ITEM 1. BUSINESS
CAUTIONARY NOTE:
In addition to historical financial information, this discussion of SigmaTron International, Inc.'s ("Company") business and other Items in this Annual Report on Form 10-K contain forward-looking statements concerning the Company's business or results of operations. These statements should be evaluated in the context of the risks and uncertainties inherent in the Company's business, including the Company's continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of the Company's operating results; the availability and cost of necessary components; the continued availability and sufficiency of the Company's credit arrangements; changes in U.S. or Mexican regulations affecting the Company's business; the continued stability of the Mexican economic, labor and political conditions and the ability of the Company to manage its growth and secure financing. These and other factors which may affect the Company's future business and results of operations are identified throughout this Annual Report on Form 10-K and in the prospectus issued in connection with the Company's February 1994 initial public offering of securities (Registration No. 33-72100), 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 this report and the Company undertakes no obligation to update such statements in light of future events or otherwise.
OVERVIEW
The Company is an independent provider of electronic manufacturing services ("EMS"), which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. Included among the wide range of services the Company offers its customers are (1) automatic and manual assembly and testing of OEM products and subassemblies, (2) material sourcing and procurement, (3) design, manufacturing and test engineering support, (4) warehousing and shipment services, and (5) assistance in obtaining product approvals from governmental and other regulatory bodies. The Company provides these services through facilities located in North America and the Far East.
The Company provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of boxbuild electronic products. The Company has the ability to produce assemblies requiring mechanical as well as electronic capabilities. The products assembled by the Company are then incorporated into finished products sold in various marketplaces, particularly consumer electronics, gaming, fitness, industrial electronics, telecommunications, home appliances and automotive.
The Company operates manufacturing facilities in Elk Grove Village, Illinois; Las Vegas, Nevada; and Acuna, Mexico. The Company maintains materials sourcing offices in Elk Grove Village, Illinois; Las Vegas, Nevada, Acuna Mexico, and Taipei, Taiwan. The Company provides warehousing
services in Del Rio, Texas and Huntsville, Alabama. In addition, the Company's 42.5% owned affiliate, SMT Unlimited L.P. (SMTU), provides electronic manufacturing services in Fremont, California.
The Company is a Delaware corporation which was organized on November 16, 1993 and commenced business when it became the successor to all of the assets and liabilities of SigmaTron L.P., an Illinois limited partnership, through a reorganization on February 8, 1994. On February 9, 1994, the Company and certain stockholders commenced an initial public offering for the sale of 1,265,000 shares of Common Stock.
PRODUCTS AND SERVICES
The Company provides a broad range of manufacturing-related outsourcing solutions for its customers on both a turnkey (material purchased by the Company) and consignment basis (material provided by the customer). These solutions incorporate the Company's knowledge and expertise in the electronic manufacturing services industry to provide its customers with advanced manufacturing technologies and high quality, responsive and flexible manufacturing services. SigmaTron's outsourcing solutions provide services from product inception through the ultimate delivery of a finished good. Such technologies and services include the following:
Manufacturing and Related Services. As its customers experience greater competition and shorter product life cycles in their respective industries, the Company has responded by expanding its prototype services. The Company also provides quick-turnaround, turnkey prototype services at all of its locations, with an emphasis on this service through dedicated resources at the Company's Elk Grove Village facility and through SMTU.
Materials Procurement. The Company is primarily a turnkey manufacturer and directly sources all, or a substantial portion, of the components necessary for its product assemblies, rather than receiving the raw materials from its customers on consignment. Material procurement includes the purchasing, management, storage and delivery of raw components required for the manufacture or assembly of a customer's product based upon the customer's orders. The Company procures components from a select group of vendors which meet its standards for timely delivery, high quality and cost effectiveness, or as directed by its customers. Raw materials used in the assembly and manufacture of printed circuit boards and electronic assemblies are generally available from several suppliers, unless restricted by the customer.
The Company believes that its ability to source and procure competitively priced, quality components is critical to its ability to effectively compete. In addition to obtaining materials in North America, the Company utilizes its Taiwanese procurement office and agents to source materials from the Far East. SigmaTron believes this office allows the Company to more effectively manage its relationships with key suppliers in the Far East by allowing the Company to respond more quickly to changes in market dynamics, including fluctuations in price, availability and quality.
Assembly and Manufacturing. The Company's core business is the assembly of printed circuit boards through the automated and manual insertion of components onto raw printed circuit boards. The Company offers its assembly services using both pin-through-hole ("PTH") and surface mount ("SMT") interconnect technologies. SMT is an assembly process which allows the placement of a higher density of components directly on both sides of a printed circuit board. The SMT process is a more recent advancement over the mature PTH technology, which normally permits electronic
components to be attached to only one side of a printed circuit board by inserting the component into holes drilled through the board. The SMT process allows original equipment manufacturers ("OEMs") to use advanced circuitry, while at the same time permitting the placement of a greater number of components on a printed circuit board without having to increase the size of the board. By allowing increasingly complex circuits to be packaged with the components in closer proximity to each other, SMT greatly enhances circuit processing speed, and thus, board and system performance.
The Company performs PTH assembly both manually and with automated component insertion and soldering equipment. Although SMT is a more sophisticated interconnect technology, the Company intends to continue providing PTH assembly services for its customers because it believes that SMT will not entirely eliminate the need for PTH technology. The Company believes that OEMs with products not limited by internal space constraints will continue to favor PTH over SMT. Through SMTU, SigmaTron possesses ball grid array ("BGA") technology and fine pitch SMT, which is used for more complex circuit boards required to perform at higher speeds.
In addition to printed circuit board assemblies, the Company also manufactures DC-to-AC inverters, coils, transformers and cable and harness assemblies. These products are manufactured using both automated and semi-automated preparation and insertion equipment and manual assembly techniques.
In response to the needs of its OEM customers, the Company also offers "boxbuild" services which integrate its printed circuit board and other manufacturing and assembly technologies into higher level sub-assemblies and end products.
Product Testing. The Company has the ability to perform both in-circuit and functional testing of its assemblies and finished products. In-circuit testing verifies that the correct components have been properly inserted and that the electrical circuits are complete. Functional testing determines if a board or system assembly is performing to customer specifications. The Company provides X-ray laminography services through its affiliate SMTU. Generally, the Company either designs or procures test fixtures. The Company seeks to provide customers with highly sophisticated testing services that are at the forefront of current test technology.
Warehousing and Distribution. In response to the needs of select customers, the Company has the ability to provide in-house warehousing, shipping and receiving and customer brokerage services in Del Rio, Texas for goods manufactured or assembled in Mexico and for goods manufactured for a customer in Huntsville, Alabama. The Company also has the ability to provide custom-tailored delivery schedules to fulfill the just-in-time inventory needs of its customers.
MARKETS AND CUSTOMERS
SigmaTron's customers are in the consumer electronics, gaming, industrial electronics, fitness, telecommunications, automotive and home appliance industries. As of April 30, 2000, the Company had approximately 130 active customers ranging from Fortune 500 companies to small, privately held enterprises.
The following table shows, for the periods indicated, the percentage of net sales to the principal end-user markets it serves.
