<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
QUARTERLY REORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 29, 1996 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 IRS 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 July 22, 1996
- ---------------------------- ----------------------------
Common Stock, $.50 par value 6,835,591
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INDEX
STERLING ELECTRONICS CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of financial position June
29, 1996 and March 30, 1996
Condensed consolidated statements of income - thirteen weeks
ended June 29, 1996 and July 1, 1995
Condensed consolidated statements of cash flows - thirteen
weeks ended June 29, 1996 and July 1, 1995
Notes to condensed consolidated financial statements - June
29, 1996
Item 2. Management's Discussion and Analysis of the Results of
Operations
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STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, March 30,
1996 1996
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 4,677,968 $ 4,376,818
Receivables-net of reserve
for doubtful accounts 42,018,187 50,083,042
Inventory 53,836,467 56,759,383
Other current assets 826,270 645,569
------------------ -----------------
101,358,892 111,864,812
Property and equipment - net of
depreciation 7,285,214 6,908,833
Goodwill, net of amortization 4,111,048 4,141,322
Other assets 4,425,824 3,923,233
------------------ -----------------
$ 117,180,978 $ 126,838,200
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and
accrued expenses $ 36,245,928 $ 39,378,115
Current portion - long term
obligations 277,600 290,498
Income taxes 1,906,117 805,020
------------------ -----------------
38,429,645 40,473,633
Long-term obligations - net of
amounts due within one year 23,455,263 33,719,186
Postemployment benefits and other
non-current liabilities 4,232,400 4,192,029
Shareholders' Equity
Foreign currency translation adjustment (125) (125)
Common stock, $.50 par value 3,519,784 3,517,211
Additional paid-in capital 22,298,270 22,053,742
Retained earnings 27,374,575 24,983,760
------------------ -----------------
53,192,504 50,554,588
------------------ -----------------
Less treasury stock, at cost 2,128,834 2,101,236
------------------ -----------------
51,063,670 48,453,352
------------------ -----------------
$ 117,180,978 $ 126,838,200
================== =================
</TABLE>
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STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THIRTEEN WEEKS ENDED JUNE 29, 1996 AND JULY 1, 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ----------------
<S> <C> <C>
Net sales $ 82,122,830 $ 70,422,501
Cost of sales 63,965,326 55,301,313
Selling, administrative and
other operating expenses 13,640,695 11,076,158
-------------- ----------------
77,606,021 66,377,471
Income from operations 4,516,809 4,045,030
Interest expense 517,993 263,068
-------------- ----------------
Income before income taxes 3,998,816 3,781,962
Income taxes 1,608,000 1,509,000
-------------- ----------------
2,390,816 2,272,962
Income from discontinued operations - 24,159
-------------- ----------------
$ 2,390,816 $ 2,297,121
============== ================
Income per common share and common share equivalents:
Primary
Income from continuing operations $ 0.34 $ 0.32
Income from discontinued operations - -
-------------- ----------------
$ 0.34 $ 0.32
============== ================
Fully diluted
Income from continuing operations $ 0.34 $ 0.32
Income from discontinued operations - -
-------------- ----------------
$ 0.34 $ 0.32
============== ================
Number of common shares and common share
equivalents used in computing per share amounts
Primary 7,048,088 7,042,976
Fully diluted 7,048,088 7,088,443
</TABLE>
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STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTEEN WEEKS ENDED JUNE 29, 1996 AND JULY 1, 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,390,815 $ 2,297,122
Adjustments needed to reconcile net income
to net cash provided by operating acitivities:
Depreciation and amortization 439,102 281,948
Provision for losses on accounts receivable 331,477 234,019
-------------- --------------
3,161,394 2,813,089
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable 7,733,378 (3,337,330)
(Increase) decrease in inventories 2,922,916 (8,378,733)
Decrease in prepaid and other current assets (899,651) (258,874)
Increase (decrease) in accounts payable and accrued
expenses (1,090,575) 4,319,559
Increase in postemployment benefits and other
non-current liabilities 40,371 50,699
-------------- --------------
Net cash (used) provided by operating activities 11,867,833 (4,791,590)
