Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SGMA > SEC Filings for SGMA > Form 10-Q on 12-Sep-2013All Recent SEC Filings

Show all filings for SIGMATRON INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SIGMATRON INTERNATIONAL INC


12-Sep-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. 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 and 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, including conflict minerals; 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 this Annual Report 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) manufacturing and test engineering support; (4) design services; (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.


Table of Contents

SigmaTron International, Inc.

July 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. 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, 2013 and 2012.

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 Company has seen signs of a slowdown in demand at the beginning of its second quarter of fiscal 2014. However; the Company has not lost any customers or specific programs. The overall market remains difficult and the Company continues to experience pricing pressures.

On May 31, 2012, the Company acquired certain assets and assumed certain liabilities of Spitfire. Spitfire was a privately held Illinois corporation 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 of electronic controls, with a focus on the major appliance (white goods) industry. Although North America was its primary market, Spitfire's applications 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.

The Company's Spitfire division provides cost effective designs as control solutions for its customers, primarily in high volume applications of domestic cooking ranges, dishwashers, refrigerators, and portable appliances. It 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 has enabled 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.

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.


Table of Contents

SigmaTron International, Inc.

July 31, 2013

Results of Operations:

Net Sales

Net sales increased for the three month period ended July 31, 2013 to $56,166,061 from $47,629,229 for the three month period ended July 31, 2012. Sales volume increased for the three month period ended July 31, 2013 as compared to the same period in the prior fiscal year in the appliance, consumer electronics and medical/life sciences marketplaces. The increase in sales for these marketplaces was partially offset by a decrease in sales in the fitness, telecommunications, gaming, industrial electronics and semiconductor equipment marketplaces. The increase in revenue for the three month period ended July 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 and the addition of new customers. The Company has seen signs of a slowdown in demand at the beginning of its second quarter of fiscal year 2014 and anticipates an overall sluggish and volatile economy without sustained growth.

Gross Profit

Gross profit increased during the three month period ended July 31, 2013 to $6,288,408 or 11.2% of net sales, compared to $4,705,898 or 9.9% of net sales for the same period in the prior fiscal year. The increase in gross profit for the three month period ended July 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 and the addition of new customers and programs. The Company saw improved performance from the two manufacturing facilities obtained through the Spitfire acquisition due to achieving economies of scale. The Company experienced steady performance from its other operations. During the first quarter of fiscal 2013 the Company incurred one-time expenses of approximately $392,000 in relocation expenses for its Tijuana Mexico operation.

Selling and Administrative Expenses

Selling and administrative expenses increased to $4,855,558 or 8.6% of net sales for the three month period ended July 31, 2013, compared to $4,665,405 or 9.8% of net sales for the same period in the prior fiscal year. The net increase for the three month period ended July 31, 2013 was $190,153. Of the increase noted above, $453,751 was for salaries and other administrative expenses attributable to Spitfire operations. In addition, general insurance and bonus expenses increased by approximately $88,500 for the three month period ended July 31, 2013 compared to the same period in the prior fiscal year. The increase in the foregoing selling and administrative expenses were partially offset by a decrease in legal, accounting, and other professional fee expenses related to the Spitfire acquisition in fiscal 2013.


Table of Contents

SigmaTron International, Inc.

July 31, 2013

Interest Expense

Interest expense increased to $213,960 for the three month period ended July 31, 2013 compared to $188,337 for the same period in the prior fiscal year. The increase in interest expense for the three month period ended July 31, 2013 was due to increased borrowings under the Company's banking arrangements during the quarter. Interest expense for future quarters may increase if interest rates or borrowings, or both, increase.

Taxes

The income tax expense from operations was $272,875 for the three month period ended July 31, 2013 compared to an income tax benefit of $54,700 for the same period in the prior fiscal year. The income tax expense for the three month period ended July 31, 2013 is a result of pre-tax income for the period compared to a pre-tax loss for the quarter ended July 31, 2012. The Company's effective tax rate was 22% and 37% for the quarter ended July 31, 2013 and 2012, respectively. The decrease in the effective tax rate between periods was driven by a higher level of pre-tax income by foreign subsidiaries, which are subject to lower statutory tax rates.

Net Income/Loss

Net income from operations was $967,464 for the three month period ended July 31, 2013 compared to net loss of $93,144 for the same period in the prior fiscal year. 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 its Tijuana Mexican operation during the first quarter of fiscal year 2013. Basic and diluted earnings per share for the first fiscal quarter of 2014 were each $0.24 compared to basic and diluted loss per share of $0.02 for the same period in the prior fiscal year.

Liquidity and Capital Resources:

Operating Activities.

