<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1995 Commission File No.: 1-5522
STERLING ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 74-1261194
(State or other jurisdiction of (I.R. S. Employer Identification No.)
incorporation or organization)
4201 Southwest Freeway, Houston, Texas 77027
(Address of principal executive office) (Zip Code)
Registrant's area code and telephone number: (713) 627-9800
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period by this report.
Class Outstanding at November 7, 1995
Common Stock, $.50 par value 6,588,941
Page 1 of 12
<PAGE>
INDEX
STERLING ELECTRONICS CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of financial position
September 30, 1995 and April 1, 1995
Condensed consolidated statements of income - thirteen
weeks and twenty-six weeks ended September 30, 1995 and
October 1, 1994
Condensed consolidated statements of cash flows - twenty-six
weeks ended September 30, 1995 and October 1, 1994
Notes to condensed consolidated financial statements -
September 30, 1995
Item 2. Management's Discussion and Analysis of the Results of
Operations
Page 2 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, April 1,
ASSETS 1995 1995
------------ ---------------
Restated-Note D
<S> <C> <C>
Current assets
Cash $ 3,141,273 $ 3,110,397
Receivables-net of reserve
for doubtful accounts 45,294,929 34,594,615
Inventory 51,618,775 36,968,153
Other current assets 587,425 320,043
Net assets of discontinued operations - Note D 0 1,812,546
------------ -----------
Total current assets 100,642,402 76,805,754
Property & equipment-net of
depreciation 5,974,813 5,055,234
Goodwill, net of amortization 4,192,168 1,757,107
Other assets 3,623,238 2,729,925
------------ -----------
$114,432,621 $86,348,020
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable & accrued expenses $33,751,790 $29,540,584
Current portion - long term obligations 296,699 303,233
------------ -----------
Total current liabilities 34,048,489 29,843,817
Long-term obligations - net of amounts
due within one year 31,643,232 12,950,129
Postemployment benefits and other
non-current liabilities 4,197,785 4,057,205
Shareholders' Equity
Common stock, $.50 par value 3,346,899 3,343,005
Additional paid-in capital 16,804,112 16,410,284
Retained earnings 24,795,905 20,535,094
------------ -----------
44,946,916 40,288,383
Less treasury stock, at cost 403,801 791,514
------------ -----------
44,543,115 39,496,869
------------ -----------
$114,432,621 $86,348,020
------------ -----------
------------ -----------
</TABLE>
Page 3 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THIRTEEN WEEKS ENDED SEPTEMBER 30, 1995 AND OCTOBER 1, 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------------
Restated-Note D
<S> <C> <C>
Net sales $80,383,000 $57,538,640
Cost of sales 63,179,966 44,639,975
Selling, administrative and
other operating expenses 12,601,875 9,673,338
----------- -----------
75,781,841 54,313,313
Income from operations 4,601,159 3,225,327
Interest expense 379,884 315,904
----------- -----------
Income before income taxes and
minority interests 4,221,275 2,909,423
Income taxes 1,699,000 1,180,000
----------- -----------
Income from continuing operations $2,522,275 $1,729,423
Discontinued operations
Income (loss) from operations less
applicable income taxes of $411,000
and $0 respectively (546,483) 2,487
Loss on disposal (12,000) 0
----------- -----------
Net income $1,963,792 $1,731,910
----------- -----------
----------- -----------
Income per common share and common share equivalents:
Primary
Income from continuing operations $0.37 $0.26
Income (loss) from discontinued operations (0.08) 0.00
----------- -----------
0.29 0.26
----------- -----------
----------- -----------
Fully diluted
Income from continuing operations $0.37 $0.26
Income (loss) from discontinued operations (0.08) 0
----------- -----------
$0.29 $0.26
----------- -----------
----------- -----------
Number of common shares and common share
equivalents used in computing per share amounts
Primary 6,808,238 6,655,475
Fully diluted 6,816,192 6,660,690
</TABLE>
Page 4 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
TWENTY-SIX WEEKS ENDED SEPTEMBER 30, 1995 AND OCTOBER 1, 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------------
