SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note A
-
Basis of Presentation
The accompanying unaudited
condensed
consolidated financial statements of SigmaTron International, Inc. (“SigmaTron”),
SigmaTron’s
wholly-owned subsidiaries Stan
dard Components de Mexico S.A.,
Ab
leM
ex, S.A. de C.V.,
Digital Appliance Controls de Mexico, S.A. de C.V.,
Spitfire Controls (Vietnam) Co. Ltd.
, Spitfire Controls (Cayman) Co. Ltd.
and
wholly-owned foreign enterprise
s
Wujiang SigmaTron Electronics Co.
,
Ltd.
and SigmaTron Electronic Technology Co., Ltd.
(“SigmaTron China”)
and
internat
ional procurement office
SigmaTron Taiwan
branch
(collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the
condensed
consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three
month
period ended
J
ul
y
31, 201
7
is
not necessarily indicative of the results that may be expected f
or the year ending April 30,
201
8
. For further information, refer to the
condensed
consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30,
201
7
.
Note B -
Inventories
, net
The components of inventory consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
April 30,
|
|
2017
|
|
2017
|
|
|
|
|
|
|
Finished products
|
$
|
22,006,677
|
|
$
|
20,291,768
|
Work-in-process
|
|
2,087,011
|
|
|
1,795,852
|
Raw materials
|
|
58,453,987
|
|
|
52,748,542
|
|
|
82,547,675
|
|
|
74,836,162
|
Less excess and obsolescence reserve
|
|
(1,252,988)
|
|
|
(1,264,924)
|
|
$
|
81,294,687
|
|
$
|
73,571,238
|
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note C - Earnings Per Share
and Stockholders’ Equity
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
$
|
382,882
|
|
$
|
146,597
|
|
Weighted-average shares
|
|
|
|
|
|
|
Basic
|
|
4,195,985
|
|
|
4,183,955
|
|
Effect of dilutive stock options
|
|
73,516
|
|
|
30,580
|
|
|
|
|
|
|
|
|
Diluted
|
|
4,269,501
|
|
|
4,214,535
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.09
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
0.09
|
|
$
|
0.03
|
|
Options to purchase
36
2
,
803
and
367
,
963
shares of common stock were outstanding at
J
ul
y
31, 201
7
and 201
6
, respectively. There were no options granted during the
three
month period ended
J
ul
y
31, 201
7
and
2016, respectively.
The Company recognized $
8
3
,
6
59
and $
8
3
,
6
73
in stock option expense for the three month period ended
J
ul
y
31, 201
7
and 201
6
, respectively.
The balance of unrecognized compensation expense related to the Company’s stock option plans was $
0
and $
329
,
210
at
J
ul
y
31, 201
7
and 201
6
, respectively.
There were
no
anti-dilutive common stock equivalents during the three month period ended J
ul
y 31, 2017
.
There were 24,123 anti-dilutive common stock equivalents during the three month period ended July 31, 2016 which were excluded from the calculation of diluted earnings per share.
On October 1, 2016
,
the Company issued 11,250 shares of restricted stock pursuant to the 2013 Non-Employee Director Restricted Stock Plan, which fully vest
ed
on April 1, 2017
.
The Company recognized
no
compensation expense
with respect to such shares for the three month period ended July 31, 2017.
The Company implemented an employee stock purchase plan (“ESPP”) for all eligible employees on February 1, 2014. The ESPP reserved 500,000 shares of common stock for issuance to employees. In addition, the number of shares of common stock reserved for issuance under the plan automatically increases on the first day of the Company’s fiscal years by 25,000 shares.
The ESPP was terminated effective August 15, 2016. Final purchases under the ESPP were completed on August 31, 2016.
The Company recorded $0 and $1,882 in compensation expense for the three months ended July 31, 2017 and 2016 respectively.
The Company recorded $
6
,
875
to stockholders’ equity relating to purchases under the ESPP
for the three months ended
J
ul
y
31, 2016.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note D - Long-term Debt
Notes Payable – Banks
On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with U.S. Bank, N.A., which expires on March 31, 2022. The credit facility is collateralized by substantially all of the Company’s domestically located assets. The facility allows the Company to choose among interest rates at which it may borrow funds: the fixed rate of four percent or LIBOR plus one and one half percent (effectively 2.75% at July 31, 2017). Interest is due monthly. Under the senior secured credit facility, the Company may borrow up to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base. Deferred financing costs of $207,647 were capitalized in the fourth quarter of fiscal 2017 and will be amortized over the term of the agreement. As of July 31, 2017, there was $24,996,309 outstanding and $10,003,691 of unused availability under the credit facility agreement compared to an outstanding balance of $23,178,429 and $11,821,571 of unused availability at April 30, 2017. At July 31, 2017, the Company was in compliance with its financial covenant and other restricted covenants under the credit facility.
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron Electronics Co., Ltd. c
ould
borrow up to 5,000,000 Renminbi and the facility
wa
s collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest
wa
s payable monthly and the facility
had
a fixed interest rate of 6.67%. The facility was due to expire on August 3, 2017. The credit facility was closed as of March 1, 2017. There was no outstanding balance under the facility at July 31, 2017 or April 30, 2017.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 6.09%. The term of the facility extends to February 7, 2018. There was no outstanding balance under the facility at July 31, 2017 or April 30, 2017.