INVESTING ACTIVITIES
Purchase of property and equipment (776,008) (459,809)
Increase (decrease) in other assets 207,158 (52,653)
-------------- --------------
Net cash (used) provided in investing activities (568,850) (512,462)
FINANCING ACTIVITIES
Proceeds from borrowings under revolver 4,836,313 21,526,562
Repayments of borrowings under revolver (30,030,166) (17,462,805)
-------------- --------------
Net increase (decrease) in revolving line of credit (25,193,853) 4,063,757
Proceeds from long term borrowings 15,000,000 -
Principal payments on other long term debt (82,968) (87,612)
Issuance of common stock under option plans 169,904 67,500
Purchases of treasury stock (890,916) -
-------------- --------------
Net cash provided (used) by financing activities (10,997,833) 4,043,645
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 301,150 (1,260,407)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,376,818 3,110,397
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,677,968 $ 1,849,990
============== ==============
</TABLE>
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STERLING ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 1996
The accompanying unaudited condensed consolidated financial statements include
the accounts of Sterling Electronics Corporation (the "Company") 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 June 29, 1996 and the results of operations for the thirteen
weeks then ended. The results of operations for the thirteen weeks ended June
29, 1996 are not necessarily indicative of the results to be expected for the
full year.
Long-term debt as of June 29, 1996 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 $ 8,000,000 1999
Senior note 0 15,000,000 2007
Capitalized lease obligations 102,038 133,912 1996-2000
Equipment loans 175,562 321,351 1999-2001
-------- -----------
$277,600 $23,455,263
</TABLE>
On April 15, 1996 the Company borrowed $15 million from an insurance company
under a ten year agreement with a fixed interest rate of 6.45%. The loan
agreement requires semiannual interest payments with seven equal annual
principal payments of $2,143,000 commencing on April 15, 2000. Proceeds from
this loan were used to reduce amounts borrowed under the revolving credit line.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
Thirteen Weeks Ended June 29, 1996 Compared to Thirteen Weeks Ended July 1, 1995
Net Sales - Consolidated net sales for the current thirteen week period were
17% ahead of sales for thirteen week period a year ago. This increase is the
result of increases in semi-conductor revenues (up 11% ), connector revenues
(up 28%) and passive/electro-mechanical revenues (up 18%).
Gross Margin - Sterling's consolidated gross margin for the thirteen weeks
improved to 22.1% from 21.5% for the thirteen weeks a year ago stemming
principally from improved gross margins on semiconductor sales and sales of
higher margin passive and connector products increasing more rapidly than
semiconductor sales.
Selling and Administrative Costs - Consolidated operating expenses increased to
16.6% of sales compared to 15.7% of sales for the thirteen weeks a year ago.
The majority of the dollar increase is due to increased sales personnel and
sales support related costs - commissions, salaries, travel and fringe
benefits, including the costs associated with the recently established team
of field application engineers. Additionally, the Company operated six more
sales locations (Portland, Calgary, Vancouver, Ottawa, Toronto and Montreal)
during the current thirteen week period compared to a year ago. Various other
operating expenses including management information systems, telephone and
warehouse expenses also increased.
Interest Expense - The 97% increase in interest expense is the result of the
$15 million increase from the comparable period in average indebtedness plus
the effect of the 6.45% interest rate on the $15 million senior note entered
into on April 15, 1996 being higher than the rates on borrowings during the
comparable period.
Liquidity and Capital Resources - Since the beginning of the current fiscal
year, Sterling has reduced receivables and inventory by approximately $10.7
million. In connection with this reduced investment, the Company reduced its
borrowings by approximately $10.3 million. A use of funds has been capital
expenditures of approximately $800,000, principally for new computer hardware
and software. These expenditures were financed by cash flow from operations.
On April 15, 1996 the Company borrowed $15 million at a fixed interest rate of
6.45% from an insurance company under a ten year agreement with a seven year
average maturity. Proceeds from this loan were used to reduce amounts borrowed
under the bank credit line.
