10-Q 1 c81421e10vq.txt QUARTERLY REPORT 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 October 31, 2003 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 Incorporation (I.R.S. Employer 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] On December 3, 2003 there were 3,579,319 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 - October 31, 2003 and April 30, 2003 3 Condensed Consolidated Statements of Operations - Three and Six Months Ended October 31, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended October 31, 2003 and 2002 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 Item 4. Controls and Procedures 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 SigmaTron International, Inc. Condensed Consolidated Balance Sheets
OCTOBER 31, 2003 April 30, UNAUDITED 2003 -------------- ------------- CURRENT ASSETS: Cash $ 5,907,488 $ 383,739 Accounts receivable, less allowance for doubtful accounts of $70,000 at October 31, 2003 and April 30, 2003 9,923,890 12,286,783 Inventories 12,737,836 12,883,496 Prepaid and other assets 1,231,117 628,954 Income taxes receivable 1,615,908 146,822 Deferred income taxes 214,142 214,142 Other receivables 194,434 48,772 -------------- ------------- Total current assets 31,824,815 26,592,708 Property, machinery and equipment, net 13,608,319 13,626,187 DUE FROM SMTU: Investment and advances 1,034,345 865,846 Equipment receivable 1,605,361 2,170,185 Other receivable 812,793 545,475 Other assets 1,395,608 1,305,593 -------------- ------------- Total assets $50,281,241 $45,105,994 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable 7,028,514 7,331,080 Accrued expenses 3,067,896 4,137,336 Income taxes payable - 1,422,212 Notes payable - other 250,000 250,000 Capital lease obligations 670,223 802,431 -------------- ------------- Total current liabilities 11,016,633 13,943,059 Notes payable - banks - 1,653,963 Notes payable- other 1,325,103 1,454,454 Capital lease obligations, less current portion 601,650 905,995 Deferred income taxes 1,185,061 1,185,061 -------------- ------------- Total liabilities 14,128,447 19,142,532 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, 3,577,254 and 2,933,984 shares issued 35,773 29,340 and outstanding at October 31, 2003 and April 30, 2003, respectively Capital in excess of par value 16,623,009 9,560,341 Retained earnings 19,494,012 16,373,781 -------------- ------------- Total stockholders' equity 36,152,794 25,963,462 -------------- ------------- Total liabilities and stockholders' equity $50,281,241 $45,105,994 ============== =============
See accompanying notes. 3 SigmaTron International, Inc. Condensed Consolidated Statements Of Operations Unaudited
THREE MONTHS Three Months SIX MONTHS Six Months ENDED Ended ENDED Ended OCTOBER 31, 2003 October 31, 2002 OCTOBER 31, 2003 October 31, 2002 ---------------- ---------------- ---------------- ---------------- Net sales $23,769,901 $22,584,664 $45,885,273 $41,821,380 Cost of products sold 18,731,527 18,752,758 36,691,302 35,171,305 ---------------- ---------------- ---------------- ---------------- 5,038,374 3,831,906 9,193,971 6,650,075 Selling and administrative expenses 2,154,470 1,902,057 4,290,186 3,655,869 ---------------- ---------------- ---------------- ---------------- Operating income 2,883,904 1,929,849 4,903,785 2,994,206 Equity in net income of SMTU (42,329) (37,320) (94,519) (92,959) Interest expense - Banks and capital lease obligations 27,768 173,519 89,784 371,141 Interest income - SMTU and LC (72,031) (80,698) (154,835) (168,489) ---------------- ---------------- ---------------- ---------------- Income before income tax expense 2,970,496 1,874,348 5,063,355 2,884,513 Income tax expense 1,157,760 736,980 1,943,122 1,130,944 ---------------- ---------------- ---------------- ---------------- Net income $ 1,812,736 $ 1,137,368 $ 3,120,233 $ 1,753,569 ================ ================ ================ ================ Net income per common share - Basic $0.54 $0.39 $0.99 $0.61 ================ ================ ================ ================ Net income per common share - Assuming dilution $0.52 $0.34 $0.92 $0.53 ================ ================ ================ ================ Weighted average shares of common stock outstanding Basic 3,367,289 2,881,227 3,165,511 2,881,227 ================ ================ ================ ================ Diluted 3,478,249 3,327,727 3,403,659 3,301,477 ================ ================ ================ ================