Notes Payable – Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of $2,500,000, with Wells Fargo, N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. On November 24, 2014, the Company refinanced the mortgage agreement with Wells Fargo, N.A. The note requires the Company to pay monthly principal payments in the amount of $9,500, bears an interest rate of LIBOR plus two and one-quarter percent (effectively 3.50% at July 31, 2017) and is payable over a sixty month period. A final payment of
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note D - Long-term Debt - Continued
approximately $2,289,500 is due on or before November 8, 2019. The outstanding balance was $2,546,000 and $2,574,500 at July 31, 2017 and April 30, 2017, respectively.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of $1,275,000, with Wells Fargo, N.A. to finance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The Wells Fargo, N.A. note requires the Company to pay monthly principal payments in the amount of $4,250, bears interest at a fixed rate of 4.5% per year and is payable over a sixty month period. A final payment of approximately $1,030,000 is due on or before October 2018. The outstanding balance was $1,083,750 and $1,096,500 at July 31, 2017 and April 30, 2017, respectively.
Note Payable – Equipment
On November 1, 2016, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $596,987. The term of the agreement extends to November 1, 2021 with average quarterly payments of $35,060 beginning on February 1, 2017 and a fixed interest rate of 6.65%. The balance outstanding under this note agreement was $537,288 and $567,138 at July 31, 2017 and April 30, 2017, respectively.
On February 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $335,825. The term of the agreement extends to February 1, 2022 with average quarterly payments of $20,031 beginning on May 1, 2017 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $319,034 and $335,825 at July 31, 2017 and April 30, 2017, respectively.
On June 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $636,100. The term of the agreement extends to June 1, 2022 with average quarterly payments of $37,941 beginning on September 1, 2017 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $636,100 at July 31, 2017.
Capital Lease and Sales Leaseback Obligations
From October 2013 through June 2017, the Company entered into various capital lease and sales leaseback agreements with Associated Bank, National Association to purchase equipment totaling $6,893,596. The terms of the lease agreements extend to September 2018 through May 2022 with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 4.90%. The balance outstanding under these capital lease agreements was $3,951,842 and $3,627,760 at July 31, 2017 and April 30, 2017, respectively. The net book value of the equipment under these leases was $5,225,480 and $4,713,044 at July 31, 2017 and April 30, 2017, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT Finance LLC to purchase equipment totaling $2,512,051. The terms of the lease agreements extend to March 2019 through July 2020 with monthly installment payments ranging from $1,931 to $12,764 and a fixed interest rate ranging from 5.65% through 6.50%. The balance outstanding under these capital lease agreements was $1,334,749 and $1,448,269 at July 31, 2017 and April 30, 2017,
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note D - Long-term Debt - Continued
respectively. The net book value of the equipment under these leases was $1,893,691 and $1,946,026 at July 31, 2017 and April 30, 2017, respectively.
Note E - Goodwill and Other Intangible Assets
Goodwill
There were no changes in the carrying amount of tax-deductible goodwill in the amount of $3,222,899 for the three months ended July 31, 2017 and 2016, respectively.
Other Intangible Assets
Intangible assets subject to amortization are summarized as of July 31, 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
-
|
|
|
2,395,000
|
|
|
2,395,000
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
9.83
|
|
|
4,690,000
|
|
|
1,329,320
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Trade names
|
14.83
|
|
|
980,000
|
|
|
253,146
|
Non-compete agreements
|
1.83
|
|
|
50,000
|
|
|
36,890
|
Patents
|
-
|
|
|
400,000
|
|
|
400,000
|
Total
|
|
|
$
|
8,912,000
|
|
$
|
4,811,356
|
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note E - Goodwill and Other Intangible Assets - Continued
Intangible assets subject to amortization are summarized as of April 30, 2017, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
-
|
|
|
2,395,000
|
|
|
2,395,000
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
10.08
|
|
|
4,690,000
|
|
|
1,237,410
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Trade names
|
15.08
|
|
|
980,000
|
|
|
240,897
|
Non-compete agreements
|
2.08
|
|
|
50,000
|
|
|
35,105
|
Patents
|
0.08
|
|
|
400,000
|
|
|
393,353
|
Total
|
|
|
$
|
8,912,000
|
|
$
|
4,698,765
|
Estimated aggregate amortization expense for intangible assets, which becomes fully amortized in 2032, for the remaining periods is as follows:
|
|
|
|
|
|
|
|
|
|
For the remaining 9 months of the fiscal year ending April 30:
|
2018
|
|
$
|
322,452
|
For the fiscal year ending April 30:
|
2019
|
|
|
423,721
|
|
2020
|
|
|
411,406
|
|
2021
|
|
|
403,199
|
|
2022
|
|
|
395,578
|
|
Thereafter
|
|
|
2,144,288
|
|
|
|
$
|
4,100,644
|
Amortization expense was $112,591
and $121,415
for the three months ended July 31, 2017 and 2016, respectively.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note E - Goodwill and Other Intangible Assets - Continued
In conjunction with the May 2012 acquisition of Spitfire, an estimate of the fair value of the contingent consideration, $2,320,000, was recorded based on expected operating results through fiscal 2019 and the specific terms of when such consideration would be earned. Those terms provide for additional consideration to be paid based on a percentage of sales and pre-tax profits over those years in excess of certain minimums. Payments are made quarterly each year and adjusted after each year-end audit. The Company made payments totaling $342,162 during fiscal year 2016. The Company made payments totaling $273,672 during fiscal year 2017. During fiscal year 2017 the Company decreased the estimated remaining payments expected to be paid under the agreement, which resulted in a decrease of $353,591 to the contingent consideration liability. Any change in the Company’s estimate is reflected as a change in the contingent consideration liability and as additional charges or credits to selling and administrative expenses. The Company made one payment in the quarter ended July 31, 2017 in the amount of $45,875. As of July 31, 2017, the contingent consideration liability was $494,436 compared to $523,818 at April 30, 2017.
Note F - Commitments and Contingencies
From time to time the Company is involved in legal proceedings, claims or investigations that are incidental to the conduct of the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect that these legal proceedings or claims will have any material adverse impact on its future consolidated financial position or results of operations.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies
Management Estimates and Uncertainties
- The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, reserves for inventory and valuation of long-lived assets and goodwill, deferred taxes, contingent consideration and other commitments and litigation. Actual results could materially differ from these estimates.
