SigmaTron International, Inc.
July
31, 201
8
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
8
is
not necessarily indicative of the results that may be expected f
or the year ending April 30,
201
9
. 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
8
.
Note B -
Inventories
, net
The components of inventory consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
April 30,
|
|
2018
|
|
2018
|
|
|
|
|
|
|
Finished products
|
$
|
22,242,349
|
|
$
|
20,404,849
|
Work-in-process
|
|
2,744,046
|
|
|
2,075,465
|
Raw materials
|
|
64,229,332
|
|
|
65,652,411
|
|
|
89,215,727
|
|
|
88,132,725
|
Less excess and obsolescence reserve
|
|
(1,202,932)
|
|
|
(1,202,932)
|
|
$
|
88,012,795
|
|
$
|
86,929,793
|
SigmaTron International, Inc.
July
31, 201
8
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,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(526,607)
|
|
$
|
382,882
|
|
Weighted-average shares
|
|
|
|
|
|
|
Basic
|
|
4,223,657
|
|
|
4,195,985
|
|
Effect of dilutive stock options
|
|
-
|
|
|
73,516
|
|
|
|
|
|
|
|
|
Diluted
|
|
4,223,657
|
|
|
4,269,501
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
(0.12)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
(0.12)
|
|
$
|
0.09
|
|
Options to purchase
3
4
7
,
318
and
36
2
,
803
shares of common stock were outstanding at
J
ul
y
31, 201
8
and 201
7
, respectively. There were
no
options granted during the
three
month period
s
ended
J
ul
y
31, 201
8
and
201
7
, respectively.
The Company recognized
$
0
and
$
8
3
,
659
in stock option expense for the three month period
s
ended
J
ul
y
31, 201
8
and 201
7
, respectively.
The
balance of unrecognized compensation expense related to the Company’s stock option plans was
$
0
at
J
ul
y
31, 201
8
and 201
7
.
There were
no
anti-dilutive common stock equivalents outstanding during the three month period ended July 31, 2018
or three month period ended July
3
1, 2017.
SigmaTron International, Inc.
July
31, 201
8
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, 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 bank fixed rate of
five
percent or LIBOR plus
one
and one half percent (effectively
3.83%
at July 31, 2018). 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 eligible inventory borrowing base (the “Borrowing Base”).
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The amended revolving credit facility allows the Company to borrow up to the lesser of (i)
$45,000,000
less reserves or (ii)
90%
of the Company’s Borrowing Base, except that the 90% limitation will expire if the Company’s actual revolving loans for the first
90
days after the amendment’s effective date are less than
80%
of the Company’s Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of
1.2
to 1.0 for four consecutive quarters. The amendment also imposes sublimits on categories of inventory equal to
$17,500,000
on raw materials and
$25,000,000
on finished goods.
As of July 31, 2018, there was
$34,201,740
outstanding and
$
5
,
503
,
206
of unused availability under the U.S. Bank facility compared to an outstanding balance of
$29,279,631
and
$5,720,369
of unused availability at April 30, 2018. At July 31, 2018, the Company was in compliance with its financial covenant and other restricted covenants under the credit facility. Deferred financing costs of
$11,100
were capitalized during the three month period ending July 31, 2018 which are amortized over the term of the agreement. As of July 31, 2018 and April 30, 2018 the unamortized amount
offset against outstanding debt
was
$191,068
and
$192,502
, respectively
.
On February 12, 2018, 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
5,000,000
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, 2019
. There was
no
outstanding balance under the facility at July 31, 2018 and April 30, 2018.
Notes Payable – Buildings
The Company entered into a mortgage agreement on December 21, 2017, in the amount of
$5,200,000
, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. The note requires the Company to pay monthly principal payments in the amount of
$17,333
, bears interest at a fixed rate of
4.0%
per year and is payable over a
fifty-one
month period. Deferred financing costs of
$74,066
were capitalized in fiscal year 2018 which are amortized over the term of the agreement. As of July 31, 2018
,
the unamortized amount
offset against outstanding debt was
$62,671
. A final payment of approximately
$4,347,778
is due on or before
March 31, 2022
.
