1
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 27, 1997 Commission File No.: 1-5522
STERLING ELECTRONICS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 74-1261194
(Sate 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 November 7,1997
Common Stock, $.50 par value 7,256,205
<PAGE>
INDEX
STERLING ELECTRONICS CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of financial position September 27
1997 and March 29, 1997
Condensed consolidated statements of income - thirteen and twenty-six
weeks ended September 27, 1997 and September 28, 1996
Condensed consolidated statements of cash flows - twenty-six weeks ended
September 27, 1997 and September 28, 1996
Notes to condensed consolidated financial statements - September 27,
1997
Item 2. Management's Discussion and Analysis of the Results of
Operations
<PAGE>
<TABLE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 27, March 29,
1997 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 714,542 $ 3,817,570
Receivables-net of reserve
for doubtful accounts 58,804,845 55,722,058
Inventory 79,110,249 67,531,193
Other current assets 1,630,211 1,472,205
------------------ ------------------
140,259,847 128,543,026
Property and equipment - net of
depreciation 9,741,404 9,708,564
Goodwill, net of amortization 9,012,609 9,205,174
Other assets 4,804,608 4,072,845
------------------ ------------------
$ 163,818,468 $ 151,529,609
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and
accrued expenses $ 43,127,635 $ 48,991,420
Current portion - long term
obligations 242,201 238,907
Income taxes 2,520,950 1,479,371
------------------ ------------------
45,890,786 50,709,698
Long-term obligations - net of
amounts due within one year 51,788,478 39,300,820
Postemployment benefits and other
non-current liabilities 5,038,136 5,035,258
Shareholders' Equity
Common stock, $.50 par value 3,695,613 3,695,613
Additional paid-in capital 26,655,472 26,794,705
Retained earnings 33,071,627 29,970,978
------------------ ------------------
63,422,712 60,461,296
Treasury stock, at cost (2,222,801) (3,905,829)
Foreign currency translation adjustment (98,843) (71,634)
------------------ ------------------
65,546,670 64,295,491
------------------ ------------------
$ 168,264,070 $ 159,341,267
================== ==================
</TABLE>
<PAGE>
<TABLE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
1997 1996
----------------- ----------------
<S> <C> <C>
Net sales $100,547,836 $77,276,952
Cost of sales 80,203,848 59,691,551
----------------- ----------------
Gross Profit 20,343,988 17,585,401
Selling, administrative and
other operating expenses 16,850,183 13,318,044
----------------- ----------------
Income from operations 3,493,805 4,267,357
Interest expense 853,059 400,037
----------------- ----------------
Income before income taxes 2,640,746 3,867,320
Income taxes 1,030,000 1,527,000
----------------- ----------------
Net Income $ 1,610,746 $ 2,340,320
================= ================
Income per common share and common share equivalents:
Primary $ 0.22 $ 0.32
Fully diluted $ 0.21 $ 0.32
Number of common shares and common share
equivalents used in computing per share amounts
Primary 7,435,147 7,226,688
Fully diluted 7,662,700 7,226,688
</TABLE>
<PAGE>
<TABLE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
TWENTY-SIX WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
1997 1996
----------------- -------------------
<S> <C> <C>
Net sales $195,390,134 $ 159,399,782
Cost of sales 155,536,079 123,656,877
----------------- -------------------
Gross Profit 39,854,055 35,742,905
Selling, administrative and
other operating expenses 33,234,159 26,958,739
----------------- -------------------
Income from operations 6,619,896 8,784,166
Interest expense 1,537,269 918,030
----------------- -------------------
Income before income taxes 5,082,627 7,866,136
Income taxes 1,982,000 3,135,000
----------------- -------------------
Net Income $ 3,100,627 $ 4,731,136
================= ===================
Income per common share and common share equivalents:
Primary $ 0.43 $ 0.65
Fully diluted $ 0.41 $ 0.65
Number of common shares and common share
equivalents used in computing per share amounts
Primary 7,280,406 7,313,590
Fully diluted 7,619,224 7,313,590
</TABLE>
<PAGE>
<TABLE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
1997 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,100,627 $ 4,731,134
Adjustments needed to reconcile net income
to net cash provided by operating acitivities:
Depreciation and amortization 1,561,871 917,249
Provision for losses on accounts receivable 768,670 695,439
Changes in operating assets and liabilities
(Increase) decrease in accounts receivable (3,851,457) 8,834,680
(Increase) decrease in inventories (11,579,056) 3,436,648
Increase in prepaid and other current assets (158,006) (250,175)
Decrease in accounts payable and accrued
expenses (4,949,883) (2,607,110)
Increase (decrease) in accrued income taxes 1,041,579 (246,503)
Increase in postemployment benefits and other
non-current liabilities 72,170 97,743
---------------- ----------------
Net cash (used) provided by operating activities (13,993,485) 15,609,105
INVESTING ACTIVITIES
Purchase of property and equipment (1,383,744) (1,706,690)
Increase in other assets (750,165) (494,795)
---------------- ----------------
Net cash (used) provided in investing activities (2,133,909) (2,201,485)
FINANCING ACTIVITIES
Proceeds from borrowings under revolver 54,332,460 11,615,700
