Add
SGMA to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SGMA > SEC Filings for SGMA > Form 10-Q on 14-Sep-2012 | All Recent SEC Filings |
14-Sep-2012
Quarterly Report
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. ("SigmaTron"), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd. and SigmaTron International Trading Co., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. (collectively, "SigmaTron China") and international procurement office SigmaTron Taiwan branch (collectively, the "Company") and other Items in this Quarterly Report on Form 10-Q contain forward-looking statements concerning the Company's business or results of operations. On May 31, 2012, SigmaTron acquired certain assets and assumed certain liabilities of Spitfire. Spitfire was a privately held Illinois corporation headquartered in Carpentersville, Illinois with captive manufacturing sites in Chihuahua, Mexico and suburban Ho Chi Minh City, Vietnam. Both manufacturing sites were among the assets acquired by the Company. 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 the Company. 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, but not necessarily limited to, the Company's 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 long-lived assets 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, Vietnamese or Taiwanese regulations affecting the Company's business; the turmoil in the global economy and financial markets; the stability of the U.S., Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; currency exchange fluctuations; and the ability of the Company to manage its growth, including its integration of the Spitfire operation acquired in May 2012. 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 such filings, and the Company undertakes no obligation to update such statements in light of future events or otherwise unless otherwise required by law.
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) automated 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, Vietnam and Taiwan.
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. Further, the Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers. Increased demands for components and rising commodity prices have resulted in upward pricing pressure from the Company's supply chain, which has affected and could continue to affect our results of operations. The Company does not enter into long-term purchase agreements with major or single-source suppliers. The Company believes that short-term purchase orders with its suppliers provides flexibility, given that the Company's orders are based on the changing needs of its customers.
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 versus 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 and gross margin levels. Consignment orders accounted for less than 5% of the Company's revenues for the three months ended July 31, 2012 and 2011.
On May 31, 2012, the Company acquired certain assets and assumed certain liabilities of Spitfire (the ("Spitfire Transaction"). Spitfire was a privately held Illinois corporation headquartered in Carpentersville, Illinois with captive manufacturing sites in Chihuahua, Mexico and suburban Ho Chi Minh City, Vietnam. Both manufacturing sites were among the assets acquired by the Company. Spitfire was an original equipment manufacturer ("OEM") of electronic controls, with a focus on the major appliance (white goods) industry. Although North America was its primary market, Spitfire has applications that can be used worldwide. The Company provided manufacturing solutions for Spitfire since 1994, and was a strategic partner to Spitfire as it developed its OEM electronic controls business.
Spitfire provides cost effective designs as control solutions for its customers, primarily in high volume applications of domestic cooking ranges, dishwashers, refrigerators, and portable appliances. Spitfire is a member of the Association of Home Appliance Manufacturers ("AHAM"), as well as other industry related trade associations and is ISO 9001-2008 certified. The acquisition will allow the Company to offer design services for the first time in specific markets.
Due to the acquisition of Spitfire, effective June 1, 2012, the Company discontinued selling to Spitfire. The Company instead began selling directly to Spitfire's former customers.
In an effort to facilitate growth of our China operation, the Company established a new Chinese entity in October 2011 that allows the Company to provide services competitively to the Chinese domestic market. The Company continues to see a trend of Chinese costs increasing, thereby making Mexico a more competitive manufacturing location to service North America. Indications suggest that this trend will continue. We feel the Company's international footprint provides our customers with flexibility within the Company to manufacture in China, Mexico and Vietnam. The Company believes this strategy has continued to serve it well during these difficult economic times as its customers continuously evaluate their supply chain strategies.
In the past, the timing of production and delivery of orders has caused the Company to experience significant quarterly fluctuations in its revenues and earnings. The uncertainty associated with the worldwide economy in general, and the United States economy specifically, makes forecasting difficult. Short-term customer demands remain volatile. The Company expects continuing margin pressures. The Company anticipates a choppy and volatile economy and plans to cautiously manage its business considering the international events and the upcoming election in the U.S. The Company plans to focus on opportunities to increase revenue and control costs.
