1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended January 31, 1999 Commission File Number 0-23248 SigmaTron International, Inc. - ------------------------------------------------------------------------------- (Exact Name of Registrant, as Specified in its Charter) Delaware 36-3918470 - ------------------------------------------------------------------------------- (State or other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification Number) 2201 Landmeier Road, Elk Grove Village, Illinois 60007 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (847) 956-8000 No Change - ------------------------------------------------------------------------------- (Former Name, Address, or Fiscal Year, if Changed Since Last Reports) Indicate, by check mark, whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ On March 12, 1999 there were 2,881,227 shares of the Registrant's Common Stock outstanding.
2 SigmaTron International, Inc. Index PART 1. FINANCIAL INFORMATION: Page No. -------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets--January 31, 1999 and April 30, 1998 3 Condensed Consolidated Statements of Income-- Nine Months Ended January 31, 1999 and 1998 4 Condensed Consolidated Statements of Cash Flows-- Nine Months Ended January 31, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risks 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12
3 SIGMATRON INTERNATIONAL, INC. Consolidated Balance Sheets <TABLE> <CAPTION> JANUARY 31 April 30, 1999 1998 ----------- ----------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash $ 46,426 $ 284,679 Accounts receivable 21,447,645 11,977,973 Inventories 19,513,315 18,972,587 Prepaid expenses 1,170,279 418,464 Deferred incomes taxes 218,788 218,788 Other assets 2,391,107 331,461 ----------- ----------- Total current assets 44,787,560 32,203,952 Machinery and equipment, net 13,270,880 11,249,550 Due from SMTU: Investment and advances 221,172 311,107 Equipment lease receivable 3,368,011 3,207,691 Other receivable 1,322,478 650,695 ----------- ----------- 4,911,661 4,169,493 Other assets 1,133,489 1,018,211 ----------- ----------- Total assets $64,103,590 $48,641,206 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable 690,865 111,108 Trade accounts payable 14,518,291 6,751,886 Trade accounts payable - Related parties 267,079 915,475 Accrued expenses 1,399,755 1,575,434 Income tax payable 563,125 60,025 Capital lease obligations 2,354,033 2,081,338 ----------- ----------- Total current liabilities 19,793,148 11,495,266 Notes payable - Banks, less current portion 21,955,062 15,177,695 Capital lease obligations, less current portion 3,307,091 3,604,793 Deferred income taxes 760,061 760,061 Stockholders' equity: Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding - - Common stock, $.01 par value; 6,000,000 shares authorized, 2,881,227 shares issued and outstanding 28,812 28,812 at January 31, 1999 and April 30, 1998 Capital in excess of par value 9,436,554 9,436,554 Retained earnings 8,822,862 8,138,025 ----------- ----------- Total stockholders' equity 18,288,228 17,603,391 Total liabilities and stockholders' equity $64,103,590 $48,641,206 =========== =========== </TABLE> See accompanying notes. 3
4 SIGMATRON INTERNATIONAL, INC. Condensed Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> THREE MONTHS Three Months NINE MONTHS Nine Months ENDED Ended ENDED Ended JANUARY 31, 1999 January 31, 1998 JANUARY 31, 1999 January 31, 1998 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Net sales $ 23,019,878 $ 22,632,041 $ 64,584,094 $ 65,534,233 Cost of products sold 21,171,334 20,740,001 58,661,723 59,387,383 ------------- ------------- ------------- ------------- 1,848,544 1,892,040 5,922,371 6,146,850 Selling and administrative expenses 1,484,456 1,367,459 4,078,296 4,139,505 ------------- ------------- ------------- ------------- Operating income 364,088 524,581 1,844,075 2,007,345 Equity in net loss (income) of affiliate (4,404) 131,004 89,935 142,426 Interest expense - banks and capital lease obligations 547,401 514,788 1,498,509 1,428,191 Interest expense - related party - - - 523 Interest income - related party (148,094) (138,891) (448,836) (352,671) Gain on flood proceeds (436,948) - (436,948) - ------------- ------------- ------------- ------------- (37,641) 375,897 612,725 1,076,043 Income before income taxes 406,133 17,680 1,141,415 788,876 Income taxes 162,456 7,072 456,578 316,576 ------------- ------------- ------------- ------------- Net income $ 243,677 $ 10,608 $ 684,837 $ 472,300 ============= ============= ============= ============= Net income per common share - basic $ 0.08 $ 0.00 $ 0.24 $ 0.16 ============= ============= ============= ============= Weighted average number of common shares outstanding - basic 2,881,227 2,881,227 2,881,227 2,881,097 ============= ============= ============= ============= Net income per common share - diluted $ 0.08 $ 0.00 $ 0.24 $ 0.16 ============= ============= ============= ============= Weighted average number of common shares and common equivalent shares outstanding - diluted 2,881,227 2,951,210 2,881,227 2,987,930 ============= ============= ============= ============= </TABLE> See accompanying notes. 4