The outstanding balance was
$5,096,000
and
$5,148,000
at July 31, 2018 and April 30, 2018, respectively.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note D - Long-term Debt - Continued
The Company entered into a mortgage agreement on December 21, 2017, in the amount of
$1,800,000
, with U.S. Bank to refinance the property that serves a
s the Company’s engineering and
design center in Elgin, Illinois. The note requires the Company to pay monthly principal payments in the amount of
$6,000
, bears interest at a fixed rate of
4.0%
per year and is payable over a
fifty-one
month period. Deferred financing costs of
$65,381
were capitalized in the fiscal year 2018 which are amortized over the term of the agreement. As of
Ju
l
y
3
1
, 2018 the unamortized amount
offset against outstanding debt was
$5
5
,
322
. A final payment of approximately
$1,505,000
is due on or before
March 31, 2022
. The outstanding balance was
$1,764,000
and
$1,782,000
at
July 31, 2018 and
April 30, 2018
, respectively
.
Notes 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
$4
1
7,
891
and
$
44
7,
741
at J
ul
y 31, 2018 and April 30, 201
8
, 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
$25
1
,
869
and
$
268
,
660
at J
uly 31, 2018 and April 30, 2018
, 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
$5
08
,
880
and
$540,685
at J
ul
y 31, 2018
and April 30, 2018, respectively
.
On October 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
$307,036
. The term of the agreement extends to
November 1, 2022
with average quarterly payments of
$18,314
beginning on
February 1, 2018
and a fixed interest rate of
7.35%
. The balance outstanding under this note agreement was
$
276
,
332
and
$291,684
at
July
31, 2018 and April 30, 2018, respectively.
On May 1, 2018, 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
$182,557
. The term of the agreement extends to
May 1, 2023
with average quarterly payments of
$11,045
beginning on
August 1, 2018
and a fixed interest rate of
8.00%
. The balance outstanding under this note agreement was
$182,557
at July 31, 2018.
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
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note D - Long-term Debt - Continued
$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
$2,
573
,
702
and
$
2
,
923
,
524
at
July
3
1
, 2018 and April 30, 201
8
, respectively. The net book value of the equipment under these leases was
$4,
657
,
943
and
$4,7
99
,
827
at
Ju
l
y
3
1
, 2018 and April 30, 201
8
, 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
$
863
,
65
5
and
$
984
,
031
at
Ju
l
y
3
1
, 2018 and April 30, 201
8
, respectively. The net book value of the equipment under these leases was
$1
,684
,
353
and
$1,
736
,
688
at
Ju
l
y
3
1
, 2018 and April 30, 201
8
, respectively.
From September 2017 through April 2018, the Company entered into various capital lease and sales leaseback agreements with First American Equipment Finance to purchase equipment totaling
$3,011,387
. The terms of the lease agreements extend to
August 2021
through
April 2022
with monthly installment payments ranging from
$6,716
to
$20,093
and a fixed interest rate ranging from
5.82%
through
7.23%
. The balance outstanding under these capital lease agreements was
$2,514,937
and
$2,688,029
at
July 31, 2018 and
April 30, 2018
, respectively
. The net book value of the equipment under these leases was
$2,742,439
and
$2,808,209
at
July 31, 2018 and
April 30, 2018
, respectively
.
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 2019. 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.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note E - Intangible Assets
I
ntangible assets subject to amortization are summarized as of
J
ul
y
31, 201
8
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
|
8.83
|
|
|
4,690,000
|
|
|
1,701,990
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Non-compete agreements
|
0.83
|
|
|
50,000
|
|
|
44,030
|
Patents
|
-
|
|
|
400,000
|
|
|
400,000
|
Total
|
|
|
$
|
7,932,000
|
|
$
|
4,938,020
|
Intangible assets subject to amortization are summarized as of April 30, 201
8
, 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
|
9.08
|
|
|
4,690,000
|
|
|
1,609,670
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Non-compete agreements
|
1.08
|
|
|
50,000
|
|
|
42,245
|
Patents
|
-
|
|
|
400,000
|
|
|
400,000
|
Total
|
|
|
$
|
7,932,000
|
|
$
|
4,843,915
|
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note E - Intangible Assets - Continued
Estimated aggregate amortization expense for intangible assets, which becomes fully amortized in 20
27
, for the remaining periods is as follows:
|
|
|
|
|
|
|
|
|
|
For the remaining 9 months of the fiscal year ending April 30:
|
2019
|
|
$
|
280,620
|
For the fiscal years ending April 30:
|
2020
|
|
|
362,410
|
|
2021
|
|
|
354,203
|
|
2022
|
|
|
346,582
|
|
2023
|
|
|
339,128
|
|
Thereafter
|
|
|
1,311,037
|
|
|
|
$
|
2,993,980
|
Amortization expense was $
94
,
105
and $
112
,
591
for the three months ended
J
ul
y
31, 201
8
and 201
7
, respectively.
