UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 2008
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) (Zip Code)
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 a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check One):
[ ] Large accelerated filer [ ] Accelerated Filer
[X] Non-accelerated filer [ ] Smaller reporting company
(Do not check if a smaller reporting company)
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated [X].
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
On March 12, 2008, there were 3,822,556 shares of the Registrant's Common Stock
outstanding.
SigmaTron International, Inc.
Index
Page No.
--------
PART 1. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets - January 31, 2008 (Unaudited)
and April 30, 2007 3
Consolidated Statements of Operations -
Three and Nine Months Ended January 31, 2008 and 2007 4
Consolidated Statements of Cash Flows -
Nine Months Ended January 31, 2008 and 2007 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION:
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
SIGMATRON INTERNATIONAL, INC.
Consolidated Balance Sheets
January 31,
2008 April 30,
(Unaudited) 2007
------------ ------------
CURRENT ASSETS:
Cash $ 3,273,518 $ 2,769,653
Accounts receivable, less allowance for doubtful
accounts of $194,800 at January 31, 2008
and $150,000 at April 30, 2007 23,765,033 20,279,874
Inventories, net 40,869,075 40,849,791
Refundable income taxes 157,940 --
Prepaid and other assets 1,337,799 1,289,207
Deferred income taxes 1,260,214 1,251,241
Other receivables 91,869 224,189
------------ ------------
Total current assets 70,755,448 66,663,956
Property, machinery and equipment, net 29,612,340 30,971,107
Other assets 974,529 1,006,126
Intangible assets, net of amortization $1,694,928 1,075,072 1,461,772
and $1,308,228
Goodwill 9,298,945 9,298,945
------------ ------------
Total assets $111,716,334 $109,401,906
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Trade accounts payable $ 16,914,144 $ 15,473,660
Accrued expenses 1,939,495 2,613,636
Accrued wages 1,934,633 2,241,287
Income taxes payable -- 243,596
Notes payable - bank 1,000,000 1,000,000
Notes payable - building 452,686 528,092
Capital lease obligations 1,661,610 1,690,437
------------ ------------
Total current liabilities 23,902,568 23,790,708
Notes payable - banks 28,857,768 27,219,015
Notes payable- building, less current portion 2,670,000 2,988,372
Capital lease obligations, less current portion 1,898,659 3,125,297
Deferred income taxes 2,691,393 2,537,493
------------ ------------
Total long-term liabilities 36,117,820 35,870,177
------------ ------------
Total liabilities 60,020,388 59,660,885
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 3,822,556 and 3,794,956 shares issued and 38,226 37,950
outstanding at January 31, 2008 and April 30, 2007
Capital in excess of par value 19,590,929 19,315,104
Retained earnings 32,066,791 30,387,967
------------ ------------
Total stockholders' equity 51,695,946 49,741,021
------------ ------------
Total liabilities and stockholders' equity $111,716,334 $109,401,906
============ ============
The accompanying notes to financial statements are an integral part of these
statements.
3
SIGMATRON INTERNATIONAL, INC.
Consolidated Statements Of Operations
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
January 31, January 31, January 31, January 31,
2008 2007 2008 2007
------------------ ------------------ ----------------- -----------------
Net sales $41,131,744 $44,584,513 $123,790,664 $126,403,040
Cost of products sold 36,668,148 40,281,945 109,652,272 113,385,773
----------- ----------- ------------ ------------
Gross profit 4,463,596 4,302,568 14,138,392 13,017,267
Selling and administrative expenses 3,191,689 3,519,246 9,086,864 9,635,932
----------- ----------- ------------ ------------
Operating income 1,271,907 783,322 5,051,528 3,381,335
Other expense (income) -net 24,355 (59,835) 36,379 (208,618)
Interest expense 730,529 717,648 2,152,016 1,879,688
----------- ----------- ------------ ------------
Income from operations before income tax expense 517,023 125,509 2,863,133 1,710,265
Income tax expense 204,559 48,937 1,030,411 667,013
----------- ----------- ------------ ------------
Net income $ 312,464 $ 76,572 $ 1,832,722 $ 1,043,252
=========== =========== ============ ============
Earnings per share - basic $ 0.08 $ 0.02 $ 0.48 $ 0.28
=========== =========== ============ ============
Earnings per share - diluted $ 0.08 $ 0.02 $ 0.47 $ 0.27
=========== =========== ============ ============
Weighted average shares of common stock outstanding
Basic 3,822,556 3,794,956 3,808,335 3,789,836
=========== =========== ============ ============
Weighted average shares of common stock outstanding
Diluted 3,897,314 3,895,939 3,925,403 3,877,564
=========== =========== ============ ============
The accompanying notes to financial statements are an integral part of these
statements.
