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SGMA > SEC Filings for SGMA > Form 10-Q on 15-Mar-2013All Recent SEC Filings

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Form 10-Q for SIGMATRON INTERNATIONAL INC


15-Mar-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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) design of appliance controls;
(5) warehousing and shipment services; and (6) 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.


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SigmaTron International, Inc.

January 31, 2013

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 could result in upward pricing pressure from the Company's supply chain, which could 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 and nine months ended January 31, 2013 and 2012.

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. The Company's Spitfire division 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 allows 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.


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SigmaTron International, Inc.

January 31, 2013

Results of Operations:

Net Sales

Net sales increased for the three month period ended January 31, 2013 to $46,758,568 from $38,099,493 for the three month period ended January 31, 2012. Net sales increased for the nine month period ended January 31, 2013 to $147,117,192 from $116,894,157 for the same period in the prior fiscal year. Sales volume increased for the three and nine month periods ended January 31, 2013 as compared to the same period in the prior fiscal year in the appliance, industrial and consumer electronics, medical/life sciences, and gaming marketplaces. The increase in sales for these marketplaces was partially offset by a decrease in sales in the telecommunications and fitness marketplaces. The increase in revenue for the three and nine month periods ended January 31, 2013 is a result of sales to customers arising out of the Spitfire acquisition, as well as our existing customers' increased demand for product.

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. The decrease in revenues in the third fiscal quarter of 2013 compared to the second fiscal quarter in the same fiscal year is a result of customer demand and is a direct reflection of what the Company perceives as a slowing economy. The Company anticipates a reduction in demand for product in the short-term; however; the Company has not lost any customers or specific programs and has been awarded significant new programs from current customers. The Company anticipates these new programs will result in additional revenues during fiscal 2014. The overall market remains difficult and the Company is experiencing pricing pressures and has excess capacity.

Gross Profit

Gross profit increased during the three month period ended January 31, 2013 to $4,122,377 or 8.8% of net sales, compared to $3,521,580 or 9.2% of net sales for the same period in the prior fiscal year. Gross profit increased for the nine month period ended January 31, 2013 to $14,231,445 or 9.7% of net sales, compared to $10,635,495 or 9.1% of net sales for the same period in the prior fiscal year. The increase in gross profit for the three and nine month periods ended January 31, 2013 was primarily the result of sales to customers arising out of the Spitfire acquisition, as well as, increased sales revenue from our existing customers'. The decrease in gross profit as a percent of net sales is the result of product mix and pricing pressures. The increase in gross profit for the nine month period ended January 31, 2013 was partially offset by relocation expenses of approximately $399,000 for the Tijuana, MX move and a foreign currency loss of $250,312.

Selling and Administrative Expenses

Selling and administrative expenses increased to $4,380,524 or 9.4% of net sales for the three month period ended January 31, 2013, compared to $3,125,677 or 8.2% of net sales for the same period in the prior fiscal year. The net increase for the three month period ended January 31, 2013 was $1,254,847. Of the increase noted above, $1,199,315 was for salaries and other administrative expenses attributable to Spitfire operations and $27,228 was transaction costs for the Spitfire Transaction. In addition, amortization expense, office and sales salaries, other professional fees, and general insurance expenses increased by approximately $361,015 for the three month period ended January 31, 2013 compared to the same period in the prior fiscal year. The increase in the foregoing selling and administrative


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SigmaTron International, Inc.

January 31, 2013

expenses were partially offset by a decrease in bonus, depreciation expense, and professional legal and accounting fees. Selling and administrative expenses increased to $13,725,684, or 9.3% of net sales for the nine month period ended January 31, 2013 compared to $9,067,123, or 7.8% of net sales for the same period in the prior fiscal year, or an increase of $4,658,561. Of the increase noted above, for the nine month period ended January 31, 2013, $3,270,987 was attributable to salaries and other administrative expenses for the Spitfire operations and $769,983 was transaction costs for the Spitfire Transaction. Other increases in selling and administrative expenses for the nine month period ended January 31, 2013, were due to commissions, freight out, computer maintenance, insurance and amortization expense. The increases in the foregoing selling and administrative expenses were partially offset by a decrease in bonus, depreciation expense and paper and supply expenses.

Interest Expense

Interest expense decreased to $220,977 for the three month period ended January 31, 2013 compared to $262,463 for the same period in the prior fiscal year. Interest expense for the nine month period ended January 31, 2013 was $626,684 compared to $827,897 for the same period in the prior fiscal year. The decrease in interest expense for the three and nine month periods ended January 31, 2013 was due to decreased borrowings under the Company's banking arrangements 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 $262,348 for the three month period ended January 31, 2013 compared to an income tax expense of $50,386 for the same period in the prior fiscal year. The income tax benefit from operations was $293,337 for the nine month period ended January 31, 2013 compared to an income tax expense of $284,773 for the same period in the prior year. The income tax benefit for the three and nine month periods ended January 31, 2013 is a result of a pre-tax loss for the U.S. operations in fiscal 2013 created by the Spitfire acquisition. The U.S. statutory tax rate applied to the pre-tax U.S. loss created a tax benefit, which was partially offset by income tax expense from the Company's foreign jurisdictions that have lower effective tax rates than in the U.S.

