Quarterly Report (10-q)

Date : 09/12/2019 @ 3:51PM
Source : Edgar (US Regulatory)
Stock : Sigmatron International Inc (SGMA)
Quote : 4.3551  0.0 (0.00%) @ 7:16PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



_________________





Form 10-Q



__________________



(Mark One)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

      EXCHANGE ACT OF 1934



For the quarterly period ended July 31, 2019



OR



 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

     EXCHANGE ACT OF 1934



For the transition period from    to



Commission File Number 0-23248



SIGMATRON INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

_________________





 

Delaware

36-3918470

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)



 

2201 Landmeier Road

 

Elk Grove Village, Illinois

60007

(Address of principal executive offices)

(Zip Code)



Registrant’s telephone number, including area code:  (847) 956-8000

__________________



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 


 

SigmaTron International, Inc.

July 31, 2019

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.  Yes    No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer     Accelerated filer 



Non-accelerated filer          Smaller reporting company 



Emerging growth company 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes    No 



Indicate the number of shares outstanding of the registrant’s common stock, $0.01 par value, as of September 10, 2019:  4,242,508







 

2

 


 

 



SigmaTron International, Inc.



Index





 

 

 

 



 

 

 

 

PART 1.

FINANCIAL INFORMATION:         

 

Page No.



Item 1.

Condensed Consolidated Financial Statements

 

 



 

Condensed Consolidated Balance Sheets – July 31, 2019 (Unaudited) and April 30, 2019

 



 

Condensed Consolidated Statements of Operations – (Unaudited)

 

 



 

Three Months Ended July 31, 2019 and 2018

 



 

Condensed Consolidated Statements of Changes in Stockholders’

 

 



 

Equity – Three Months Ended July 31, 2019 and 2018

 



 

Condensed Consolidated Statements of Cash Flows – (Unaudited)

 

 



 

Three Months Ended July 31, 2019 and 2018

 



 

Notes to Condensed Consolidated Financial Statements – (Unaudited)  

 

10 



Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 



 

Results of Operations

 

22 



Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

29 



Item 4.

Controls and Procedures

 

29 



 

 

 

 

PART II

OTHER INFORMATION:

 

 



Item 1.

Legal Proceedings

 

29 



Item 1A.

Risk Factors

 

30 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30 



Item 3.

Defaults Upon Senior Securities

 

30 



Item 4.

Mine Safety Disclosures

 

30 



Item 5.

Other Information

 

30 



Item 6.

Exhibits

 

31 



 

Signatures

 

32 



 

 

 

 

 



 

3

 


 

 



SigmaTron International, Inc.

Condensed Consolidated Balance Sheets





 

 

 

 

 



 

 

 

 

 



 

July 31,

 

 

 



 

2019

 

 

April 30,



 

(Unaudited)

 

 

2019



 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

1,487,730 

 

$

1,005,810 



 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of

 

 

 

 

 

$631,283 at July 31, 2019 and April 30, 2019

 

31,929,092 

 

 

31,441,381 

Inventories, net

 

74,255,011 

 

 

85,579,575 

Prepaid expenses and other assets

 

2,426,259 

 

 

2,436,894 

Refundable and prepaid income taxes

 

1,144,693 

 

 

1,339,739 

Other receivables

 

1,875,358 

 

 

1,741,890 



 

 

 

 

 

Total current assets

 

113,118,143 

 

 

123,545,289 



 

 

 

 

 

Property, machinery and equipment, net

 

32,681,869 

 

 

33,232,769 



 

 

 

 

 



 

 

 

 

 

Intangible assets, net

 

2,621,940 

 

 

2,713,360 

Deferred income taxes

 

384,022 

 

 

384,022 

Other assets

 

6,982,585 

 

 

1,589,325 

   

 

 

 

 

 

Total other long-term assets

 

9,988,547 

 

 

4,686,707 



 

 

 

 

 

Total assets

$

155,788,559 

 

$

161,464,765 



 

 

 

 

 

Liabilities and stockholders' equity:

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

$

36,240,995 

 

$

45,627,014 

Accrued wages

 

5,192,603 

 

 

4,680,399 

Accrued expenses

 

2,722,534 

 

 

2,410,311 

Income taxes payable

 

41,831 

 

 

60,921 

Current portion of long-term debt

 

691,701 

 

 

691,701 

Current portion of finance lease obligations

 

1,821,341 

 

 

1,939,374 

Current portion of operating lease obligations

 

2,049,962 

 

 

 -

Contingent consideration

 

 -

 

 

57,537 

Current portion of deferred rent

 

 -

 

 

139,509 



 

 

 

 

 

Total current liabilities

 

48,760,967 

 

 

55,606,766 



 

 

 

 

 

Long-term debt, less current portion

 

40,503,158 

 

 

42,710,954 

Income taxes payable

 

452,619 

 

 

500,263 

Finance lease obligations, less current portion

 