4
SigmaTron International, Inc.
Consolidated Statements of Cash Flows
Nine Nine
Months Ended Months Ended
January 31, January 31,
2008 2007
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,832,722 $ 1,043,252
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 2,780,337 3,031,122
Stock-based compensation 23,009 34,286
Provision for doubtful accounts 44,800 --
Provision for inventory obsolescence (102,273) --
Deferred income taxes (8,973) (13,371)
Amortization of intangibles 386,700 554,034
Changes in operating assets and liabilities, net of acquisition
Accounts receivable (3,529,958) (3,765,515)
Inventories 82,989 (7,040,430)
Prepaid expenses and other assets (42,615) 868,866
Trade accounts payable 1,440,485 2,269,303
Accrued expenses and wages (980,795) 561,492
Income taxes payable (243,595) (839,438)
----------- -----------
Net cash provided by (used in) operating activities 1,682,833 (3,296,399)
INVESTING ACTIVITIES:
Purchases of machinery and equipment (1,421,570) (1,728,839)
----------- -----------
Net cash used in investing activities (1,421,570) (1,728,839)
FINANCING ACTIVITIES:
Proceeds from exercise of options 253,092 17,600
Payments under capital lease obligations (1,255,465) (1,159,512)
Proceeds under term loan -- 1,250,000
Payments under term loan (750,000) (250,000)
Proceeds under lines of credit 2,388,753 4,642,711
Payments under building notes payable (393,778) (376,332)
----------- -----------
Net cash provided by financing activities 242,602 4,124,467
CHANGE IN CASH 503,865 (900,771)
Cash at beginning of period 2,769,653 3,269,925
----------- -----------
CASH AT END OF PERIOD $ 3,273,518 $ 2,369,154
=========== ===========
Supplementary disclosures of cash flow information
Cash paid for interest $ 2,512,453 $ 1,890,947
Cash paid for income taxes, net of (refunds) 1,301,446 1,415,033
The accompanying notes to financial statements are an integral part of these
statements.
5
SigmaTron International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
January 31, 2008
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of SigmaTron
International, Inc. ("SigmaTron"), wholly-owned subsidiaries Standard Components
de Mexico S.A., and Ablemex, S.A. de C.V., which was acquired in July 2005, and
its wholly-owned foreign enterprise Wujiang SigmaTron Electronics Co. Ltd.
("SigmaTron China"), and procurement branch SigmaTron Taiwan (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, the consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America 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 and nine month periods ended January 31, 2008,
are not necessarily indicative of the results that may be expected for the year
ending April 30, 2008. 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, 2007.
NOTE B - INVENTORIES
The components of inventory consist of the following:
January 31, April 30,
2008 2007
----------- -----------
Finished products $18,010,978 $10,359,223
Work-in-process 2,593,536 3,002,970
Raw materials 20,264,561 27,487,598
----------- -----------
$40,869,075 $40,849,791
=========== ===========
NOTE C - STOCK INCENTIVE PLANS
The Company adopted Financial Accounting Standards Board, Share-Based Payment
("SFAS 123 (R)") Accounting for Stock Based Compensation on May 1, 2006, and
implemented the new standard utilizing the modified prospective application
transition method. SFAS 123 (R) requires the Company to measure the cost of
employee services received in exchange for an equity award based on the grant
date fair value. Options for which the requisite service requirement has not
been rendered and that were outstanding as of May 1, 2006 are valued in
accordance with SFAS 123 "Accounting for Stock Based Compensation" and
compensation expense will be recognized over the remaining service period. Stock
based compensation expense for all stock-based awards granted subsequent to May
1, 2006 was based on the grant date fair value estimated in accordance with the
provisions of SFAS No.
6
123 (R). The Company did not grant any stock options in the third quarter ending
January 31, 2008. In the third quarter of fiscal 2008, the Company recognized
approximately $8,600 in stock option expense for options that vested during the
period and a tax benefit of approximately $3,300. The Company recognized
approximately $23,000 in stock compensation expense associated with the grants
and a tax benefit of approximately $9,000 for the nine months ended January 31,
2008.
In the third quarter of fiscal 2007, the Company granted 6,000 options to
non-executive employees and the fair value of the option grants were $6.57 and
$7.23. The Company recognized approximately $34,200 in stock compensation
expense and a tax benefit of approximately $13,400 for the nine months ended
January 31, 2007.