During the first quarter of fiscal year 2013, the Company relocated its Tijuana, MX operation to a new facility within Tijuana, MX. The Company incurred a total of approximately $417,420 in relocation expenses to date, as a result of the move. For the first quarter ended July 31, 2012, relocation expenses of approximately $391,750 are included in cost of products sold and consist primarily of moving expenses related to equipment, the write-off of leasehold improvements and the restoration of the prior Tijuana facility.
Results of Operations:
Net Sales
Net sales increased for the three month period ended July 31, 2012 to $47,629,229 from $38,892,011 for the three month period ended July 31, 2011. Sales volume increased for the three month period ended July 31, 2012 as compared to the same period in the prior fiscal year in the industrial electronics, appliance, medical/life sciences, telecommunications and gaming marketplaces. The increase in sales for these marketplaces was partially offset by a decrease in sales in the fitness, consumer electronics and semiconductor equipment marketplaces. The increase in revenue for the three month period ended July 31, 2012 as compared to the same period in the prior fiscal year, is primarily the result of sales to customers due to the Spitfire acquisition, as well as our existing customers' increased demand for product and the addition of some new customer programs ramping up.
Gross Profit
Gross profit increased during the three month period ended July 31, 2012 to $4,705,898 or 9.9% of net sales, compared to $3,542,508 or 9.1% of net sales for the same period in the prior fiscal year. The increase in gross profit was primarily the result of sales to customers due to the Spitfire acquisition, as well as, increased sales revenue from our existing customers' and product mix. The increase in gross profit for the three month period ended July 31, 2012 was partially offset by relocation expenses of approximately $391,750 for the Tijuana, MX move and a foreign currency loss of $50,438. Gross profit for the three month period ended July 31, 2011 was impacted by a currency loss of $57,363.
In the past, the timing of production and delivery of orders has caused the Company to experience significant quarterly fluctuations in its revenues and earnings. The uncertainty associated with the worldwide economy in general, and the United States economy specifically, makes forecasting difficult. Short-term customer demands remain volatile and the Company expects continuing margin pressures. The Company anticipates a choppy and volatile economy and plans to cautiously manage its business considering the international events and the upcoming election in the U.S. The Company plans to focus on opportunities to increase revenue and control costs.
Selling and Administrative Expenses
Selling and administrative expenses increased to $4,665,405 or 9.8% of net sales, for the three month period ended July 31, 2012, compared to $2,909,136 or 7.5% of net sales for the same period in the prior fiscal year. The net increase for the three month period ended July 31, 2012 totaled $1,756,269 of which $1,230,950 resulted from additional selling and administrative expenses related to Spitfire following the Spitfire Transaction, including salaries, other general administrative expenses and additional professional fees. In addition, commissions and bonus expenses increased by approximately $128,000 for the three month period ended July 31, 2012 compared to the same period in the prior fiscal year.
Interest Expense
Interest expense decreased to $188,337 for the three month period ended July 31, 2012 compared to $269,316 for the same period in the prior fiscal year. The decrease in interest expense for the three month period ended July 31, 2012, was due to the Company's decreased borrowings under its senior secured credit facility and capital lease obligations. Interest expense for future quarters may increase if interest rates or borrowings, or both, increase.
Taxes
The income tax benefit from operations was $54,700 for the three month period ended July 31, 2012 compared to income tax expense of $141,526 for the same period in the prior fiscal year. The Company's effective tax rate was 37% for the three month period ended July 31, 2012 and 2011. The disparity in income tax expenses for the three month period ended July 31, 2012 compared to July 31, 2011 is primarily the effect on taxable income (loss) of one-time expenses incurred relating to the Spitfire acquisition and the relocation of the Tijuana, MX operation. Specifically, the Company incurred approximately $589,000 of one-time expenses related to the Spitfire acquisition and approximately $392,000 of one-time expenses related to the relocation of the Tijuana, MX operation. While the Company bore the majority of related expenses during the first quarter of fiscal year 2013, the Company expects to incur additional one-time expenses related to the Spitfire acquisition during the second quarter of fiscal year 2013.