Repayments of borrwoings under revolver (41,715,332) (39,287,249)
---------------- ----------------
Net increase (decrease) in revolving line of credit 12,617,128 (27,671,549)
Proceeds from long term borrowings - 15,000,000
Principal payments on other long term debt (126,176) (151,993)
Stock issued under employee plans 680,653 168,225
Purchases of treasury stock (142,065) (3,184,515)
---------------- ----------------
Net cash provided (used) by financing activities 13,029,540 (15,839,832)
Effect of exchange rate changes on cash (5,174) -
---------------- ----------------
13,024,366 (15,839,832)
DECREASE IN CASH AND CASH EQUIVALENTS (3,103,028) (2,432,212)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,817,570 4,376,818
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 714,542 $ 1,944,606
================ ================
</TABLE>
<PAGE>
STERLING ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 1997
Note A - Accounting Policies
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 September 27, 1997 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 27, 1997
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 27, 1997 and the amounts due within one
year are as follows:
AMOUNTS DUE LONG TERM MATURING IN
DESCRIPTION WITHIN ONE YEAR PORTION FISCAL YEAR
Revolving credit line $ 0 $ 36,617,128 1999
Senior note 0 15,000,000 2007
Capitalized lease obligation 63,824 67,466 2000
Equipment loans 178,377 103,884 1999-2001
---------- ----------
$ 242,201 $ 51,788,478
On October 7, 1997 the Company borrowed $5 million under a 120 day
note from one of the banks in the Company's revolving credit line.
<PAGE>
Note C - Merger
On September 19, 1997 Sterling announced the signing of a definitive
agreement to be acquired by Marshall Industries, an El Monte, California
based electronics distributor. A merger proxy statement has been filed with
the Securities and Exchange Commission and is currently under review. The
acquisition is subject to the approval of Sterling's shareholders and the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act ("HSR"). The Company has been informed that the waiting
period under the HSR has been terminated.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
Thirteen Weeks ended September 27, 1997 compared to thirteen weeks ended
September 28, 1996
Net Sales - Consolidated net sales for the current thirteen week period
were 30% ahead of sales for the thirteen week period a year ago. If the sales of
Marsh Electronics, Inc. ("Marsh"), acquired in November, 1996, were excluded,
sales would have increased 17%. Such increase would be the result of increased
passive and electromechanical, connector and semiconductor revenues.
Gross Margin - Sterling's consolidated gross margin for the thirteen weeks
declined to 20.2% from 22.8% for the thirteen weeks a year ago. The gross margin
percentage declined in all major product categories as a result of competitive
pricing pressures.
Selling and Administrative Costs - Consolidated operating expenses
decreased to 16.8% of sales compared to 17.2% of sales for the thirteen weeks a
year ago. Operating expenses decreased as a percentage of sales as a result of
economies of scale from sales growth. However, operating expense dollars
increased 26%. The majority of the dollar increase is due to the cost of
operating the four Marsh sales offices and the Marsh service center during the
current period. In addition to the four Marsh locations the Company operated two
more sales locations (Mission, Texas and Rochester, New York) during the current
period than a year ago. Warehouse expenses, management information system costs
and the cost of the recently established team of field application engineers
increased significantly for the current thirteen week period compared to the
thirteen week period a year ago.
Interest Expense - The 113% increase in interest expense is primarily the
result of the $25 million increase from the comparable period in average
indebtedness.
Twenty-six weeks ended September 27, 1997 compared to twenty-six weeks ended
September 28, 1996
Net Sales - Consolidated net sales for the current twenty-six week period
were 23% ahead of sales for the twenty-six week period a year ago. If the sales
of Marsh Electronics, Inc. ("Marsh"), acquired in November, 1996, were excluded,
sales would have increased 9%. Such increase would be the result of increased
passive and electromechanical, connector and semiconductor revenues.
Gross Margin - Sterling's consolidated gross margin for the twenty-six
weeks declined to 20.4% from 22.4% for the twenty-six weeks a year ago. The
gross margin percentage declined in all major product categories as a result of
competitive pricing pressures.
Selling and Administrative Costs - Consolidated operating expenses
increased to 17.0% of sales compared to 16.9% of sales for the twenty-six weeks
a year ago. Operating expense dollars increased 23%. The majority of the dollar
increase is due to the cost of operating the four Marsh sales offices and the
Marsh service center during the current period. In addition to the four Marsh
locations the Company operated two more sales locations (Mission, Texas and
Rochester, New York) during the current period than a year ago. Warehouse
expenses, management information system costs and the cost of the recently
established team of field application engineers increased significantly for the
current twenty-six week period compared to the twenty-six week period a year
ago.