Revenue Recognition
- Revenues from sales of the Company's electronic manufacturing services business are recognized when the finished good product is shipped to the customer. In general, and except for consignment inventory, it is the Company's policy to recognize revenue and related costs when the finished goods have been shipped from its facilities, which is also the same point in time that title passes under the terms of the purchase order and control passes to the customer. Finished goods inventory for certain customers is shipped from the Company to an independent warehouse for storage or shipped directly to the customer and stored in a segregated part of the customer’s own facility. Upon the customer’s request for finished goods inventory, the inventory is shipped to the customer if the inventory was stored off-site, or transferred from the segregated part of the customer’s facility for consumption or use by the customer. The Company recognizes revenue upon such shipment or transfer. The Company does not earn a fee for such arrangements. The Company from time to time may ship finished goods from its facilities, which is also the same point in time that title passes under the terms of the purchase order, and invoice the customer at the end of the calendar month. This is done only in special circumstances to accommodate a specific customer. Further, from time to time customers request the Company hold finished goods after they have been invoiced to consolidate finished goods for shipping purposes. The Company generally provides a warranty for workmanship, unless the assembly was designed by the Company, in which case it warrants assembly/design. The Company does not have any installation, acceptance or sales incentives (although the Company has negotiated longer warranty terms in certain instances). The Company assembles and tests assemblies based on customers’ specifications. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s standard or extended warranties.
Inventories
-
Inventories are valued at cost.
Cost is determined by an average cost method and the Company allocates labor and overhead to work-in-process and finished goods. In the event of an inventory write-down, the Company records expense to state the inventory at lower of cost or market. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. For convenience, the Company records these inventory reserves against the inventory cost through a contra asset rather than through a new cost basis. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve is relieved to ensure the cost basis of the inventory reflects any reductions. Actual results differing from these estimates could significantly affect the Company’s inventories and cost of products sold as the inventory is sold or otherwise relieved.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies - Continued
Goodwill
- Goodwill represents the purchase price in excess of the fair value of assets acquired in business combinations. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles – Goodwill and Other,” requires the Company to assess goodwill and other indefinite-lived intangible assets for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. The Company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value, then the Company is not required to take further action. However, if the Company concludes otherwise, then it is required to perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, a second step of the test is required to determine if recorded goodwill is impaired. The Company also has the option to bypass the qualitative assessment for goodwill in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period. The Company performed its annual goodwill impairment test as of February 1, 2017 and determined no impairment existed as of that date. The step one analysis was performed using a combination of a market approach and an income approach based on a discounted cash flow approach. The Company did not note any triggering events that might indicate an impairment during the three month period ended July 31, 2017.
Intangible Assets
- Intangible assets are comprised of finite life intangible assets including patents, trade names, backlog, non-compete agreements, and customer relationships. Finite life intangible assets are amortized on a straight line basis over their estimated useful lives of 5 years for patents, 20 years for trade names, 1 year for backlog and 7 years for non-compete agreements except for customer relationships which are amortized on an accelerated basis over their estimated useful life of 15 years.
Impairment of Long-Lived Assets
- The Company reviews long-lived assets, including amortizable intangible assets, for impairment. Property, machinery and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment. If events or changes in circumstances occur that indicate possible impairment, the Company first performs an impairment review based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of its assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. If the carrying value exceeds the undiscounted cash flows, the Company records an impairment, if any, for the difference between the estimated fair value of the asset group and its carrying value. The Company further conducts annual reviews for idle and underutilized equipment, and reviews business plans for possible impairment. As of July 31, 2017, there were no indicators of possible impairment of long-lived assets.
Income Tax
- The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and several foreign jurisdictions. Significant
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies - Continued
judgments and estimates by management are required in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company begins with historical results and changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment and estimates by management about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income and/or loss. Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized. The Company established a valuation allowance of $78,100 related to its foreign tax credit carry-forward at April 30, 2017. The Company did not change the previous valuation allowance or establish any new valuation allowances at July 31, 2017.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across its global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
A tax benefit from an uncertain tax position may only be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
The Company adjusts its tax liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined.
Reclassifications -
Certain reclassifications have been made to the previously reported 2017 financial statements to conform to the 2018 presentation. There was no change to net income.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies - Continued
New Accounting Standards:
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
"Revenue from Contracts with Customers"
(Topic 606)
which supersedes the revenue recognition requirements in ASC 605, “
Revenue Recognition”
. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue. In August 2015, the FASB amended the effective date to be annual reporting periods beginning after December 15, 2017, including interim periods within that year (effective the first quarter of the Company’s fiscal year ending April 30, 2019), with early adoption permitted for annual reporting periods beginning after December 15, 2016 including the interim period within that year. The FASB issued several amendments clarifying various aspects of the ASU, including revenue transactions that involve a third party, goods or services that are immaterial in the context of the contract and licensing arrangements. ASC 606 may be adopted on either a full retrospective or modified retrospective basis. The Company plans to adopt the ASU effective the first quarter of fiscal year ending April 30, 2019. As the new standard will supersede all existing revenue guidance affecting the Company, it could impact the timing and amounts of revenue and costs recognized from customer contracts. The Company continues to evaluate the impact that adoption of the standard will have on its consolidated financial statements including the preparation of expanded disclosures. The Company plans to select a transition method as part of its implementation plan by the end of the current fiscal year.
