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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 31, 1999
Commission File Number 0-23248
SigmaTron International, Inc.
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(Exact Name of Registrant, as Specified in its Charter)
Delaware 36-3918470
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(State or other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification Number)
2201 Landmeier Road, Elk Grove Village, Illinois 60007
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(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (847) 956-8000
No Change
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(Former Name, Address, or Fiscal Year, if Changed Since Last Reports)
Indicate, by check mark, whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
On September 3, 1999 there were 2,881,227 shares of the Registrant's Common
Stock outstanding.
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SigmaTron International, Inc.
Index
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION: Page No.
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets--July 31, 1999
and April 30, 1999 3
Condensed Consolidated Statements of Income--Three
Months Ended July 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows--Three
Months Ended July 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 11
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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SIGMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JULY 31, April 30,
1999 1999
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash $ 149,855 $ 280,071
Accounts receivable, less allowance for doubtful
accounts of $590,000 and $575,000 at July 31, 1999 and
April 30, 1999, respectively 16,730,426 13,563,836
Inventories 16,899,079 16,240,502
Prepaid 637,354 498,675
Deferred income taxes 147,514 147,514
Receivable from insurance reimbursement 2,453,235
Other receivables 412,068 1,013,982
Other assets 496,494 366,220
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Total current assets 35,472,790 34,564,035
Machinery and equipment, net 13,292,520 13,434,789
Due from SMTU:
Investment and advances 475,176 448,545
Equipment receivable 4,204,038 4,201,823
Other receivable 1,189,569 1,511,372
Other assets 1,164,755 1,115,893
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Total assets $55,798,848 $55,276,457
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 7,716,066 8,003,377
Trade accounts payable - Related parties 735,012 1,256,000
Accrued expenses 1,602,683 1,721,932
Income tax payable 769,096 644,101
Capital lease obligations 2,048,020 2,271,693
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Total current liabilities 12,870,877 13,897,103
Notes payable - Bank, less current portion 19,149,373 17,382,681
Capital lease obligations, less current portion 3,075,396 3,538,721
Deferred income taxes 1,157,460 1,157,460
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Total liabilities 36,253,106 35,975,965
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding - -
Common stock, $.01 par value; 6,000,000 shares
authorized, 2,881,227 shares issued and outstanding 28,812 28,812
at July 31, 1999 and April 30, 1999
Capital in excess of par value 9,436,554 9,436,554
Retained earnings 10,080,376 9,835,126
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Total stockholders' equity 19,545,742 19,300,492
Total liabilities and stockholders' equity $55,798,848 $55,276,457
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</TABLE>
See accompanying notes.
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SigmaTron International, Inc.
Consolidated Statements Of Income
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS Three Months
ENDED Ended
JULY 31, 1999 July 31, 1998
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<S> <C> <C>
Net sales $20,185,936 $18,527,432
Cost of products sold 18,120,002 16,868,870
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2,065,934 1,658,562
Selling and administrative expenses 1,358,442 1,254,254
Operating income 707,492 404,308
Equity in net (income) loss of SMTU (26,632) 30,989
Interest expense - Banks and capital lease obligations 486,378 473,520
Interest income - SMTU and LC (161,004) (137,954)
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Income before income tax expense 408,750 37,753
Income tax expense 163,500 15,126
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Net income $ 245,250 $ 22,627
============= =============
Net income per common share - Basic $ 0.09 $ 0.01
============= =============
Net income per common share - Assuming dilution $ 0.09 $ 0.01
============= =============
</TABLE>
See accompanying notes.
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SIGMATRON INTERNATIONAL, INC.
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 245,250 $ 22,627
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 445,012 364,591
Equity in net (income) loss of affiliate (26,632) 30,989
Provision for doubtful accounts 15,000 -
Changes in operating assets and liabilities:
Accounts receivable (3,181,590) 1,291,218
Inventories (658,577) (403,899)
Prepaid expenses (138,679) 55,288
Other assets 742,403 (500,807)
Trade accounts payable (287,311) 627,906
Trade accounts payable - related parties (520,988) (162,556)
Accrued expenses (119,245) (302,230)
Receivable from flood insurance proceeds 2,453,235 -
Income tax payable 124,958 61,217
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Net cash used in operating activities (907,164) 1,084,344
INVESTING ACTIVITIES:
Purchases of machinery and equipment (302,746) (168,697)
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Net cash used in investing activities (302,746) (168,697)
FINANCING ACTIVITIES:
Net payments under capital lease obligations (686,998) (522,532)
Net proceeds under line of credit 1,766,692 (645,950)
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Net cash provided by financing activities 1,079,694 (1,168,482)
Change in cash (130,216) (252,835)
Cash at beginning of period 280,071 284,679
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Cash at end of period $ 149,855 $ 31,844
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</TABLE>
See accompanying notes.