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 increased the estimated remaining payments expected to be paid under the agreement, which resulted in an increase of $17,52
9
for the three month period ended July 31, 2018. 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 a payment of $55,075 and $45,875 as of July 31, 2018 and 2017
, respectively
. As of July 31, 2018, the contingent consideration liability was $175,914 compared to $213,460 at April 30, 2018.
Note F
-
Income Tax
The income tax benefit was $
197
,
006
for the three month period ended July 31, 2018 compared to an income tax expense of $197,963 for the same period in the prior fiscal year. The decrease in income tax expense for the three month period ended July 31, 2018 compared to the same period in the previous year is the result of
a
pretax loss during the three month period ended July 31, 2018 compared to pretax income recognized during the three month period ended July 31, 2017. The Company’s effective tax rate was 27.22% and 34.08% for the quarters ended July 31, 2018 and 2017, respectively. The effective tax rate for the quarter ended July 31, 2018 is
lower
than the quarter ended July 31, 2017 due to
less
income recognized in high tax rate jurisdictions for the period ended July 31, 2018.
On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs
Act
(Tax Act)
. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 34% to 21% and imposing a mandatory one-time transition tax on earnings of certain foreign subsidiaries that were previously tax
-
deferred.
Due to the Tax Act, the Company’s federal statutory income tax rate for the current fiscal year is approximately 21.0%.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note F
-
Income Tax - Continued
Due to the
enactment of the
Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Because of
the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates for certain effects of the Tax Act and recorded provisional amounts in its financial statements as of July 31, 2018. As the Company collects and prepares necessary calculations of cumulative earnings and profits,
cumulative taxes
and amounts held in cash or other specified assets, as well as interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact its provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to complete its accounting for the tax effects of the Tax Act in fiscal year 2019.
Note
G
- 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
,
results of operations
or cash flows
.
Note H - 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, lower of cost or market adjustment for inventory, contingent consideration, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of long-lived assets. Actual results could materially differ from these estimates.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Critical Accounting Policies - Continued
Revenue Recognition
–
The Company recognizes revenue when control of the promised goods or services are transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s primary performance obligation to its customers is the production of finished goods electronic assembly products pursuant to purchase orders. The Company has concluded that control of the products it sells transfers to its customers and an enforceable right to receive payment is customarily established at the point in time when the finished goods are shipped to its customers, or in some cases delivery pursuant to the specified shipping terms of each customer arrangement. With respect to consignment arrangements, control transfers and revenue is recognized at the point in time when the goods are shipped to the customer from the consignment location or when delivered to the customer (pursuant to agreed upon shipping terms). In those limited instances where finished goods delivered to the customer location are stored in a segregated area
which
are not controlled by the customer (title transfer, etc.) until they are pulled from the segregated area and consumed by the Company’s customer
,
revenue is recognized upon consumption. For tooling services, the Company’s performance obligation is satisfied at the point in time when
the
customer takes possession of dies and/ or molds. For engineering, design, and testing services
,
the Company’s performance obligations are satisfied over time as the respective services are rendered as its customers simultaneously derive value from the Company’s performance.
From the time that a customer purchase order is received and contract is established
,
the Company’s performance obligations are typically fulfilled within a few weeks. The Company does not have any performance obligations that require more than one year to fulfill.