See accompanying notes. 4 SigmaTron International, Inc. Condensed Consolidated Statements of Cash Flows Unaudited
SIX MONTHS Six Months ENDED Ended OCTOBER 31, October 31, 2003 2002 ------------ ------------ OPERATING ACTIVITIES: Net income $3,120,233 $1,753,569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 982,434 1,210,274 Equity in net income of SMTU (168,499) (92,959) Changes in operating assets and liabilities: Accounts receivable 2,362,893 (1,745,424) Inventories 145,660 268,260 Prepaid expenses and other assets (2,034,422) 223,016 Trade accounts payable (302,566) 2,167,466 Income taxes payable (1,422,212) 362,234 Accrued expenses (1,069,440) 511,247 ------------ ------------ Net cash provided by operating activities 1,614,081 4,657,683 INVESTING ACTIVITIES: Purchases of machinery and equipment (939,566) (3,050,782) ------------ ------------ Net cash used in investing activities (939,566) (3,050,782) FINANCING ACTIVITIES: Proceeds from exercise of options 3,626,857 - Tax benefit of options exercised 3,442,244 - Net payments under note payable obligation (129,351) 1,824,336 Net payments under capital lease obligations (436,553) 67,889 Net payments under line of credit (1,653,963) (3,841,506) ------------ ------------ Net cash provided by (used in) financing activities 4,849,234 (1,949,281) ------------ ------------ Change in cash 5,523,749 (342,380) Cash at beginning of period 383,739 344,880 ------------ ------------ Cash at end of period $5,907,488 $ 2,500 ============ ============ Supplementary disclosures of cash flow information Cash paid for interest $ 21,105 $ 263,594 Cash paid for income taxes, net of (refunds) 1,297,317 630,000 Acquisition of building financed under bank notes - 1,950,000
See accompanying notes. 5 SigmaTron International, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) October 31, 2003 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of SigmaTron International, Inc., and its wholly-owned subsidiaries (collectively, the Company) 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 and six month period ended October 31, 2003 are not necessarily indicative of the results that may be expected for the year ending April 30, 2004. 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, 2003. NOTE B - INVENTORIES The components of inventory consist of the following: October 31, April 30, 2003 2003 ------------------- ------------------- Finished products $ 3,260,852 $ 3,532,689 Work-in-process 1,239,788 1,072,298 Raw materials 8,237,196 8,278,509 ------------------- ------------------- $12,737,836 $12,883,496 =================== =================== 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 in the loan and security agreement. At October 31, 2003 there was approximately $12,400,000 of unused credit under the terms of the agreement. There was no outstanding loan balance as of October 31, 2003. At October 31, 2003, the Company was in compliance with its financial covenants under the revolving credit facility. 6 NOTE D - STOCK INCENTIVE PLANS The Company maintains various stock incentive plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company recognizes compensation cost for restricted shares and restricted stock units to employees. As of October 31, 2003 there are no issued restricted shares or restricted stock units. No compensation cost is recognized for stock option grants. All options granted under the Company's plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based compensation. The following table also provides the amount of stock-based compensation cost included in net earnings as reported.