5 SIGMATRON INTERNATIONAL, INC. Condensed Consolidated Statements of Cash Flow (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED JANUARY 31, 1999 1998 ------------ ------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 684,837 $ 472,300 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation 1,116,472 917,194 Equity in net loss of affiliate 89,935 142,426 Amortization - 14,136 Provision for doubtful accounts 250,000 130,502 Write-off or uncollectable accounts - (195,502) Changes in operating assets and liabilities: Accounts receivable (9,719,674) (5,832,863) Inventories (688,793) 328,809 Prepaid expenses (751,815) (164,456) Other assets (2,846,705) (538,806) Trade accounts payable 7,766,405 4,343,304 Trade accounts payable - related parties (648,396) (441,630) Accrued expenses (175,679) (342,603) Income tax payable 503,100 40,159 ------------ ------------ Net cash (used in) operating activities (4,420,313) (1,127,030) INVESTING ACTIVITIES: Purchase of machinery and equipment (2,021,098) (797,246) Proceeds from sale and leaseback of machinery and equipment - 1,429,899 Proceeds from affiliate subleases - 263,999 Proceeds from insurance advances 5,500,000 - Proceeds from gain on insurance 563,318 - ------------ ------------ Net cash provided by investing activities 4,042,220 896,652 FINANCING ACTIVITIES: Repayment of term loan and other notes payable - 42,596 Net payments under capital lease obligations (1,717,284) (1,158,756) Issuance of common stock - 42,000 Net proceeds under line of credit 1,857,124 1,288,888 ------------ ------------ Net cash provided by financing activities 139,840 129,536 Change in cash (238,253) (100,842) Cash at beginning of period 284,679 323,223 ------------ ------------ Cash at end of period $ 46,426 $ 222,381 ============ ============ </TABLE> See accompanying notes. 5
6 SigmaTron International, Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) January 31, 1999 NOTE A -- BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended January 31, 1999 are not necessarily indicative of the results that may be expected for the year ending April 30, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended April 30, 1998. NOTE B -- INVENTORIES The components of inventory consist of the following: January 31, April 30, 1999 1998 ------------ ------------ Finished products $ 1,134,981 $ 3,292,442 Work-in-process 1,672,263 1,887,517 Raw materials 16,706,071 13,792,628 ------------ ------------ $ 19,513,315 $ 18,972,587 ============ ============ NOTE C -- FLOOD DAMAGE IN DEL RIO, TEXAS AND ACUNA, MEXICO In late August, 1998 the Company's warehousing operation in Del Rio, Texas and one of its manufacturing operations in Acuna, Mexico were significantly damaged by a flash flood. The Company expedited replacement machinery and equipment and inventory to its damaged facilities. The damaged equipment used in the manufacturing process was replaced with new or upgraded equipment. The manufacturing operation in Acuna has run pre-flood levels and all raw material issues created by the flood have been resolved. In January, 1999 the Company settled the U.S. insurance claim, for its warehousing operation in Del Rio Texas which resulted in a nominal net book gain. The Company has continued to negotiate the claim for damage at its Mexican facility. In January, 1999 the Company 6
7 recorded a net gain of approximately $563,000. The gain included approximately $415,000 and $148,000 for machinery and equipment and inventory, respectively for Mexico. The gain on the inventory segment has been recorded as a reduction to cost of products sold. The gain on machinery and equipment has been recorded as a gain on flood proceeds. As of January 31, 1999, the extra expense and business interruption segments of the claim have not been finalized. The results for the nine months ended January 31, 1999 include expenses and a reduction in revenues that management believes will be covered by its extra expense and business interruption insurance. Since there has been no agreement with the insurance company as to these issues, the Company has recorded nothing for the extra expense or business interruption claims. The Company believes the final settlement will not have a negative impact on the financial statements. The Company will continue to work diligently with its insurance adjusters and insurance companies to finalize a settlement. NOTE D - SMT UNLIMITED L.P. The Company owns 42.5% of SMT Unlimited L.P., ("SMTU") an affiliate located in Fremont California. At January 31, 1999 the Company has amounts due from SMTU of approximately $4,911,000. SMTU recorded a nominal profit for the quarter ended January 31, 1999. SMTU's management believes sales will increase in the fourth fiscal quarter of 1999 and result in overall profitability for fiscal 1999. At April 30, 1999 the Company will review SMTU's progress and determine if the amounts past due are recoverable. NOTE E -- LINE OF CREDIT The Company and SMTU currently utilize the same lender for their respective lines of credit. In recent months SMTU'S growth has