In July 2015, the FASB issued ASU No. 2015-11, “
Inventory (Topic 330): Simplifying the Measurement of Inventory”
. ASU No. 2015-11 requires an entity that determines the cost of inventory by methods other than last-in, first-out (LIFO) and the retail inventory method (RIM) to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to all inventory that is measured using the average cost or first-in first-out (FIFO) methods. This supersedes prior guidance which allowed entities to measure inventory at the lower of cost or market, where market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. ASU No. 2015-11 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016 and prospective application is required. The Company adopted the ASU on May 1, 2017 and the adoption did not have an impact on our consolidated financial position or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases”
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for capital leases and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While the Company is still evaluating the impact of its pending adoption of the new
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies - Continued
standard on its consolidated financial statements, the Company expects that upon adoption in the fiscal year ending April 30, 2020, it will recognize ROU assets and lease liabilities and that the amounts could be material.
In March 2016, the FASB issued ASU No. 2016-09, “
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”,
a new accounting standard update intended to simplify several aspects of the accounting for share-based payment transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statements of Income, introducing a new element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 1, 2017. Effective with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in the consolidated statements of income as a component of the provision for income taxes on a prospective basis, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected forfeitures over the course of a vesting period. The adoption of the ASU had no impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption.
In June 2016, the FASB issued ASU No. 2016-13, “
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
.” ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. For public business entities, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2019, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the new guidance and has not determined the impact this ASU may have on its consolidated financial statements.
In August 2016, the FASB issued ASU Update No. 2016-15,
“Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments,
” which is intended to reduce diversity in practice in how certain transactions are classified in the statements of cash flows. This update will be effective for fiscal years beginning after December 15, 2017 (the Company’s fiscal year ending April 30, 2019), and interim periods within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company plans to adopt the ASU in its fiscal year ending April 30, 2019 using the retrospective transition method. The Company does not expect the impact of the adoption of this ASU to have a material impact on the Company’s Consolidated Statements of Cash Flows.
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note G - Critical Accounting Policies - Continued
In January 2017, the FASB issued ASU No. 2017-04, “
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. This guidance is effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. The Company does not expect this guidance to have a significant impact on its financial statements and plans to adopt ASU No. 2017-04 in its fiscal year ending April 30, 2018.
In January 2017, the FASB issued ASU No. 2017-01, “
Business Combinations (Topic 805): Clarifying the Definition of a Business
,” which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company plans to adopt this ASU in the first quarter of its fiscal year ending April 30, 2019. The Company will apply the clarified definition of a business, as applicable, from the period of adoption.
Note H - Related Parties
In March, 2015, two of the Company’s executive officers invested in a start-up customer. The executive officers’ investments constitute less than 2% (individually and in aggregate) of the outstanding beneficial ownership of the customer, according to information provided by the customer to the executive officers. As of July 31, 2017, the Company had an outstanding note receivable and account receivable from that customer of approximately $888,000 and $1,429,000, respectively, compared to an outstanding note receivable and account receivable of approximately $888,000 and $1,271,000, respectively, at April 30, 2017. As of July 31, 2017, inventory on hand related to this customer approximated $220,000 compared to $310,000 at April 30, 2017. Sales to this customer have not been material for the three months ended July 31, 2017 or during fiscal year 2017.
On January 29, 2016, the Company entered into a memorandum of understanding with this customer. Under the subsequent agreement, effective January 29, 2016, the then account receivable of approximately $888,000 was converted into a short-term promissory note. The promissory note bears interest at the rate of 8% per annum, payable at the maturity of the promissory note. The promissory note was scheduled to mature at the earlier of October 31, 2016, or within 10 days after the customer obtains certain equity financing, or at the closing of a sale of substantially all of the customer’s stock or assets. As additional consideration, the Company received warrants under the agreement. The warrants are ten years in duration and may be exercised at an exercise price of $0.01 per share and for a number of shares determined pursuant to the warrant, expected to be, at a minimum, approximately 1% of the customer’s then – outstanding equity securities. The Company believes the warrants have nil value. Further, the Company has been granted a security interest in the customer’s accounts receivable and authority to access and be a signatory on the customer’s deposit accounts.
On December 6, 2016
,
the Company extended the maturity of the promissory note to July 31, 2017. The promissory note continues to bear interest at the rate of 8% per annum, payable
SigmaTron International, Inc.
July
31, 201
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Related Parties - Continued
monthly. As consideration, the Company received additional warrants under the agreement, which the Company currently believes have nil value.
On August 25, 2017, effective as of July 31, 2017, the Company and the customer entered into a new forbearance agreement. The Company agreed to extend the maturity of the promissory note and forbear exercising its remedies until the earliest of a capital raise , the sale of the customer, or October 31, 2017, and to fund the customer’s operations while the customer explores its options by advancing a maximum of $315,000 through October 31, 2017, pursuant to a new promissory note that bears interest at 8% per annum. Additionally, should the customer’s business be sold at a price exceeding the amount necessary to pay its creditors, the Company would receive a fee in addition to the debt owed to the Company. The customer is obligated to pay proceeds of an account receivable to the Company on receipt, expected in October. The forbearance period and maturity date of the notes expire on
the
earlie
st
of
a capital raise,
the sale of the customer or October 31, 2017, but the Company has a unilateral right to extend the forbearance period and maturity of the notes and to make additional advances.
Management continues to assess whether the recorded accounts receivable, notes receivable and inventory are recoverable and whether reserves are necessary. This assessment includes (1) the customer’s successful efforts to raise capital in the past; (2) orders that continue to come in from large big-box and online customers; and (3) an assessment of the value of the customer by an investment banker with significant experience in the customer’s industry. The Company retains its priority position as a secured creditor in a potential sale, liquidation or bankruptcy filing by or against the customer. Based on these factors, the Company believes the accounts receivable, notes receivable and inventory are recoverable. However, in the event that the customer fails to sell its business or raise additional capital in the short term, the Company may not receive payment in full of the obligations owed by the customer or payments by the customer to the Company may be further delayed. The Company will continue to monitor and assess any need to record a reserve against this obligation.
SigmaTron International, Inc.