Under the Company's stock option plans, options to acquire shares of common
stock have been made available for grant to certain employees and directors.
Each option granted has an exercise price of not less than 100% of the market
value of the common stock on the date of grant. The contractual life of each
option is generally 10 years. The vesting of the grants varies according to the
individual options granted.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Nine Months Ended Nine Months Ended
January 31, 2008 January 31, 2007
----------------- ----------------
Expected dividend yield 0% 0%
Expected stock price volatility .750 .750
Average risk-free interest rate 3.91% 4.98%
Weighted-average expected
life of options 6.5 years 6.5 years
Option-valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing method does not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options. The Company
used the U.S. Treasury yield in effect at the time of the option grant to
calculate the risk-free interest rate. The weighted-average expected life of
options was calculated using the simplified method. The Company did not grant
any stock options in the third quarter ending January 31, 2008.
The table below summarizes option activity from the beginning of fiscal year
2008 through January 31, 2008:
Number of
Weighted- options
average exercisable
Number of exercise at end
options price of period
--------- --------- -----------
Outstanding at April 30, 2007 531,307 8.00 502,701
Options forfeited (4,400) 9.17
Options granted 2,500 11.56
Options exercised (27,600) 9.17
-------
Outstanding at January 31, 2008 501,807 480,947
=======
7
The following tables set forth information with respect to stock options
outstanding and stock options exercisable at January 31, 2008.
Options outstanding
----------------------------------------------------
Number Weighted-average Weighted-
outstanding at remaining average
Range of exercise prices January 31, 2008 contractual life exercise price
------------------------ ---------------- ---------------- --------------
$2.20 - 5.63 103,515 3.85 years $2.51
9.17 - 12.25 398,292 6.45 years 9.36
-------
501,807
=======
Options exercisable
---------------------------------
Number Weighted-
exercisable at average
Range of exercise prices January 31, 2008 exercise price
------------------------ ---------------- --------------
$2.20 - 5.63 103,515 $2.51
9.17 - 12.25 377,432 9.30
-------
480,947
=======
The following table summarizes the activity of the non-vested stock options from
the beginning of fiscal year 2008 through January 31, 2008.
Weighted-
average
fair value at
Options grant date
------- -------------
Non-vested at April 30, 2007 23,354 9.37
Forfeited (1,000) 9.17
Vested (3,970) 9.17
------
Non-vested at July 31, 2007 18,384 9.42
======
Granted 2,500 11.56
Vested (625) 11.56
Vested (3,300) 9.17
------
Non-vested at October 31, 2007 16,959 9.71
======
Forfeited (3,400) 9.17
Vested (1,650) 10.12
Vested (333) 9.20
------
Non-vested at January 31, 2008 11,576 9.83
======
8
The aggregate intrinsic value is calculated as the difference between the market
price of the Company's common stock as of January 31, 2008 and the exercise
price of the underlying options. There were no options exercised during the
third quarter ending January 31, 2008 and 2007, respectively. There were 27,600
and 8,000 options exercised for the nine months ended January 31, 2008 and 2007,
respectively. The aggregate intrinsic value of options outstanding was $544,637
and $704,324 for the third quarter ending January 31, 2008 and 2007,
respectively.
As of January 31, 2008, there was approximately $50,200 of unrecognized
compensation cost related to the Company's stock option plans. Compensation cost
of $35,000 is being amortized over a three year vesting period using a
straight-line basis, and compensation cost of $15,200 is being amortized over a
four year vesting period using a straight-line basis.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
------------------------- -------------------------
January 31, January 31, January 31, January 31,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 312,464 $ 76,572 $1,832,722 $1,043,252
========== ========== ========== ==========
Weighted-average shares
Basic 3,822,556 3,794,956 3,808,335 3,789,836
Effect of dilutive stock options 74,758 100,983 117,068 87,728
---------- ---------- ---------- ----------
Diluted 3,897,314 3,895,939 3,925,403 3,877,564
========== ========== ========== ==========
Basic earnings per share $ 0.08 $ 0.02 $ 0.48 $ 0.28
Diluted earnings per share $ 0.08 $ 0.02 $ 0.47 $ 0.27
Options to purchase 501,807 and 531,307 shares of common stock were outstanding
at January 31, 2008 and 2007, respectively.
NOTE D - FIN 48 (INCOME TAXES)
The Company adopted the provisions of FIN 48, on May 1, 2007. As a result of
this adoption, the Company recognized an increase to its unrecognized tax
positions of $153,900, which was recorded as a cumulative effect adjustment to
retained earnings. As a result of implementing FIN 48, the Company had $197,978
of unrecognized tax benefits, of which $197,978, if recognized, would affect the
Company's effective tax rate.