For the fiscal year ended April 30, 2000, Nighthawk Systems Inc. (" NSI") and Life Fitness accounted for 28.8% and 18.4% respectively, of the Company's net sales. In fiscal 1999 NSI and Life Fitness accounted for 36.2% and 13.7%, respectively, of net sales. In addition, NSI and Life Fitness accounted for 29.4% and 13.5%, respectively, of the Company's net sales for the fiscal 1998. The Company expects that these customers as a group will continue to account for a significant percentage of the Company's net sales, although the individual percentages may vary from period to period.
NSI is a leading U.S. manufacturer of residential carbon monoxide detection systems. The Company has entered into an agreement with NSI calling for the Company to function as a contract manufacturer for all models of NSI's proprietary carbon monoxide detectors on a turnkey basis through January 1, 2002, or after the sales of 3 million carbon monoxide detectors, whichever occurs first. The Company agreed that during the term of the agreement and for three months thereafter it will not produce carbon monoxide detectors for any other customer. The amount of sales to NSI beyond fiscal 2002 remains unclear and if the relationship is not continued it could significantly impact the Company's revenues and earnings. However, the Company expects that sales to NSI will continue to account for a significant percentage of the Company's net sales in fiscal 2001 and 2002. Sales to NSI are seasonal due to the nature of the product and the Company experiences stronger sales to NSI in the second and third fiscal quarters. The carbon monoxide detector market continues to be an emerging market which could lead to volatility in NSI's forecast, having the effect of causing the Company's revenues to fluctuate significantly on a seasonal basis.
SALES AND MARKETING
The Company markets its services through 33 independent manufacturers' representative organizations that together currently employ approximately 80 sales personnel in the United States and Canada. Independent manufacturers' representative organizations receive variable commissions based on orders received by the Company. The members of the Company's senior management are actively involved in sales and marketing efforts.
Sales volume and gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Specifically, variations in orders for turnkey services versus consignment services and variations in the number of orders for products with high raw material costs can lead to significant fluctuations in the Company's operating results. Further, customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. The ability to replace such delayed or lost sales in a short period of time is not assured.
MEXICAN OPERATIONS
The Company's wholly-owned subsidiary, Standard Components de Mexico, S.A. ("Standard Components"), a Mexican corporation, is located in Acuna, Mexico, a border town across the Rio Grande River from Del Rio, Texas, and is 155 miles west of San Antonio. Standard Components was incorporated and commenced operation in 1969. The Company believes that one of the key benefits to having operations in Mexico is its access to cost-effective labor resources.
Standard Components is a maquiladora, which is the status afforded a corporation under a trade agreement between the United States of America and Mexico. The Company believes economic events affecting the Mexican economy and the implementation of NAFTA have not had a material impact on the Company or its financial position to date.
In 1995 the Mexican Ministry of Finance and Public Credit (Hacienda) adopted rules which require arms length pricing for transactions between maquiladoras and their U.S. affiliated companies. The impact of these regulations requires Standard Components to allocate costs and profits on an arms length basis. Its operating results continue to be consolidated with the Company's financial results. The effect of the rules did not have a material impact on the Company's consolidated results.
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate Standard Components. Since the Company provides funding to Standard Components in U.S. dollars, which are exchanged for pesos as needed, the fluctuation of the peso from time to time, without an equal or greater increase in Mexican inflation, has not had a material impact on the financial results of the Company. In fiscal 2000 the Company provided funding of approximately $9,850,000 to Standard Components.
COMPETITION
The EMS industry is highly competitive and subject to rapid change. Furthermore, both large and small companies compete in the industry, and many have significantly greater financial resources, more extensive business experience and greater marketing and production capabilities than the Company. Also, foreign companies, especially companies with production operations in the Far East, have substantially lower costs, and thus, are able to offer their services at lower prices. The significant
competitive factors in this industry include price, quality, service, timeliness, reliability, the ability to source raw components, and manufacturing and technological capabilities. The Company believes it can competitively provide all of these services.
In addition, the Company may be operating at a cost disadvantage compared to manufacturers who have greater direct buying power with component suppliers or who have lower cost structures. Current and prospective customers continually evaluate the merits of manufacturing products internally and will from time to time offer manufacturing services to third parties in order to utilize excess capacity. During downturns in the electronics industry, OEMs may become more price sensitive.
There can be no assurance that competition from existing or potential competitors will not have a material adverse impact on the Company's business, financial condition, or results of operations. The introduction of lower priced competitive products or significant price reductions by the Company's competitors could result in price reductions that would adversely affect the Company's business, financial condition, and results of operations, as would the introduction of new technologies which render the Company's manufacturing process technology less competitive or obsolete.
CONSOLIDATION
As a result of consolidation and other transactions involving competitors and other companies in the Company's markets, the Company occasionally reviews potential transactions relating to its business, products and technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures, licensing agreements, co-promotion agreements or other types of transactions. The Company may choose to enter into such transactions at any time, and such transactions could have a material impact on the Company, its business or operations.
GOVERNMENTAL REGULATIONS
The Company's operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management and health and safety matters. Management believes that the Company's business is operated in material compliance with all such regulations. The cost to the Company of such compliance to date has not had a material impact on the Company's business, financial condition or results of operations. However, there can be no assurance that violations will not occur in the future as a result of human error, equipment failure or other causes. The Company cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by the Company and could have a material impact on the Company's business, financial condition and results of operations.
BACKLOG
The Company's backlog as of April 30, 2000 was approximately $35,180,000. Backlog consists of contracts or purchase orders with delivery dates scheduled within the next twelve months. The Company currently expects to ship substantially all of the April 30, 2000 backlog by the end of the 2001 fiscal year. Backlog as of April 30, 1999 totaled $38,999,000. Variations in the magnitude and duration of contracts and purchase orders received by the Company and delivery requirements generally may result in substantial fluctuations in backlog from period to period. Because customers
may cancel or reschedule deliveries, backlog may not be a meaningful indicator of future financial results.
EMPLOYEES
The Company employed approximately 1,615 people as of April 30, 2000, including 30 engaged in engineering, 1,395 in manufacturing and 190 in administrative and marketing functions.
The Company has a labor contract with Production Workers Union Local No. 10, AFL-CIO, covering the Company's workers in Elk Grove Village, Illinois which expires on November 30, 2000. The Company's Mexican subsidiary has a labor contract with Sindicato De Trabajadores de la Industra Electronica, Similares y Conexos del Estado de Coahuila, C.T.M. covering the Company's workers in Acuna, Mexico which expires on January 15, 2001.
Since the time the Company commenced operations, it has not experienced any work stoppages. The Company believes its relations with both unions and its other employees are good.
RISK FACTORS
In addition to the other risks identified herein, the Company's business is subject to the following risks:
COMPANY EXPERIENCES VARIABLE OPERATING RESULTS
The Company's results of operations have varied and may continue to fluctuate significantly from period to period, including on a quarterly basis. Consequently, results of operations in any period should not be considered indicative of the results for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Company's Common Stock.
COMPANY'S CUSTOMER BASE IS CONCENTRATED
The Company's customer base is concentrated, for the fiscal year ended April 30, 2000, two customers accounted for 28.8% and 18.4% of the Company's net sales, respectively. The loss of any such customer or a reduction in business levels could have a material impact on the Company's results of operations.
VARIABILITY OF CUSTOMER REQUIREMENTS
The timing of purchase orders placed by the Company's customers is affected by a number of factors, including variation in demand for the customers' products, regulatory changes affecting customer industries, customer attempts to manage inventory, changes in the customers' manufacturing strategies and customers' technical problems or issues. Many of these factors are outside the control of the Company.