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SigmaTron International, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended July 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report for the year ended April 30, 1999.
NOTE B - INVENTORIES
The components of inventory consist of the following:
July 31, April 30,
1999 1999
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Finished products $ 1,169,868 $ 1,359,207
Work-in-process 1,440,481 1,709,482
Raw materials 14,288,730 13,171,813
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$16,899,079 $16,240,502
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NOTE C - FLOOD DAMAGE IN DEL RIO, TEXAS AND ACUNA, MEXICO
In late August 1998, the Company's warehousing operations in Del Rio, Texas, and
one of its manufacturing operations in Acuna, Mexico, were significantly damaged
by a flash flood. The Company expedited replacement machinery and equipment
inventory to its damaged facilities. The majority of the damaged equipment used
in the manufacturing process was replaced with new equipment. The manufacturing
operation in Acuna was running at preflood levels and all raw material issues
created by the flood were resolved by December 1998.
The inventory, machinery, and equipment and building contents segments of the
loss have been settled in full. In June 1999, the Company collected the total
flood insurance receivable of $2,453,000 which was included on the April 30,
1999 balance sheet. The business
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interruption and extra expense segments of the claim have not been finalized.
Since there is no agreement with the insurance company on the business
interruption and extra expense segments of the loss, the Company has not
recognized any net proceeds related to these items. The settlement of the
business interruption and extra expense claim is expected to result in
additional income for fiscal 2000.
NOTE D - SMT, UNLIMITED L.P.
The Company owns 42.5% of SMT Unlimited L.P. ("SMTU"), an affiliate located in
Fremont, California. At July 31, 1999 the Company has amounts due from SMTU of
approximately $5,866,000. SMTU was profitable for the year ended April 30, 1999
and the quarter ended July 31, 1999. On August 26, 1999 SMTU entered into a new
credit arrangement to support its working capital requirements. The revolving
loan facility expires on August 26, 2001. The Company provided SMTU's lender
with a guaranty of the obligation of SMTU under its revolving line of credit to
a maximum of $2,000,000 plus interest and related costs associated with the
enforcement of the guaranty. The other outside limited partner of SMTU has
agreed with the Company to be responsible for $1,000,000 of that liability.
NOTE E - LINE OF CREDIT - SUBSEQUENT EVENT
On August 26, 1999 the Company entered into a new credit arrangement which is
comprised of a revolving loan facility and a term loan. Under the revolving loan
facility, the Company may borrow certain percentages of the Company's accounts
receivable and inventory, up to a maximum of $25.0 million. Outstanding
borrowings under the revolving loan facility bear interest at the Company's
option of either the London Interbank Offered Rate ("LIBOR") plus 2.25% or the
bank's prime rate of interest. The revolving loan facility is collateralized
under a loan and security agreement by substantially all of the domestically
located assets and inventory located in Mexico. The agreement contains certain
financial covenants pertaining to the maintenance of tangible net worth, net
income and financial covenants. The revolving loan facility matures on August
26, 2001. The Company at its discretion can initiate an equipment term loan up
to the maximum of $800,000 based on 80% of the orderly liquidation value of the
Company's domestically located equipment. The term note is amortized over five
years and if initiated matures on August 26, 2001 at prime plus 1/2 percent or
the bank's cost of funds plus 2.25%.
NOTE F - LIGHTING COMPONENTS
The Company has an equity interest of 12% in Lighting Components. The Company
has amounts due from Lighting Components of approximately $1,040,000 at July 31,
1999. In prior periods the Company had adjusted the carrying value of the
Lighting Components assets on its books leaving approximately $491,000 of assets
in the accompanying balance sheet at July 31, 1999. The Company has a security
interest in substantially all of Lighting Component's assets.
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Lighting Components distributes a variety of electronic and molded plastic
components for use in the sign and lighting industries. Field trials for
Lighting Component's new product have been positive and the level of orders is
increasing, which is critical to a turnaround in their financial performance.
NOTE G - PATENTS AND TRADEMARKS
The Company generally does not offer its own proprietary products but assembles
custom products to the specifications of its customers. The Company relies
primarily upon the patents, confidential designs and proprietary know-how of its
customers and its own proprietary know-how in order to establish and maintain
its competitive advantage. The Company owns no patents or registered trademarks.
The Company relies on confidentiality agreements with its customers and its
employees as well as other incentives to its employees to maintain its
proprietary information. There can be no assurance that the steps taken by the
Company will be adequate to protect its proprietary rights or that a competitor
will not independently develop know-how or processes similar or superior to
those of the Company.