Net Income
Net loss from operations was $93,144 for the three month period ended July 31, 2012 compared to net income from operations of $240,961 for the same period in the prior fiscal year. Basic and diluted loss per share for the first fiscal quarter of 2013 were each $0.02 compared to basic and diluted earnings per share of $0.06 for the same period in the prior fiscal year.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $4,741,213 for the three months ended July 31, 2012, compared to cash flow used in operating activities of $4,008,189 for the same period in the prior fiscal year. During the first three months of fiscal year 2013, cash flow used in operating activities was primarily the result of an increase in inventory and accounts receivable. The increase in inventory of $1,871,827 was primarily related to the Spitfire acquisition and increased customer orders. The increase in accounts receivable of $5,592,925 was due to increased sales volume from both existing customers and sales to customers due to the Spitfire acquisition. Net cash used in operating activities was partially offset by an increase in accounts payable, the non cash effects of depreciation, amortization, stock compensation and related expenses.
Cash flow used in operating activities was $4,008,189 for the three months ended July 31, 2011. During the first three months of fiscal year 2012, cash flow used in operating activities was primarily the results of an increase in inventories of $2,833,415 due to rising inventory levels for some customers delaying shipments and the start up of new customer programs. Cash flow used in operating activities was further impacted by an increase in accounts receivable of $1,586,890 due to increased sales volume and timing of cash receipts from a significant customer. Net cash used in operating activities was partially offset by net income, the non-cash effect of depreciation and amortization and a decrease in accounts payable. The decrease in accounts payable of $232,833 during the first fiscal quarter was due to timing of payments in the ordinary course of business.
Investing Activities.
During the first three months of fiscal year 2013, the Company purchased approximately $771,400 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 $3,728,600 during the balance of fiscal year 2013. The Company anticipates the purchases will be funded by lease transactions and its bank line of credit. The Company received approximately $1,142,000 in cash in conjunction with the Spitfire Transaction.
During the first quarter of fiscal year 2012, investing activities consisted of purchases of approximately $1,100,000 in machinery and equipment to be used in the ordinary course of business.
Financing Activities.
Cash provided by financing activities was $5,154,348 for the three months ended July 31, 2012, compared to cash provided by financing activities of $4,272,526 for the same period in the prior fiscal year. Cash provided by financing activities was primarily the result of increased borrowings under the credit facility. The additional borrowings were required to support increased inventories driven by customer demand, accounts payable related to the Spitfire acquisition and an increase in accounts receivable in the ordinary course of business.
Cash provided by financing activities was $4,272,526 for the three months ended July 31, 2011. Cash provided by financing activities was primarily the result of increased borrowings of $2,527,192 under the credit facility. The additional borrowings were required to support the increase in inventory and accounts receivable.
Financing Summary.
The Company has a senior secured credit facility with Wells Fargo Bank ("Wells Fargo"), with a credit limit up to $30 million. The term of the credit facility extends through September 30, 2013, and allows the Company to choose among interest rates at which it may borrow funds. The interest rate is the prime rate plus one half percent (effectively, 3.75% at July 31, 2012) or LIBOR plus two and three quarter percent (effectively, 3.1% at July 31, 2012), which is paid monthly. The credit facility is collateralized by substantially all of the domestically located assets of the Company and requires the Company to be in compliance with several financial covenants. In conjunction with the Spitfire acquisition, two of the financial covenants required by terms of the Company's senior secured credit facility were amended as of May 31, 2012. The Company was in violation of certain of its financial covenants at July 31, 2012 and received a waiver for the financial covenant violations. The Company will renegotiate its financial covenants prior to October 31, 2012 with its bank to ensure it is in compliance with its financial covenants at October 31, 2012 and at its fiscal year end. As of July 31, 2012, there was a $21,260,111 outstanding balance under the credit facility and $8,739,889 of unused availability.
