
independent auditors of the Company. Each holder of common stock is entitled to
one vote for each share held on the record date.
The following person was elected as a Class I director to hold office until the
2009 Annual Meeting of Stockholders: Thomas W. Rieck. The number of shares cast
for, against and abstained with respect to the nominee were as follows:
Nominee For Against Abstain
--------------- --------- ------- -------
Thomas W. Rieck 3,091,282 40,851 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 2006 Annual Meeting of Stockholders: John P. Chen, Gary R. Fairhead,
Franklin D. Sove, Dilip S. Vyas and Carl Zemenick. There was no solicitation in
opposition to management's nominees for directors.
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, 2007. A total of 3,097,908 shares were cast for such ratification,
20,548 shares were opposed and 13,677 shares abstained.
18
William L. McClelland, a Class I Director, decided not to stand for re-election
at the 2006 Annual Meeting. As a result the Company's Board of Directors had
resolved that the number of directors be reduced to six with one director to
serve as a Class I Director and redesignated to be elected at the 2006 Annual
Meeting of Stockholders. At the 2008 Annual Meeting of Stockholders, one of the
Class III Directors, whose term will be expiring at that meeting will be
redesignated as a Class I Director whose initial term will expire in one year,
so that there will be two directors of each Class.
ITEM 5. OTHER INFORMATION.
Thirteenth Amendment to Loan and Security Agreement between SigmaTron
International, Inc. and LaSalle Bank National Association, dated October 20,
2006.
The credit facility was amended to increase the revolving credit facility from
$27 million to $32 million. The increase of $5 million is for a term of 6
months.
ITEM 6. EXHIBITS.
(a) Exhibits:
Exhibit 10.22 -- Thirteenth Amendment to Loan and Security Agreement
between SigmaTron International, Inc. and LaSalle Bank National
Association, dated October 20, 2006, filed as Exhibit 10.22.
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 14, 2006
---------------------------------- ----------------------
Gary R. Fairhead Date
President and CEO
(Principal Executive Officer)
/s/ Linda K. Blake December 14, 2006
---------------------------------- ----------------------
Linda K. Blake Date
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer
and Principal Accounting Officer)