The Company has recently received a Notice of Patent Infringement from Lemelson
Medical, Education & Research Foundation, Limited Partnership (the "Lemelson
Partnership") alleging that the Company is infringing certain patents claimed by
the Lemelson Partnership.
The Company has retained patent counseling and is evaluating the Lemelson
Partnership claims from the information received to date and plans to meet with
them to better understand their claims. The Company will then evaluate the
merits of their claims and, if appropriate, seek a license from the Lemelson
Partnership to permit the Company to continue to operate as it has in the past.
The Company believes that similar claims have been or will be made to a large
number of companies in our industry, because the claims referred to in the
notice involve processes standard to the Electronic Manufacturing Services
industry.
Should the Company be required to seek a license from Lemelson there can be no
assurance that a license could be obtained on acceptable terms, that litigation
would not occur or that damages for the past infringement by the Company, if
any, would not be material. In addition litigation, could result in substantial
cost and diversion of resources of the Company. The failure to obtain necessary
licenses from Lemelson or the advent of litigation with Lemelson could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE: To the extent any statements in this quarterly statement may be deemed to
be forward looking, such statements should be evaluated in the context of the
risks and uncertainties inherent in the Company's business, including the
Company's continuing dependence on certain major customers; the Company's
ability to obtain financing; the availability and cost of components; the
anticipated seasonality of its business; the possibility of patent
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infringement; the timing and re-scheduling of customer orders for SigmaTron
International, Inc. and SMT Unlimited and other risks and uncertainties set
forth in the Company's periodic reports filed with the Securities and Exchange
Commission including but not limited to, its Annual Report on Form 10-K and
cautionary note contained therein for the fiscal year ended April 30, 1999. Any
forward looking statements speak as of the date of this report and the Company
makes no obligation to update such statements in light of future events or
otherwise.
RESULTS OF OPERATIONS:
Net sales increased for the three month period ended July 31, 1999 to
$20,185,936 from $18,527,432 for the three month period ended July 31, 1998. The
increase in net sales is primarily due to additional sales to some of the
Company's existing customers. The timing and rescheduling of orders has caused
the Company to experience significant quarterly fluctuations in its revenue and
earnings and the Company expects such fluctuations to continue. Historically,
the Company's highest level of sales are achieved in its second and third
quarters. In the Electronic Manufacturing Services industry the sales level can
be misleading as to whether or not a company is profitable and to what extent.
Sales levels can fluctuate due to labor only orders compared to turnkey orders.
Turnkey orders require the Company to procure the necessary components for
assembly, which increases the selling price compared to labor only services. A
turnkey order may have a higher selling price but may not be as profitable as a
labor only order.
Gross profit increased during the three month period ended July 31, 1999 to
$2,065,934 or 10.2% of net sales, compared to $1,658,562 or 9.0% of net sales
for the same period in the prior fiscal year. The increase in gross product as a
percent to net sales is primarily due to product mix.
Selling and administrative expenses increased to $1,358,442 or 6.7% of net sales
for the three month period ended July 31, 1999 compared to $1,254,254 or 6.8% of
net sales in the first quarter of fiscal 1999. The increase is primarily due to
additional support personnel in purchasing, engineering, accounting and
administrative departments.
Interest expense for bank debt and capital lease obligations for the three month
period ended July 31, 1999 was $486,378 compared to $473,520 for the same period
in the prior year. This increase was attributable to a higher outstanding
balance on the line of credit and interest expense for increased capital lease
obligations.
As a result of the factors described above, net income increased to $245,250 for
the three month period ended July 31, 1999 from $22,627 for the same period in
the prior year. Basic and dilutive earnings per share for the first fiscal
quarter of 2000 were $0.09 compared to $0.01 for the same period in the prior
year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -con't
LIQUIDITY AND CAPITAL RESOURCES:
For the three months ended July 31, 1999 the primary source of liquidity was
cash provided by borrowings from the Company's secured lender. The net cash used
in operations was $907,167 for the three months ended July 31, 1999 compared to
net cash provided by operations of $1,084,344 for the same period in the prior
year.
Net cash used in investing activities for the three months ended July 31, 1999
was $302,746 compared to $168,697 for the quarter ended July 31, 1998.
Net cash provided by financing activities was $1,079,694 for the three month
period ended July 31, 1999 compared to net cash used in financing activities of
$1,168,482 in the same period as last year.