Each customer purchase order sets forth the transaction price for the products and services purchased under that arrangement. The Company evaluates the credit worthiness of its customers and exercises judgment to recognize revenue based upon the amount the Company expects to be paid for each sales transaction it enters into with its customers. Some customer arrangements include variable consideration, such as volume rebates, some of which depend upon the Company’s customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company
exercises
judgment to estimate the most likely amount of variable consideration at each reporting date.
The Company’s
typical payment terms are 30 days and
its
sales arrangements do not contain any significant financing component for
its
customers.
The Company’s
customer arrangements do not generate contract assets or liabilities that are material to the consolidated financial statements.
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 assembles and tests assemblies based on customers’ specifications prior to shipment. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s standard or extended warranties.
The Company utilized the practical expedient to treat shipping and handling activities after the customer obtains control as fulfillment activities.
The Company records shipping and handling costs as selling and administrative expenses and costs are accrued when revenue is recognized. Customers are typically invoiced for shipping costs and such amounts are included in net sales.
The Company pays sales commissions to its sales representatives which may be considered as incremental costs to obtain a contract. However, since the recoverability period is less than one year, the
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Critical Accounting Policies - Continued
Company utilized the practical expedient
provided by the new revenue recognition accounting standard that allows an entity
to expense the costs of obtaining a contract
as incurred
.
During the first quarter of fiscal 2019, no revenues were recognized from performance obligations satisfied or partially satisfied in previous periods and
no
amounts were allocated to performance obligations that remain unsatisfied or partially unsatisfied at July 31, 2018.
The following table presents
the Company’s
revenue disaggregated by the principal end-user markets
it
serve
s
:
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
|
Net trade sales by end-market
|
|
2018
|
|
|
Industrial Electronics
|
|
38,135,102
|
|
|
Consumer Electronics
|
|
29,200,913
|
|
|
Medical / Life Sciences
|
|
4,078,042
|
|
|
Total Net Trade Sales
|
|
71,414,057
|
|
|
|
|
|
|
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 net realizable value. 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 inve
ntory 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.
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
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Critical Accounting Policies - Continued
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 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 a result of the analysis performed in the fourth quarter of fiscal 2018, the Company determined that the carrying value of the trade name intangible asset was not recoverable and recorded a fourth quarter charge of
$690,107
for the entire carrying amount. The Company’s analysis did not indicate that any of its other long-lived assets were impaired.
As of July 31, 2018, 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 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
April 30, 2018 or
July 31, 2018.
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. Except as noted below, 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.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Critical Accounting Policies - Continued
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.
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”
.
The guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to a customer, and replaces most existing revenue recognition guidance in U.S. GAAP. The Company adopted the ASU on May 1, 2018 using the modified retrospective transition method. Under the modified retrospective transition method, the cumulative effect of applying ASC 606 to all contracts that are not completed as of the date of adoption is recorded as an adjustment to the opening balance of retained earnings (if applicable) while the comparative periods are not restated and continue to be reported under the accounting standards in effect for those periods. The Company has determined that revenue from contracts with customers under the new revenue recognition standard is the same as under prior accounting standards. Accordingly, the Company did not record an adjustment to the beginning balance of retained earnings as a result of adopting ASC 606.
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
as of the effective date of the standard
, with certain practical expedients available. While the Company is still evaluating the impact of its pending adoption of the new 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 the amounts could be material.
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.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note H - Critical Accounting Policies – Continued
On May 1, 2018, the Company adopted the guidance contained in ASU 2016 -15
,
“
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
”
.
The amendments in ASU 2015-16 are applied using a retrospective transition method to each period presented. The Company has evaluated each of the eight specific issues addressed by ASU 2016-15. During the year ended April 30, 2018 the Company received cash settlement of insurance claims related to equipment damaged by a fire at one of its subsidiaries. The estimated settlement was recorded in April 2017 when the settlement was deemed to be probable. Cash payments related to this settlement were received in September 2017, November 2017 and January 2018. The Company has classified these receipts as cash flows from operating activities in its annual and interim statements of cash flows for the year ended April 30, 2018. The Company is not required to restate its statement of cash flow for the three-month period ended July 31, 2017 as the Company did not receive any cash. The Company will be
required to
reclassify the cash receipts related to this insurance settlement from cash flows from operations to cash flows from investing activities in its statements of cash flows for the six month, nine month and annual periods of the fiscal year ended April 30, 2018.