Upon adoption of FIN 48, the Company elected a new accounting policy to classify
interest and penalties related to unrecognized tax benefits as a component of
income tax expense. Interest was computed on the difference between the tax
position recognized in accordance with FIN 48 and the amount previously taken or
expected to be taken in the Company's tax returns. As of the adoption date, the
Company has $25,690 of accrued interest expense, net of taxes related to
unrecognized tax benefits. Penalties, if incurred, would be accounted for as a
component of tax expense.
No statutes have been extended on any of the Company's federal income tax
filings. The statute of limitations on the Company's fiscal year 2004, 2005 and
2006 federal income tax returns will expire on January 15, 2008, 2009 and 2010,
respectively. The IRS concluded an examination of the
9
Company's fiscal 2005 federal income tax returns during the fourth quarter of
2007. This examination resulted in no changes to the previously reported tax
liability.
The Company's state income tax returns for the fiscal years 2003 through 2006
remain subject to examination by various state authorities with the latest
closing period on November 15, 2011. The Company recently concluded an
examination with Texas for the fiscal 2003-2005 tax years. This examination
resulted in no changes to the previously reported tax liability. The Company is
currently not under examination by any state authority for income tax purposes
and no statutes for state income tax filings have been extended.
The Company's foreign subsidiary, Wujiang SigmaTron Electronics Co., Ltd filed
income tax returns for the 2005, 2006, and 2007 tax years, which remain subject
to examination by China. The subsidiary is currently not under examination and
no statutes have been extended.
The Company's foreign subsidiary, Standard Components de Mexico S.A., filed
income tax returns for the 2002 through 2006 tax years, which remain subject to
examination by Mexico. Standard Components de Mexico S.A. is currently not under
examination and no statutes have been extended.
Additionally, the Company's foreign subsidiary, AbleMex, S.A. de C.V. filed
income tax returns for the 2002 through 2006 tax years, which remain subject to
examination by Mexico. AbleMex S.A. de C.V. is currently not under examination
and no statutes have been extended.
NOTE E - ACCOUNTING CHANGE
The Company changed the date of its annual goodwill impairment test under
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and
other Intangible Assets, from the last day of the fiscal year to the first day
of the fiscal fourth quarter. The impairment test procedure will be carried out
during the fourth quarter and up to the time of the filing of the Company's Form
10-K, which will allow the Company additional time to complete the required
analysis under SFAS 142. The Company believes that the resulting change in
accounting principle related to the annual testing date will not delay,
accelerate or avoid an impairment charge. The Company determined that the change
in accounting principle related to the annual testing date is preferable under
the circumstances and does not result in adjustments to the Company's financial
statements when applied retrospectively. The Company believes, based on the
preliminary analysis it is likely it may have a significant impairment of
goodwill. The analysis will be completed during the fourth quarter and the
impairment, if any, will be reported in the fourth quarter of fiscal 2008. An
impairment is reported as a non-cash transaction and as an expense on the
Consolidated Statement of Operations. The Company has discussed this potential
impairment with its bank and has been informed the potential recording of the
goodwill impairment will not negatively affect its relationship with the bank
going forward.
CRITICAL ACCOUNTING POLICIES:
Management Estimates and Uncertainties - The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
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, reserves for inventory and valuation of
goodwill. Actual results could materially differ from these estimates.
10
Revenue Recognition - Revenues from sales of product including the Company's
electronic manufacturing services business are recognized when the product is
shipped to the customer. 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 except for consignment inventory. Consignment inventory is shipped from
the Company to an independent warehouse for storage or shipped directly to the
customer and stored in a segregated part of the customer's own facility. Upon
the customer's request for inventory, the consignment inventory is shipped to
the customer if the inventory was stored offsite or transferred from the
segregated part of the customer's facility for consumption, or use, by the
customer. The Company recognizes revenue upon such transfer. The Company does
not earn a fee for storing the consignment inventory. The Company generally
provides a ninety (90) day warranty for workmanship only and does not have any
installation, acceptance or sales incentives, although the Company has
negotiated extended warranty terms in certain instances. The Company assembles
and tests assemblies based on customers' specifications. Historically, the
amount of returns for workmanship issues has been de minimis under the Company's
standard or extended warranties. Any returns for workmanship issues received
after each period end are accrued in the respective financial statements.