July
31, 201
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc. (“SigmaTron”), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”) and international procurement office SigmaTron Taiwan branch (collectively, the “Company”) and other Items in this
Quarterly
Report on Form 10-
Q
contain forward-looking statements concerning the Company’s business or results of operations. Words such as “continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify forward-looking statements. These forward-looking statements are based on the current expectations of the Company. Because these forward-looking statements involve risks and uncertainties, the Company’s plans, actions and actual results could differ materially. Such statements should be evaluated in the context of the risks and uncertainties inherent in the Company’s business including, but not necessarily limited to, the Company’s continued dependence on certain significant customers; the continued market acceptance of products and services offered by the Company and its customers; pricing pressures from the Company’s customers, suppliers and the market; the activities of competitors, some of which may have greater financial or other resources than the Company; the variability of
the Company’s
operating results; the results of long-lived assets and goodwill impairment testing; the variability of
the Company’s
customers’ requirements; the availability and cost of necessary components and materials; the ability of the Company and
its
customers to keep current with technological changes within
its
industries; regulatory compliance, including conflict minerals; the continued availability and sufficiency of
the Company’s
credit arrangements; changes in U.S., Mexican, Chinese, Vietnamese or Taiwanese regulations affecting the Company’s business; the turmoil in the global economy and financial markets; the stability of the U.S., Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; currency exchange fluctuations; and the ability of the Company to manage its growth. These and other factors which may affect the Company’s future business and results of operations are identified throughout the Company’s Annual Report on Form 10-K, and as risk factors, may be detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These statements speak as of the date of such filings, and the Company undertakes no obligation to update such statements in light of future events or otherwise unless otherwise required by law.
SigmaTron International, Inc.
July
31, 201
7
Overview:
The Company operates in one business segment as an independent provider of EMS, which includes printed circuit board assemblies and completely assembled (box-build) electronic products. In connection with the production of assembled products, the Company also provides services to its customers, including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; and (6) assistance in obtaining product approval from governmental and other regulatory bodies. The Company provides these manufacturing services through an international network of facilities located in the United States, Mexico, China, Vietnam and Taiwan.
The Company relies on numerous third-party suppliers for components used in the Company’s production process. Certain of these components are available only from single-sources or a limited number of suppliers. In addition, a customer’s specifications may require the Company to obtain components from a single-source or a small number of suppliers. The loss of any such suppliers could have a material impact on the Company’s results of operations. Further, the Company could operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers. The Company does not enter into long-term purchase agreements with major or single-source suppliers. The Company believes that short-term purchase orders with its suppliers provides flexibility, given that the Company’s orders are based on the changing needs of its customers.
Sales can be a misleading indicator of the Company’s financial performance. Sales levels can vary considerably among customers and products depending on the type of services (turnkey versus consignment) rendered by the Company and the demand by customers. Consignment orders require the Company to perform manufacturing services on components and other materials supplied by a customer, and the Company charges only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey contracts, in general, have a higher dollar volume of sales for each given assembly, owing to inclusion of the cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey orders compared to consignment orders can lead to significant fluctuations in the Company’s revenue and gross margin levels. Consignment orders accounted for less than 1% of the Company’s revenues for
the three months ended July 31, 2017 and 2016, respectively.
The Company’s international footprint provides our customers with flexibility within the Company to manufacture in China, Mexico, Vietnam or the U.S. We believe this strategy will continue to serve the Company well as its customers continuously evaluate their supply chain strategies.
The first quarter of fiscal year 2018 exhibited short term volatility, which was not anticipated by the Company.
In fact, as late as the end of June, the Company expected July revenue levels to mirror the higher revenue levels experienced in May and June.
Several customers shut down in July for a week or more and others push
ed
orders
out
several weeks. The Company believes customers were adjusting inventory levels after a strong first half of the calendar year. July results were disappointing
;
however, the strong revenue trend resurfaced in August. The Company anticipates it will have better results for the second quarter of fiscal 2018.
The Company has been encountering shortages in the component marketplace. During the first quarter of fiscal year 2018 those
shortages
increased and they have affected the Company’s ability to meet some customer requirements. Customers continue to work with the Company on these situations.
The Company is unsure
as to when this will end and, in fact,
the situation
could continue to
SigmaTron International, Inc.
July
31, 201
7
deteriorate. The shortages that impacted the Company the most are in the semiconductor marketplace. Most of those suppliers have indicated they will have additional capacity online by early next calendar
year
.
While the Company continues to experience margin pressures, it also continues to see more new opportunities than in the past. Many of
the opportunities
are attractive and the Company will continue to work towards diversifying its customer base and the markets it serves. If the general economy stays on its current path, the Company anticipates it
will have the opportunity to continue to add new
customers and business during fiscal year 2018.
Results of Operations:
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
|
Ended
|
|
Ended
|
|
|
July 31,
|
|
July 31,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
Net sales
|
100.0%
|
|
100.0%
|
|
Operating expenses:
|
|
|
|
|
Cost of products sold
|
90.5
|
|
90.3
|
|
Selling and administrative expenses
|
8.3
|
|
9.1
|
|
Total operating expenses
|
98.8
|
|
99.4
|
|
Operating income
|
1.2%
|
|
0.6%
|
|
Net Sales
Net sales
in
creased
for the three month period ended
J
ul
y
31, 201
7
to $
71,224,293
from
$59,184,975
for
the three month period ended
J
ul
y
31, 201
6.
Sales volume
in
creased for the three month period
ended
J
ul
y
31, 201
7
as compared to the prior year in the
industrial electronics, gaming, fitness, medical/life science, semiconductor equipment and auto
marketplaces.
During the three month period ended July 31, 2017, sales in the appliance, consumer electronics and telecommunications marketplaces decreased compared to the same period in the prior year.