2,368,517 

 

 

2,862,784 

Operating lease obligations, less current portion

 

3,692,295 

 

 

 -

Deferred rent, less current portion

 

 -

 

 

179,059 

Other long-term liabilities

 

1,191,665 

 

 

1,155,907 

Deferred income taxes

 

170,869 

 

 

161,583 



 

 

 

 

 

Total long-term liabilities

 

48,379,123 

 

 

47,570,550 



 

 

 

 

 

Total liabilities

 

97,140,090 

 

 

103,177,316 



 

 

 

 

 

4

 


 

 

Commitments and contingencies

 

 

 

 

 



 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $.01 par value; 500,000 shares

 

 

 

 

 

authorized, none issued or outstanding

 

 -

 

 

 -

Common stock, $.01 par value; 12,000,000 shares

 

 

 

 

 

authorized, 4,242,508 and 4,240,008 shares issued and

 

 

 

 

 

outstanding at July 31, 2019 and April 30, 2019, respectively

 

42,146 

 

 

42,146 

Capital in excess of par value

 

23,474,379 

 

 

23,474,379 

Retained earnings

 

35,131,944 

 

 

34,770,924 



 

 

 

 

 

Total stockholders' equity

 

58,648,469 

 

 

58,287,449 



 

 

 

 

 

Total liabilities and stockholders' equity

$

155,788,559 

 

$

161,464,765 



 

 

 

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.



























5

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Operations









 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months

 

 

Three Months

 



 

Ended

 

 

Ended

 

 

 

July 31,

 

 

July 31,

 



 

2019

 

 

2018

 



 

(Unaudited)

 

 

(Unaudited)

 



 

 

 

 

 

 

Net sales

$

74,009,981 

 

$

71,414,057 

 

Cost of products sold

 

67,049,649 

 

 

65,625,001 

 



 

 

 

 

 

 

Gross profit

 

6,960,332 

 

 

5,789,056 

 



 

 

 

 

 

 

Selling and administrative expenses

 

5,827,326 

 

 

5,934,116 

 



 

 

 

 

 

 

Operating income (loss)

 

1,133,006 

 

 

(145,060)

 



 

 

 

 

 

 

Other (income) expense

 

(66,362)

 

 

25,063 

 

Interest expense

 

591,228 

 

 

553,490 

 

Income (loss) before income tax expense

 

608,140 

 

 

(723,613)

 



 

 

 

 

 

 

Income tax expense (benefit)

 

247,115 

 

 

(197,006)

 



 

 

 

 

 

 

Net income (loss)

$

361,025 

 

$

(526,607)

 



 

 

 

 

 

 



 

 

 

 

 

 

Earnings (loss) per share – basic

$

0.09 

 

$

(0.12)

 



 

 

 

 

 

 

Earnings (loss) per share – diluted

$

0.09 

 

$

(0.12)

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

Basic

 

4,241,883 

 

 

4,223,657 

 



 

 

 

 

 

 

Weighted average shares of common stock outstanding

 

 

 

 

 

 

Diluted

 

4,241,883 

 

 

4,223,657 

 



 

 

 

 

 

 

The accompanying notes to the condensed consolidated financial statements are an integral part of these statements.













6

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity







 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the three months ended July 31, 2019



 

 

 

 

 

 

 

Capital in

 

 

 

 

 

Total



 

Preferred

 

 

Common

 

 

excess of par

 

 

Retained

 

 

stockholders’



 

stock

 

 

stock

 

 

value

 

 

earnings

 

 

equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2019

$

 -

 

$

42,146 

 

$

23,474,379 

 

$

34,770,924 

 

$

58,287,449 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative-effect adjustment for the adoption of Topic 842

 

 -

 

 

 -

 

 

 -

 

 

(5)

 

 

(5)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 -

 

 

 -

 

 

 -

 

 

361,025 

 

 

361,025 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 31, 2019

$

 -

 

$

42,146 

 

$

23,474,379 

 

$

35,131,944 

 

$

58,648,469 









 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the three months ended July 31, 2018



 

 

 

 

 

 

 

Capital in

 

 

 

 

 

Total



 

Preferred

 

 

Common

 

 

excess of par

 

 

Retained

 

 

stockholders’



 

stock

 

 

stock

 

 

value

 

 

earnings

 

 

equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 30, 2018

$

 -

 

$

41,896 

 

$

23,132,017 

 

$

35,636,038 

 

$

58,809,951 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

(526,607)

 

 

(526,607)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 31, 2018

$

 -

 

$

41,896 

 

$

23,132,017 

 

$

35,109,431 

 

$

58,283,344 











7

 


 

 

SigmaTron International, Inc.

