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 December 28, 1996 Commission File No.: 1-5522
STERLING ELECTRONICS CORPORATION
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(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
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(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 February 5, 1997
- ---------------------------- -------------------------------
Common Stock, $.50 par value 7,044.872
<PAGE>
INDEX
STERLING ELECTRONICS CORPORATION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated statements of financial position December 28,
1996 and March 30, 1996
Condensed consolidated statements of income - thirteen and thirty-
nine weeks ended December 28, 1996 and December 30, 1995
Condensed consolidated statements of cash flows - thirty-nine weeks
ended December 28, 1996 and December 30, 1995
Notes to condensed consolidated financial statements - December 28,
1996
Item 2. Management's Discussion and Analysis of the Results of Operations
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 28, March 30,
1996 1996
----------------- ---------------
ASSETS
Current Assets
Cash $ 1,707,038 $ 4,376,818
Receivables-net of reserve
for doubtful accounts 46,824,817 50,083,042
Inventory 66,314,540 56,759,383
Other current assets 817,364 645,569
----------------- ---------------
115,663,759 111,864,812
Property and equipment - net of
depreciation 9,596,761 6,908,833
Goodwill, net of amortization 9,213,968 4,141,322
Other assets 4,363,497 3,923,233
----------------- ---------------
$ 138,837,985 $ 126,838,200
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable and
accrued expenses $ 38,400,347 $ 39,378,115
Current portion - long term
obligations 251,806 290,498
Income taxes 854,201 805,020
----------------- ---------------
39,506,354 40,473,633
Long-term obligations - net of
amounts due within one year 41,343,009 33,719,186
Postemployment benefits and other
non-current liabilities 4,358,491 4,192,029
Shareholders' Equity
Foreign currency translation adjustment (125) (125)
Common stock, $.50 par value 3,695,508 3,517,211
Additional paid-in capital 26,817,489 22,053,742
Retained earnings 27,336,304 24,983,760
----------------- ---------------
57,849,176 50,554,588
Less treasury stock, at cost 4,219,045 2,101,236
----------------- ---------------
53,630,131 48,453,352
----------------- ---------------
$ 138,837,985 $ 126,838,200
================= ===============
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THIRTEEN WEEKS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
------------------- ------------------
Net sales $ 82,180,913 $ 79,347,305
Cost of sales 64,206,044 62,296,312
------------------- ------------------
17,974,869 17,050,993
Selling, administrative and
other operating expenses 13,800,581 12,367,684
------------------- ------------------
Income from operations 4,174,288 4,683,309
Interest expense 485,491 504,371
------------------- ------------------
Income before income taxes 3,688,797 4,178,938
Income taxes 1,457,000 1,676,000
------------------- ------------------
$ 2,231,797 $ 2,502,938
=================== ==================
Income per common share and
common share equivalents:
Primary $ 0.31 $ 0.31
=================== ==================
Fully diluted $ 0.31 $ 0.31
=================== ==================
Number of common shares and
common share equivalents used in
computing per share amounts
Primary 7,191,593 7,457,833
Fully diluted 7,199,798 7,457,833
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THIRTY-NINE WEEKS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
-------------- --------------
Net sales $ 241,580,695 $ 230,152,806
Cost of sales 187,862,921 180,775,591
-------------- --------------
53,717,774 49,377,215
Selling, administrative and
other operating expenses 40,759,320 36,047,767
-------------- --------------
Income from operations 12,958,454 13,329,448
Interest expense 1,403,521 1,147,323
-------------- --------------
Income before income taxes 11,554,933 12,182,125
Income taxes 4,592,000 4,884,000
-------------- --------------
6,962,933 7,298,125
Loss from discontinued operations - (534,374)
-------------- --------------
$ 6,962,933 $ 6,763,751
============== ==============
Income per common share and
common share equivalents:
Primary
Income from continuing operations $ 0.96 $ 0.98
Loss from discontinued operations - (0.07)
-------------- --------------
0.96 $ 0.91
============== ==============
Fully diluted
Income from continuing operations $ 0.96 $ 0.98
Loss from discontinued operations - (0.07)
-------------- --------------
$ 0.96 $ 0.91
============== ==============
Number of common shares and
common share equivalents used in
computing per share amounts
Primary 7,272,924 7,453,013
Fully diluted 7,275,903 7,471,850
<PAGE>
STERLING ELECTRONICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
-------------- -------------
OPERATING ACTIVITIES
Net income $ 6,962,933 $ 6,763,751
Adjustments needed to reconcile
net income to net cash provided
by operating acitivities:
Depreciation and amortization 1,585,371 909,971
Provision for losses on
accounts receivable 1,055,010 995,515
-------------- --------------
9,603,314 8,669,237
Changes in operating assets and
liabilities
Decrease (increase) in accounts
receivable 9,085,784 ( 5,129,003)
Increase in inventories (2,045,898) (18,748,903)
(Increase) decrease in
other current assets (104,177) 692,399
Increase (decrease) in accounts
payable and accrued expenses (5,310,779) 2,222,454
Increase in postemployment benefits
and other non-current liabilities 166,462 12,911
-------------- ---------------
Net cash provided (used)
by operating activities 11,394,706 (12,280,905)
INVESTING ACTIVITIES
Purchase of property and equipment (2,386,536) (2,039,210)
Acquisition of Marsh Electronics, Inc. (15,859,080) -
Acquisition of DGW Electronics Corporation - (5,807,745)
(Increase) in other assets (454,761) (353,581)
-------------- --------------
Net cash (used) in investing activities (18,700,377) (8,200,536)
FINANCING ACTIVITIES
Proceeds from borrowings under revolver 40,988,751 65,894,476
Repayments of borrowings under revolver (48,182,604) (44,054,553)
-------------- --------------
Net increase (decrease) in revolving
line of credit (7,193,853) 21,839,923
Proceeds from long term borrowings 15,000,000 -
Principal payments on other long term debt (221,016) (222,096)
Issuance of common stock under option plans 253,253 101,517
Purchases of treasury stock (3,202,493) (1,634,250)
-------------- --------------
Net cash (used) provided by
financing activities 4,635,891 20,085,094
DECREASE IN CASH AND CASH EQUIVALENTS (2,669,780) (396,347)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,376,818 3,110,397
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,707,038 $ 2,714,050
============== ==============
<PAGE>
STERLING ELECTRONICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1996
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 December 28, 1996 and the results of operations for the thirteen
and thirty-nine weeks then ended. The results of operations for the thirteen and
thirty-nine weeks ended December 28, 1996 are not necessarily indicative of the
results to be expected for the full year.
Note B - Long-term Debt
Long-term debt as of December 28, 1996 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 $ 26,000,000 1999
Senior note 0 15,000,000 2007
Capitalized lease
obligations 75,159 108,177 1996-2000
Equipment loans 176,647 234,832 1999-2001
___________ ______________
$ 251,806 $ 41,343,009
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.
Note C - Acquisition of Marsh Electronics, Inc.
The Company completed the acquisition of Marsh Electronics, Inc. ("Marsh") on
November 19, 1996. Marsh is a distributor of electronic parts with facilities in
Milwaukee and Appleton, Wisconsin; Indianapolis, Indiana and Detroit, Michigan.
Marsh facilities in Chicago, Illinois and Minneapolis, Minnesota were closed and
personnel were relocated into existing Sterling facilities in those geographic
areas. The operating results of Marsh are included with those of the Company
from the date of the acquisition forward. Sales of Marsh from November 19, 1996
through December 28, 1996 were approximately $5.2 million.
Note D - Common Stock Dividends
All per share amounts have been retroactively adjusted for the five percent
common stock dividends paid to shareholders of record as of December 9, 1996 and
January 11, 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
Thirty-nine weeks ended December 28, 1996 compared to thirty-nine weeks
ended December 30, 1995
Net Sales - Consolidated net sales for the current thirty-nine week period were
5% ahead of sales for the thirty-nine week period a year ago. If the sales of
Marsh Electronics, Inc. ("Marsh") acquired in November 1996, and the Canadian
locations, acquired in August 1995, are excluded from both periods, sales would
decline 1%. Such decrease would be the result of decreased semiconductor
revenues partially offset by increased connector revenues.
Gross Margin - Sterling's consolidated gross margin for the thirty-nine weeks
increased to 22.2% from 21.5% for the thirty-nine weeks a year ago stemming
principally from improved gross margins on semiconductor sales and sales of
higher margin connector products increasing while lower margin semiconductor
sales declined.
Selling and Administrative Costs - Consolidated operating expenses increased to
16.9% of sales compared to 15.7% of sales for the thirty-nine 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. The cost of operating the four Marsh sales offices and
the Marsh warehouse for the six weeks since acquisition are included in the
current period. Additionally, the Company operated two more sales locations
(Portland and Huntsville) during the current thirty-nine week period compared to
a year ago and the five locations in Canada were included for only twenty weeks
in the thirty-nine week period a year ago. Various other operating expenses
including management information systems, telephone and warehouse expenses also
increased.