In January 2018, the FASB released guidance on the accounting for tax on the Global Intangible Low-Taxed Income (“GILTI”) provisions of the Tax Act.
The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The Company elects to treat any potential GILTI inclusions as a period cost.
In February 2018, the FASB issued ASU No. 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”
The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company
adopted
this ASU in the
first
quarter of its
current
fiscal year
and had no
impact on its consolidated financial statements.
Note
I
- Related Parties
In March, 2015,
two
of the Company’s executive officers invested in a start-up customer, Petzila, Inc. (“Petzila”). The executive officers’ investments constituted less than
2%
(individually and in aggregate) of the outstanding beneficial ownership of Petzila, according to information provided by Petzila to the executive officers.
On April 30, 2018 the Company foreclosed on its security interest
that consisted of an outstanding note receivable of
$2,117,500
and account receivable of
$1,535,300
and held a public sale of the assets in accordance with the requirements of Article 9 of the California Uniform Commercial Code. The Company acquired all of the assets of Petzila as the winning bidder at the public sale by a credit bid of
$3,500,000
, the aggregate amount of Petzila’s liability to the company.
Concurrent with the foreclosure sale, the Company entered into an Asset Purchase Agreement with Wagz, Inc. (Wagz) whereby the Company sold the assets to Wagz for
$350,000
cash,
600,000
shares of Wagz common stock and an earn-out based on sales by Wagz generated from use of the assets through
July 31, 2022
. The earn-out is
$6.00
per unit of a product specified in the asset purchase agreement and any upgrade to such product.
SigmaTron International, Inc.
July
31, 201
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note I - Related Parties - Continued
Accordingly, the Company recognized the fair value of the assets received from Wagz and derecognized the receivables from Petzila. The fair value of the assets received from Wagz was approximately
$950,000
; therefore, the Company recognized a loss of approximately
$2,509,423
in its consolidated statement of operations for the year ended April 30, 2018.
The fair value of the non-cash consideration consisted of
$600,000
for the 600,000 shares of Wagz common stock which is recorded within other assets. The Company determined the fair value of the equity using the price per common share received by Wagz in a recent financing transaction, a level 3 input.
The Company did not assign any value to the earn-out because any receipts from the earn-out are highly uncertain and contingent upon Wagz selling the product specified in the asset purchase agreement between the Company and Wagz
.
There was no change
in the fair value of the common stock and no amounts were recognized for the earn-out as of July 31, 2018.
SigmaTron International, Inc.
July
31, 201
8
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 impairment testing;
the collection of aged account receivables;
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;
the ability to meet the Company’s financial covenant;
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
8
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
Ju
l
y
31, 201
8
and 201
7
, 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.
During the first quarter of fiscal 2019 the Company experienced several issues that negatively impacted its results. The first issue and one that will continue to impact fiscal 2019, is the trade war between the United States and China that started in July 2019 with the imposition of punitive tariffs on various goods and commodities. During the first fiscal quarter of 2019 the United States dollar strengthened significantly vs. many currencies but especially against the Yuan. Included in the first quarter of fiscal 2019 results is a foreign currency loss of approximately $270,000.
The second issue was the continuing volatile marketplace for electronic components. As reported previously this phenomenon continues to negatively affect production and revenue. No orders have been cancelled related to this issue which is a positive sign. Further, the Company had several major programs encounter design issues unrelated to SigmaTron which resulted in pushed-out revenue. Most of these design issues have been resolved and are back in production heading into the second fiscal
SigmaTron International, Inc.
July
31, 201
8
quarter of 2019. Demand from customers remains strong and the Company continues to win new programs from existing customers and land first-time customers.