Condensed Consolidated Statements of Cash Flows







 

 

 

 

 



 

 

 

 

 



 

Three

 

 

Three



 

Months Ended

 

 

Months Ended



 

July 31,

 

 

July 31,



 

2019

 

 

2018 (As Revised)



 

(Unaudited)

 

 

(Unaudited)



 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

$

361,025 

 

$

(526,607)



 

 

 

 

 

Adjustments to reconcile net income (loss)

 

 

 

 

 

to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,235,516 

 

 

1,267,528 

Amortization of right-of-use operating leased assets

 

532,418 

 

 

 -

Deferred income tax expense (benefit)

 

9,286 

 

 

(251,158)

Amortization of intangible assets

 

91,420 

 

 

94,105 

Amortization of financing fees

 

26,614 

 

 

20,704 

Fair value adjustment of contingent consideration

 

 -

 

 

17,529 

Loss from disposal or sale of machinery and equipment

 

51 

 

 

34 



 

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

(487,711)

 

 

(4,522,665)

Inventories

 

11,324,564 

 

 

(1,083,002)

Prepaid expenses and other assets

 

57,808 

 

 

263,923 

Refundable and prepaid income taxes

 

195,046 

 

 

(86,267)

Income taxes payable

 

(66,734)

 

 

(43,281)

Trade accounts payable

 

(9,386,019)

 

 

1,422,738 

Deferred rent

 

 -

 

 

(68,242)

Operating lease liabilities

 

(586,079)

 

 

 -

Accrued expenses and wages

 

763,629 

 

 

53,565 



 

 

 

 

 

Net cash provided by (used in) operating activities

 

4,070,834 

 

 

(3,441,096)



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of machinery and equipment

 

(684,667)

 

 

(706,808)



 

 

 

 

 

Net cash used in investing activities

 

(684,667)

 

 

(706,808)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds under equipment notes

 

 -

 

 

182,557 

Payments of contingent consideration

 

(57,537)

 

 

(55,075)

Payments under finance lease and sale leaseback agreements

 

(612,300)

 

 

(643,290)

Payments under equipment notes

 

(102,925)

 

 

(93,798)

Payments under building notes payable

 

(70,000)

 

 

(70,000)

Borrowings under revolving line of credit

 

82,796,750 

 

 

82,479,011 

Payments under revolving line of credit

 

(84,852,276)

 

 

(77,556,902)

Payments of debt financing costs

 

(5,959)

 

 

(11,100)



 

 

 

 

 

Net cash (used in) provided by financing activities

 

(2,904,247)

 

 

4,231,403 



 

 

 

 

 

Change in cash and cash equivalents

 

481,920 

 

 

83,499 

Cash and cash equivalents at beginning of period

 

1,005,810 

 

 

1,721,599 



 

 

 

 

 

8

 


 

 

Cash and cash equivalents at end of period

$

1,487,730 

 

$

1,805,098 



 

 

 

 

 

Supplementary disclosures of cash flow information

 

 

 

 

 

Cash paid for interest

$

564,188 

 

$

504,897 

Cash paid for income taxes

 

162,276 

 

 

160,239 

Financing of insurance policy

 

96,556 

 

 

67,675 



 

 

 

 

 





 





 

9

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note A - Description of the Business



SigmaTron International, Inc., its subsidiaries, foreign enterprises and international procurement office (collectively, the “Company”) operates in one business segment as an independent provider of electronic manufacturing services (“EMS”), which includes printed circuit board assemblies and completely assembled (box-build) electronic products.  In connection with the production of assembled products, the Company also provides services to its customers, including (1) 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. 



Note B - Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of SigmaTron International, Inc. (“SigmaTron”), SigmaTron’s wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman) Co. Ltd. and wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron Electronic Technology Co., Ltd. (“SigmaTron China”) and international 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 July 31, 2019 is not necessarily indicative of the results that may be expected for the year ending April 30, 2020.  The condensed consolidated balance sheet at April 30, 2019, was derived from audited annual financial statements but does not contain all of the footnotes disclosures from the annual financial statements.  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, 2019

 

10

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note C - Inventories, net



The components of inventory consist of the following:









 

 

 

 

 



 

 

 

 

 



July 31,

 

April 30,



2019

 

2019



 

 

 

 

 

Finished products

$

22,414,687 

 

$

20,682,669 

Work-in-process

 

2,955,440 

 

 

3,037,810 

Raw materials

 

50,192,856 

 

 

63,203,068 



 

75,562,983 

 

 

86,923,547 

Less excess and obsolescence reserve

 

(1,307,972)

 

 

(1,343,972)



$

74,255,011 

 

$

85,579,575 

 



Note D - Earnings Per Share and Stockholders’ Equity



The following table sets forth the computation of basic and diluted earnings (loss) per share:







 

 

 

 

 

 



Three Months Ended

 



July 31,

 



2019

 

2018

 



 

 

 

 

 

 

Net income (loss)

$

361,025 

 

$

(526,607)

 

Weighted-average shares

 

 

 

 

 

 