COMPANY MUST KEEP CURRENT WITH THE INDUSTRY'S TECHNOLOGICAL CHANGES
The market for the Company's manufacturing services is characterized by rapidly changing technology and continuing product development. The future success of the Company's business will depend in large part upon its customers ability to maintain and enhance their technological capabilities,
develop and market manufacturing services which meet changing customer needs and successfully anticipate or respond to technological changes in manufacturing processes on a cost-effective and timely basis.
COMPANY HAS STEEP INDUSTRY COMPETITION
The electronics manufacturing services industry is highly fragmented and characterized by intense competition. Many of the Company's competitors have substantially greater experience, as well as greater manufacturing, purchasing, marketing and financial resources than the Company.
FOREIGN OPERATION RISKS
A substantial part of the Company's manufacturing operations is based in Mexico. Therefore, the Company's business and results of operations are dependent upon numerous factors, including the stability of the Mexican economy, the political climate in Mexico, prevailing worker wages, the legal authority of the Company to own and operate its business in Mexico and the ability to identify, hire, train and retain qualified personnel and operating management in Mexico. The Company obtains many of its materials and components in Taipei, Taiwan and, therefore, the Company's access to these materials and components is dependent on the continued success of these Asian suppliers. It is uncertain whether these suppliers will continue to be able to serve as a supplier to the Company.
RISK OF FLUCTUATION OF VARIOUS CURRENCIES INTEGRAL TO THE COMPANY'S OPERATIONS
The Company purchases some of its materials and components in foreign currencies. From time to time the currencies fluctuate against the U.S. dollar. Such fluctuations could have a measurable impact on the Company's operations and performance. These fluctuations are expected to continue.
SEASONALITY OF RESULTS
The Company currently experiences seasonality in quarterly results, with stronger net sales and demand for its products and services historically in its second and third fiscal quarters.
AVAILABILITY OF RAW COMPONENTS MAY AFFECT OPERATIONS
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.
COMPANY IS DEPENDENT ON KEY PERSONNEL
The Company depends significantly on its President and Chief Executive Officer, Gary R. Fairhead, and on other executive officers. The loss of the services of these key employees could have a material impact on the Company's business and results of operations. In addition, despite significant competition, continued growth and expansion of the Company's contract manufacturing business will require that it attract, motivate, and retain additional skilled and experienced personnel.
FAVORABLE LABOR RELATIONS IS IMPORTANT
The Company currently has labor contracts with certain of its employees. Although the Company believes its labor relations are good, any labor disruptions, whether union-related or otherwise, could significantly impair the Company's business, substantially increase the Company's costs or otherwise have a material impact on the Company's results of operations.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD SUBJECT COMPANY TO LIABILITY
The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present or future regulations could subject it to future liabilities or the suspension of production which could have a material impact on the Company's results of operations.
VOLATILITY OF STOCK PRICE
The price of the Company's Common Stock historically has experienced significant volatility due to fluctuations in the Company's revenue and earnings, other factors relating to the Company's operations, the market's changing expectations for the Company's growth, overall equity market conditions and other factors unrelated to the Company's operations. In addition, the limited float of the Company's Common Stock and the limited number of market markers also affect the volatility of the Company's Common Stock. Such fluctuations are expected to continue.
ITEM 2.
ITEM 2. PROPERTIES
The Company, in combination with its wholly-owned subsidiary and affiliate, has manufacturing facilities located in Elk Grove Village, Illinois; Las Vegas, Nevada; Fremont, California and Acuna, Mexico. In addition, the Company provides inventory management services through its Del Rio, Texas, warehouse facilities and materials procurement services through its Elk Grove Village, Illinois; Las Vegas, Nevada; Acuna, Mexico and Taipei, Taiwan office.
Certain information about the Company's manufacturing, warehouse and purchasing facilities is set forth below:
*There is no lease for this facility. The Company has entered into a service agreement whereby contracted warehouse personnel provide services for the Company and its customer.
All of the above properties are occupied pursuant to leases of the premises except for the Huntsville, Alabama facility. The Company leases its executive offices and manufacturing facility in Elk Grove Village, Illinois from Circuit Systems, Inc. ("CSI"), a significant shareholder of the Company. The Company, through an agent, leases the purchasing and engineering office in Taipei, Taiwan to coordinate Far East purchasing and design activities. In addition, SMTU, leases the facility in Fremont, California. The Company has guaranteed lease payments of approximately $1.17 million for SMTU, and has been indemnified by one of the SMTU limited partners to the extent of 50% of the lease payment guaranty.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which it believes to be material, and there are no such proceedings which are known to be contemplated for which the Company anticipates material risk of loss.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter of fiscal 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
Gary R. Fairhead 48 President and Chief Executive Officer. Gary R. Fairhead has been the President of the Company since January 1990.
Linda K. Blake 39 Chief Financial Officer, Vice President - Finance Treasurer and Secretary. Linda K. Blake is the Company's Vice President of Finance, Treasurer, Secretary and Chief Financial Officer and was Controller of the Company from June 1991 to February 1994.
Daniel P. Camp 51 Vice President - Mexican Operations. Daniel P. Camp has been Vice President - Mexican Operations since February 2000. Mr. Camp was General Manager of Mexican Operations from February 1994 to February 2000.
Gregory A. Fairhead 44 Executive Vice President - Mexican Operations and Assistant Secretary. Gregory A. Fairhead has been Executive Vice President since February 2000 and is Assistant Secretary. Mr. Fairhead was Vice President - Mexican Operations for the Company from February 1990 to February 2000.
Stephen H. McNulty 46 Vice President - Sales. Stephen H. McNulty has been Vice President of Sales since February 2000. Mr. McNulty was National Sales Manager from April 1997 to February 2000.
Andrew J. Saarnio 52 Vice President - Elk Grove Operations. Andrew J. Saarnio has been Vice President - Elk Grove Operations since November 1998.
John P. Sheehan 39 Vice President - Director of Materials and Assistant Secretary. John P. Sheehan has been Vice President - Director of Materials of the Company since April 1990 and is Assistant Secretary.
Nunzio A. Truppa 62 Vice President - Las Vegas Operations. Nunzio A. Truppa has been Vice President - Las Vegas Operations for the Company, or held equivalent management positions since January 1990.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market System under the symbol SGMA. The following table sets forth the range of quarterly high and low bid information for the Common Stock for the periods ended April 30, 1999 and 2000.
Common Stock as Reported by Nasdaq
Period High Low
Fiscal 2000: Fourth Quarter 7.219 4.250 Third Quarter 8.750 5.313 Second Quarter 7.875 4.875 First Quarter 7.875 3.750
Fiscal 1999: Fourth Quarter 5.875 2.125 Third Quarter 3.750 2.500 Second Quarter 8.625 0.938 First Quarter 9.000 5.500
As of June 30, 2000, there were approximately 110 holders of record of the Company's Common Stock, which does not include shareholders whose stock is held through securities position
listings. The Company estimates there to be approximately 2,150 beneficial owners of the Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since completing its February 1994 initial public offering and does not intend to pay any dividends in the foreseeable future. So long as any indebtedness remains unpaid under the Company's revolving loan facility, the Company is prohibited from paying or declaring any cash or other dividends on any of its capital stock, except stock dividends, without the written consent of the lender under the facility.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE:
The following discussion provides an analysis of the Company's financial condition and results of operations, and should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements of the Company, and the Notes thereto, appearing in this Annual Report on Form 10-K, as well as in conjunction with the cautionary note concerning forward-looking information which appears at the beginning of Item 1.
