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SGMA > SEC Filings for SGMA > Form 10-Q on 13-Dec-2013All Recent SEC Filings

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Form 10-Q for SIGMATRON INTERNATIONAL INC


13-Dec-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 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 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) 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.

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


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SigmaTron International, Inc.

October 31, 2013

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 than consignment orders due 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 October 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 economy remains volatile, the cost of doing business is increasing and long-term planning is difficult. The Company believes there could be a shift in demand for product as customers try to manage their inventory for calendar 2013 year end. Pricing pressures continue from both customers and suppliers and the Company plans to continue managing its expenses conservatively. At the same time the Company continues to leverage the assets from the Spitfire transaction and believes it is well positioned to handle the challenges.

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.


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SigmaTron International, Inc.

October 31, 2013

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 $424,000 in relocation expenses during the first quarter of fiscal 2013 as a result of the move. Approximately $399,000 of the relocation expenses were 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. Of the total relocation expenses, approximately $25,000 was recorded in selling and administrative expenses.

Results of Operations:

Net Sales

Net sales increased for the three month period ended October 31, 2013 to $56,577,287 from $52,729,395 for the three month period ended October 31, 2012. Net sales increased for the six month period ended October 31, 2013 to $112,743,348 from $100,358,624 for the same period in the prior fiscal year. Sales volume increased for the three and six month periods ended October 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 industrial electronics, fitness, semiconductor equipment, telecommunications and gaming marketplaces. The increase in revenue for the three and six month periods ended October 31, 2013 is a result of sales to new customers and new programs that had previously been delayed. The Company is hopeful the momentum will continue and it has several new opportunities that it believes will support growth in fiscal 2015. The Company is considering modest expansions at several of its offshore facilities during the balance of fiscal 2014.

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 economy remains volatile, the cost of doing business is increasing and long-term planning is difficult. The Company believes there could be a shift in demand for product as customers try to manage their inventory for calendar 2013 year end. Pricing pressures continue from both customers and suppliers and the Company plans to continue managing its expenses conservatively. At the same time the Company continues to leverage the assets from the Spitfire transaction and believes it is well positioned to handle the challenges.

Gross Profit

Gross profit increased during the three month period ended October 31, 2013 to $5,996,136 or 10.5% of net sales, compared to $5,403,170 or 10.2% of net sales for the same period in the prior fiscal year. Gross profit increased for the six month period ended October 31, 2013 to $12,284,544 or 10.9 % of net sales, compared to $10,109,068 or 10.1% of net sales for the same period in the prior fiscal year. The increase in gross profit for the three and six month periods ended October 31, 2013 was primarily the result of sales to existing customers, new customers, new programs and product mix. The increase in gross profit for the six month period ended October 31, 2013 was partially offset by foreign currency loss of $87,845.

Selling and Administrative Expenses

Selling and administrative expenses increased to $4,839,754 or 8.6% of net sales for the three month period ended October 31, 2013, compared to $4,679,755 or 8.9% of net sales for the same period in


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SigmaTron International, Inc.

October 31, 2013

the prior fiscal year. The net increase for the three month period ended October 31, 2013 was approximately $160,000. Bonus expense, legal fees and one-time expenses related to the Company's October 2013 Tender Offer (See Note
I) accounted for approximately $208,000 in additional selling and administrative expense for the quarter ended October 31, 2013. The increase in the foregoing selling and administrative expenses were partially offset by a decrease in sales salaries, commissions and other professional fees. Selling and administrative expenses increased to $9,695,312 or 8.6% of net sales for the six month period ended October 31, 2013 compared to $9,345,160, or 9.3% of net sales for the same period in the prior fiscal year. The increases for the six month period ended October 31, 2013 was primarily from salaries and other administrative expenses as a result of the Spitfire Transaction in the amount of $515,245. Other increases in selling and administrative expenses for the six month period ended October 31, 2013, were due to bonus expense and accounting salaries. The increases in the foregoing selling and administrative expenses were partially offset by a decrease in legal and accounting fees.

Interest Expense

Interest expense increased to $236,094 for the three month period ended October 31, 2013 compared to $208,615 for the same period in the prior fiscal year. Interest expense for the six month period ended October 31, 2013 was $450,054 compared to $396,952 for the same period in the prior fiscal year. The increase in interest expense for the three and six month periods ended October 31, 2013 was due to increased borrowings under the Company's banking arrangements during the quarter ended October 31, 2013 and additional capital lease obligations. Interest expense for future quarters may increase if interest rates or borrowings, or both, were to increase.

Taxes

Income tax expense from operations was $165,157 for the three month period ended October 31, 2013 compared to an income tax expense of $23,711 for the same period in the prior fiscal year. The income tax expense from operations was $438,030 for the six month period ended October 31, 2013 compared to income tax benefit of $30,989 for the same period in the prior year. Income tax expense increased for the three and six month period ended October 31, 2013 compared to the same period in the prior year as a result of a pre-tax loss for the US operations in fiscal 2013 created by the Spitfire acquisition. The US statutory tax rate applied to the pre-tax US loss created a tax benefit in fiscal 2013, which was partially offset by income tax expense from the Company's foreign jurisdictions that have lower effective tax rates than in the US.