Restated-Note D
<S> <C> <C>
Net sales $150,805,501 $113,803,926
Cost of sales 118,479,279 88,083,096
Selling, administrative and
other operating expenses 23,680,083 19,140,652
------------ ------------
142,159,362 107,223,748
Income from operations 8,646,139 6,580,178
Interest expense 642,952 592,079
------------ ------------
Income before income taxes and
minority interests 8,003,187 5,988,099
Income taxes 3,208,000 2,426,000
------------ ------------
Income from continuing operations $4,795,187 $3,562,099
Discontinued operations
Income (loss) from operations less
applicable income taxes of $393,000
and $13,000 respectively (522,374) 25,047
Loss on disposal (12,000) 0
------------ ------------
Net income 4,260,813 3,587,146
------------ ------------
------------ ------------
Income per common share and common share equivalents:
Primary
Income from continuing operations $0.71 $0.54
Income (loss) from discontinued operations (0.08) 0.00
------------ ------------
$0.63 $0.54
------------ ------------
------------ ------------
Fully diluted
Income from continuing operations $0.71 $0.54
Income (loss) from discontinued operations (0.08) 0
------------ ------------
$0.63 $0.54
------------ ------------
------------ ------------
Number of common shares and common share
equivalents used in computing per share amounts
Primary 6,757,917 6,642,982
Fully diluted 6,783,545 6,646,060
</TABLE>
Page 5 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED SEPTEMBER 30, 1995 AND OCTOBER 1, 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------------
Restated-Note D
<S> <C> <C>
OPERATING ACTIVITIES
Net income $4,260,813 $3,587,144
Adjustments needed to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 579,860 458,778
Provision for losses on accounts receivable 667,980 311,798
------------ ------------
5,508,653 4,357,720
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (8,722,354) 140,723
(Increase) in inventories (10,358,651) (4,203,656)
(Increase) decrease in other current assets 727,040 (216,533)
Increase decrease in accounts payable and
accrued expenses 1,050,391 (3,830,987)
Increase (decrease) in post employment benefits
and other non-current liabilities 106,522 (21,744)
------------ -----------
Net cash used in operating activities (11,688,399) (3,774,477)
INVESTING ACTIVITIES
Purchases of property and equipment (1,289,050) (1,008,572)
Acquisition of DGW Electronics Corporation (5,807,745) 0
(Increase) in other assets (33,659) (61,807)
------------ -----------
Net cash used in investing activities (7,130,454) (1,070,379)
FINANCING ACTIVITIES
Proceeds from borrowings under revolving line of credit 47,307,710 20,657,749
Repayments of borrowings under revolving line of credit (28,467,787) (16,657,749)
------------ -----------
Net change in revolving line of credit 18,839,923 4,000,000
Principal payments on long-term debt, capital lease
obligations and other (153,354) (120,677)
Proceeds from excercise of stock options 163,160 0
------------ -----------
Net cash provided by financing activities 18,849,729 3,879,323
Decrease in cash and cash equivalents 30,876 (965,533)
Cash and cash equivalents at beginning of period 3,110,397 2,859,647
------------ -----------
Cash and cash equivalents at end of period $3,141,273 $1,894,114
------------ -----------
------------ -----------
</TABLE>
During fiscal 1996 and 1995 the Company issued $622,000 and $600,000,
respectively, of common stock under the Company's Incentive Bonus Plan
Page 6 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
Note A - Accounting Policies
The accompanying unaudited condensed consolidated financial statements
include the accounts of Sterling Electronics Corporation and its
majority-owned subsidiaries after elimination of all significant intercompany
accounts and transactions. In the opinion of the company, the unaudited
condensed consolidated financial statements contain all the adjustments
(consisting of only normal accruals) necessary to present fairly the
financial position as of September 30, 1995 and the results of operations for
the thirteen and twenty-six weeks then ended. The results of operations for
the thirteen and twenty-six weeks ended September 30, 1995 are not
necessarily indicative of the results to be expected for the full year.