Basic

 

4,241,883 

 

 

4,223,657 

 

Effect of dilutive stock options

 

 -

 

 

 -

 



 

 

 

 

 

 

Diluted

 

4,241,883 

 

 

4,223,657 

 



 

 

 

 

 

 

Basic earnings (loss) per share

$

0.09 

 

$

(0.12)

 



 

 

 

 

 

 

Diluted earnings (loss) per share

$

0.09 

 

$

(0.12)

 



Options to purchase 465,232 and 347,318 shares of common stock were outstanding at July 31, 2019 and 2018, respectively.  There were no options granted during the three month periods ended July 31, 2019 and 2018, respectively.  There was no stock option expense recognized for the three month periods ended July 31, 2019 and 2018, respectively.  There was no balance of unrecognized compensation expense related to the Company’s stock option plans at July 31, 2019 and 2018.  For the three month period ended July 31, 2019 and 2018, 424,484 and 0 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive.    



11

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt



Debt and capital lease obligations consisted of the following at July 31, 2019 and April 30, 2019:







 

 

 

 

 



 

July 31,

 

 

April 30,



 

2019

 

 

2019



 

 

 

 

 

Debt:

 

 

 

 

 

Notes Payable - Banks

$

33,671,686 

 

$

35,727,212 

Notes Payable - Buildings

 

6,580,000 

 

 

6,650,000 

Notes Payable - Equipment

 

1,225,828 

 

 

1,328,753 

Unamortized deferred financing costs

 

(282,655)

 

 

(303,310)

Total debt

 

41,194,859 

 

 

43,402,655 

Less current maturities

 

691,701 

 

 

691,701 

Long-term debt

$

40,503,158 

 

$

42,710,954 



 

 

 

 

 

Finance lease and sale leaseback obligations

$

4,189,858 

 

$

4,802,158 

Less current maturities

 

1,821,341 

 

 

1,939,374 

Total finance lease obligations, less current portion

$

2,368,517 

 

$

2,862,784 



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 3.81% at July 31, 2019).  Interest is due monthly. 



On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving line of credit under the senior secured credit facility.  The amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 (the “Revolving Line Cap”) less reserves or (ii) the Borrowing Base, but no more than 90% of the Company’s Revolving Line Cap, except that the 90% limitation will expire if (i) the Company’s actual revolving loans for 90 consecutive days after the amendment’s effective date are less than 80% of the Company’s Borrowing Base and (ii) 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 $10,500,000 on raw materials, $10,000,000 on finished goods and $28,000,000 on all eligible inventory. 



On December 13, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment provides an exception to otherwise ineligible foreign receivables for up to $3,000,000 of receivables paid by certain enumerated account debtors outside of the U.S. and Canada.





12

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



On March 22, 2019, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment allows the Company to borrow up to the lesser of (i) the Revolving Line Cap less reserves or (ii) the Borrowing Base, but no more than 95% of the Company’s Revolving Line Cap until August 1, 2019 and 90% on and after August 1, 2019.



On August 26, 2019, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment allows the Company to borrow up to the lesser of (i) the Revolving Line Cap less reserves or (ii) the Borrowing Base, but no more than 95% of the Company’s Revolving Line Cap until February 26, 2020 and 90% on and after February 26, 2020. 



As of July 31, 2019, there was $33,671,686 outstanding and $8,993,594 of unused availability under the U.S. Bank facility compared to an outstanding balance of $35,727,212 and $6,645,730 of unused availability at April 30, 2019.  At July 31, 2019, the Company was in compliance with its financial covenant and other restrictive covenants under the credit facility.  Deferred financing costs of $5,959 were capitalized during the three month period ended July  31, 2019, which are amortized over the term of the agreement.  As of July  31, 2019 and April 30, 2019, the unamortized amount offset against outstanding debt was $196,675 and $209,162, respectively.    



On March 15, 2019, 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, approximately $726,000 as of July  31, 2019, 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 March 14, 2024.  There was no outstanding balance under the facility at July  31, 2019 and April 30, 2019.



The Company is in compliance with its financial covenant and other restrictive covenants and anticipates that its credit facilities, expected future cash flows from operations and leasing resources are adequate to meet its working capital requirements, and fund capital expenditures for the next 12 months.  In addition, if customers delay orders, future payments are not made timely, the Company desires to expand its operations, its business grows more rapidly than expected, or the current economic climate deteriorates, additional financing resources may be necessary. 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.



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 in Elk Grove Village, Illinois.  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

13

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



of July 31, 2019 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $45,746 and $49,852, respectivelyA final payment of approximately $4,347,778 is due on or before March 31, 2022The outstanding balance was $4,888,000 and $4,940,000 at July, 31 2019 and April 30, 2019, 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, 2019 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $40,234 and $44,006, respectivelyA final payment of approximately $1,505,000 is due on or before March 31, 2022The outstanding balance was $1,692,000 and $1,710,000 at July, 31 2019 and April 30, 2019, respectively. 