OVERVIEW
The Company is an independent provider of EMS, which includes, printed circuit board assemblies, and boxbuild (completely assembled) electronic products. Included among the wide range of services the Company offers its customers are (1) automatic and manual assembly and testing of customer products, (2) material sourcing, procurement and control, (3) design, manufacturing and test engineering support, (4) warehousing and shipment services, and (5) assistance in obtaining product approvals from governmental and other regulatory bodies. The Company provides these services through facilities located in North America and the Far East.
Sales volume can be misleading as an indication of the Company's financial performance. Gross profit margins can vary considerably among customers and products depending on the type of services rendered by the Company. Specifically, the variation of orders for turnkey services versus consignment services. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company's revenue levels and margins. Further, generally customers' orders can be delayed, rescheduled or canceled at any time, which can significantly impact the operating results of the Company. In addition, the ability to replace such delayed or lost sales in a short period of time cannot be assured.
As a manufacturing company, the Company includes all fixed manufacturing overhead in cost of goods sold. The inclusion of fixed manufacturing overhead in cost of goods sold magnifies the fluctuations in gross profit margin percentages caused by fluctuations in net sales and capital expenditures. Specifically, fluctuations in the mix of consignment and turnkey contracts could have an effect on the cost of goods sold and the resulting gross profit as a percentage of net sales. 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. However, turnkey contracts typically have lower gross margins due to the large material content. Historically, more than 90% of the Company's sales have been from turnkey orders.
The Company recently renewed through January 1, 2002 its manufacturing agreement with NSI relating to the production of carbon monoxide detection systems. Sales to NSI accounted for a significant percentage of the Company's net sales from fiscal 1996 through 2000. The Company expects sales to NSI will be significant in fiscal 2001 and 2002. The amount of sales to NSI beyond fiscal 2002 is not certain and if the relationship is not continued it could significantly impact the Company's revenues and earnings.
In the past, the timing and rescheduling of orders has caused the Company to experience significant quarterly fluctuations in its revenues and earnings and the Company expects such fluctuations to continue. In addition, the Company's fourth and first quarters have historically been the weakest periods.
RESULTS OF OPERATIONS:
Fiscal Year Ended April 30, 2000 Compared to Fiscal Year Ended April 30, 1999
Net sales for fiscal 2000 were $88,884,591 compared to $88,159,189 for fiscal 1999. NSI accounted for approximately $25,703,137 or 28.8% of the Company's fiscal 2000 net sales compared to $31,894,500 or 36.2% in fiscal 1999.
Gross profit decreased to $8,196,589 in fiscal 2000 from $8,921,091 in fiscal 1999. Gross profit as a percent of net sales was 9.2% and 10.1% for fiscal 2000 and 1999, respectively. The decrease in gross profit for the fiscal year ended April 30, 2000 compared to the same period in the prior year is due to product mix and value added services required by customers in the EMS industry.
Selling and administrative expenses decreased from $5,890,752 in fiscal 1999 to $5,721,593 in fiscal 2000. The decrease is primarily due to a decrease in bonus accrual in fiscal 2000 compared to fiscal 1999. Selling and administrative expenses as a percent of net sales decreased to 6.4% in fiscal 2000 compared to 6.7% in fiscal 1999.
Interest expense increased in fiscal 2000 to $2,125,292 from $2,049,396 in fiscal 1999. The overall increase was primarily due to the higher interest rates on the Company's line of credit. Interest expense as a percent of net sales remained unchanged at 2.3% for fiscal 2000 and fiscal 1999.
In fiscal 1999 a gain of approximately $1,391,000 was recognized on settlement of the insurance reimbursement related to the flood at the Del Rio, Texas and Acuna, Mexico locations. This gain is reported as a reduction of cost of products sold of $259,000 and gain on insurance reimbursement of $1,132,000 in the accompanying 1999 statement of income.
In fiscal 2000 an extraordinary item for the early extinguishment of debt related to the change of banks was recorded in the amount of $87,500, net of taxes of $58,333.
Income tax expense decreased to $506,122 in fiscal 2000 from $1,052,784 in fiscal 1999. The effective tax rate for fiscal 2000 and 1999 was 37.2% and 38.3%, respectively.
As a result of the foregoing, net income decreased to $766,647 in fiscal 2000 from $1,697,101 in fiscal 1999. Basic earnings per share for the year ended April 30, 2000 was $0.27 compared to $0.59 in fiscal 1999. Diluted earnings per share for fiscal 2000 was $0.27.
Fiscal Year Ended April 30, 1999 Compared to Fiscal Year Ended April 30, 1998
Net sales for fiscal 1999 were $88,159,189 compared to $85,650,598 for fiscal 1998. The 3% increase in net sales was due to additional sales to some of the Company's key customers. NSI accounted for approximately $31,894,500 or 36.2% of the Company's fiscal 1999 net sales compared to $25,191,000 or 29.4% in fiscal 1998.
Gross profit increased to $8,921,091 in fiscal 1999 from $8,456,834 in fiscal 1998. Gross profit as a percent of net sales was 10.1% and 9.9% for fiscal 1999 and 1998, respectively. The increase in gross profit for the fiscal year ended April 30, 1999 compared to the same period in the
prior year is primarily due to product mix.
Selling and administrative expenses increased from $5,704,346 in fiscal 1998 to $5,890,752 in fiscal 1999. The increase is generally consistent with the increase in net sales, but is also due to a write down of $462,000 for Lighting Components, L.P. ("LC") receivables in fiscal 1999. LC distributes a variety of electronic and molded plastic components for use in the sign and lighting industries. The Company owns approximately 12% of LC. Selling and administrative expenses as a percent of net sales remained at 6.7% for fiscal 1999 and fiscal 1998.
Interest expense increased in fiscal 1999 to $2,049,396 from $1,898,488 in fiscal 1998. The overall increase was primarily due to the higher outstanding balance on the Company's line of credit due to the Company's increased working capital requirements. Interest expense as a percent of net sales increased from 2.2% in fiscal 1998 to 2.3% in fiscal 1999.
A gain of approximately $1,391,000 was recognized on settlement of the insurance reimbursement related to the flood at the Del Rio, Texas and Acuna, Mexico locations. This gain is reported as a reduction of cost of products sold of $259,000 and gain on insurance reimbursement of $1,132,000 in the accompanying 1999 statement of income. The inventory, machinery, and equipment and building contents segments of the loss have been settled in full. In June 1999, the Company collected the total flood insurance receivable of $2,453,000, which was included on the April 30, 1999 balance sheet. The business interruption and extra expense segments of the claim have not been finalized. The results for the year ended April 30, 1999, include expenses and a reduction in revenue that management believes is covered by its business interruption insurance. Since there is no agreement with the insurance company on the business interruption and extra expense segments of the loss, the Company has not recognized any net proceeds related to these items. The settlement of the business interruption and extra expense claim is expected to result in additional income for fiscal 2000.