Inventories - Inventories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method. The Company establishes inventory
reserves for valuation, shrinkage, and excess and obsolete inventory. The
Company records provisions for inventory shrinkage based on historical
experience to account for unmeasured usage or loss. Actual results differing
from these estimates could significantly affect the Company's inventories and
cost of products sold. The Company records provisions for excess and obsolete
inventories for the difference between the cost of inventory and its estimated
realizable value based on assumptions about future product demand and market
conditions. Actual product demand or market conditions could be different than
that projected by management.
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 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.
Goodwill and Other Intangibles - The Company adopted on June 1, 2001, SFAS No.
141 "Business Combinations". Under SFAS No. 141, a purchaser must allocate the
total consideration paid in a business combination to the acquired tangible and
intangible assets based on their fair value. Goodwill represents the purchase
price in excess of the fair value of assets acquired in business combinations.
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets", requires the Company to assess goodwill for impairment at
least annually in the absence of an indicator of possible impairment and
immediately upon an indicator of possible impairment. The Company adopted SFAS
effective January 1, 2002. During the fourth quarter of fiscal 2007, the Company
completed its annual assessment of impairment regarding the goodwill recorded.
The Company calculates fair value of the reporting unit utilizing a combination
of a discounted cash flow approach and certain market approaches which
considered both the Company's market capitalization and trading multiples of
comparable companies. The calculations of fair value of the reporting unit
involve significant judgment and different underlying assumptions could result
in different calculated fair values. The goodwill impairment analysis indicated
there was no goodwill impairment for the year ended April 30, 2007 as the fair
value of the reporting unit exceeded the carrying value of the reporting unit by
approximately 1%.
11
In January 2008, the Company changed the date of its annual goodwill impairment
test under SFAS 142, from the last day of the fiscal year to the first day of
the fiscal fourth quarter. The impairment test procedures will be carried out
during the fourth quarter and up to the time of the filing of the Company's Form
10-K, which will allow the Company additional time to complete the required
analysis under SFAS 142. The Company believes that the resulting change in
accounting principle related to the annual testing date will not delay,
accelerate or avoid an impairment charge. The Company determined that the change
in accounting principle related to the annual testing date is preferable under
the circumstances and does not result in adjustments to the Company's financial
statements when applied retrospectively. The Company believes, based on the
preliminary analysis it is likely it may have a significant impairment of
goodwill. The analysis will be completed during the fourth quarter and the
impairment, if any, will be reported in the fourth quarter of fiscal 2008. An
impairment is reported as a non-cash transaction and as an expense on the
Consolidation Statement of Operations. The Company has discussed this potential
impairment with its bank and has been informed the potential recording of the
goodwill impairment will not negatively affect its relationship with the bank
going forward.
NEW ACCOUNTING STANDARDS:
In February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, "Accounting for Certain Hybrid Instruments" (SFAS 155). FASB 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financials instruments acquired or issued after
the beginning of the entity's first fiscal year that begins after September 15,
2006. The adoption of SFAS 155 did not have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes" to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance and
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 as of May 1, 2007,
as required. During the first quarter ended July 31, 2007, the Company recorded
a cumulative effect adjustment of $153,900 to retained earnings as a result of
the impact of FIN 48.
In September 2006, FASB issued SFAS No. 157 (SFAS 157), "Fair Value
Measurements". SFAS 157 establishes a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently assessing the impact SFAS 157 may have on its
financial statements.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Options for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS 159 permits
entities to choose to measure many financial assets and financial liabilities at
fair value. Unrealized gains and losses on items for which the fair value option
has been elected are reported in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently assessing the
impact of SFAS 159 may have on financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
12
In addition to historical financial information, this discussion of the business
of SigmaTron International, Inc., its wholly-owned subsidiaries Standard
Components de Mexico S.A., and AbleMex, S.A. de C.V., and its wholly-owned
foreign enterprise Wujiang SigmaTron Electronics Co., Ltd. ("SigmaTron China"),
and its procurement branch SigmaTron Taiwan (collectively the "Company") and
other Items in this Report on Form 10-Q contain forward-looking statements
concerning the Company's business or results of operations. Words such as
"continue," "anticipate," "will," "expect," "believe," "plan," and similar
expressions identify forward-looking statements. These forward-looking
statements are based on the current expectations of SigmaTron (including its
subsidiaries). Because these forward-looking statements involve risks and
uncertainties, the Company's plans, actions and actual results could differ
materially. Such statements should be evaluated in the context of the risks and
uncertainties inherent in the Company's business including our continued
dependence on certain significant customers; the continued market acceptance of
products and services offered by the Company and its customers; pricing
pressures from our customers, suppliers and the market; the activities of
competitors, some of which may have greater financial or other resources than
the Company; the variability of our operating results; the results of goodwill
impairment testing; the variability of our customers' requirements; the
availability and cost of necessary components and materials; the ability of the
Company and our customers to keep current with technological changes within our
industries; regulatory compliance; the continued availability and sufficiency of
our credit arrangements; changes in U.S., Mexican, Chinese or Taiwanese
regulations affecting the Company's business; the continued stability of the
U.S., Mexican, Chinese and Taiwanese economic systems, labor and political
conditions; and the ability of the Company to manage its growth. 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 as risk
factors 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.