Gross Profit
Gross profit
dollars
in
creased
during the three month period ended
J
ul
y
31, 201
7
to $
6,757,054
or
9.5%
of net sales compared to $
5,770,234
or
9.7%
of net sales for the same pe
riod in the prior fiscal year.
The
in
crease in gross profit
dollars
for the
three
month period ended
J
ul
y
31, 201
7
was primarily the result of increased sales in the majority of marketplaces the Company serves
compared to the same period in the prior year.
Selling and Administrative Expenses
Selling and administrative
expenses
in
creased
to $
5,912,146
or
8.3%
of net sales for t
he three month period ended
J
ul
y
31, 20
1
7
compared to $
5,359,535
or
9.1%
of net sales for the same period in the prior fiscal year. The net
in
crease
in
selling and administrative expenses for the three m
onth period
SigmaTron International, Inc.
July
31, 201
7
ended
J
ul
y
31, 201
7
was driven
by
in
creases in
accounting
,
general office salaries
and other general administrative expenses
.
The increase in the foregoing selling and administrative expenses was partiall
y
offset by a decrease in
computer maintenance
expense
and
property
tax expense
.
Interest Expense
Interest expense
in
creased
to $
308,414
for the three month period ended
J
ul
y
31, 201
7
compared to $
243,243
for the same pe
riod in the prior fiscal year.
The
in
crease in int
erest expense for the three
month period
ended
J
ul
y
31, 201
7
was due to
increase
d
loan obligations
and higher interest rates
compared to the same period in the prior year.
Interest expense for future quarters may fluctuate depending on interest rates
and
borrowings levels.
Income
Tax
Expense
The income tax expense was
$197,963
for the three month period ended J
ul
y 31, 2017 compared to an income tax expense of
$80,261
for the same period in the prior fiscal year. The
in
crease in income tax expense for the three month period ended J
ul
y 31, 2017 compared to the same period in the previous year is the result of
higher
pretax income recognized in the U.S. and foreign jurisdictions. The Company’s effective tax rate was
34
.
08
% and
35
.
40
% for the quarters ended J
ul
y 31, 2017 and 2016, respectively. The effective tax rate is
lowe
r for the quarter ended J
ul
y 31, 2017 than the quarter ended J
ul
y 31, 2016
due to the impact of lower tax rates in foreign jurisdictions and the blend of income by jurisdiction for the period ended
J
ul
y 31, 2017.
The Company has not recorded U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries have been, and under fiscal April 30, 201
8
plans will continue to be
,
indefinitely reinvested, and as a result, no deferred tax liability was recorded at J
ul
y 31, 2017. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $1
0
,
672
,000 as of J
ul
y 31, 2017. The amount of U.S. income taxes on these earnings is impractical to compute due to the complexities of the hypothetical calculation.
Net Income
Net
income
in
creased
to
$382,882
for the three month period ended
J
ul
y
31, 201
7
compared to net
income of $
146,597
for
the same period in the prior fiscal year.
Basic and diluted
earnings
per share for the
first
quarter of 201
8
wer
e
$0.0
9
each
,
compared to basic and diluted
earnings per share of
$0.04
and $0.03
,
respectively,
for the same pe
riod in the prior fiscal year.
Liquidity and Capital Resources:
Operating Activities.
Cash flow
provided by
operating activities was $
399,269
for the
three
months ended
Jul
y
31,
201
7
.
During the first
three
months of fiscal year 201
8
, cash flow
provided by
operating activities was primarily the result of an increase in
accounts payable,
net income, t
he non-cash effects of depreciation and amortization
and a reduction in
prepaid expenses and other expenses and
accounts receivable
. The
in
crease in
accounts payable
and reduction in accounts receivable
was the result of
timing of payments to vendors
and collection of cash receipts from customers in the ordinary course of business
. Cash flow provided by operating activities was partially offset by a
n
in
crease in
inventory
of $7,723,449
. The
increase in inventory is the result of increasing customer orders.
SigmaTron International, Inc.
July
31, 201
7
Cash flow used in operating activities was $1,8
63
,
643
for the three months ended July 31, 2016. During the first three months of fiscal year 2017, cash flow used in operating activities was primarily the result of an increase in inventory of $4,763,160 and accounts receivable of $1,518,722. Cash flow used in operating activities was partially offset by net income, an increase in accounts payable of $3,052,317 and the non-cash effects of depreciation and amortization. The increase in inventory was the result of slow
er than expected
demand for customer
orders
based on forecast.
Investing Activities
.
During the
first
three
months
of fiscal year 201
8
,
the Company
purchased
$3,823,955
in
machinery and equipment to be used in the ordinary course of business. The Company has received forecasts from current customers for increased business that would require additional investment in capital equipment and facilities. To the extent that these forecasts come to fruition, the Company anticipates that it will make additional machinery and equipment purchases in fiscal year 201
8
.
The Company anticipates purchases will be funded by lease transactions
and
its senior secured credit facility
.
During th
e
three
months
of fiscal year 201
7
,
the Company purchased
$1,244,331
in machinery and equipment used in the ordinary course of business. The Company made additional machinery
and equipment purchases of
$
2
,
261
,
155
during the balance of fiscal year 201
7
.
Financing Activities.
Cash
provided by
financing activities
was
$1,888,654
for
the
three
months
ended
J
ul
y
31, 201
7
.
Cash
provided by
financing activities
was primarily the result of
net
borrowings
under the line of credit
.
Cash
provided by
f
inancing
activities was
$2,923,306
for the
three
months ended
J
ul
y
31, 201
6
.
Cash
provided by
financing activities was primarily the result of
net
borrowings under the line of credit.
Financing Summary
.
Notes Payable – Banks
On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with U.S. Bank, N.A., which expires on March 31, 2022. The credit facility is collateralized by substantially all of the Company’s domestically located assets. The facility allows the Company to choose among interest rates at which it may borrow funds: the fixed rate of four percent or LIBOR plus one and one half percent (effectively 2.