Note B - Long-term Debt
Long-term debt as of September 30, 1995 and the amounts due within one year
are as follows:
<TABLE>
<CAPTION>
AMOUNTS DUE LONG-TERM MATURING IN
DESCRIPTION WITHIN ONE YEAR PORTION FISCAL YEAR
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Revolving credit line $ -0- $31,000,000 1998
Capitalized lease
obligations 122,687 198,196 1996-2000
Equipment loans 174,012 445,036 1999-2001
------- ----------
$296,699 $31,643,232
</TABLE>
Note C - Acquisition of Canadian Subsidiary
The Company completed the acquisition of DGW Electronics Corporation
("DWG") on August 22, 1995. DGW is a distributor of electronic parts with
five locations in Canada. The operating results of DGW are included with
those of the Company from the date of the acquisition forward. Sales of DGW
from August 22, 1995 through September 30, 1995 were approximately $2.7
million.
Page 7 of 12
<PAGE>
Note D - Sale of Phaostron Instruments
The Company completed the sale of its Phaostron Instruments subsidiary in
September 1995. The operating results, assets and liabilities of Phaostron
have been classified as discontinued operations for all periods presented.
Previously reported amounts have been restated to conform to this
presentation. Phaostron Instruments accounted for 1%, 2% and 4%,
respectively, of total Company sales in fiscal years 1995, 1994 and 1993.
Page 8 of 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED SEPTEMBER 30, 1995 COMPARED TO TWENTY-SIX WEEKS ENDED
OCTOBER 1, 1994.
NET SALES - Consolidated net sales for the current twenty-six week period
were 35% ahead of sales for the twenty-six week period a year ago. Sales
increased 24% for passive/electromechanical components, 19% for connector
products and 44% for semiconductor products, compared to the twenty-six week
period a year ago.
GROSS MARGIN - Sterling's consolidated gross margin for the twenty-six weeks
declined to 21.4% from 22.6% for the twenty-six weeks a year ago stemming
principally from competitive pressures and semiconductor sales increasing
more rapidly than sales of higher margin passive and connector products.
SELLING AND ADMINISTRATIVE COSTS - Consolidated operating expenses declined
to 15.7% of sales compared to 16.8% of sales for the twenty- six weeks a year
ago. This improvement resulted from economies of scale from sales growth
(fixed costs were spread over an increasing sales base) coupled with
continuing cost controls.
OPERATING INCOME - As a result of gross margin dollars increasing more
rapidly than operating expenses, operating income increased $2,066,000, a 31%
improvement over the previous fiscal year.
INTEREST EXPENSE - The 9% increase in interest expense is the result of the
$3.7 million increase from the comparable period in average indebtedness
under the revolving credit line partially offset by the effect of slightly
lower interest rates.
THIRTEEN WEEKS ENDED SEPTEMBER 30, 1995 COMPARED TO THIRTEEN WEEKS ENDED
OCTOBER 1, 1994.
NET SALES - Consolidated net sales for the current thirteen week period were
40% ahead of sales for the thirteen week period a year ago. Sales increased
29% for passive/electromechanical components, 18% for connector products and
57% for semiconductor products, compared to the thirteen week period a year
ago.
GROSS MARGIN - Sterling's consolidated gross margin for the thirteen weeks
declined to 21.4% from 22.4% for the thirteen weeks a year ago stemming
principally from competitive pressures and semiconductor sales increasing
more rapidly than sales of higher margin passive and connector products.
SELLING AND ADMINISTRATIVE COSTS - Consolidated operating expenses declined
to 15.7% of sales compared to 16.8% of sales for the thirteen
Page 9 of 12
<PAGE>
weeks a year ago. This improvement resulted from economies of scale from
sales growth (fixed costs were spread over an increasing sales base) coupled
with continuing cost controls.
OPERATING INCOME - As a result of gross margin dollars increasing more
rapidly than operating expenses, operating income increased $1,376,000, a 43%
improvement over the previous fiscal year.
INTEREST EXPENSE - The 20% increase in interest expense is the result of the
$5.5 million increase from the comparable period in average indebtedness
under the revolving credit line partially offset by the effect of slightly
lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of the current fiscal year, Sterling has invested $19.1
million in receivables and inventory to support higher sales volume. In
connection with this increased investment, the Company increased its
borrowings under the bank line by $18.8 million. A secondary use of funds was
the $5.8 million used to acquire DGW Electronics Corporation in Canada.
Another use of funds has been capital expenditures of $1.3 million,
principally for new computer hardware and software. The expenditures in
excess of th $18.8 million increase in borrowings under the bank line were
financed by cash flow from operations.