To the extent that the Company provides funds for salaries, wages, overhead and
capital expenditure items necessary to operate its Mexican operations, the
amount of funds available for use in the Company's domestic operations may be
depleted. The funds, which ordinarily derive from the Company's cash from
operations and borrowings under its revolving credit facility, total
approximately $2,436,000 for the first three months of fiscal 2000. The Company
provides funding in U.S. dollars, which are exchanged to pesos as needed.
YEAR 2000 COMPLIANCE:
In early 1998 the Company formed a committee of executive officers and others to
examine Year 2000 compliance issues. The scope of the program is focused on the
Company's primary business applications, including both IT and non-IT
applications. This stage has been completed and management believes that these
systems are currently Year 2000 compliant. In addition, the Company has reviewed
other systems including production equipment, to determine possible risk. Based
on assurances received to date provided by vendors, the Company does not believe
significant modifications to production equipment or information systems is
required. However, the Company cannot verify assurances it has been provided by
third parties.
The Company has implemented a review process to ensure that the delivery of raw
material and services will not be disrupted due to non-compliance by a key third
party supplier. Communications with these suppliers have been favorable. The
Company is receiving assurances that no interruptions of delivery for product or
services will occur; however, the Company cannot ensure third parties will be
compliant. Non-compliance by any supplier of products or services for a
prolonged period could have an adverse effect on the Company and its results of
operations and financial condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -con't
The Company has developed a limited contingency plan as third party suppliers
for components are customer-mandated. There can be no assurance the plan will
fully mitigate any problems. Furthermore, there may be certain suppliers, such
as utilities, telecommunication companies, or material vendors where alternative
resources are limited or unavailable.
In addition, the Company cannot anticipate if a significant portion of its key
customers or its banks will be Year 2000 compliant. The Company's customers'
inability to process timely payments or the inability of the Company's bank to
provide working capital could have an adverse effect on the Company's cash flow
and liquidity. The Company cannot verify assurances provided by its customers or
banks that they will be year 2000 compliant.
Based on its internal review the Company does not anticipate that current or
future costs related to the Year 2000 issue will have a material impact on its
financial condition. To date the Company has incurred approximately $20,000 in
Year 2000 compliance costs.
The foregoing is a Year 2000 readiness disclosure entitled to protection as
provided in the Year 2000 Information and Readiness Disclosure Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS:
Not applicable
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SIGMATRON INTERNATIONAL, INC.
PART II - OTHER INFORMATION
July 31, 1999
ITEM 5. OTHER INFORMATION
The Company has received Notice of Patent Infringement from the Lemelson
Medical, Education & Research Foundation, Limited Partnership ("Lemelson").
Lemelson is alleging that the Company is infringing on certain patents and
pending patent applications owned by Lemelson which cover machine vision,
automatic identification operations and flexible manufacturing systems which are
widely used in the manufacture of electronic assemblies and integrated circuits
and in general in modern manufacturing enterprises. Over the years Lemelson has
made similar claims against a large number of companies in SigmaTron's and other
industries, many of which have been resolved to Lemelson's advantage. The Notice
offers the Company a license which calls for certain royalty payments to be made
to Lemelson for the continued use of the patents that the Company is allegedly
infringing upon. Should the Company seek a license from Lemelson there can be no
assurance that a license could be obtained on acceptable terms. If the Company
does not seek a license litigation would occur. In addition litigation could
result in substantial cost and diversion of resources of the Company. The
failure to obtain necessary licenses from Lemelson or the advent of litigation
with Lemelson could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has retained patent
counsel, which is currently investigating Lemelson's claims and the appropriate
course of action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data schedule (EDGAR version only)
(b) No report on Form 8-K was filed during the quarter ended July 31, 1999.
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGMATRON INTERNATIONAL, INC.
/s/ Gary R. Fairhead 9/7/99
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Gary R. Fairhead Date
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake 9/7/99
- ----------------------------------------------- ---------------
Linda K. Blake Date
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 7/31/99 and the Consolidated Earnings for the
quarter ended 7/31/99 and is qualified in its entirety by reference to such
Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 149855
<SECURITIES> 0
<RECEIVABLES> 17320426
<ALLOWANCES> 590000
<INVENTORY> 16899079
<CURRENT-ASSETS> 35472790
<PP&E> 19849290
<DEPRECIATION> 6556770
<TOTAL-ASSETS> 55798848
<CURRENT-LIABILITIES> 12870877
<BONDS> 0
0
0
<COMMON> 28812
<OTHER-SE> 19516930
<TOTAL-LIABILITY-AND-EQUITY> 55798848
<SALES> 20185936
<TOTAL-REVENUES> 20185936
<CGS> 18120002
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1331810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325374
<INCOME-PRETAX> 408750
<INCOME-TAX> 163500
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245250
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