Three Months Ended Six Months Ended ------------------------------------ ----------------------------------- 2003 2002 2003 2002 --------------- ----------------- ---------------- --------------- Net Income, as reported $1,812,736 $1,137,368 $3,120,233 $1,753,569 Deduct: total stock-based employee compensation expense determined under fair based method for awards granted, modified, or settled, net of related tax effects (66,632) (102,243) (133,264) (204,486) --------------- ----------------- ---------------- --------------- Pro forma net income $1,746,104 $1,035,125 $2,986,969 $1,549,083 =============== ================= ================ ===============
Three Months Ended Six Months Ended ------------------------------------ ----------------------------------- 2003 2002 2003 2002 --------------- ----------------- ---------------- --------------- Earnings per share Basic - as reported $ .54 $ .39 $ .99 $ .61 Basic - pro forma .52 .36 .94 .54 Diluted - as reported .52 .34 .92 .53 Diluted - pro forma .50 .31 .88 .50 =============== ================= ================ ===============
Options to purchase stock at exercise prices greater than the average fair market value of the Company's stock for periods presented are excluded from the calculation of diluted income 7 because their inclusion would be anti-dilutive. For the three and six month periods ended October 31, 2003 and 2002, all options were dilutive and included in the diluted income per share calculations. NOTE E - PURCHASE OF BUILDING On November 19, 2003 the Company purchased the property that serves as the Company's corporate headquarters and its Midwestern manufacturing facility. The Company executed a note with LaSalle Bank N.A. in the amount of $3,600,000. The note bears a fixed interest rate of 5.453% and is payable in sixty monthly installments. A final payment of approximately $2,700,000 is due on or before November 30, 2008. NOTE F - INCOME TAXES The Company has recorded tax expense at an anticipated effective rate of approximately 39% for all periods. In addition, the Company has recorded a tax benefit of approximately $3,440,000 associated with tax deductible compensation arising from the exercise of stock options in the first six months of fiscal 2004. The benefit was recorded as a reduction of taxes payable and an increase in additional paid in capital. CRITICAL ACCOUNTING POLICES Management Estimates and Uncertainties - The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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. In general it is the Company's policy 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. Periodically inventory is held on consignment and revenue is recognized when the product is consumed by the Company's customer. Based on the Company's history of providing contract manufacturing services, we believe that collectibility is reasonably 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 8 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, including its investment and assets related to its affiliate SMTU 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 its fair market value. The Company has adopted SFAS No. 144, which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." It is an interpretation of Accounting Research Bulletin No. 51 and revises the requirements for consolidation by business enterprises of variable interest entities. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period and to nonpublic enterprises as of the end of the applicable annual period. It may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company believes it is reasonably likely it will have to consolidate its SMTU affiliate for the quarter ending January 31, 2004. 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., Mexican or Chinese regulations affecting the Company's business; the continued stability of the Mexican and Chinese economic, labor and political conditions; the ability of the Company to manage its growth; expansion to include manufacturing in China; and securing financing for the operation in China. These and other factors which may affect the Company's future business and results 9 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 October 31, 2003 to $23,769,901 from $22,584,664 for the three month period ended October 31, 2002. Net sales for the six months ended October 31, 2003 increased to $45,885,273 from $41,821,380 for the same period in the prior fiscal year. Sales increased for the three and six months ended October 31, 2003 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. Gross profit increased during the three month period ended October 31, 2003 to $5,038,374 or 21.2% of net sales, compared to $3,831,906 or 17.0% of net sales for the same period in the prior fiscal year. Gross profit increased for the six month period ended October 31, 2003 to $9,193,971 or 20.0% of net sales, compared to $ 6,650,075 or 15.9% of net sales for the same period in the prior fiscal year. The increase in the Company's gross margin for the three and six month periods is the result of a number of factors including overhead efficiencies, decrease in component pricing, increased capacity utilization and product mix. 