The Company's needs for additional investment in receivables and inventories
is expected to continue in connection with anticipated sales growth and
geographic expansion.
Management believes that internal generation of cash flow (net income plus
non-cash items such as depreciation and amortization), available equipment
financing, funds available under the bank credit line plus possible increases
in the bank credit line will be sufficient to meet liquidity needs over the
next two fiscal years.
Working capital was $66.6 million at September 30, 1995 compared to $47.0
million at April 1, 1995. The current ratio was 3.0 compared to 2.6 at the
beginning of the year. Working capital continues to increase, reflected
principally in higher receivables and inventory required to support higher
sales, partially offset by increased accounts payable and accrued expenses.
The ratio of long-term debt to total capital was 42% at September 30, 1995
compared to 25% at the beginning of the year.
Page 10 of 12
<PAGE>
OTHER INFORMATION
ITEM 1 THROUGH ITEM 5
The Company was not required to report on Items 1 through 5.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(11) Statement re: computation of earnings per share
(b) Reports of Form 8-K -- There were no reports on Form 8-K filed
during the thirteen weeks ended September 30, 1995
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.
STERLING ELECTRONICS CORPORATION
DATE: NOVEMBER 10, 1995 Mac McConnell
- ------------------------- ---------------------------------
Mac McConnell, Vice-President
Chief Financial Officer
Page 11 of 12
<PAGE>
STERLING ELECTRONICS CORPORATION
(11) - Statement Re: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
------------------------------ -----------------------------
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 6,607,656 6,532,260 6,581,489 6,516,770
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 200,582 123,215 176,428 126,212
---------- ---------- ---------- ----------
Total 6,808,238 6,655,475 6,757,917 6,642,982
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income applicable to common stock
Income from continuing operations $2,522,275 $1,729,423 $4,795,187 $3,562,099
Income (loss) from discontinued operations (558,483) 2,487 (534,374) 25,047
---------- ---------- ---------- ----------
$1,963,792 $1,731,910 $4,260,813 $3,587,146
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per share amount
Income from continuing operations $0.37 $0.26 $0.71 $0.54
Income (loss) from discontinued operations (0.08) 0.00 (0.08) 0.00
---------- ---------- ---------- ----------
$0.29 $0.26 $0.63 $0.54
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED
Average shares outstanding 6,607,656 6,532,260 6,581,489 6,516,770
Net effect of dilutive stock options-
based on the treasury stock method
using the end of period market price,
if higher than average market price 208,536 128,430 202,056 129,290
---------- ---------- ---------- ----------
Total 6,816,192 6,660,690 6,783,545 6,646,060
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income applicable to common stock
Income from continuing operations $2,522,275 $1,729,423 $4,795,187 $3,562,099
Income (loss) from discontinued operations (558,483) 2,487 (534,374) 25,047
---------- ---------- ---------- ----------
$1,963,792 $1,731,910 $4,260,813 $3,587,146
Per share amount
Income from continuing operations $0.37 $0.26 $0.71 $0.54
Income (loss) from discontinued operations (0.08) 0.00 (0.08) 0.00
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
$0.29 $0.26 $0.63 $0.54
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Page 12 of 12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-30-1996
<PERIOD-START> APR-02-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,141,273
<SECURITIES> 0
<RECEIVABLES> 46,668,744
<ALLOWANCES> 1,373,815
<INVENTORY> 51,618,775
<CURRENT-ASSETS> 100,642,402
<PP&E> 10,151,190
<DEPRECIATION> 4,176,377
<TOTAL-ASSETS> 114,432,621
<CURRENT-LIABILITIES> 34,048,489
<BONDS> 31,643,232
<COMMON> 3,346,899
0
0
<OTHER-SE> 41,196,216
<TOTAL-LIABILITY-AND-EQUITY> 114,432,621
<SALES> 150,805,501
<TOTAL-REVENUES> 150,850,501
<CGS> 118,479,279
<TOTAL-COSTS> 142,159,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 579,860
<INTEREST-EXPENSE> 642,952
<INCOME-PRETAX> 8,003,187
<INCOME-TAX> 3,208,000
<INCOME-CONTINUING> 4,795,187
<DISCONTINUED> (534,374)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,260,813
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