7
5% at
July
3
1
, 2017). Interest is due monthly. Under the senior secured credit facility, the Company may borrow up to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base. Deferred financing costs of $207,647 were capitalized in the fourth quarter of fiscal 2017 and will be amortized over the term of the agreement. As of
July
3
1
, 2017, there was $2
4
,
996
,
309
outstanding and $1
0
,
003
,
691
of unused availability under the
credit
facility
agreement
compared to an outstanding balance of $2
3
,
178
,
429
and $
11
,
821
,
571
of unused availability at April 30, 201
7
. At
July
3
1
, 2017, the Company was in compliance with its financial covenant and other restricted covenants under the credit facility.
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd
.,
entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron Electronics Co., Ltd
.
c
ould
borrow up to
5,000,000
Renminbi and the facility
wa
s
SigmaTron International, Inc.
July
31, 201
7
collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest
wa
s payable monthly and the facility
had
a fixed interest rate of
6.67%
. The facility was due to expire on
August 3, 2017
. The credit facility was closed as of
March 1, 2017
. There was
no
outstanding balance under the facility at
July
3
1
, 2017 or April 30, 201
7
.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd
.,
entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd
.
can borrow up to
9,000,000
Renminbi and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of
6.09%
. The term of the facility extends to
February 7, 2018
. There was
no
outstanding balance under the facility at
Ju
l
y
3
1
, 2017
or April 30, 2017
.
Notes Payable – Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of
$2,500,000
, with Wells Fargo, N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility.
On November 24, 2014, the Company refinanced the mortgage agreement with Wells Fargo, N.A. The note requires the Company to pay monthly principal
payments in the amount of
$9,500
, bears an interest rate of LIBOR plus
two
and one-quarter percent (effectively
3.5
0
%
at
July
31, 201
7
) and is payable over a
sixty
month period. A final payment of approximately
$2,289,500
is due on or before
November 8, 2019
.
The outstanding balance was
$2,
546
,000
and
$2,
574
,500
at
July
31, 201
7
and April 30, 201
7
, respectively.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of
$1,275,000
, with Wells Fargo, N.A. to finance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The Wells Fargo, N.A. note requires the Company to pay monthly principal payments in the amount of
$4,250,
bears interest at a fixed rate of
4.5%
per year and is payable over a
sixty
month period. A final payment of approximately
$1,030,000
is due on or before
October 2018
.
The outstanding balance was
$1,
083
,
7
50
and
$1,
096
,500
at J
ul
y 31, 2017 and April 30, 201
7
, respectively.
Note Payable – Equipment
On
November 1, 2016
,
the Company entered into a
secured note
agreement with Engencap Fin S.A. DE C.V. to
finance the
purchase
of
equipment in the amount of
$596,987
. The term of the agreement extends to
November 1, 2021
with
average quarterly
payments of
$35,060
beginning on
February 1, 2017
and a fixed interest rate of
6.65%
.
The balance outstanding under th
i
s
note agreement
was
$5
37
,
288 and $567,138
at
July
31, 201
7 and April 30, 2017, respectively
.
On February 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $335,825. The term of the agreement extends to February 1, 2022 with average quarterly payments of $20,031 beginning on May 1, 2017 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $
319
,
034 and $335,825
at
Ju
l
y
3
1
, 2017
and April 30, 2017, respectively
.
On
June
1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $
636
,
100
. The term of the agreement extends to
June
1, 2022 with average quarterly payments of $
37
,
941
beginning on
September
1, 2017
SigmaTron International, Inc.
July
31, 201
7
and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $
636
,
100
at
Ju
l
y
3
1
, 2017
.
Capital Lease
and Sales Leaseback
Obligations
From October 2013 through
June
201
7
, the Company entered into various capital lease
and sales leaseback
agreements with Associated Bank, National Association to purchase equipment totaling
$
6
,
893
,5
9
6
. The terms of the lease agreements extend to
September 2018
through
May
202
2
with monthly installment payments ranging from
$1,455
to
$40,173
and a fixed interest rate ranging from
3.75%
to
4.
90
%
. The balance outstanding under these capital lease agreements was
$3,
951
,
842
and
$
3
,
627
,
76
0
at
July
31, 201
7
and April 30, 201
7
, respectively. The net book value of the equipment under these leases was
$
5
,
225
,
480
and
$
4
,
713
,
044
at
July
31, 201
7
and April 30, 201
7
, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT Finance LLC to purchase equipment totaling
$2,512,051
. The terms of the lease agreements extend to
March 2019
through
July 2020
with monthly installment payments ranging from
$1,931
to
$12,764
and a fixed interest rate ranging from
5.65%
through
6.50%
. The balance outstanding under these capital lease agreements was
$1,
334
,
749
and
$1,
448
,
269
at
July
31, 201
7
and April 30, 201
7
, respectively. The net book value of the equipment under these leases was
$1,
893
,
691
and
$
1
,
946
,
026
at
July
31, 201
7
and April 30, 201
7
, respectively.
Operating Leases
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent
approximately
11
7
,
000
square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through March 2021. The amount of the deferred rent income recorded
for the three
month period ended
J
ul
y
31, 201
7
and 2016
was $
25
,
383
and $19,395, respectively
.
In addition, the landlord provided the Company tenant incentives of $418,000, which are being amortized over the
life
of the lease.
The balance of deferred rent at July 31, 2017 was $525,29
0
compared to $550,672 at April 30, 2017.
SigmaTron International, Inc.
July
31, 201
7
O
n May
31,
2012, the Company entered into a lease agreement in Tijuana, MX, to rent
approximately
112,000 square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through November 2018. The amount of the deferred rent
income for the three
month
period
ended
J
ul
y
31, 201
7
and 2016
was
$
33
,
577
and $30,860, respectively
.