Income tax expense increased to $1,052,784 in fiscal 1999 from $310,962 in fiscal 1998. The effective tax rate for fiscal 1999 and 1998 was 38.3% and 37.2%, respectively.
As a result of the foregoing, net income increased to $1,697,101 in fiscal 1999 from $525,892 in fiscal 1998. Basic earnings per share for the year ended April 30, 1999 was $0.59 compared to $.18 in fiscal 1998. Diluted earnings per share for fiscal 1999 was $0.59.
QUARTERLY RESULTS AND SEASONALITY
Historically, the Company's highest levels of sales are achieved in its second and third quarters. This is due to the seasonal nature of the business for several of the Company's customers. In particular, NSI's sales of carbon monoxide detectors generally coincide with the heating season, and several other customers have sales tied to the holidays. This trend has caused the Company to experience generally stronger second and third quarters in each fiscal year. However, regardless of seasonal fluctuations, there can be no assurance that the Company will be profitable in any particular quarter.
The Company's results of operations have varied significantly and may continue to fluctuate from quarter to quarter. Operating results are affected by a number of factors, including timing of orders from and shipments to major customers, availability of materials and components, the volume of orders as related to the Company's capacity, timing of expenditures in anticipation of future sales, the gain or loss of significant customers and variations in the demand for products in the industries served
by the Company. A significant portion of the Company's expenses are relatively fixed in nature and planned expenditures are based in part on anticipated orders. The inability to adjust expenditures to compensate for a decline in net sales may magnify the adverse impact of such decline in the Company's results of operations. The Company's customers generally require short delivery cycles. In the absence of substantial backlog, quarterly sales and operating results depend on the volume and timing of orders received during the quarter, which can be difficult to forecast. In addition, variations in the size and delivery schedules of purchase orders received by the Company, as well as changes in customers' delivery requirements or the rescheduling or cancellations of orders and commitments, may result in substantial fluctuations in backlog from period to period. Accordingly, the Company believes that backlog cannot be considered a meaningful indicator of future operating results.
LIQUIDITY AND CAPITAL RESOURCES:
In fiscal 2000 the Company financed its growth and operations through cash provided by operating activities and net income. The Company had working capital of $18,489,828 as of April 30, 2000 and $20,666,932 at April 30, 1999. This represents a current ratio of 2.6 and 2.5 for the years ended April 30, 2000 and 1999, respectively.
The Company entered into a new loan and security agreement during fiscal 2000 which provides for a revolving credit facility, an $800,000 equipment loan facility and a $2,000,000 letter of credit facility. In conjunction with the new agreement, the Company paid $87,500, net of taxes of $58,333, as part of the extinguishment of the prior debt agreement. This amount is reflected on the statement of income as a loss from an extraordinary item. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $25,000,000; or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $10,000,000 or up to 60% of the inventory borrowing base, as defined. At April 30, 2000, the Company had outstanding borrowings of $14,654,320. At April 30, 2000, there was approximately $620,000 of unused credit available under the terms of the agreement. The revolving credit facility matures August 25, 2001.
The agreement is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends or distributions of any cash or other property on any of its capital stock, except that common stock dividends may be distributed by a stock split or dividends pro rata to its stockholders.
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, were approximately $9,852,500 for fiscal 2000. The Company provides funding in U.S. dollars, which are exchanged for pesos as needed.
The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, in Fremont, California. SMTU has positive working capital of approximately $2,284,000 and an accumulated deficit of approximately $404,000 at April 30, 2000.
In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guaranty the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus
interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and the Chairman of SMTU have each executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify the Company for 50% of all of SMTU's payments to the lender. The limited partner's obligation to the Company under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender.
The Company's investment and advances to and receivables from SMTU totaled approximately $5,065,000 at April 30, 2000, and no amount was recorded by the Company related to its guaranty of SMTU's credit agreement.
During 1996, the Company invested $1,200 in exchange for a 12% limited partnership interest in Lighting Components, L.P. ("LC") and invested $1,300 in Lighting Components, Inc, which is the general partner of LC, in exchange for 13% of its capital stock. At April 30, 1998, the Company had also made advances to LC in exchange for subordinated debentures and promissory notes totaling $280,000. Approximately $60,000 in subordinated debentures are due at various dates beginning on October 15, 2000, and approximately $220,000 of promissory notes are due on August 1, 2000. Both the subordinated debentures and promissory notes bear interest at 12% with interest payments beginning on August 1, 2000. The subordinated debentures and promissory notes totaling $280,000 had been written down at April 30, 1998. The accrued interest on these subordinated debentures and promissory notes totaling approximately $122,521 is included in other long-term assets in the accompanying balance sheet. In addition, the Company also has miscellaneous and trade receivables recorded in the accompanying balance sheet from LC at April 30, 2000, totaling approximately $1,437,000.
The Company's miscellaneous and trade receivables are secured by a security interest in substantially all of LC assets. In fiscal 2000 and fiscal 1999 the Company reduced the carrying value of assets recorded in the Company's balance sheet by approximately $239,000 and $550,000, respectively.
The impact of inflation for the past three fiscal years has been minimal.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The response to this item is included in Item 14(a) of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters during the Company's fiscal years ended April 30, 2000 and 1999.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by reference to the Company's definitive proxy statement, filed with the Commission not later than 120 days after the close of the Company's fiscal year ended April 30, 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2)
The financial statements, including required supporting schedule, are listed in the index to Consolidated Financial Statements and Financial Schedule filed as part of the Form 10-K on Page.
INDEX TO EXHIBITS
(a)(3)
3.1 Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1, File No. 33-72100 dated February 9, 1994.
3.2 Restated By-laws of the Company, adopted on September 24, 1999.
10.1 Lease Agreement dated as of February 13, 1990 between the Company and CSI and amendments and addenda thereto - Filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
* 10.2 401(K) Retirement Savings Plan of the Company - Filed as Exhibit 10.3 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
* 10.3 Form of 1993 Stock Option Plan - Filed as Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
* 10.4 Form of Incentive Stock Option Agreement for the Company's 1993 Stock Option Plan - Filed as exhibit 10.5 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
* 10.5 Form of Non-Statutory Stock Option Agreement for the Company's 1993 stock Option Plan - Filed as Exhibit 10.6 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
* 10.6 1994 Outside Directors Stock Option Plan - Filed as Exhibit 10.15 to the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
10.7 The Company's 1997 Directors' Stock Option Plan - filed as Exhibit A to the Company's 1997 Proxy Statement filed on August 18, 1997 and hereby incorporated by reference.
10.8 Organization Agreement between the Company and other Partners of SMT Unlimited L.P. dated September 15, 1994 - Filed as Exhibit 10.23 to the Company's Form 10-K for the fiscal year ended April 30, 1995 and hereby incorporated by reference.
10.9 Agreement between SigmaTron International, Inc. and Nighthawk Systems, Incorporated dated July 9, 1995 - Filed as Exhibit 10.33 to the Company's Form 10-Q for the quarter ended July 31, 1995 and hereby incorporated by reference.
10.10 Putnam Flexible 401(K) and Profit Sharing Plan Agreement #001 dated March 22, 1996 between SigmaTron International, Inc. and Putnam Defined Contribution Plans - Filed as Exhibit 10.35 to the Company's Form 10-Q for the quarter ended July 31, 1996 and hereby incorporated by reference.