Notes Payable – Equipment



The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment. The terms of these secured note agreements extend to November 2021 through May 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00%.



Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods as of July  31, 2019, are as follows:







 

 

 

 

 

 

 

 

 

 

 

Fiscal Year

Bank

 

Building

 

Equipment

 

Total



 

 

 

 

 

 

 

 

 

 

 

2020

$

 -

 

$

210,000 

 

$

308,775 

 

$

518,775 

2021

 

 -

 

 

280,000 

 

 

411,701 

 

 

691,701 

2022

 

33,475,011 

 

 

6,004,020 

 

 

381,852 

 

 

39,860,883 

2023

 

 -

 

 

 -

 

 

114,372 

 

 

114,372 

2024

 

 -

 

 

 -

 

 

9,128 

 

 

9,128 



$

33,475,011 

 

$

6,494,020 

 

$

1,225,828 

 

$

41,194,859 



 

 

 

 

 

 

 

 

 

 

 







14

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note E - Long-term Debt - Continued 



Finance Lease and Sales Leaseback Obligations



The Company enters into various finance lease and sales leaseback agreements.  The terms of the lease agreements mature through January 2023, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 8.00%.  





Note F - Income Tax



The income tax expense was $247,115 for the three month period ended July 31, 2019 compared to an income tax benefit of $197,006 for the same period in the prior fiscal year.  The Company’s effective tax rate was 40.63% and 27.22% for the quarters ended July 31, 2019 and 2018, respectively.  The increase in income tax expense for the three month period ended July 31, 2019 compared to the benefit recognized for the same period in the previous year is due to operating income recognized in the current period as opposed to a loss recognized in the same period in the previous year. The increase in effective tax rate is due primarily to the operating loss recognized in China and Vietnam in the current period for which no tax benefit is recorded due to a full valuation allowance. 



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.



15

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.



Revenue Recognition - The following table presents the Company’s revenue disaggregated by the principal end-user markets it serves:







 

 

 

 

 

 



 

 

Three Months Ended July 31,

 

Three Months Ended July 31,

 



Net trade sales by end-market

 

2019

 

2018

 



Industrial Electronics

 

42,848,712 

 

38,135,102 

 



Consumer Electronics

 

26,659,187 

 

29,200,913 

 



Medical / Life Sciences

 

4,502,082 

 

4,078,042 

 



Total Net Trade Sales

 

74,009,981 

 

71,414,057 

 



 

 

 

 

 

 



During the three month period ending July 31, 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, 2019.  The Company is electing not to disclose the value of the remaining unsatisfied performance obligation with a duration of one year or less as permitted by the practical expedient in ASU 2014-09, “Revenue from Contracts with Customers.”  The Company had no material remaining unsatisfied performance obligations as of July 31, 2019, with an expected duration of greater than one year.



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

16

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



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’s valuation allowance was $1,349,098 and $1,294,605 as of July 31, 2019 and April 30, 2019, respectively.



Revisions - Previously reported cash flows from financing activities for the three-month period ended July 31, 2018 have been revised to reflect the classification of payments and borrowings under the Company’s revolving line of credit presented in the condensed consolidated statement of cash flows. The revision had no impact to total cash flows from financing activities, net loss or net loss per share, or the condensed consolidated balance sheets or statements of operations or stockholders’ equity. See Note B, “Summary of Significant Accounting Policies” in the Company’s 2019 10-K for additional information on these revisions.



New Accounting Standards:



In February 2016, the FASB issued ASU 2016-02, as amended, Leases (Topic 842), which requires a lessee to record a right-of-use asset and a lease liability for all leases with a term greater than twelve months regardless of whether the lease is classified as an operating lease or a financing lease.



Effective May 1, 2019, the Company adopted the new standard under the modified retrospective approach, applying the current-period adjustment method.  Under the transition guidance of the modified retrospective approach there are a number of optional practical expedients made available to simplify the transition of the new standard. The Company has elected the following:



·

The condensed consolidated balance sheets for reporting periods beginning on or after May 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840, Leases. The Company recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption of $5. 

·

The Company has elected to utilize the package of practical expedients permitted under the transition guidance in the standard, which allowed the Company to not reassess (i) whether any expired or existing contracts contain leases, (ii) historical lease classification, and (iii) initial direct costs.

·

The Company has elected to combine lease and non-lease components as a single component for all asset classes.

·

The Company has elected to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 are or contain a lease under this Topic.

·

The Company has elected to keep leases with an initial term of 12 months or less off of the balance sheet.

17

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note H - Critical Accounting Policies - Continued



Upon adoption, the Company recorded Right-of-use ("ROU") assets and lease liabilities relating to operating leases of $6,017,771 and $6,290,289, respectively. The changes did not have a material impact on our results of operations or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note J - Leases, for the impact on the financial statements and related disclosures from the adoption of this standard.