The Company entered into a mortgage agreement on January 8, 2010, in the amount of $2,500,000, with Wells Fargo to refinance the property that serves as the Company's corporate headquarters and its Illinois manufacturing facility. The Company repaid the prior Bank of America mortgage, which equaled $2,565,413, as of January 8, 2010, using proceeds from the Wells Fargo mortgage and senior secured credit facility. The Wells Fargo note bears interest at a fixed rate of 6.42% per year and is amortized over a sixty month period. A final payment of approximately $2,000,000 is due on or before January 8, 2015. The outstanding balance as of July 31, 2012 was $2,250,010.
On January 19, 2010, the Company entered into a leasing transaction with Wells Fargo Equipment Finance, Inc. to refinance $1,287,407 of equipment. The term of the lease financing agreement extended to January 18, 2012 with monthly payments of $55,872 and a fixed interest rate of 4.29%. This lease financing arrangement was paid in full as of January 31, 2012. The net book value of the equipment was $1,343,313 at July 31, 2012.
On August 20, 2010 and October 26, 2010, the Company entered into two capital leasing transactions (a lease finance agreement and a sale leaseback agreement) with Wells Fargo Equipment Finance, Inc., to purchase equipment totaling $1,150,582. The term of the lease finance agreement, with an initial principal amount of $315,252, extends to September 2016 with monthly payments of $4,973 and a fixed interest rate of 4.28%. The term of the sale leaseback agreement, with an initial principal amount of $835,330, extends to August 2016 with monthly payments of $13,207 and a fixed interest rate of 4.36%. At July 31, 2012, $226,764 and $579,272 was outstanding under the lease finance and sale leaseback agreements, respectively. The net book value at July 31, 2012 for the equipment under each of the lease finance agreement and sale leaseback agreement was $267,088 and $678,999, respectively.
On November 29, 2010, the Company entered into a capital lease with Wells Fargo Equipment Finance, Inc., to purchase equipment totaling $226,216. The term of the lease agreement extends to October 2016 with monthly payments of $3,627 and a fixed interest rate of 4.99%. At July 31, 2012, the balance outstanding under the capital lease agreement was $166,371. The net book value of the equipment under this lease at July 31, 2012 was $192,518.
The total amount outstanding at July 31, 2012 for the three remaining equipment lease transactions discussed above was $972,407. The Company had two other capital leases not discussed above, one of which was paid in full in August 2011 and the other was paid in full in November 2011. The total net book value of the equipment under these other leases at July 31, 2012 was $541,884.
On May 8, 2012, the Company entered into a lease agreement in Tijuana, MX, to rent 112,000 square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through November 2018. The amount of the deferred rent expense recorded for the three month period ended July 31, 2012 was $160,400.
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly-owned Mexican, Vietnam and Chinese subsidiaries and the Taiwan international procurement office. The Company provides funding in U.S. dollars, which are exchanged for Pesos, Dong, Renminbi, and New Taiwan Dollars as needed. The fluctuation of currencies from time to time, without an equal or greater increase in inflation, could have a material impact on the financial results of the Company. The impact of currency fluctuation for the three months ended July 31, 2012, resulted in a foreign currency loss of $50,438. During the first three months of fiscal year 2013, the Company's U.S. operations paid approximately $5,862,000 to its foreign subsidiaries for services provided. During the third quarter of fiscal year 2012, the Company received a distribution of previously taxed earnings of approximately $1,039,000 from a foreign subsidiary based in Mexico. The Company does not anticipate any U.S. income taxes on the distribution as the earnings were previously subject to U.S. tax. This distribution of previously taxed earnings from the foreign subsidiary based in Mexico does not change the Company's intentions to indefinitely reinvest the income from its foreign subsidiaries. Our intent is to keep these funds indefinitely reinvested outside of the United States and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. It is not practicable to estimate the amount of additional taxes that may be payable upon distribution, if such a distribution would occur.
The Company anticipates its credit facilities, cash flow from operations and leasing resources will be adequate to meet its working capital requirements and capital expenditures for the next twelve months. There is no assurance that the Company will be able to retain or renew its credit agreements in the future, or that any retention or renewal will be on the same terms as currently exist. In the event the business grows rapidly, the current economic climate deteriorates, customers delay payments, 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, or at all, in the future.
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
Contractual Obligations and Commercial Commitments:
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange Act, we are not required to provide the information required by this item.
|
|