OVERVIEW:
The Company operates in one business segment as an independent provider of
electronic manufacturing services ("EMS"), which includes printed circuit board
assemblies and completely assembled (box-build) electronic products. In
connection with the production of assembled products, the Company also provides
services to its customers, including (1) automatic and manual assembly and
testing of products; (2) material sourcing and procurement; (3) design,
manufacturing and test engineering support; (4) warehousing and shipment
services; and (5) assistance in obtaining product approval from governmental and
other regulatory bodies. The Company provides these manufacturing services
through an international network of facilities located in the United States,
Mexico, China and Taiwan.
Pricing for some components and related commodities has escalated and may
continue to increase in the future periods. The impact of these price increases
could have a negative effect on the Company's gross margins and operating
results.
The Company relies on numerous third-party suppliers for components used in the
Company's production process. Certain of these components are available only
from single sources or a limited number of suppliers. In addition, a customer's
specifications may require the Company to obtain components from a single source
or a small number of suppliers. The loss of any such suppliers could have a
material impact on the Company's results of operations, and the Company may be
required to operate at a cost disadvantage compared to competitors who have
greater direct buying power from suppliers. The Company does not enter into
purchase agreements with major or single-source suppliers. The Company believes
that ad-hoc negotiations with its suppliers provides flexibility, given that the
Company's orders are based on the needs of its customers, which constantly
change.
13
Sarbanes-Oxley, as well as rules subsequently implemented by the Securities and
Exchange Commission and listing requirements subsequently adopted by Nasdaq in
response to Sarbanes-Oxley, have required changes in corporate governance
practices, internal control policies and audit committee practices of public
companies. These rules, regulations, and requirements have increased the
Company's legal expenses, financial compliance and administrative costs, made
many other activities more time consuming and costly and diverted the attention
of senior management. These rules and regulations could also make it more
difficult for us to attract and retain qualified members for our board of
directors, particularly to serve on our audit committee. In addition, if the
Company were to receive a qualified opinion on the adequacy of its internal
control over financial reporting, shareholders could lose confidence in the
reliability of the Company's financial statements, which could have a material
adverse impact on the value of the Company's stock.
Sales can be a misleading indicator of the Company's financial performance.
Sales levels can vary considerably among customers and products depending on the
type of services (consignment and turnkey) rendered by the Company and the
demand by customers. Consignment orders require the Company to perform
manufacturing services on components and other materials supplied by a customer,
and the Company charges only for its labor, overhead and manufacturing costs,
plus a profit. In the case of turnkey orders, the Company provides, in addition
to manufacturing services, the components and other materials used in assembly.
Turnkey contracts, in general, have a higher dollar volume of sales for each
given assembly, owing to inclusion of the cost of components and other materials
in net sales and cost of goods sold. Variations in the number of turnkey orders
compared to consignment orders can lead to significant fluctuations in the
Company's revenue levels. However, the Company does not believe that such
variations are a meaningful indicator of the Company's gross margins.
Consignment orders accounted for less than 5% of the Company's revenues for the
nine months ended January 31, 2008.
In the past, the timing and rescheduling of orders have caused the Company to
experience significant quarterly fluctuations in its revenues and earnings, and
the Company expects such fluctuations to continue.
RESULTS OF OPERATIONS:
Net Sales
Net sales decreased for the three month period ended January 31, 2008 to
$41,131,744 from $44,584,513 for the three month period ended January 31, 2007.
Net sales for the nine months ended January 31, 2008 decreased to $123,790,664
from $126,403,040 for the same period in the prior fiscal year. Sales volume
decreased for the three and nine month periods ended January 31, 2008 as
compared to the same period in the prior year in the gaming, consumer
electronics, appliance, auto, life sciences and semiconductor marketplaces.
Sales volume increased for the nine month period ending January 31, 2008 as
compared to the same period in the prior year in the fitness, industrial
electronics and telecommunications marketplaces. The overall decrease in revenue
for the three month period ended January 31, 2008 is a result of our customers'
demand for product based on their forecast and a slower than anticipated startup
of several new programs for certain customers. Pricing pressures continue at all
locations.