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, as amended by ASU 2019-04 and ASU 2019-05, 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.



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 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), “an unrelated party,” 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.



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.



18

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J - Leases



The Company leases office and storage space, vehicles and other equipment under non-cancellable operating leases with initial terms typically ranging from 1 to 5 years.  At contract inception, the Company reviews the facts and circumstances of the arrangement to determine if the contract is or contains a lease.  The Company follows the guidance in Topic 842 to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if the Company has the right to direct the use of the underlying asset.  When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset.  When determining if the Company has the right to direct the use of an underlying asset, the Company considers if they have the right to direct how and for what purpose the asset is used throughout the period of use and if they control the decision-making rights over the asset.



The Company’s lease terms may include options to extend or terminate the lease.  The Company exercises judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.



The Company has elected to include both lease and non-lease components in the determination of lease payments. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.



At commencement, lease-related assets and liabilities are measured at the present value of future lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company exercises judgment in determining the incremental borrowing rate based on the information available at when the lease commences to measure the present value of future payments.



Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.



Operating leases are included in other assets, current operating lease obligations, and operating lease obligations (less current portion) on the Company’s consolidated balance sheet. Finance leases are included in property, plant and equipment and current and long-term portion of finance lease obligations on the Company’s consolidated balance sheet. Short term leases with an initial term of 12 months or less are not presented on the balance sheet with expense recognized as incurred.

19

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J - Leases - Continued



The following table presents lease assets and liabilities and their balance sheet classification:



 

 

 



 

 

July 31,



Classification

 

2019

Operating Leases:

 

 

 

Right-of-use Assets

Other assets

$

5,485,353 

Operating lease current liabilities

Current portion of operating lease obligations

 

2,049,962 

Operating lease noncurrent liabilities

Operating lease obligations, less current portion

 

3,692,295 

Finance Leases:

 

 

 

Right-of-use Assets

Property, plant and equipment

 

10,506,242 

Finance lease current liabilities

Current portion of finance lease obligations

 

1,821,341 

Finance lease noncurrent liabilities

Finance lease obligations, less current portion

 

2,368,517 



The components of lease expense for the three month period ended July 31, 2019, are as follows:







 

 

 



 

 

Three Months



 

 

Ended



 

 

July 31,



Classification

 

2019

Operating Leases:

 

 

 

Operating lease cost

Operating expenses

 

594,494 

Variable lease cost

Operating expenses

 

73,897 

Short term lease cost

Operating expenses

 

1,350 

Finance Leases:

 

 

 

Amortization of right-of-use assets

Operating expenses

 

347,375 

Interest expense

Interest expense

 

67,786 

Total

 

 

1,084,902 



The weighted average lease term and discount rates are as follows:







 

 



 

July 31,



 

2019

Operating Leases:

 

 

Weighted average remaining lease term (months)

 

41.10

Weighted average discount rate

 

3.8%

Finance Leases:

 

 

Weighted average remaining lease term (months)

 

28.63

Weighted average discount rate

 

5.9%



20

 


 

SigmaTron International, Inc.

July 31, 2019

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note J - Leases - Continued



Future payments due under leases reconciled to lease liabilities are as follows:







 

 

 

 

 

 



 

 

Finance Leases

 

 

Operating Leases

For the remaining 9 months of the fiscal year ending April 30:

 

 

 

 

 

 

2020 

 

$

1,535,763 

 

$

1,847,153 

For the fiscal years ending April 30:

 

 

 

 

 

 

2021 

 

 

1,792,747 

 

 

2,243,547 
2022 

 

 

1,049,198 

 

 

1,289,278 
2023 

 

 

133,819 

 

 

1,136,290 
2024 

 

 

 -

 

 

698,778 

Thereafter

 

 

 -

 

 

180,288 

Total undiscounted lease payments

 

 

4,511,527 

 

 

7,395,334 

Present value discount, less interest

 

 

321,669 

 

 

1,653,077 

Lease liability

 

$

4,189,858 

 

$

5,742,257 



Supplemental disclosures of cash flow information related to leases are as follows:







 



Three Months



Ended



July 31,

Other Information

2019

Cash paid for amounts included in the measurement of lease liabilities

 

Operating cash flows from finance leases

67,786 

Operating cash flows from operating leases

62,155 

Financing cash flows from finance leases

612,300 

Supplemental non-cash information on lease labilities arising from obtaining right-of-use assets:

 

Right-of-use assets obtained in exchange for new finance lease liabilities

 -

Right-of-use assets obtained in exchange for operating lease liabilities

 -







 

21

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

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.