Results of Operations:
The following table sets forth selective financial data as a percentage of net sales for the periods indicated.
|
|
|
|
|
|
Three Months
|
|
Three Months
|
|
|
Ended
|
|
Ended
|
|
|
July 31,
|
|
July 31,
|
|
|
2018
|
|
2017
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
Net sales
|
100.0%
|
|
100.0%
|
|
Operating expenses:
|
|
|
|
|
Cost of products sold
|
91.9
|
|
90.5
|
|
Selling and administrative expenses
|
8.3
|
|
8.3
|
|
Total operating expenses
|
100.2
|
|
98.8
|
|
Operating (loss) income
|
(0.2%)
|
|
1.2%
|
|
Net Sales
Net sales
in
creased
for the three month period ended
Ju
l
y
31, 201
8
to $
71,414,057
from
$71,224,293
for
the three month period ended
Ju
l
y
31, 201
7
.
Sales volume
in
creased for the three
mo
nth period
ended
J
ul
y
31, 201
8
as compared to the prior year in the
industrial electronics
and
medical/life science
m
arketplaces.
During the three
month period ended
Ju
l
y
31, 201
8
, sales in the
consumer electronics
marketplace
decreased compared to the same period in the prior year.
Gross Profit
Gross profit
dollars
de
creased
during the three month period ended
J
ul
y
31, 201
8
to $
5,789,056
or
8.1%
of net sales compared to $
6,757,054
or
9.5%
of net sales for the same pe
riod in the prior fiscal year.
The
de
crease in gross profit
for the
three
month period ended
Ju
l
y
31, 201
8
was primarily the result of
margin pressures from both customers and vendors
.
Selling and Administrative Expenses
Selling and administrative
expenses
in
creased
to $
5,934,116
or
8.3%
of net sales for t
he three month period ended
Ju
l
y
31, 20
1
8
compared to $
5,912,146
or
8.3%
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
ended
Ju
l
y
31, 201
8
was driven
by
in
creases in
general office salaries
,
insurance
expenses
and financing fees
.
The increase in the foregoing selling and administrative expenses was partiall
y
offset by a decrease in
legal professional fees and
bonus expense
.
SigmaTron International, Inc.
July
31, 201
8
Interest Expense
Interest expense
in
creased
to $
553,490
for the three month period ended
Ju
l
y
31, 201
8
compared to $
308,414
for the same pe
riod in the prior fiscal year.
The
in
crease in int
erest expense for the three
m
onth period
ended
Ju
l
y
31, 201
8
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 benefit was $197,006 for the three month period ended July 31, 2018 compared to an income tax expense of $197,963 for the same period in the prior fiscal year. The decrease in income tax expense for the three month period ended July 31, 2018 compared to the same period in the previous year is the result of a pretax loss during the three month period ended July 31, 2018 compared to pretax income recognized during the three month period ended July 31, 2017. The Company’s effective tax rate was 27.22% and 34.08% for the quarters ended July 31, 2018 and 2017, respectively. The effective tax rate for the quarter ended July 31, 2018 is
low
er than the quarter ended July 31, 2017 due to
less
income recognized in high tax rate jurisdictions for the period ended July 31, 2018.
Net Income
Net
income
de
creased
to
a net loss of
$526,607
for the three month period ended
Ju
l
y
31, 201
8
compared to net
income
of $
382,882
for
the same period in the prior fiscal year.
Basic and diluted
loss
per share for the
first
quarter of 201
8
wer
e
$0.
1
2
each
,
compared to basic and diluted
earnings
per share of
$0.0
9
each
for the same pe
riod in the prior fiscal year.
The
de
creases in net income and earnings per share are due to the results of operations described above, mainly from a
de
crease in
gross profit
.
Liquidity and Capital Resources:
Operating Activities.
Cash flow
used in
operating activities was $
3,441,096
for the
three
months ended
Ju
l
y
31,
201
8
.
During the first
three
months of fiscal year 201
9
, cash flow used in operating activities was
primarily
the result of an increase in
accounts receivable
in the amount of $
4
,
522
,
665
,
a
n
in
crease in
inventory
of $1,
083
,
002
and the reported net loss
.
The increase in accounts receivable is the result of increased sales.
The increase in inventory is the result of an increase in customer orders and in some cases orders being pushed out.
Further, capacity issues in the component industry are making it difficult to obtain some components to complete assemblies for shipping.