Gross Profit
Gross profit increased during the three month period ended January 31, 2008 to
$4,463,596 or 10.9% of net sales, compared to $4,302,568 or 9.6% of net sales
for the same period in the prior fiscal year. Gross profit increased for the
nine month period ended January 31, 2008 to $14,138,392 or 11.4% of
14
net sales, compared to $13,017,267 or 10.3% of net sales for the same period in
the prior fiscal year. The gross profit increased for the three and nine month
period ended January 31, 2008 due to the mix of product shipped to customers.
There can be no assurance that gross margins will not decrease in future
quarters.
Selling and Administrative Expenses
Selling and administrative expenses decreased to $3,191,689 or 7.8% of net sales
for the three month period ended January 31, 2008 compared to $3,519,246 or 7.9%
of net sales in the same period in the prior fiscal year. Selling and
administrative expenses decreased to $9,086,864 or 7.3% of net sales for the
nine month period ended January 31, 2008 compared to $9,635,932 or 7.6% of net
sales in the same period in the prior fiscal year. The decrease for the three
and nine month periods ended January 31, 2008, is due to a decrease in sales
commissions, sales and office salaries, amortization expense and accounting and
legal fees. Expense increased for the three and nine month periods ended January
31, 2008, in accounting and IT salaries and general insurance expenses.
Interest Expense
Interest expense for bank debt and capital lease obligations for the three month
period ended January 31, 2008 was $730,529 compared to $717,648 for the same
period in the prior fiscal year. Interest expense increased to $2,152,016 for
the nine month period ended January 31, 2008 as compared to $1,879,688 for the
same period in the prior fiscal year. This change was attributable to the
Company's increased borrowings under its revolving credit facility and increased
capital lease obligations.
Taxes
The effective tax rate from operations for the three and nine month periods
ended January 31, 2008 was 39.6% and 36.0%, respectively. The effective tax rate
for the comparable periods in fiscal 2007 was 39.0% for the three and nine month
periods ended, respectively. The effective tax rate has fluctuated due to the
tax effects of the Company's foreign operations.
Net Income
Net income from operations increased to $312,464 for the three month period
ended January 31, 2008 compared to $76,572 for the same period in the prior
fiscal year. Basic and diluted earnings per share for the third fiscal quarter
of 2008 were $0.08 compared to basic and diluted earnings per share of $0.02,
respectively, for the same period in the prior fiscal year. For the nine months
ended January 31, 2008, the Company recorded net income of $1,832,722 compared
to $1,043,252 for the same period in the prior fiscal year. Basic and diluted
earnings per share for the nine month period ended January 31, 2008 were $0.48
and $0.47 compared to basic and diluted earnings per share of $0.28 and $0.27,
respectively, for the same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES:
OPERATING ACTIVITIES.
Cash flow provided by operating activities was $1,682,833 for the nine months
ended January 31, 2008, compared to cash used in operations of $3,296,399 for
the same period in the prior year. During the first nine months of fiscal year
2008, cash provided by operations was due to net income, an increase in trade
payables and the non-cash effect of depreciation and amortization. Cash provided
by operating activities was partially offset by an increase in accounts
receivable due to timing of cash receipts from a significant customer.
15
For the nine months ended January 31, 2007, cash used in operations was due to
an increase in accounts receivable and inventory. The increase in inventories
was primarily attributable to an increase in customer orders and safety stock
requirements. The increase in accounts receivable was due to an increase in
sales volume. Cash used in operating activities was partially offset by net
income, the non-cash effect of depreciation and amortization and an increase in
trade payables.
INVESTING ACTIVITIES.
During the first nine months of fiscal 2008, the Company purchased approximately
$1,422,000 in machinery and equipment to be used in the ordinary course of
business. The Company expects to make additional machinery and equipment
purchases of approximately $500,000 during the balance of fiscal 2008. During
the first nine months of fiscal 2007, the Company purchased approximately
$1,730,000 in machinery and equipment to be used in the ordinary course of
business.
FINANCING TRANSACTIONS.
On July 31, 2006, the Company amended the credit facility to increase the
revolving credit facility from $22,000,000 to $27,000,000. The Company also has
a term loan which was increased to $4,000,000 from $2,750,000 on July 31, 2006.