22

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

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 month periods ended July 31, 2019 and July 31, 2018, 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 Company reported profitable results for its first quarter of fiscal year 2020.  This follows its profitable fourth quarter of fiscal year 2019. The Company’s positive financial results are primarily driven by an increased revenue level combined with improved pricing and productivity.  Based on the Company’s current backlog, it expects this trend to continue going into the second quarter of fiscal year 2020.  However, uncertainty and volatility continue in the Company’s industry.  While there are many factors driving this uncertainty, the trade wars remain the primary factor and the trade war with China the primary driver.  The Company continues to closely manage inventory levels with a focus on accuracy of customers’ forecasts and lead-times for components. The Company’s projection for current customer sales remains positive which it believes will result in continued growth.  Additionally, the Company is launching products with new customers during its second quarter. All of these are positive developments.  However, conditions can change quickly and currently are difficult to forecast.

23

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

Issues remain in the component marketplace, including component availability, lead times, deliveries and price increases, but they are fewer and farther between. In fact, for some component classes lead times have shortened.



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,

 



2019

 

2018

 



(Unaudited)

 

(Unaudited)

 



 

 

 

 

Net sales

100.0%

 

100.0%

 

Operating expenses:

 

 

 

 

Cost of products sold

90.6

 

91.9

 

Selling and administrative expenses

7.9

 

8.3

 

Total operating expenses

98.5

 

100.2

 

Operating income (loss)

1.5%

 

(0.2%)

 



Net Sales



Net sales increased for the three month period ended July 31, 2019, to $74,009,981 from $71,414,057 for the three month period ended July 31, 2018.  The Company’s sales increased for the three month period ended July 31, 2019, as compared to the prior year in the industrial electronics and medical/life science marketplaces.  The increase in sales dollars for these marketplaces was partially offset by a decrease in sales dollars in the consumer electronics marketplace.  Revenues started an upward trend during the first quarter of fiscal year 2020.



Gross Profit



Gross profit dollars increased during the three month period ended July 31, 2019, to $6,960,332 or 9.4% of net sales compared to $5,789,056 or 8.1% of net sales for the same period in the prior fiscal year.    The increase in gross profit for the three month period ended July 31, 2019, was primarily the result of increased sales in the majority of the marketplaces the Company serves compared to the same period in the prior year



Selling and Administrative Expenses



Selling and administrative expenses decreased to $5,827,326 or 7.9% of net sales for the three month period ended July 31, 2019, compared to $5,934,116 or 8.3% of net sales for the same period in the prior fiscal year.  The net decrease in selling and administrative expenses for the three month period ended July 31, 2019, was attributable to sales salaries, financing fees and legal professional fees.  The decrease in the foregoing selling and administrative expenses was partially offset by an increase in general insurance, accounting professional fees and bonus expense.



24

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

Interest Expense



Interest expense increased to $591,228 for the three month period ended July 31, 2019, compared to $553,490 for the same period in the prior fiscal year.  The increase in interest expense for the three month period ended July 31, 2019, was due to 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 $247,115 for the three month period ended July 31, 2019, compared to an income tax benefit of $197,006 for the same period in the prior fiscal year.  The Company’s effective tax rate was 40.63% and 27.22% for the quarters ended July 31, 2019 and 2018, respectively.  The increase in income tax expense for the three month period ended July 31, 2019, compared to the benefit recognized for the same period in the previous year is due to operating income recognized in the current period as opposed to a loss recognized in the same period in the previous year. The increase in effective tax rate is due primarily to the operating loss recognized in Vietnam in the current period for which no tax benefit is recorded due to a full valuation allowance.    



Net Income



Net income increased to $361,025 for the three month period ended July 31, 2019, compared to net loss of $526,607 for the same period in the prior fiscal year.  Basic and diluted earnings per share for the first quarter of fiscal year 2020 were $0.09, compared to basic and diluted loss per share of $0.12 for the same period in the prior fiscal year.  The increase in net income and earnings per share are due to the results of operations described above, mainly from an increase in gross profit.

 

Liquidity and Capital Resources:



Operating Activities.



Cash flow provided by operating activities was $4,070,834 for the three months ended July 31, 2019.  During the first three months of fiscal year 2020, cash flow provided by operating activities was primarily the result of net income, a  decrease in inventory of $11,324,564 and an increase in accrued expenses and wages.   The decrease in inventory is primarily the result of increased sales and the implementation of an inventory reduction program.  Cash flow provided by operating activities was partially offset by the result of a decrease in accounts payable of $9,386,019.



Cash flow used in operating activities was $3,441,096 for the three months ended July 31, 2018.  During the first three months of fiscal year 2019, cash flow used in operating activities was primarily the result of an increase in accounts receivable in the amount of $4,522,665, an increase 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 made 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 assets and the non-cash effects of depreciation and amortization.





25

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

Investing Activities.



During the first three months of fiscal year 2020, the Company purchased $684,667 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 2020.  The Company anticipates purchases will be funded by lease transactions.