Cash flow used in operating activities was partially offset by the result of an increase in accounts payable,
decrease in prepaid expenses and other
and the non-cash effects of depreciation and amortization.
Cash flow
provided by
operating activities was
$399,269
for
the three months ended July 31, 2017. During the first three months of fiscal year 2018, cash flow provided by operating activities was primarily the result of an increase in accounts payable, net income
excluding
the non-cash effects of depreciation and amortization and a reduction in prepaid expenses and other
assets
and accounts receivable. The increase 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 an increase in inventory of
SigmaTron International, Inc.
July
31, 201
8
$7,723,449. The increase in inventory
was
the result of increasing customer orders
and in some cases orders being pushed out
.
Investing Activities
.
During the
first
three
months
of fiscal year 201
9
,
the Company
purchased
$706,808
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
9
.
The Company anticipates purchases will be funded by lease transactions
and
its senior secured credit facility
.
During th
e
first
three
months
of fiscal year 201
8
,
the Company purchased
$3,823,955
in machinery and equipment used in the ordinary course of business. The Company made additional machinery
and equipment purchases of
$
3,
594
,
636
during the balance of fiscal year 201
8
.
Financing Activities.
Cash
provided by
financing activities
was
$4,231,403
for
the
three
months
ended
J
ul
y
31, 201
8
.
Cash
provided by
financing activities
was primarily the result of
net
borrowings
under the line of credit
.
Cash
provided by
f
inancing
activities was
$1,888,654
for the
three
months ended
Ju
l
y
31, 201
7
.
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, 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 bank fixed rate of five percent or LIBOR plus one and one half percent (effectively 3.83% at July 31, 2018). 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 eligible inventory borrowing base (the “Borrowing Base”).
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 less reserves or (ii) 90% of the Company’s Borrowing Base, except that the 90% limitation will expire if the Company’s actual revolving loans for the first 90 days after the amendment’s effective date are less than 80% of the Company’s Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of 1.2 to 1.0 for four consecutive quarters. The amendment also imposes sublimits on categories of inventory equal to $17,500,000 on raw materials and $25,000,000 on finished goods. As of July 31, 2018, there was $34,201,740 outstanding and $
5
,
503
,
206
of unused availability under the U.S. Bank facility compared to an outstanding balance of $29,279,631 and $5,720,369 of unused availability at April 30, 2018. At July 31, 2018, the Company was in compliance with its financial covenant and other restricted covenants under the credit facility. Deferred financing costs of $11,100 were capitalized during the three month period ending July 31,
SigmaTron International, Inc.
July
31, 201
8
2018 which are amortized over the term of the agreement. As of July 31, 2018 and April 30, 2018 the unamortized amount
offset against outstanding debt
was $191,068 and $192,502, respectively.
On February 12, 2018, 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 5,000,000 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, 2019. There was no outstanding balance under the facility at July 31, 2018 and April 30, 2018.
Notes Payable – Buildings
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. The note requires the Company to pay monthly principal payments in the amount of $17,333, bears interest at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred financing costs of $74,066 were capitalized in fiscal year 2018 which are amortized over the term of the agreement. As of July 31, 2018
,
the unamortized amount
offset against outstanding debt
was $62,671. A final payment of approximately $4,347,778 is due on or before March 31, 2022. The outstanding balance was $5,096,000
and $5,148,000
at July 31, 2018
and April 30, 2018, respectively
.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with U.S. Bank to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The note requires the Company to pay monthly principal payments in the amount of $6,000, bears interest at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred financing costs of $65,381 were capitalized in the fiscal year 2018 which are amortized over the term of the agreement. As of July 31, 2018 the unamortized amount
offset against outstanding debt
was $55,322. A final payment of approximately $1,505,000 is due on or before March 31, 2022.
The outstanding balance was
$1,764,000 and
$1,782,000 at
July 31, 2018 and
April 30, 2018
, respectively
.
Note
s
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 $417,891 and $447,741 at July 31, 2018 and April 30, 2018, 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 $251,869 and $268,660 at July 31, 2018 and April 30, 2018, 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
8
and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $508,880 and $540,685 at July 31, 2018 and April 30, 2018, respectively.