The
balance
of deferred rent at
J
ul
y
31, 201
7
was $191,387 compared to
$
224
,9
64
at April 30, 2017.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly-owned Mexican, Vietnam and Chinese subsidiaries and the Taiwan international procurement office. The Company provides funding, as needed, in U.S. dollars, which are exchanged for Pesos, Dong, Renminbi, and New Taiwan dollars
.
The fluctuation of currencies from time to time, without an equal or greater increase in inflation, could have a material impact on the financial results of the Company.
The impact of currency fluctuation for the
three
month period ended
J
ul
y
31
, 201
7
resulted in a foreign currenc
y
transaction
loss
of $
19
,
623
com
pared to a foreign currency
transaction
loss
of approximately
$
106
,
862
for the same period in the prior year
.
Foreign currency gains or losses are recorded in the cost of
products
sold.
During the first
three
months of fiscal year 201
8
,
the Company’s U.S. operations paid approximately
$
13
,
55
0
,
000
to its foreign subsidiaries for services provided.
The Company has not recorded U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries have been, and under fiscal April 30, 201
8
plans, will continue to be indefinitely reinvested, and as a result, no deferred tax liability
was
recorded
at
J
ul
y
3
1
, 201
7
. The cumulative amount of unremitted earnings for which U.S. income taxes h
ave not been recorded
is
$
1
0
,
672
,
000
as of
J
ul
y
31, 201
7
. The amount of U.S. income taxes on these earnings is impractical to compute due to the complexities of the hypothetical calculation
.
The Company anticipates that its credit facilities, cash flow from operations and leasing resources are adequate to meet its working capital requirements and capital expenditures for fiscal year 2018. In addition, in the event the Company desires to expand its operations, its business grows more rapidly than expected, the current economic climate deteriorates, customers delay payments, or the Company desires to consummate an acquisition, additional financing resources may be necessary in the current or future fiscal years. There is no assurance that the Company will be able to obtain equity or debt financing at acceptable terms, or at all, in the future. There is no assurance that the Company will be able to retain or renew its credit agreements in the future, or that any retention or renewal will be on the same terms as currently exist.
The impact of inflation on the Company’s net sales, revenues and income
from operations for the past
two
fiscal years has been minimal.
SigmaTron International, Inc.
July
31, 201
7
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
Tabular Disclosure of Contractual Obligations
:
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act,
the Company is
not required to provide the information required by this item.
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act,
the Company is
not required to provide the information required by this item.
Item 4.
Controls and Procedures.
Disclosure Controls:
The Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15(d)-15(e)) as of
July
3
1
, 2017. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and its President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of
Ju
l
y
3
1
, 2017.
Internal Controls:
There has been no change in
the Company’s
internal control over financial reporting du
ring the three months ended
J
ul
y
31, 201
7
, that has materially affected or is reasonably likely to materially affect,
its
internal control over financial reporting.
The Company’s
internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with U.S. GAAP.
On May 14, 2013,
the Committee of Sponsoring Organizations of the Treasury Commission (“
COSO
”)
issued an updated version of its Internal Control - Integrated Framework (the “2013 Framework”)
which officially superseded COSO’s earlier Internal Control-Integrated Framework (1992) (the “1992 Framework”)
on December 15, 2014. Originally issued in 1992, the framework helps organizations design, implement and evaluate the effectiveness of internal control concepts and simplify the
ir use and application.
None of
COSO, the Securities and Exchange Commission or any other regulatory body has mandated adoption of the 2013 Framework by a specified date. We
are currently performing
an analysis to evaluate what changes to our control environment, if any, would be needed to successfully implement the 2013 Framework. Until such time as such analysis and any related transition to the 2013 Framework is complete, we will continue to use the 1992 Framework in connection with our assessment of internal control.
The Company anticipates the transition will be completed in fiscal year 2018.
SigmaTron International, Inc.
July
31, 201
7
PART II
– OTHER INFORMATION
Item 1.
Legal Proceedings.
From time to time the Company is involved in legal proceedings, claims, or investigations that are incidental to the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect these legal proceedings or claims will have any material adverse impact on its future consolidated financial position or results of operations.
Item 1A.
Risk Factors.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K under the Exchange Act, the Company is not required to provide the information required by this item.
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item
5
.
Other Information.
None.
SigmaTron International, Inc.
July
31, 201
7
Item 6.
Exhibits.
|
|
10.1
|
Promissory Note, entered into June 1, 2017, by and between ENGENCAP FIN, S.A. DE C.V., SOFOM, E.N.R. “HOLDER”) and SigmaTron International, Inc. (“The Maker”).
|
|
|
10.2
|
Lease No. 013, entered into July 6, 2017, is an attachment to Master Lease No. 2170 dated October 17, 2013 by and between Associated Bank, National Association and SigmaTron International, Inc.
|
|
|
31.1
|
Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
|
|
|
31.2
|
Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
|
|
|
32.1
|
Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
|
|
|
32.2
|
Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
|
|
|
101.INS
|
XBRL Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Scheme Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
SigmaTron International, Inc.
July
31, 201
7
SIGNATURES
:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behal
f by the undersigned
thereunto duly authorized.
SIGMATRON INTERNATIONAL, INC.
|
|
|
/s/ Gary R. Fairhead
|
|
September
1
3
, 201
7
|
|
|
|
Gary R. Fairhead
|
|
Date
|
President and CEO (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
/s/ Linda K. Frauendorfer
|
|
September
1
3
, 201
7
|
|
|
|
Linda K. Frauendorfer
|
|
Date
|
Chief Financial Officer, Secretary and Treasurer
|
|
|
(Principal Financial Officer and Principal
|
|
|
Accounting Officer)
|
|
|