Interest Expense - The 22% increase in interest expense is primarily the result
of the approximately $6 million increase from the comparable period in average
indebtedness.
Thirteen weeks ended December 28, 1996 compared to thirteen weeks ended December
30, 1995
Net Sales - Consolidated net sales for the current thirteen week period were 4%
ahead of sales for the thirteen week period a year ago. If the sales of Marsh,
acquired in November, 1996, are excluded, sales would decline 3%. Such decrease
would be the result of decreased semiconductor revenues partially offset by
increased connector revenues.
Gross Margin - Sterling's consolidated gross margin for the thirteen weeks
improved to 21.9% from 21.5% for the thirteen weeks a year ago stemming
principally from improved gross margins on semiconductor sales and sales of
higher margin connector products increasing while sales of lower margin
semiconductors declined.
Selling and Administrative Costs - Consolidated operating expenses increased to
16.8% of sales compared to 15.6% 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. The cost of operating the four Marsh sales offices and
the Marsh warehouse for the six weeks since acquisition are included in the
current period. Additionally, the Company operated two more sales locations
(Portland and Huntsville) 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.
Liquidity and Capital Resources - Since the beginning of the current fiscal
year, Sterling has reduced receivables (excluding receivables purchased in the
Marsh acquisition) by approximately $ 9.1 million. In November 1996, the Company
borrowed $15.9 million under the line of credit to purchase Marsh. A secondary
use of funds has been capital expenditures of approximately $ 2.4 million,
principally for new computer hardware and software. These capital 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.
Working capital was $ 76.2 million at December 28, 1996 compared to $71.4
million at March 30, 1996. The current ratio was 2.9 compared to 2.8 at the
beginning of the year. Working capital increased as a result of financing the
purchase of Marsh inventory and receivables with long-term debt. Average
annualized inventory turnover for the most recent thirteen week period was 4.1
down from 5.4 for all of fiscal 1996.
<PAGE>
The ratio of long-term debt to total capitalization was 44% at December 28, 1996
compared to 41% at the beginning of the year. At December 28, 1996 the Company
had approximately $ 14 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 an estimated $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
second half 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 December 28, 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
______________________________
Date: February 10, 1997 Mac McConnell, Vice-President
Chief Financial Officer
<PAGE>
STERLING ELECTRONICS CORPORATION
(11) - Statement Re: COMPUTATION OF PER SHARE EARNINGS
Thirty-nine
Thirteen weeks ended weeks ended
-------------------- --------------------
Dec. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
PRIMARY
Average shares outstanding 7,033,834 7,255,921 7,128,341 7,265,415
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 157,759 201,912 144,583 187,598
---------- ---------- ---------- ----------
Total 7,191,593 7,457,833 7,272,924 7,453,013
Net income applicable to
common stock
Income from continuing
operations $2,231,797 $2,502,938 $6,962,933 $7,298,125
Income from dicontinued
operations - - - (534,374)
---------- ---------- ---------- ----------
$2,231,797 $2,502,938 $6,962,933 $6,763,751
========== ========== ========== ==========
Per share amount
Income from continuing
operations $ 0.31 $ 0.34 $ 0.96 $ 0.98
Income from dicontinued
operations - - - (0.07)
---------- --------- ---------- ---------
$ 0.31 $ 0.34 $ 0.96 $ 0.91
========== ========= ========== =========
FULLY DILUTED
Average shares outstanding 7,033,104 7,255,921 7,128,340 7,256,034
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 166,694 201,912 147,563 215,816
---------- ---------- ---------- ----------
Total 7,199,798 7,457,833 7,275,903 7,471,850
Net income applicable to
common stock
Income from continuing
operations $2,231,797 $2,502,938 $6,962,933 $7,298,125
Income from dicontinued
operations - - - (534,374)
---------- ---------- ---------- ----------
$2,231,797 $2,502,938 $6,962,933 $6,763,751
========== ========== ========== ==========
Per share amount
Income from continuing
operations $ 0.31 $ 0.34 $ 0.96 $ 0.98
Income from dicontinued
operations - - - (0.07)
---------- ---------- --------- ----------
$ 0.31 $ 0.34 $ 0.96 $ 0.91
========== ========== ========= ==========