10.11 Amended 401(k) plan agreement between the Company and Putnam Investments dated May 1, 1996 filed as Exhibit 10.35 to the Company's Form 10-Q for the quarter ended July 31, 1996 and hereby incorporated by reference.
10.12 Lease Agreement between SigmaTron International, Inc. and Industrias Irvin DeMexico S.A. dated January 15, 1997 and filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended January 31, 1997 and hereby incorporated by reference.
10.13 Lease Agreement between SigmaTron International, Inc. and G. E. Capital dated July 14, 1997 filed as Exhibit 10.34 to the Company's Form 10-Q for the quarter ended July 31, 1997 and hereby incorporated by reference.
10.14 Lease Agreement # 97-054 between SigmaTron International, Inc. and International Financial Services dated June 6, 1997 filed as Exhibit 10.37 to the Company's Form 10-Q for the quarter ended October 31, 1996 and hereby incorporated by reference.
10.15 Lease Agreement # 97-087 between SigmaTron International, Inc. and International Financial Services dated June 26, 1997 filed as Exhibit 10.36 to the Company's Form 10-Q for the quarter ended October 31, 1997 and hereby incorporated by reference.
10.16 Lease Agreement # 97-097 between SigmaTron International, Inc. and International Financial Services dated August 11, 1997 filed as Exhibit 10.37 to the Company's Form 10-Q for the quarter ended October 31, 1997 and hereby incorporated by reference.
10.17 Lease Agreement # 97-185 between SigmaTron International, Inc. and International Financial Services dated December 22, 1997 filed as Exhibit 10.38 to the Company's Form 10-Q for the quarter ended January 31, 1998 and hereby incorporated by reference.
10.18 Lease Agreement # E002 between SigmaTron International, Inc. and G. E. Capital dated December 31, 1997 filed as Exhibit 10.39 to the Company's Form 10-Q for the quarter ended January 31, 1998 and hereby incorporated by reference.
10.19 Lease Agreement # 98-10 between SigmaTron International, Inc. and International Financial Services dated February 2, 1998 filed as Exhibit 10.21 to the Company's Form 10-K for fiscal year ended April 30, 1998 and hereby incorporated by reference.
10.20 Lease Agreement # 98-106 between SigmaTron International, Inc. and International Financial Services dated June 30, 1998 and hereby incorporated by reference filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended July 31, 1998.
10.21 Lease Agreement # E003 between SigmaTron International, Inc. and G.E. Capital dated November 10, 1998 filed as Exhibit 10.42 to the Company's Form 10-Q for the quarter ended January 31, 1999 and hereby incorporated by reference.
10.22 Lease Agreement # 99-048 between SigmaTron International, Inc. and International Financial Services dated April 30, 1999.
10.23 Lease Agreement between the Company and International Financial Services # 96-049 dated April 18, 1996 filed as Exhibit 10.36 to the Company's Form 10-Q for the quarter ended October 31, 1996 and hereby incorporated by reference.
10.24 Loan and Security Agreement between SigmaTron International, Inc. and LaSalle National
Bank dated August 25, 1999 filed as Exhibit 10.26 to the Company's Form 10-Q for the quarter ended October 31, 1999.
10.25 Amended and Restated Agreement between Nighthawk Systems, Inc. and SigmaTron International Inc., dated January 1, 2000.
10.26 Lease Agreement # E004 between SigmaTron International, Inc. and G.E. Capital dated May 9, 2000.
22.1 Subsidiaries of the Registrant - Filed as Exhibit 22.1 of the Company's Registration Statement on Form S-1, File No. 33-72100 and hereby incorporated by reference.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule (EDGAR only)
* Indicates management contract or compensatory plan.
(b) No reports on Form 8-K were filed during the 2000 fiscal year.
(c) Exhibits
The Company hereby files as exhibits to this Report the exhibits listed in Item 14 (a) (3) above, which are attached hereto.
(d) Financial Statements Schedules
The Company hereby files a schedule to this Report the financial schedules in Item 14, which are attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Gary R. Fairhead ----------------------
Gary R. Fairhead, President and Chief Executive Officer
Dated: July 26, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, and on the dates indicated.
Consolidated Financial Statements
SigmaTron International, Inc.
Years ended April 30, 2000, 1999, and 1998 with Report of Independent Auditors
SigmaTron International, Inc.
Consolidated Financial Statements
Contents
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets at April 30, 2000 and 1999 Consolidated Statements of Income for the Years Ended April 30, 2000, 1999, and 1998 Consolidated Statements of Equity for the Years Ended April 30, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the Years Ended April 30, 2000, 1999, and 1998 Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
Financial statement schedules not listed above are omitted because they are not applicable or required.
Report of Independent Auditors
The Board of Directors and Stockholders SigmaTron International, Inc.
We have audited the accompanying consolidated balance sheets of SigmaTron International, Inc. as of April 30, 2000 and 1999, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended April 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SigmaTron International, Inc., at April 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois June 29, 2000
SigmaTron International, Inc.
Consolidated Balance Sheets
SigmaTron International, Inc.
Consolidated Balance Sheets (continued)
See accompanying notes.
SigmaTron International, Inc.
Consolidated Statements of Income
See accompanying notes
SigmaTron International, Inc.
Consolidated Statements of Equity
See accompanying notes.
SigmaTron International, Inc.
Consolidated Statements of Cash Flows
SigmaTron International, Inc.
Consolidated Statements of Cash Flows (continued)
See accompanying notes.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements
1. Description of the Business
SigmaTron International, Inc. (the Company), is an independent provider of electronic manufacturing services, which includes printed circuit board assemblies and completely assembled (boxbuild) electronic products. Included among the wide range of services the Company, its wholly owned subsidiary, Standard Components de Mexico, S.A., and its affiliate, SMT Unlimited L.P. (SMTU), offer their customers are: (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) design, manufacturing, and test engineering support; (4) warehousing and shipment services; and (5) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these services through an international network of facilities located in North America and the Far East.
2. Summary of Significant Accounting Policies
Consolidation Policy
The consolidated financial statements include the accounts and transactions of the Company and its wholly owned subsidiary, Standard Components de Mexico, S.A. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first in, first out (FIFO) method.
Machinery and Equipment
Machinery and equipment are stated at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets which range from 3 to 15 years.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of the diluted earnings per share is similar to the basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
Revenue Recognition
The Company's net sales are comprised of product sales and service revenue. Revenue from product sales is recognized upon shipment of goods. Service revenue is recognized as the services are performed.
Fair Value of Financial Instruments
The Company's financial instruments include receivables, notes payable, accounts payable, and accrued liabilities. The fair values of all financial instruments are not materially different from their carrying values.