required additional working capital, which is not available through the current line of credit. The Company and SMTU's management believe it is in the best interest of both companies to reassess their current banking relationships. In March, 1999 both companies selected a replacement lender. Due diligence audits by the prospective lender began in early March, 1999 and the Company believes it will finalize the transaction for both companies by early April, 1999. NOTE F -- LIGHTING COMPONENTS The Company has an equity interest of 12% in Lighting Components. At April 30, 1998 the Company recorded a write off of $360,000 related to the investment. The Company has amounts due from Lighting Components of approximately $795,000 at January 31, 1999. In January, 1999 the Company recorded a $250,000 allowance for doubtful accounts for possible uncollectable receivables owed to the Company by Lighting Components. If Lighting Components fails to make progress and management believes that some or all of the remaining Lighting Component receivables are not recoverable at April 30, 1999, the Company may recognize additional losses. 7
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE: To the extent any statements in this quarterly report may be deemed to be forward looking, such statements should be evaluated in the context of the risks and uncertainties inherent in the Company's business, including the receipt of insurance proceeds; the Company's continuing dependence on certain major customers; the Companys ability to obtain financing; the availability and cost of components; the anticipated seasonality of its business; the timing and rescheduling of customer orders for SigmaTron International, Inc. and SMT Unlimited and other risks and uncertainties set forth in the Company's periodic reports filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS: Net sales increased for the three month period ended January 31, 1999 to $23,019,878 from $22,632,041 for the three month period ended January 31,1998. During the first nine months of fiscal 1999 net sales decreased to $64,584,094 from $65,534,233 compared to the same period in the prior year. The Company's operations in Texas and Mexico were hit by a flash flood in late August, 1998. The Company's damaged operations were operating at pre-flood levels by the end of the second fiscal quarter of 1999. However, the results for the nine months ended January 31, 1999 include expenses and a reduction in revenues related to the flood. Management believes they will be covered by insurance but has not accrued any revenue to date. Historically the timing and rescheduling of orders has caused the Company to experience significant quarterly fluctuations in its revenue and earnings and the Company expects such fluctuations to continue. Gross profit decreased during the three month period ended January 31, 1999 to $1,848,544 or 8.0% of net sales, compared to $1,892,040 or 8.4% of net sales for the same period in the prior fiscal year. For the nine month period ended January 31, 1999 gross profit decreased from $6,146,850 or 9.4% of net sales to $5,922,371 or 9.1% of net sales. The variation in gross profit for the nine months ended January 31, 1999 compared to the same period in the prior year is primarily related to expenses and a reduction in revenues related to the flood. Management believes the expenses and reduction in revenues will be covered by its extra expense and business interruption insurance. The Company believes the insurance settlement will not have a material negative impact on the financial statements. Selling and administrative expenses increased to $1,484,456 or 6.4% of net sales for the three month period ended January 31, 1999 compared to $1,367,459 or 6.0% of net sales in the third quarter of fiscal 1998. The increase is primarily due to a $250,000 reserve for allowance for doubtful accounts due from Lighting Components. Selling and administrative expense for the nine month period ended January 31, 1999 decreased to $4,078,296 compared to $4,139,505 in the same period in the prior fiscal year. 8
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -con't Interest expense for bank debt and capital lease obligations for the three month period ended January 31, 1999 was $547,401 compared to $514,788 for the same period in the prior year. For the nine month period ended January 31, 1999 interest expense for bank and capital lease obligations increased to $1,498,509 compared to $1,428,191 for the same period in fiscal 1998. This increase was attributable to a higher outstanding balance on the line of credit and interest expense for increased capital lease obligations. In January, 1999 the Company settled the U.S. insurance claim which resulted in a nominal gain. The Company also recorded a net book gain of approximately $545,000, which included the inventory and machinery and equipment segments of its claim for damage at its Mexican facilities. As of this date the extra expense and business interruption segments of the claim have not been settled with the insurance company. The results for the nine months ended January 31, 1999 includes