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 $2,154,470 or 9.1% of net sales for the three month period ended October 31, 2003 compared to $1,902,057 or 8.4% of net sales in the same period last year. Selling and administrative expenses increased to $4,290,186 or 9.3% of net sales for the six month period ended October 31, 2003 compared to $3,655,869 or 8.7% of net sales in the same period last year. The increase is primarily due to an increase in insurance, professional fees and bonus expense for the three and six month period ended October 31, 2003. Interest expense for bank debt and capital lease obligations for the three month period ended October 31, 2003 was $27,768 compared to $173,519 for the same period in the prior year. Interest expense for the six month period ended October 31, 2003 decreased to $89,784 from $371,141 compared to the same period in the prior year. This change was attributable to the decrease in the amount outstanding under the Company's credit facility and a decrease in the interest rates. 10 As a result of the factors described above, net income increased to $1,812,736 for the three month period ended October 31, 2003 compared to $1,137,368 for the same period in the prior year. Basic and dilutive earnings per share for the second fiscal quarter of 2003 were $0.54 and $0.52, respectively, compared to basic and dilutive earnings per share of $0.39 and 0.34, respectively, for the same period in the prior year. For the six months ended October 31, 2003, the Company recorded net income of $3,120,233 compared to $1,753,569 for the same period in the prior fiscal year. Basic and dilutive earnings per share for the six month period ended October 31, 2003 were $0.99 and $0.92, respectively, compared to basic and dilutive earnings per share of $0.61 and $0.53, respectively, for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES: During the first six months of fiscal 2004 the Company financed operations through cash provided by operating activities. During the period, cash provided by operating activities was primarily related to net income of $3,120,233 compared to a net income of $1,753,569 in the prior fiscal year. The Company used $939,566 in cash for investing activities in the six months ended October 31, 2003. The Company anticipates additional expenditures for the startup of the China manufacturing operation during fiscal 2004, which will result in additional cash being used for investing activities. In November 2003, the Company decided to terminate its previous announced efforts to raise additional capital. Cash flow from operations and capital raised from the exercise of stock options exceeded forecasts and has allowed the Company to meet its short term capital objectives without additional financing. There were no costs associated with the termination other than legal fees, which were not material. Currently, the Company has no loan amounts outstanding with its banks. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the President and Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness, as of the end of the fiscal quarter covered by this report, of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, the Company's CEO and CFO concluded that the Company's disclosure controls and procedures, as of the end of such fiscal quarter, were 11 effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in Internal Controls During the period covered by this report, there have been no changes to the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 19, 2003, the Company held its 2003 Annual Meeting of Stockholders. The following persons were elected as directors to hold office until the 2006 Annual Meeting of Stockholders: Thomas W. Rieck and William L. McClelland. The number of shares cast for, withheld and abstained with respect to each of the nominees were as follows: Nominee For Against Abstained Thomas W. Rieck 3,098,045 5,630 0 William L. McClelland 3,098,045 5,630 0 The following persons are directors of the Company whose current term extends beyond the 2003 Annual Meeting of Stockholders: John P. Chen, Carl A. Zemenick, Gary R. Fairhead, Franklin D. Sove and Dilip S. Vyas. The stockholders also voted to approve the ratification of the selection of Grant Thornton LLP as independent auditors for the Company for the fiscal year ended April 30, 2004. A total of 3,097,485 shares were cast for such ratification, 3,290 shares were opposed and 2,900 shares abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 10.19 - Mortgage and Security Agreement between SigmaTron International, Inc. and LaSalle Bank, dated November 17, 2003. Exhibit 10.20 - Mortgage Note between SigmaTron International, Inc. and LaSalle Bank, dated November 17, 2003. 12 Exhibit 31.1 - Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 - Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 - Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). Exhibit 32.2 - Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (b) Reports on Form 8-K: The Company filed a report on Form 8-K on December 8, 2003 to announce financial results for the quarter ended October 31, 2003. 13 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 12/11/03 ----------------------------------------------- --------------------- Gary R. Fairhead Date President and CEO (Principal Executive Officer) /s/ Linda K. Blake 12/11/03 ----------------------------------------------- --------------------- Linda K. Blake Date Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)