On October 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 $307,036. The term of the agreement extends to November 1, 2022 with average quarterly payments of $18,314 beginning on February 1, 2018 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $276,332 and $291,684 at July 31, 2018 and April 30, 2018, respectively.
On May 1, 2018, 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 $182,557. The term of the agreement extends to May 1, 2023 with average quarterly payments of $11,045 beginning on August 1, 2018 and a fixed interest rate of 8.00%. The balance outstanding under this note agreement was $182,557 at July 31, 2018.
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 $2,573,702 and $2,923,524 at July 31, 2018 and April 30, 2018, respectively. The net book value of the equipment under these leases was $4,657,943 and $4,799,827 at July 31, 2018 and April 30, 2018, 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 $863,655 and $984,031 at July 31, 2018 and April 30, 2018, respectively. The net book value of the equipment under these leases was $1,684,353 and $1,736,688 at July 31, 2018 and April 30, 2018, respectively.
From September 2017 through April 2018, the Company entered into various capital lease and sales leaseback agreements with First American Equipment Finance to purchase equipment totaling $3,011,387. The terms of the lease agreements extend to August 2021 through April 2022 with monthly installment payments ranging from $6,716 to $20,093 and a fixed interest rate ranging from 5.82% through 7.23%. The balance outstanding under these capital lease agreements was $2,514,937 and $2,688,029 at July 31, 2018 and April 30, 2018, respectively. The net book value of the equipment under these leases was $2,742,439 and $2,808,209 at July 31, 2018 and April 30, 2018, 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
Ju
l
y
31, 201
8
and 2017
was
$
31
,
588 and $25,383, respectively.
In addition, the landlord provided the
SigmaTron International, Inc.
July
31, 201
8
Company tenant incentives of $418,000, which are being amortized over the
life
of the lease.
The balance of deferred rent at
J
ul
y
31, 201
8
was
$
4
15
,
485
compared to $
447
,
073
at April 30, 201
8
.
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
Ju
l
y
31, 201
8
and 2017
was
$
3
6
,
654
and
$
33
,
57
6
, respectively
.
The
balance
of deferred rent at
Ju
l
y
31, 201
8
was
$
48
,
873
compared to
$
85
,
527
at April 30, 201
8
.
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
Ju
l
y
31
, 201
8
resulted in a foreign currenc
y
transaction
loss
of $
299
,
177
com
pared to a foreign currency
transaction
loss
of approximately
$
19
,
623
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
9
,
the Company’s U.S. operations paid
approximately $
12
,
16
0
,
000
to its foreign subsidiaries for services provided.
Except for the impact of the Tax Act, the Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $
12,773,000
as of J
ul
y 31, 2018.
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 201
9
. 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.
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.
SigmaTron International, Inc.
July
31, 201
8
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
Ju
l
y
3
1
, 201
8
. 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
J
ul
y
3
1
, 201
8
.
Internal Controls:
There has been no change in
the Company’s
internal control over financial reporting du
ring the three months ended
Ju
l
y
31, 201
8
, 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 organiz
ations design, implement and evaluate the effectiveness of internal control concepts and simplify their use and application.
B
ased on the Company’s evaluation, management concluded that its internal controls over financial reporting were effective at the reasonable assurance level as of
July
3
1
, 2018.
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
,
results of operations
or cash flows
.
SigmaTron International, Inc.
July
31, 201
8
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
8
Item 6.
Exhibits.
|
|
10.1
|
Promissory Note, entered into May 1, 2018, by and between ENGENCAP FIN, S.A. DE C.V., SOFOM, E.N.R. “HOLDER”) and SigmaTron International, Inc. (“The Maker”).
|
|
|
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
8
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
8
|
|
|
|
Gary R. Fairhead
|
|
Date
|
President and CEO (Principal Executive Officer)
|
|
|
|
|
|
|
|
|
/s/ Linda K. Frauendorfer
|
|
September
1
3
, 201
8
|
|
|
|
Linda K. Frauendorfer
|
|
Date
|
Chief Financial Officer, Secretary and Treasurer
|
|
|
(Principal Financial Officer and Principal
|
|
|
Accounting Officer)
|
|
|