expenses and a reduction in revenues, which the Company believes will be covered by its insurance. The Company believes the insurance settlement will not have a material negative impact on its financial condition. Management continues to work closely with its insurance adjusters and insurance companies to settle the claim. As a result of the factors described above, net income increased to $243,677 for the three month period ended January 31, 1999 from $10,608 for the same period in the prior year. Basic earnings per share for the third fiscal quarter of 1999 were $0.08 compared to $0.00 for the same period in the prior year. For the first nine months of fiscal 1999 net income increased to $684,837 compared to $472,300 for the same period in the prior year. Basic earnings per share for the nine month period ended January 31, 1999 were $0.24 compared to $0.16 for the same period in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES: For the nine months ended January 31, 1999 the primary source of liquidity was cash provided by borrowings from the Company's secured lender, advances from the insurance company and net income from operations. The net cash used in operations was $4,420,313 for the nine months ended January 31, 1999 compared to net cash used for operations of $1,127,030 for the same period in the prior year. Net cash provided by investing activities was $4,042,220, which was due to the cash advances for the insurance claim and proceeds from the gain on insurance. For the same period in the prior year net cash provided by investing activities was $896,652. 9
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -con't Net cash provided by financing activities was $139,840 for the nine month period ended January 31, 1999 compared to $129,536 in the prior year. Net proceeds under the line of credit increased to $1,857,124 for the nine months ended January 31, 1999 from $1,288,888 for the nine months ended January 31, 1998. To the extent that the Company provides funds for salaries, wages, overhead and capital expenditure items necessary to operate its Mexican operations, the amount of funds available for use in the Company's domestic operations may be depleted. The funds, which ordinarily derive from the Company's cash from operations and borrowings under its revolving credit facility, total approximately $5,885,000 for the first nine months of fiscal 1999. The Company provides funding in U.S. dollars, which are exchanged to pesos as needed. YEAR 2000 COMPLIANCE: The Company has formed a committee of executive officers and others to examine Year 2000 compliance issues. The scope of the program is focused on the Company's primary business applications. The Company is in the process of executing a strategy to evaluate and enhance its information technology systems. In addition, the Company is reviewing other systems including production equipment, to determine possible risk. Based on assurances received to date provided by vendors, the Company does not believe significant modifications to production equipment or information systems will be required. However, the Company cannot verify assurances it has been provided by third parties. The Company has implemented a review process to ensure that the delivery of raw material and services will not be disrupted due to non-compliance by a key third party supplier. Initial communication with these suppliers have been favorable. However, non-compliance by any key supplier could have an adverse effect on the Company and its results of operations or financial condition. In addition, the Company cannot anticipate if a significant portion of its key customers will be Year 2000 compliant. The Company's customers inability to process timely payments could have an adverse effect on the Company's cash flow and liquidity. Based on its internal review the Company does not anticipate that current or future costs related to the Year 2000 issue will have a material impact on its financial condition. The Company intends to develop a contingency plan which will be implemented in the event of any problems. The foregoing is a Year 2000 readiness disclosure entitled to protection as provided in the Year 2000 Information and Readiness Disclosure Act. 10
11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS: Not applicable 11
12 SIGMATRON INTERNATIONAL, INC. PART II - OTHER INFORMATION January 31, 1999 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10.42 - Lease Agreement between the Company and General Electric Capital Corporation dated November 10, 1998. Exhibit 27 - Financial Data schedule (EDGAR version only) (b) No report on Form 8-K was filed during the quarter ended January 31, 1999. 12
13 SIGNATURES: - ----------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGMATRON INTERNATIONAL, INC. /s/ Gary R. Fairhead 3/12/99 - ------------------------------------------------- ------------------- Gary R. Fairhead Date President and CEO (Principal Executive Officer) /s/ Linda K. Blake 3/12/99 - ------------------------------------------------- ------------------- Linda K. Blake Date Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)