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Working capital was $62.9 million at June 29, 1996 compared to $71.4 million at
March 30, 1996. The current ratio was 2.6 compared to 2.8 at the beginning of
the year. Working capital declined as a result of reduced inventory and
receivables required to support a lower sales backlog, partially offset by
decreased accounts payable and accrued expenses. Even though inventories have
decreased, average annualized inventory turnover for the current period was
4.6, down from 5.4 for fiscal 1996.
The ratio of long-term debt to total capitalization was 31% at June 29, 1996
compared to 41% at the beginning of the year. At June 29, 1996 the Company had
$32 million in available credit under the $40 million bank credit line which
matures on February 16, 1999. 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.
On June 5, 1996, the Company agreed to lease a 181,000 square foot warehouse to
be constructed adjacent to the Dallas/Fort Worth International Airport. The
lease term is ten years with monthly rental payments of approximately $82,000,
plus the Company is responsible for all property taxes, insurance and
maintenance. The Company intends to purchase and/or lease $4 million to $6
million of material handling equipment, computer equipment and material
management software for this warehouse and distribution center. The Company
intends to consolidate the distribution operations of its three existing
regional distribution centers into this new state-of-the-art facility during
the fourth quarter of fiscal 1997 and the first quarter of fiscal 1998.
Management believes that the capital resources described above should be
adequate to fund the cost of this consolidation and the operation of the new
distribution center.
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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 June 29, 1996
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
/s/ Mac McConnell
--------------------------------
Mac McConnell, Vice-President
Chief Financial Officer
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EXHIBIT INDEX
(11) Statement re: computation of earnings per share
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT 11
STERLING ELECTRONICS CORPORATION
(11)- Statement Re: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------------------------
June 29, 1996 July 1, 1995
<S> <C> <C>
PRIMARY
Average shares outstanding 6,887,532 6,883,088
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 160,556 159,888
------------- -------------
Total 7,048,088 7,042,976
Net income applicable to common stock
Income from continuing operations $ 2,390,816 $ 2,272,962
Income from discontinued operations - 24,159
------------- -------------
$ 2,390,816 $ 2,297,121
============= =============
Per share amount
Income from continuing operations $ 0.34 $ 0.32
Income from discontinued operations - -
------------- -------------
$ 0.34 $ 0.32
============= =============
FULLY DILUTED
Average shares outstanding 6,887,532 6,883,088
Net effect of dilutive stock options-
based on the treasury stock method
using average market price 160,556 205,355
------------- -------------
Total 7,048,088 7,088,443
Net income applicable to common stock
Income from continuing operations $ 2,390,816 $ 2,272,962
Income from discontinued operations - 24,159
------------- -------------
$ 2,390,816 $ 2,297,121
============= =============
Per share amount
Income from continuing operations $ 0.34 $ 0.32
Income from discontinued operations - -
------------- -------------
$ 0.34 $ 0.32
============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTER ENDED JUNE 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> JUN-29-1996
<CASH> 4,667,968
<SECURITIES> 0
<RECEIVABLES> 43,398,305
<ALLOWANCES> 1,380,118
<INVENTORY> 53,836,467
<CURRENT-ASSETS> 101,358,892
<PP&E> 12,455,063
<DEPRECIATION> 5,169,849
<TOTAL-ASSETS> 117,180,978
<CURRENT-LIABILITIES> 38,429,645
<BONDS> 23,455,263
<COMMON> 3,519,784
0
0
<OTHER-SE> 47,543,886
<TOTAL-LIABILITY-AND-EQUITY> 117,180,978
<SALES> 82,122,830
<TOTAL-REVENUES> 82,122,830
<CGS> 63,965,326
<TOTAL-COSTS> 77,606,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 331,477
<INTEREST-EXPENSE> 517,993
<INCOME-PRETAX> 3,998,816
<INCOME-TAX> 1,608,000
<INCOME-CONTINUING> 2,390,816
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,390,816
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