Cash flow provided by operating activities was $2,375,341 for the three months ended July 31, 2013, compared to cash flow used in operating activities of $4,741,213 for the same period in the prior fiscal year. During the first three months of fiscal year 2014, cash flow provided by operating activities was primarily the result of net income, the non-cash effects of depreciation and amortization, stock-based compensation expense and an increase of $1,365,181 in trade accounts payable. The increase in accounts payable was due to timing of payments in the ordinary course of business. Net cash provided by operating activities was partially offset by an increase in inventories and accounts receivable. The increase in accounts receivable of $99,385 and inventories of $1,797,940 was primarily related to increased customer orders during the period.

Cash flow used in operating activities was $4,741,213 for the three months ended July 31, 2012. 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.


Table of Contents

SigmaTron International, Inc.

July 31, 2013

Investing Activities.

During the first three months of fiscal year 2014, the Company purchased approximately $4,900,000 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 $8,500,000 during the balance of fiscal year 2014. The Company anticipates the purchases will be funded by lease transactions and its bank line of credit. The purchases in fiscal year 2014 are to upgrade existing equipment capabilities and to add capacity.

During the first three months of fiscal year 2013, investing activities consisted of purchases of approximately $771,400 in machinery and equipment to be used in the ordinary course of business. The Company received approximately $1,142,600 in cash in conjunction with the Spitfire Transaction.

Financing Activities.

Cash provided by financing activities was $714,835 for the three months ended July 31, 2013, compared to cash provided by financing activities of $5,154,348 for the same period in the prior fiscal year. Cash provided by financing activities was primarily the result of increased borrowings of $763,208 under the credit facility. The additional borrowings were required to support the purchases of machinery and equipment and the increase inventory.

Cash provided by financing activities was $5,154,348 for the three months ended July 31, 2012. Cash provided by financing activities was primarily the result of increased borrowings of $5,260,111under 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.

Financing Summary

The Company has a senior secured credit facility with Wells Fargo with a credit limit up to $30 million and an initial term through September 30, 2013. The facility 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, 2013) or LIBOR plus two and three quarter percent (effectively, 3.0% at July 31, 2013), which is paid monthly. The credit facility is collateralized by substantially all of the domestically located assets of the Company and the Company has pledged 65% of its equity ownership interest in some of its foreign entities. The Company is required 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 with Wells Fargo during the quarter ended October 31, 2012 and extended the credit facility through October 31, 2014. As of April 30, 2013, the Company again amended its credit agreement and renegotiated two of the financial covenants required by the terms of the Company's senior secured credit facility. At July 31, 2013, the Company was in compliance with its amended financial covenants. As of July 31, 2013, there was a $19,263,208 outstanding balance and $10,736,792 of unused availability under the credit facility.


Table of Contents

SigmaTron International, Inc.

July 31, 2013

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, 2013 was $2,150,014.

In 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 payment 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, 2013, $176,072 and $444,039 was outstanding under the lease finance and sale leaseback agreements, respectively. The net book value at July 31, 2013 of the equipment under each of the lease finance agreement and sale leaseback agreement was $240,817 and $609,388, respectively.

In 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, 2013, the balance outstanding under the capital lease agreement was $130,331. The net book value of the equipment under this lease at July 31, 2013 was $173,666.

In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent 116,993 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 March 2021. The amount of the deferred rent income recorded for the first quarter of fiscal year 2014 was $4,106. In addition, the landlord provided the Company tenant incentives of $418,000, which are being amortized over the life of the lease.

In May 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 first quarter of fiscal year 2014 was $25,197.

In May 31, 2012, the Company completed the acquisition of Spitfire, an OEM of electronic controls, with a focus on the major appliance industry. The acquisition added two manufacturing operations in locations that augment the Company's footprint and add Spitfire's design capabilities which allow the Company to offer design service for the first time in specific markets. In conjunction with the Spitfire acquisition, the Company recorded goodwill and other intangible assets of $3,222,899 and $6,142,000, 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, as needed, in U.S. dollars, which are exchanged for Pesos, Dong, Renminbi, and New Taiwan dollars as applicable. The fluctuation of currencies from


Table of Contents

SigmaTron International, Inc.

July 31, 2013

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 period ended July 31, 2013 resulted in a foreign currency gain of approximately $8,000. During the first three months of fiscal year 2014, the Company's U.S. operations paid approximately $14,464,000 to its foreign subsidiaries for services provided.

The Company has not recorded U.S. income taxes for a significant portion of undistributed earnings of the Company's foreign subsidiaries, since these earnings have been, and under current plans will continue to be, permanentaly reinvested in these foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is approximately $10,000,000.

The Company anticipates that 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.

The impact of inflation on the Company's net sales, revenues and incomes from continuing operations for the past two fiscal years has been minimal.

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.

  Add SGMA to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SGMA - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.