10-Q 1 c71824e10vq.txt FORM 10-Q FOR QUARTER ENDING JULY 31, 2002 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, 2002 Commission File Number 0-23248 SigmaTron International, Inc. -------------------------------------------------------------------------------- (Exact Name of Registrant, as Specified in its Charter) Delaware 36-3918470 -------------------------------------------------------------------------------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2201 Landmeier Road, Elk Grove Village, Illinois 60007 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (847) 956-8000 No Change -------------------------------------------------------------------------------- (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report) 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 12, 2002 there were 2,881,227 shares of the Registrant's Common Stock outstanding. SigmaTron International, Inc. Index
PART 1. FINANCIAL INFORMATION: Page No. -------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets -- July 31, 2002 and April 30, 2002 3 Condensed Consolidated Statements of Operations -- Three Months Ended July 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows -- Three Months Ended July 31, 2002 and 2001 5 Notes to 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 Risk 10 Item 4. Controls and Procedures 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10
SIGMATRON INTERNATIONAL, INC. Condensed Consolidated Balance Sheets
JULY 31, April 30, 2002 2002 UNAUDITED Audited ----------- ----------- Current assets: Cash $ 2,500 $ 344,880 Accounts receivable, less allowance for doubtful accounts of $70,000 and $194,786 at July 31, and April 30, 2002, respectively 9,322,975 9,568,947 Inventories 11,868,244 12,052,390 Prepaid and other assets 401,796 480,127 Deferred income taxes 323,940 323,940 Other receivables 132,136 100,322 ----------- ----------- Total current assets 22,051,591 22,870,606 Property, machinery and equipment, net 14,189,104 12,581,595 Due from SMTU: Investment and advances 1,208,465 1,152,826 Equipment receivable 2,538,097 2,692,737 Other receivable 820,015 835,054 Other assets 1,150,994 718,177 ----------- ----------- Total assets $41,958,266 $40,850,995 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable 4,516,906 5,260,132 Accrued expenses 2,369,501 2,514,767 Income taxes payable 328,374 17,093 Notes payable- banks 8,494,422 - Notes payable - other 250,000 - Capital lease obligations 912,237 921,444 ----------- ----------- Total current liabilities 16,871,440 8,713,436 Notes payable - banks - 9,234,015 Notes payable- other 1,635,021 - Capital lease obligations, less current portion 1,157,094 1,225,034 Deferred income taxes 1,225,079 1,225,079 ----------- ----------- Total liabilities 20,888,634 20,397,564 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, 2002 and April 30, 2001 Capital in excess of par value 9,436,554 9,436,554 Retained earnings 11,604,266 10,988,065 ----------- ----------- Total stockholders' equity 21,069,632 20,453,431 ----------- ----------- Total liabilities and stockholders' equity $41,958,266 $40,850,995 =========== ===========
See accompanying notes. 3 SIGMATRON INTERNATIONAL, INC. Condensed Consolidated Statements Of Operations Unaudited
THREE MONTHS Three Months ENDED Ended JULY 31, 2002 July 31, 2001 --------------- --------------- Net sales $19,236,716 $17,114,358 Cost of products sold 16,418,547 15,977,254 ------------ ------------ 2,818,169 1,137,104 Selling and administrative expenses 1,753,812 1,394,318 ------------ ------------ Operating income (loss) 1,064,357 (257,214) Equity in net (income) of SMTU (55,639) (102,886) Interest expense - Banks and capital lease obligations 197,622 405,099 Interest income - SMTU and LC (87,791) (115,424) ------------ ------------ Income (loss) before income tax expense 1,010,165 (444,003) Income tax expense (benefit) 393,964 (173,161) ------------ ------------ Net income (loss) $616,201 ($270,842) ============ ============ Net income (loss) per common share - Basic $0.21 ($0.09) ============ ============ Net income (loss) per common share - Assuming dilution $0.19 ($0.09) ============ ============ Weighted average shares of common stock outstanding Basic 2,881,227 2,881,227 ============ ============ Diluted 3,275,227 2,881,227 ============ ============
See accompanying notes. 4 SIGMATRON INTERNATIONAL, INC. Condensed Consolidated Statements of Cash Flows Unaudited
THREE MONTHS Three Months ENDED Ended 2002 2001 ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $616,201 ($270,842) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 504,537 507,449 Equity in net income of SMTU (55,639) (102,886) Deferred income taxes - (173,161) Changes in operating assets and liabilities: Accounts receivable 245,972 (85,503) Inventories 184,146 1,435,953 Prepaid expenses and other assets (216,621) 362,066 Trade accounts payable (743,226) 368,053 Trade accounts payable - related parties - (747,946) Income taxes payable 311,281 (60,007) Accrued expenses (145,266) (282,458) ----------- ----------- Net cash provided by operating activities 701,385 950,718 INVESTING ACTIVITIES: Purchases of machinery and equipment (162,046) (115,628) ----------- ----------- Net cash used in investing activities (162,046) (115,628) FINANCING ACTIVITIES: Net payments under note payable obligation (64,979) - Net payments under capital lease obligations (77,147) (370,387) Net payments under line of credit (739,593) (567,589) ----------- ----------- Net cash used in financing activities (881,719) (937,976) ----------- ----------- Change in cash (342,380) - Cash at beginning of period 344,880 2,500 ----------- ----------- Cash at end of period $2,500 $2,500 =========== ===========