Interest Expense - The 67% increase in interest expense is primarily the
result of the $18 million increase from the comparable period in average
indebtedness.
Liquidity and Capital Resources - Since the beginning of the current fiscal
year, Sterling has increased inventory by approximately $11.6 million and has
reduced accounts payable and accrued expenses by approximately $ 5.9 million. In
connection with the increase in inventory and reduction in current liabilities,
the Company increased its borrowings by approximately $12.5 million. Additional
use of funds has been capital expenditures of approximately $ 1,384,000,
principally for new computer hardware and software. These capital expenditures
were financed by cash flow from operations.
Working capital was $ 94.4 million at September 27, 1997 compared to $77.8
million at March 39, 1997. The current ratio was 3.1 compared to 2.5 at the
beginning of the year. Working capital increased as a result of increased
inventory and decreased accounts payable and accrued expenses. Average
annualized inventory turnover for the current period was 4.2, down slightly from
4.3 for fiscal 1997.
At September 27, 1997 the Company had $ 3 million in available credit under
the $40 million bank credit line which matures on February 16, 1999. On October
7, 1997, the Company borrowed $5 million under a 120 day note from one of the
banks in the Company's bank credit line. Management believes that internal and
external sources of cash will be sufficient to meet liquidity needs over the
next year.
On June 5, 1996, the Company agreed to lease a 181,000 square foot
warehouse which was constructed during fiscal 1997 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. As of September 27, 1997, the Company
also has leased material handling equipment, computer equipment and material
management software for this warehouse and distribution center. The lease term
on the equipment lease is five years with monthly rental payments of
approximately $57,000, plus the Company is responsible for all property taxes,
insurance and maintenance. Additionally, the Company has advanced approximately
$3 million for additional equipment and software for which the Company has a
lease commitment from a major leasing company to lease for five years. 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
third and fourth quarters 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.
<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 27, 1997
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
--------------------------------------
Date: November 10, 1997
Mac McConnell, Vice-President
Chief Financial Officer
<PAGE>
<TABLE>
STERLING ELECTRONICS CORPORATION
(11) - Statement Re: COMPUTATION OF PER SHARE EARNINGS
<S> <C> <C>
Thirteen weeks ended Twenty-six weeks ended
------------------------------ -----------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
PRIMARY
Average shares outstanding 7,176,820 7,119,278 7,134,650 7,175,593
Net effect of dilutive stock options-
based on the treasury stock
method using average
market price 258,327 107,410 145,756 137,997
------------- -------------- -------------- ------------
Total 7,435,147 7,226,688 7,280,406 7,313,590
============= ============== ============== ============
Net income applicable to common stock $ 1,610,746 $ 2,340,320 $ 3,100,627 $ 4,731,136
Per share amount $ 0.22 $ 0.32 $ 0.43 $ 0.65
FULLY DILUTED
Average shares outstanding 7,176,820 7,119,278 7,135,651 7,175,593
Net effect of dilutive stock options-
based on the treasury stock
method using average
market price 485,880 107,410 483,573 137,997
------------- -------------- -------------- ------------
Total 7,662,700 7,226,688 7,619,224 7,313,590
============= ============== ============== ============
Net income applicable to common stock $ 1,610,746 $ 2,340,320 $ 3,100,627 $ 4,731,136
Per share amount $ 0.21 $ 0.32 $ 0.41 $ 0.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000094136
<NAME> Sterling Electronics Corporation
<MULTIPLIER> 1
<CURRENCY> us
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-28-1998
<PERIOD-START> jun-29-1997
<PERIOD-END> sep-27-1997
<EXCHANGE-RATE> 1.000
<CASH> 714,542
<SECURITIES> 0
<RECEIVABLES> 60,434,829
<ALLOWANCES> 1,629,984
<INVENTORY> 79,110,249
<CURRENT-ASSETS> 140,259,847
<PP&E> 16,919,370
<DEPRECIATION> 7,177,966
<TOTAL-ASSETS> 163,818,468
<CURRENT-LIABILITIES> 45,890,786
<BONDS> 51,788,478
0
0
<COMMON> 3,695,613
<OTHER-SE> 57,405,455
<TOTAL-LIABILITY-AND-EQUITY> 163,818,468
<SALES> 100,547,836
<TOTAL-REVENUES> 100,547,836
<CGS> 80,203,848
<TOTAL-COSTS> 97,054,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 768,670
<INTEREST-EXPENSE> 853,059
<INCOME-PRETAX> 2,640,746
<INCOME-TAX> 1,030,000
<INCOME-CONTINUING> 1,610,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,610,746
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