Interest payments only were due monthly through June 30, 2007 and quarterly
principal payments of $250,000 are due each quarter beginning with the quarter
ending June 30 2007, through the quarter ending June 30, 2011. In October 2006,
the Company amended the credit facility to increase the revolving credit
facility from $27,000,000 to $32,000,000. The increase of $5,000,000 was for a
term of six months and expired on April 30, 2007. In April 2007, the amended
revolving credit facility was renewed in the amount of $32,000,000 and will
expire on September 30, 2009. The amended revolving credit facility is limited
to the lesser of: (i) $32,000,000 or (ii) an amount equal to the sum of 85% of
the receivable borrowing base and the lesser of $16,000,000 or a percentage of
the inventory base. In January and April 2007, the Company's financial covenants
were amended. At January 31, 2008, the Company was in compliance with its
financial covenants, and $29,857,768 was outstanding under the revolving credit
facility and term loan. There was approximately $2,142,232 of unused credit
available as of January 31, 2008.
The loan and security agreement is collateralized by substantially all of the
domestically-located assets of the Company and contains certain financial
covenants, including specific covenants pertaining to the maintenance of minimum
tangible net worth and net income. The agreement also restricts annual lease
rentals and capital expenditures and prohibits the payment of dividends.
The Company anticipates its credit facilities, cash flow from operations and
leasing resources will be adequate to meet its working capital requirements for
the remainder of fiscal year 2008. In the event the business grows rapidly or
the Company considers an acquisition, additional financing resources could be
necessary in the current or future fiscal years. There is no assurance that the
Company will be able to obtain equity or debt financing at acceptable terms in
the future.
The Company provides funds for salaries, wages, overhead and capital expenditure
items as necessary to operate its wholly-owned Mexican and Chinese subsidiaries
and the Taiwan procurement branch. The Company provides funding in U.S. dollars,
which are exchanged for pesos, RMB, and New Taiwan dollars as needed. The
fluctuation of currencies from time to time, without an equal or greater
increase in inflation, has not had a material impact on the financial results of
the Company. During the first nine months of fiscal year 2008, the Company paid
approximately $14,954,500 to its subsidiaries for services provided.
16
In May 2002, the Company acquired a plant in Acuna, 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 acquiring that plant, the Company rented the facility. At
January 31, 2008, approximately $272,686 was outstanding in connection with the
purchase of that facility.
Payments made under capital lease and building notes payable was $1,649,243 and
$1,535,844 for the first nine months of fiscal 2008 and 2007, respectively.
The Company paid $750,000 under its term loan obligation and borrowed an
additional $2,388,753 under its revolving credit facility during the first nine
months of fiscal 2008. The balance on January 31, 2008 under the term loan
obligation and revolving credit facility was $3,250,000 and $26,607,768,
respectively.
During the first nine months of fiscal 2007 the Company paid $250,000 under its
term loan obligation and borrowed an additional $4,642,711 under its revolving
credit facility. At January 31, 2007, the Company had $4,000,000 and $23,804,611
outstanding under its term loan and revolving credit facility, respectively.
OFF-BALANCE SHEET TRANSACTIONS:
The Company has no off-balance sheet transactions.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:
There have been no material changes to the Company's contractual obligations and
commercial commitments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates is due
primarily to its short-term investments and borrowings under its credit
agreements. The Company's borrowings are at a variable rate and an increase in
interest rates of 1% would have resulted in interest expense increasing by
approximately $224,000 for the nine month period ended January 31, 2008. As of
January 31, 2008, the Company had no short-term investments and approximately
$29,900,000 of borrowings under its credit agreements. The Company does not use
derivative financial investments. The Company's cash equivalents, if any, are
invested in overnight commercial paper. The Company does not have any
significant cash flow exposure due to rate changes for its cash equivalents,
because these instruments are short-term.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, including our President and Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of January 31, 2008. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports filed by the Company under the Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported
within the time periods specified in
17
the Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to our management, including our
President and Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Based on
this evaluation, our President and Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of January 31, 2008.
There has been no change in our internal control over financial reporting during
the quarter ended January 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material effect on our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
There were no material changes from our risk factors as presented in the section
entitled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended April 30, 2007 as filed with the SEC on July 24, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) Exhibits:
Exhibit 18.1 - Letter of Preferability Regarding Change in Goodwill
Impairment Test Date Change from BDO Seidman, LLP.
Exhibit 31.1 - Certification of Principal Executive Officer of SigmaTron
International, Inc. 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 SigmaTron
International, Inc. Pursuant to Rule 13a-14(a) under the Exchange Act, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
19
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).
20
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 March 12, 2008
------------------------------------------------ Date
Gary R. Fairhead
President and CEO (Principal Executive Officer)
/s/ Linda K. Blake March 12, 2008
------------------------------------------------ Date
Linda K. Blake
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)