During the first three months of fiscal year 2019, the Company purchased $706,808 in machinery and equipment used in the ordinary course of business.  The Company made additional machinery and equipment purchases of $1,654,821 during the balance of fiscal year 2019.



Financing Activities.



Cash used in financing activities of $2,904,247 for the three months ended July 31, 2019, was primarily the result of net payments under the line of credit.



Cash provided by financing activities of $4,231,403 for the three months ended July 31, 2018, 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 3.81% at July 31, 2019).  Interest is due monthly. 



On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving line of credit under the senior secured credit facility.  The amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 (the “Revolving Line Cap”) less reserves or (ii) the Borrowing Base, but no more than 90% of the Company’s Revolving Line Cap, except that the 90% limitation will expire if (i) the Company’s actual revolving loans for 90 consecutive days after the amendment’s effective date are less than 80% of the Company’s Borrowing Base and (ii) 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 $10,500,000 on raw materials, $10,000,000 on finished goods and $28,000,000 on all eligible inventory. 



On December 13, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment provides an exception to otherwise ineligible foreign receivables for up to $3,000,000 of receivables paid by certain enumerated account debtors outside of the U.S. and Canada.



On March 22, 2019, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment allows the Company to borrow up to the lesser of (i) the Revolving Line Cap less reserves or (ii) the Borrowing Base, but no more than 95% of the Company’s Revolving Line Cap until August 1, 2019 and 90% on and after August 1, 2019.

26

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

On August 26, 2019, the Company and U.S. Bank entered into an amendment of the revolving credit facility.  The amendment allows the Company to borrow up to the lesser of (i) the Revolving Line Cap less reserves or (ii) the Borrowing Base, but no more than 95% of the Company’s Revolving Line Cap until February 26, 2020 and 90% on and after February 26, 2020. 



As of July 31, 2019, there was $33,671,686 outstanding and $8,993,594 of unused availability under the U.S. Bank facility compared to an outstanding balance of $35,727,212 and $6,645,730 of unused availability at April 30, 2019.  At July 31, 2019, the Company was in compliance with its financial covenant and other restrictive covenants under the credit facility.  Deferred financing costs of $5,959 were capitalized during the three month period ended July 31, 2019, which are amortized over the term of the agreement.  As of July 31, 2019 and April 30, 2019, the unamortized amount offset against outstanding debt was $196,675 and $209,162, respectively.    



On March 15, 2019, 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, approximately $726,000 as of July 31, 2019, 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 March 14, 2024.  There was no outstanding balance under the facility at July 31, 2019 and April 30, 2019.



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 in Elk Grove Village, Illinois.  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, 2019 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $45,746 and $49,852, respectivelyA final payment of approximately $4,347,778 is due on or before March 31, 2022.  The outstanding balance was $4,888,000 and $4,940,000 at July, 31 2019 and April 30, 2019, 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, 2019 and April 30, 2019 the unamortized amount included as a reduction to long-term debt was $40,234 and $44,006, respectivelyA final payment of approximately $1,505,000 is due on or before March 31, 2022.  The outstanding balance was $1,692,000 and $1,710,000 at July, 31 2019 and April 30, 2019, respectively. 



Notes Payable – Equipment



The Company routinely enters into secured note agreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment. The terms of these secured note agreements extend to November 2021 through May 2023, with quarterly installment payments ranging from $11,045 to $37,941 and a fixed interest rate ranging from 6.65% to 8.00%.

27

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

Finance Lease and Sales Leaseback Obligations



The Company enters into various finance lease and sales leaseback agreements.  The terms of the lease agreements mature through January 2023, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 8.00%.



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 July 31, 2019 resulted in a foreign currency transaction loss of $109,252 compared to a foreign currency transaction loss of approximately $299,177 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 2020, the Company’s U.S. operations paid approximately $12,720,000 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 $9,195,000 as of July 31, 2019. 



The Company anticipates that its credit facilities, expected future cash flow from operations and leasing resources are adequate to meet its working capital requirements and fund capital expenditures for the next 12 months. However, in the event customers continue to delay orders or future payments are not made timely, the Company desires to expand its operations, its business grows more rapidly than expected, or the current economic climate deteriorates, additional financing resources may be necessary. 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.

28

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

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 31, 2019.  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 July 31, 2019.



Internal Controls:



There has been no change in the Company’s internal control over financial reporting during the three months ended July 31, 2019, 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 their use and application.  Based on the Company’s evaluation, management concluded that its internal controls over financial reporting were effective at the reasonable assurance level as of July 31, 2019.

 

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.

29

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

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.

 

30

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

Item 6.Exhibits.





 

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



 

31

 


 

SigmaTron International, Inc.

July 31, 2019

 

 

SIGNATURES:



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



SIGMATRON INTERNATIONAL, INC.





 

 

/s/ Gary R. Fairhead

 

September  12, 2019



 

 

Gary R. Fairhead

 

Date

President and CEO (Principal Executive Officer)