Net Loss/Income

Net loss from operations was $216,776 for the three month period ended January 31, 2013 compared to net income of $85,656 for the same period in the prior fiscal year. Net income from operations decreased to $172,914 for the nine month period ended January 31, 2013 compared to $484,884 for the same period in the prior fiscal year. Basic and diluted loss per share for the third fiscal quarter of 2013 were each $0.06 compared to basic and diluted earnings per share of $0.02 for the same period in the prior fiscal year. Basic and diluted earnings per share for the nine month period ended January 31, 2013 were each $0.04 compared to basic and diluted earnings per share of $0.13 for the same period in the prior fiscal year.


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SigmaTron International, Inc.

January 31, 2013

Liquidity and Capital Resources:

Operating Activities.

Cash flow used in operating activities was $921,133 for the nine months ended January 31, 2013, compared to cash flow provided by operating activities of $4,570,497 for the same period in the prior fiscal year. During the first nine months of fiscal year 2013, cash flow used in operating activities was the result of an increase of inventories of $2,616,116 and accounts receivable of $2,781,759, primarily related to additional sales volume resulting from the Spitfire acquisition. Net cash used in operating activities was partially offset by net income, the non-cash effect of depreciation and amortization, stock-based compensation expense, an increase in trade accounts payable and deferred rent expenses.

Cash flow provided by operating activities was $4,570,497 for the nine months ended January 31, 2012. During the first nine months of fiscal year 2012, cash flow provided by operating activities was primarily the result of a decrease in inventory, net income and the non-cash effects of depreciation and amortization. The decrease in inventory of $8,826,490 was the result of the improvement of inventory management practices. Net cash provided by operating activities was partially offset by an increase in accounts receivable and a decrease in trade accounts payable. The increase in accounts receivable of $4,462,174 was due to increased sales volume and timing of cash receipts from a significant customer. The decrease in accounts payable of $3,310,917 was due to timing of payments in the ordinary course of business.

Investing Activities.

During the first nine months of fiscal year 2013, the Company purchased approximately $4,800,000 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 $1,200,000 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 nine months of fiscal year 2012, investing activities consisted of purchases of approximately $1,824,000 in machinery and equipment to be used in the ordinary course of business.

Financing Activities.

Cash provided by financing activities was $4,185,386 for the nine months ended January 31, 2013, compared to cash used in financing activities of $1,892,866 for the same period in the prior fiscal year. Cash provided by financing activities was primarily the result of increased borrowings of $4,450,869 under the credit facility. The additional borrowings were required to support the purchases of machinery and equipment and the increase in both accounts receivable and inventory.

Cash used in financing activities was $1,892,866 for the nine months ended January 31, 2012. Cash used in financing activities was primarily the result of payments under the credit facility and for capital lease obligations.


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SigmaTron International, Inc.

January 31, 2013

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 initially extended 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 January 31, 2013) or LIBOR plus two and three quarter percent (effectively, 3.1% at January 31, 2013), 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 renegotiated its financial covenants during the quarter ended October 31, 2012 with its bank and extended the credit facility through September 30, 2014. At January 31, 2013 the Company was in compliance with its financial covenants. As of January 31, 2013, there was a $20,450,869 outstanding balance under the credit facility and $9,549,131 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 its 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 January 31, 2013 was $2,200,012.

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 $1,266,275 at January 31, 2013.

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 January 31, 2013, $201,696 and $512,413 was outstanding under the lease finance and sale leaseback agreements, respectively. The net book value at January 31, 2013 for the equipment under each of the lease finance agreement and sale leaseback agreement was $253,953 and $644,194, respectively.


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SigmaTron International, Inc.

January 31, 2013

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 January 31, 2013, the balance outstanding under the capital lease agreement was $148,576. The net book value of the equipment under this lease at January 31, 2013 was $183,092.

The total amount outstanding at January 31, 2013 for the three remaining equipment lease transactions discussed above was $862,685. 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 January 31, 2013 was $1,081,238.

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 and nine month periods ended January 31, 2013 was $56,898 and $337,599, respectively.

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 nine months ended January 31, 2013, resulted in a foreign currency loss of $250,312 compared to a foreign currency gain of $142,936 for the same period in the prior fiscal year. During the first nine months of fiscal year 2013, the Company's U.S. operations paid approximately $26,800,000 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. The Company's 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.


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SigmaTron International, Inc.

January 31, 2013

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 Item 10(f)(1) of Regulation S-K under the Exchange Act, we are not required to provide the information required by this item.

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