Noncash investing and financing activities: A loan obligation of $1,950,000 was incurred when the Company acquired certain property under seller financing. See accompanying notes. 5 SigmaTron International, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) July 31, 2002 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended July 31, 2002 are not necessarily indicative of the results that may be expected for the year ending April 30, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended April 30, 2002. NOTE B -- INVENTORIES The components of inventory consist of the following:
July 31, April 30, 2002 2002 --------------- ---------------- Finished products $ 2,609,010 $ 2,055,222 Work-in-process 2,043,590 1,519,873 Raw materials 7,215,644 8,477,295 --------------- --------------- $ 11,868,244 $ 12,052,390 =============== ===============
NOTE C -- LINE OF CREDIT The Company has a loan and security agreement that provides for a revolving line-of-credit facility. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $20,000,000; or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $9,000,000, or up to 50% of the inventory borrowing base, as defined. At July 31, 2002 there was approximately $2,800,000 of unused credit under the terms of the agreement. The revolving credit facility matures May 1, 2003. The outstanding loan balance of $8,494,422 has been classified as a short-term liability in the Company's balance sheet at July 6 31, 2002. The Company is negotiating with its current lender and anticipates the loan and security agreement will be extended for a longer period. At July 31, 2002, the Company was in compliance with its financial covenants. NOTE D -- NOTES PAYABLE -- OTHER The Company acquired a plant in Mexico through seller financing. The loan of $1,950,000 is payable in equal monthly installments of approximately $31,000 over six and a half years at a rate of 7% interest per annum. Prior to the acquisition of the plant the Company rented the facility. CRITICAL ACCOUNTING POLICES Management Estimates and Uncertainties - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, and reserves for inventory. Actual results could materially differ from these estimates. Revenue Recognition - Revenues from sales of product including the Company's contract manufacturing business are recognized when the product is shipped. The Company's policy is to recognize revenue and related costs when the order has been shipped from our facilities, which is also the same point that title passes under the terms of the purchase order. Based on the Company's history of providing contract manufacturing services, we believe that collectibility is reasonable assured. Inventories - Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost includes labor, material and manufacturing overhead. Provisions are based on assumptions about future product life cycles, product demand and market conditions. When required, provisions are made to reduce excess inventories to their estimated net realizable values. It is possible that estimates of net realizable values can change in the near term. Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset, if any, exceeds it fair market value. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets, " which establishes a single accounting model for the impairment or disposal of long-lived assets, including 7 discontinued operations. SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and APB Option No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business." The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted and, in general, are to be applied prospectively. The Company adopted SFAS No. 144 at May 1, 2002, and has determined that adoption did not have a material effect on its results of operations or financial position. ITEM 2. 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 continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company's operating results; the availability and cost of necessary components; the continued availability and sufficiency of the Company's credit arrangements; changes in U.S. or Mexican regulations affecting the Company's business; the continued stability of the Mexican economic, labor and political conditions and the ability of the Company to manage its growth and secure financing. These and other factors which may affect the Company's future business and results of operations are identified throughout the Company's Annual Report on Form 10-K and risk factors contained therein and may be detailed from time to time in the Company's filings with the Securities and Exchange Commission. These statements speak as of the date of this report and the Company undertakes 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, 2002 to $19,236,716 from $17,114,358 for the three month period ended July 31, 2001. Sales increased for the three months ended July 31, 2002 primarily due to an increase in orders from existing customers. Sales can be misleading as an indication of the Company's financial performance. Gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company, specifically the variation of orders for turnkey services versus consignment services. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue levels and margins. Further, customers' orders can generally be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. In addition, the ability to replace such delayed or lost sales in a short period of time cannot be assured. 