3. Inventories
Inventories consist of the following:
April 30 2000 1999 ------------------------------
Finished products $ 2,837,452 $ 1,359,207 Work in process 1,713,691 1,709,482 Raw materials 13,224,056 13,171,813 ------------------------------ $17,775,199 $16,240,502 ==============================
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
4. Machinery and Equipment
Machinery and equipment consist of the following:
5. Investment and Advances With SMTU
The Company has a 42.5% ownership interest in SMTU, which was formed on September 15, 1994, in Fremont, California, as a joint venture to provide surface mount technology assembly services primarily to electronic original equipment manufacturers. The Company also owns 50% of the outstanding stock of SMT Unlimited, Inc. (SMT, Inc.), which is the general partner of SMTU. One of the limited partners of SMTU is also an equal shareholder of SMT, Inc., along with the Company. The Company holds subordinated debentures totaling $1,050,000 from SMTU. Debentures totaling $650,000 outstanding at April 30, 2000, bear interest at 8%, and debentures totaling $400,000 bear interest at 12%. All debentures are to be repaid on May 1, 2002. Interest is to be paid quarterly beginning January 1, 2001. The Company guarantees lease payments of approximately $1,169,000 for SMTU. The Company has been indemnified by one of the other limited partners in the amount of $584,530 for the guaranteed lease payments. SMTU incurs a $12,500 monthly administrative fee for administrative services provided by the Company (see also Note 13).
The investment in SMTU is carried at cost plus equity in undistributed earnings or losses since acquisition. The Company has recorded its share of the losses in SMTU first as a reduction of the investment in SMTU and then as a reduction in the carrying value of the subordinated debentures.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
5. Investment and Advances With SMTU (continued)
In August 1999, the Company entered into a guaranty agreement with SMTU's lender to guaranty the obligation of SMTU under its revolving line of credit to a maximum of $2,000,000 plus interest and related costs associated with the enforcement of the guaranty. In connection with the guaranty agreement, one of the limited partners of SMTU and the Chairman of SMTU have each executed a guaranty to the lender to reimburse the Company for up to $500,000 of payments made by the Company under its guaranty to the lender in excess of $1,000,000. In addition, the limited partner has agreed to indemnify the Company for 50% of all of SMTU's payments to the lender. The limited partner's obligation to the Company under the indemnity is reduced dollar for dollar to the extent the limited partner would otherwise be obligated to pay more than $1,000,000 as a result of his guaranty to the lender.
The Company's investment and advances to and receivables from SMTU totaled approximately $5,065,000 at April 30, 2000, and no amount was recorded by the Company related to its guaranty of SMTU's credit agreement. SMTU has positive working capital of approximately $2,284,000 and an accumulated deficit of approximately $404,000 for the year ended April 30, 2000. Since its inception, sales have continued to increase and SMTU was profitable for the years ended April 30, 2000 and 1999.
6. 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 majority of the damaged equipment used in the manufacturing process was replaced with new equipment. The manufacturing operation in Acuna was running at preflood levels, and all raw material issues created by the flood were resolved, by December 1998.
In fiscal 1999, a gain of approximately $1,391,000 was recognized on settlement of a portion of the insurance reimbursement and is reported as a reduction of cost of sales of $259,000 and gain on insurance reimbursement of $1,132,000 in the accompanying 1999 statements of income. The inventory, machinery, and equipment and building contents segments of the loss have been settled in full. The business interruption and extra expense segments of the claim have not been finalized. Since there is no agreement with the insurance company on the business interruption and extra expense segments of the
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
6. Flood Damage in Del Rio, Texas, and Acuna, Mexico (continued)
loss, the Company has not recognized any future net proceeds related to these items. The business interruption and extra expense claim, if any, will be recorded when settlement has been reached.
7. Notes Payable
The Company entered into a new loan and security agreement during fiscal 2000 which provides for a revolving credit facility, an $800,000 equipment loan facility, and a $2,000,000 letter of credit facility. In conjunction with the new agreement, the Company paid $87,500, net of taxes of $58,333, as part of the extinguishment of the prior debt agreement. This amount is reflected on the statement of income as a loss from an extraordinary item. The maximum borrowing limit under the revolving line-of-credit facility is limited to the lesser of: (i) $25,000,000; or (ii) an amount equal to the sum of up to 85% of the receivables borrowing base and the lesser of $10,000,000 or up to 60% of the inventory borrowing base, as defined. At April 30, 2000, the Company had outstanding borrowings of $14,654,320.
Borrowings under the revolving line of credit bear interest at rates equal to the London Interbank Offered Rate plus 2.25% (8.56813% at April 30, 2000) or at the prime rate (9.0% at April 30, 2000) at the option of the Company. The Company must also pay an unused commitment fee equal to 0.25% on the revolving credit facility. At April 30, 2000, there was approximately $620,000 of unused credit available under the terms of the agreement. The revolving credit facility matures August 25, 2001.
Borrowings under the equipment loan bear interest at prime plus 0.5%. The equipment loan matures August 2004. No amounts were outstanding under the equipment loan facility at April 30, 2000.
The agreement is collateralized by substantially all of the assets of the Company and contains certain financial covenants, including specific covenants pertaining to the maintenance of minimum tangible net worth and net income. The agreement also restricts annual lease rentals and capital expenditures and the payment of dividends or distributions of any cash or other property on any of its capital stock, except that common stock dividends may be distributed by a stock split or dividends pro rata to its stockholders.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
8. Accrued Expenses
Accrued expenses consist of the following:
April 30 2000 1999 -------------------------------------
Payroll $1,440,366 $1,028,804 Bonuses 163,000 352,000 Interest payable 122,204 126,993 Commissions 35,833 94,119 Professional fees 155,412 120,016 ------------------------------------- $1,916,815 $1,721,932 =====================================
9. Related Party Transactions and Commitments
The Company has transactions with Circuit Systems, Inc. (CSI), a shareholder of the Company. These transactions primarily involved the purchase of raw materials and the leasing of operating space. Purchases of raw materials were approximately $6,660,000, $6,325,000 and $6,380,000 for the years ended April 30, 2000, 1999, and 1998, respectively. The Company leases space in Elk Grove Village, Illinois, owned by CSI at a base rental of $35,670 per month, with an additional $7,000 per month for property taxes. The lease requires the Company to pay maintenance and utility expenses. In fiscal 2000, the Company exercised its renewal option for an additional five-year period through February 2006. Rent and property tax expense totaled approximately $495,000, $466,000 and $486,000 for the years ended April 30, 2000, 1999, and 1998, respectively.
At April 30, 2000 and 1999, the Company had non-interest-bearing receivables of approximately $190,000 for advances to a company in which an officer of the Company is an investor. The balance has been recorded as an other long-term asset at April 30, 2000 and 1999. This outstanding receivable has been guaranteed by an officer of the Company.
During 1996, the Company invested $1,200 in exchange for a 12% limited partnership interest in Lighting Components, L.P. (LC) and invested $1,300 in Lighting Components, Inc., which is the general partner of LC, in exchange for 13% of its capital stock. At April 30, 1998, the Company had also made advances to LC in exchange for subordinated debentures and promissory notes totaling $280,000. Approximately $60,000 in subordinated debentures are due at various dates beginning on October 15, 2000, and approximately $220,000 of promissory notes are due on August 1, 2000. Both the
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
9. Related Party Transactions and Commitments (continued)
subordinated debentures and promissory notes bear interest at 12% with interest payments beginning on August 1, 2000. The subordinated debentures and promissory notes totaling $280,000 were reserved to a net realizable value of $0 at April 30, 1998. The accrued interest on these subordinated debentures and promissory notes totaling approximately $122,000 is included in other long-term assets in the accompanying balance sheet. In addition, the Company also has miscellaneous and trade receivables recorded in the accompanying balance sheet from LC at April 30, 2000, totaling approximately $1,437,000.