Net Income

Net income from operations increased to $784,654 for the three month period ended October 31, 2013 compared to $482,834 for the same period in the prior fiscal year. Net income from operations increased to $1,752,121 for the six month period ended October 31, 2013 compared to $389,690 for the same period in the prior fiscal year. Basic and diluted earnings per share for the second fiscal quarter of 2014 were $0.20 and $0.19 respectively, compared to basic and diluted earnings per share of $0.12 for the same period in the prior fiscal year. Basic and diluted earnings per share for the six month period ended October 31, 2013 were each $0.44 and $0.43, respectively, compared to basic and diluted earnings per share of $0.10 for the same period in the prior fiscal year.


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SigmaTron International, Inc.

October 31, 2013

Liquidity and Capital Resources:

Operating Activities.

Cash flow provided by operating activities was $2,262,950 for the six months ended October 31, 2013, compared to cash flow provided by operating activities of $9,424 for the same period in the prior fiscal year. During the first six months of fiscal year 2014, cash flow provided by operating activities was primarily the result of net income, exclusive of depreciation and amortization, stock-based compensation expense and a decrease of $541,183 in accounts receivable. Net cash provided by operating activities was partially offset by a decrease in accounts payable. The decrease in accounts payable of $3,844,814 was due to timing of payments to vendors in the ordinary course of business.

Cash flow provided by operating activities was $9,424 for the six months ended October 31, 2012. During the first six months of fiscal year 2013, cash flow provided by operating activities was primarily due to net income exclusive of depreciation, amortization, stock-based compensation, and an increase in accounts payable and stock compensation related expenses. Net cash provided by operations was partially offset by an increase in accounts receivable and inventories. The increase in accounts receivable of $4,560,840 and inventory of $3,512,547 was primarily related to the Spitfire acquisition.

Investing Activities.

During the first six months of fiscal year 2014, the Company purchased approximately $6,345,000 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 $7,000,000 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 six months of fiscal year 2013, investing activities consisted of purchases of approximately $2,045,000 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 $4,550,793 for the six months ended October 31, 2013, compared to cash provided by financing activities of $3,814,688 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, a sales leaseback transaction for machinery and equipment and obtaining a mortgage of the Company's facility in Elgin, Illinois.

Cash provided by financing activities was $3,814,688 for the six months ended October 31, 2012. Cash provided by financing activities was primarily the result of increased borrowings of $4,000,000 under the credit facility. The additional borrowings were required to support the increase in accounts receivable and inventory.


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SigmaTron International, Inc.

October 31, 2013

Financing Summary

The Company has a senior secured credit facility with Wells Fargo with a credit limit up to $30,000,000 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 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. During the quarter ended October 31, 2013, the Company renewed its senior secured credit facility. The facility was revised to extend the term of the agreement to October 31, 2015, amend its capital expenditure covenant, terminate the unused line fee and reduced its borrowing interest rates. The facility allows the Company to choose among interest rates at which it may borrow funds. The interest rate is prime rate (effective, 3.25% at October 31, 2013) or LIBOR plus two and a half percent (effectively, 2.75% at October 31, 2013), which is paid monthly. At October 31, 2013, the Company was in compliance with its amended financial covenants. As of October 31, 2013, there was a $20,000,000 outstanding balance and $10,000,000 of unused availability under the credit facility agreement.

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 October 31, 2013 was $2,125,000.

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 October 31, 2013, $163,046 and $409,273 was outstanding under the lease finance and sale leaseback agreements, respectively. The net book value at October 31, 2013 of the equipment under each of the lease finance agreement and sale leaseback agreement was $234,249 and $591,985, respectively.

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 in fiscal year 2014 was $8,212. In addition, the landlord provided the Company tenant incentives of $418,000, which are being amortized over the life of the lease.

In November 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 October 31, 2013, the balance outstanding under the capital lease agreement was $121,037. The net book value of the equipment under this lease at October 31, 2013 was $168,953.


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SigmaTron International, Inc.

October 31, 2013

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 in fiscal year 2014 was $50,394.

In May 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.

On October 3, 2013, the Company entered into two sale leaseback agreements with Associated Bank, National Association to finance equipment purchased in June 2012 in the amount of $2,281,355. The term of the first agreement, with an initial principal amount of $2,201,638, extends to September 2018 with monthly payments of $40,173 and a fixed interest rate of 3.75%. The term of the second agreement, with an initial principal payment amount of $79,717, extends to September 2018 with monthly payments of $1,455 and a fixed interest rate of 3.75%. At October 31, 2013, $2,161,465 and $78,262 was outstanding under the first and second agreements, respectively. The net book value at October 31, 2013 of the equipment under each of the two agreements was $2,011,015 and $71,413, respectively.

The Company entered into a mortgage agreement on October 24, 2013, in the amount of $1,275,000, with Wells Fargo to finance the property that serves as the Company's engineering and design center in Elgin, Illinois. The Wells Fargo note requires the Company to pay monthly principal payments in the amount of $4,250 and bears interest at a fixed rate of 4.5% per year and is amortized over a sixty month period. A final payment of approximately $1,030,000 is due on or before October 2018. The outstanding balance as of October 31, 2013 was $1,275,000.

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 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 six month period ended October 31, 2013 resulted in a foreign currency loss of approximately $88,000. During the first six months of fiscal year 2014, the Company's U.S. operations paid approximately $28,195,000 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, permanently reinvested in these foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is approximately $14,000,000.

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


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SigmaTron International, Inc.

October 31, 2013

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.

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