8 Gross profit increased during the three month period ended July 31, 2002 to $2,818,169 or 14.6% of net sales, compared to $1,137,104 or 6.6 % of net sales for the same period in the prior fiscal year. The increase in the Company's gross margin for the three month period ended July 31, 2002 is the result of a number of factors, including labor cost and overhead efficiencies, component pricing, increased capacity utilization and product mix. Management continues to re-evaluate and align its overhead structure with current customer requirements. While the Company's focus remains on expanding its customer base and increasing gross margins, there can be no assurance that gross margins will remain stable or increase in future quarters. Selling and administrative expenses increased to $1,753,812 or 9.1% of net sales for the three month period ended July 31, 2002 compared to $1,394,318 or 8.1% of net sales in the same period last year. The increase is due to an increase in legal and bonus expenses for the three month period ended July 31, 2002. Interest expense for bank debt and capital lease obligations for the three month period ended July 31, 2002 was $197,622 compared to $405,099 for the same period in the prior year. This decrease was attributable to a decrease in interest rates and a decrease in the balance outstanding on the Company's line of credit. Income tax expense for the period ended July 31, 2002 was $393,964 or an effective rate of 39% compared to a tax benefit of $173,161 for the same period in the prior year. As a result of the factors described above, net income increased to $616,201 for the three month period ended July 31, 2002 compared to a net loss of $270,842 for the same period in the prior year. Basic earnings per share for the first fiscal quarter of 2002 were $0.21 compared to $<0.09> for the same period in the prior year. Diluted earnings per share for the first quarter of fiscal 2002 were $0.19 compared to $<0.09> for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES: In the first quarter of fiscal 2003 the Company financed operations through cash provided by operating activities. During the period, cash provided by operating activities was primarily related to a reduction in inventory and accounts receivable, which was offset by a decrease in accounts payable. An increase in net income to $616,202 in the three month period ended July 31, 2002 compared to a net loss of $270,842 in the prior fiscal year contributed to the increase in net cash provided by operating activities. The Company used $162,046 in cash for investing activities in the first quarter of fiscal 2003 to purchase machinery and equipment. The Company anticipates additional machinery and equipment will be purchased during fiscal 2003, which will result in additional cash being used for investing activities. 9 Net cash used in financing activities was primarily used for payments under the line of credit, capital lease obligations and note payable obligations. A loan obligation of $1,950,000 was incurred when the Company acquired certain property under seller financing. The Company has a loan and security agreement that provides for a revolving line-of-credit facility. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $20,000,000; or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $9,000,000, or up to 50% of the inventory borrowing base, as defined. The revolving credit facility matures May 1, 2003. The outstanding loan balance of $8,494,422 has been classified as a short-term liability in the Company's balance sheet at July 31, 2002. The Company is negotiating with its current lender and anticipates the loan and security agreement will be extended for a longer period. At July 31, 2002, the Company was in compliance with its financial covenants. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 4. CONTROLS AND PROCEDURES Not applicable PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 99.1 -- Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). Exhibit 99.2 -- Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.C. 1350). (b) A report on Form 8-K (Item 4) reflecting Changes in Registrant's Certifying Accountant dated October 31, 2001 was filed on November 7, 2001 and amended on Form 8-K/A No. 1 filed November 14, 2001 and on Form 8-K/A No. 2 filed November 21, 2001. 10 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 9/12/02 ------------------------------------------------ -------------------------- Gary R. Fairhead Date President and CEO (Principal Executive Officer) /s/ Linda K. Blake 9/12/02 ------------------------------------------------ -------------------------- Linda K. Blake Date Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer) CERTIFICATIONS I, Gary R. Fairhead, President and Chief Executive of SigmaTron International, Inc., certify that; 1. I have reviewed this quarterly report on Form 10-Q of SigmaTron International, Inc.: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 12, 2002 /s/ Gary R. Fairhead ------------------------------------------- Gary R. Fairhead President and Chief Executive Officer of SigmaTron International, Inc. I, Linda K. Blake, Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc., certify that; 1. I have reviewed this quarterly report on Form 10-Q of SigmaTron International, Inc.: 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 12, 2002 /s/ Linda K. Blake ------------------------------------------- Linda K. Blake Chief Financial Officer, Secretary and Treasurer of SigmaTron International, Inc.