The Company's miscellaneous and trade receivables are secured by a security interest in substantially all of LC's assets. In fiscal 2000 and 1999, the Company reduced the carrying value of assets recorded in the Company's balance sheet to net realizable value by approximately $789,000 and $550,000, respectively. Accordingly, net assets in the accompanying balance sheet at April 30, 2000 and April 30, 1999, were:
Subordinated Miscellaneous Debentures and and Trade Receivables Promissory Notes ---------------------------------------------
April 30, 1999: Gross $280,000 $889,000 Reserve (280,000) (550,000) --------------------------------------------- Net $ - $339,000 =============================================
April 30, 2000: Gross $280,000 $1,560,000 Reserve (280,000) (789,000) --------------------------------------------- Net $ - $ 771,000 =============================================
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes
The following is a summary of income before income taxes:
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Significant temporary differences which result in deferred tax assets and deferred tax liabilities at April 30, 2000 and 1999 are as follows:
2000 1999 ------------------------------------
Allowance for doubtful accounts $ 56,135 $ (21,450) Inventory obsolescence reserve 148,785 129,285 Accruals not currently deductible 110,358 58,824 Inventory 56,590 64,914 Other - (84,059) ------------------------------------ Net deferred tax asset $ 371,868 $ 147,514 ====================================
Gain on involuntary conversion $ (441,558) $ (441,480) Machinery and equipment (1,008,994) (1,002,926) Other 173,537 286,946 ------------------------------------ Net deferred tax liability $(1,277,015) $(1,157,460) ====================================
11. 401(k) Retirement Savings Plan
The Company sponsors a 401(k) retirement savings plan which is available to all nonunion employees who complete 1,000 hours of service annually. Participants are allowed to contribute up to 15% of their annual compensation, and the Company may elect to match participant contributions up to the greater of 6% of the participant's compensation or $300. The Company contributed $50,232, $46,954, and $32,904 to the plan during the fiscal years ended April 30, 2000, 1999, and 1998, respectively. The Company paid total expenses of $12,400, $10,960, and $13,500 for the fiscal years ended April 30, 2000, 1999, and 1998, respectively, relating to costs associated with the Plan's administration.
12. Major Customers and Concentration of Credit Risks
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable.
For the year ended April 30, 2000, two customers accounted for 29% and 18% of net sales of the Company, and 29% and 6%, respectively, of accounts receivable at April 30, 2000. For the year ended April 30, 1999, two customers accounted for 36% and 14% of net sales of the Company, and 32% and 4% of accounts receivable at April 30, 1999. For the
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
12. Major Customers and Concentration of Credit Risks (continued)
year ended April 30, 1998, four customers accounted for 9%, 13%, 29%, and 9% of net sales of the Company, and 21%, 4%, 24%, and 11% of accounts receivable at April 30, 1998.
13. Leases
The Company leases its facilities under various operating leases. The Company also leases various machinery and equipment under capital leases.
Future minimum lease payments under leases with terms of one year or more are as follows at April 30, 2000:
Capital Operating Leases Leases ------------------------------------
2001 $2,137,598 $1,132,878 2002 1,268,911 897,084 2003 499,950 273,564 2004 178,541 227,970 ------------------------------------ 4,085,000 $2,531,496 ================ Less: Amounts representing interest 375,441 ------------------- 3,709,559 Less: Current portion 1,893,486 ------------------- $1,816,073 ===================
The Company subleased the machinery and equipment relating to 13 of the above capital lease agreements to its affiliate, SMTU. These sublease agreements contain the same maturity dates as the original underlying lease agreements. The effective interest rates on these leases are approximately 2% higher than the effective interest rates (ranging from 9.85% to 12.35%) implicit in the original lease to cover various administrative expenses of the Company. The equipment lease receivables are collateralized by the underlying machinery and equipment. Management believes the machinery and equipment would be readily usable in the Company's manufacturing operations, if necessary.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
13. Leases (continued)
Future minimum rentals to be received under subleases with SMTU with terms of one year or more are as follows:
2001 $ 630,775 2002 526,856 2003 308,815 2004 213,308 ------------------- 1,679,754 Less: Amounts representing interest 418,720 ------------------- $1,261,034 ===================
As a result of the uncertainty surrounding the timing of collection of these future minimum rentals, the Company has classified these equipment lease receivables as long-term at April 30, 2000 and 1999.
Rent expense incurred under operating leases was approximately $834,000, $1,119,000, and $714,000 for the years ended April 30, 2000, 1999, and 1998, respectively.
In July 1997, the Company refinanced some machinery and equipment under a sale/leaseback arrangement. The equipment was sold for approximately $1.4 million in cash. The Company has the option to purchase the equipment at the end of the lease term for $1. The transaction has been accounted for as a financing lease, wherein the property remains on the balance sheet and will continue to be depreciated, and a financing obligation equal to the proceeds has been recorded.
14. Stock Options
The Company has stock option plans (Option Plans) under which certain members of management and outside nonmanagement directors may acquire up to 803,500 shares of common stock of the Company. At April 30, 2000, the Company has 698,500 shares reserved for future issuance under the Option Plans. The Option Plans are interpreted and administered by the Compensation Committee (the Committee). The maximum term of options granted under the Option Plans generally is ten years. Options granted under the Option Plans are either incentive stock options or nonqualified options. Options forfeited under the Option Plans are available for reissuance. Options granted under these plans are granted at an exercise price equal to the fair market value of a share of the Company's common stock on the date of grant. The options vest at a rate of 20% each year following the date of grant provided the optionee remains an employee of the company.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
14. Stock Options (continued)
The Company also has stock option plans for the benefit of directors who are not salaried employees of the Company or full-time consultants to the Company. 178,500 shares of common stock were reserved for issuance upon exercise of such options. As of April 30, 2000, all options under these plans have been granted. An option may be exercised at any time within ten years from the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), in accounting for its employee stock options because, as discussed below, the alternative fair value accounting method provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option-valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options approximates the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123 as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period.
The Company's pro forma information follows:
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
14. Stock Options (continued)
Option-valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing method does not necessarily provide a reliable single measure of the fair value of the Company's employee stock options.
The table below summarized option activity through April 30, 2000:
Weighted- Number of Average options Exercise exercisable at Number of Options Price end of year ------------------------------------------------
Outstanding at April 30, 1997 374,500 $ 7.13 Options granted during 1998 387,000 12.45 Options exercised during 1998 (6,000) 7.00 Options canceled during 1998 (200,000) 7.00 Outstanding at April 30, 1998 555,500 10.88 163,500 Options granted during 1999 93,000 6.20 ------------------ Outstanding at April 30, 1999 648,500 10.20 207,100 Options granted during 2000 348,500 6.22 Options canceled during 2000 (336,300) 12.23 ------------------ Outstanding at April 30, 2000 660,700 7.08 378,403 ==================
The weighted-average grant date fair value of the options granted during fiscal 2000, 1999, and 1998 was $3.49, $3.50, and $6.47, respectively.
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
14. Stock Options (continued)
Information with respect to stock options outstanding and stock options exercisable at April 30, 2000, follows:
SigmaTron International, Inc.
Notes to Consolidated Financial Statements (continued)
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Options to purchase 660,700 and 648,500 shares of common stock were outstanding during 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share for all or part of the year because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
SigmaTron International, Inc.
Schedule II - Valuation and Qualifying Accounts
(1) Uncollectible accounts written off.