SIGMATRON INTERNATIONAL INC - Quarter Report: 2020 January (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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

      EXCHANGE ACT OF 1934



For the quarterly period ended January 31, 2020



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)

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





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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  ☐

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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 March 9,  2020:  4,242,508







 

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SigmaTron International, Inc.



Index



 



 

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SigmaTron International, Inc.

Condensed Consolidated Balance Sheets





























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SigmaTron International, Inc.

Condensed Consolidated Statements of Operations



















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SigmaTron International, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity





















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SigmaTron International, Inc.

Condensed Consolidated Statements of Cash Flows







 





 

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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 and nine month period ended January 31, 2020 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  consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019. 

 

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Note C - Inventories, net



The components of inventory consist of the following:







 



Note D - Earnings Per Share and Stockholders’ Equity



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







Options to purchase 513,232 and 465,232 shares of common stock were outstanding at January 31, 2020 and 2019, respectively.  There were 48,000 and 117,914 options granted during the nine month periods ended January 31, 2020 and 2019.  The Company recognized $90,432 and $116,612 in stock option expense for both the three and nine month periods ended January 31, 2020 and 2019, respectively.  There was no balance of unrecognized compensation expense related to the Company’s stock option plans at January 31, 2020 and 2019.  For the three month periods ended January 31, 2020 and 2019,  151,282 and 332,312 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive.    For the nine month periods ended January 31, 2020 and 2019,  214,177 and 64,717 shares, respectively, were not included in the diluted weighted average common shares outstanding calculation as they were anti-dilutive. 

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Note D - Earnings Per Share and Stockholders’ Equity - Continued



On December 9, 2019, the Company issued 15,000 shares of restricted stock pursuant to the 2018 Non-Employee Director Restricted Stock Plan, which will fully vest on June 9, 2020.  The Company recognized $20,558 in compensation expense for the three and  nine month periods ended January 31, 2020.  The balance of unrecognized compensation expense related to the Company’s restricted stock award was $49,492 at January 31, 2020.



Note E - Long-term Debt



Debt and capital lease obligations consisted of the following at January 31, 2020 and April 30, 2019:







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 3.18% at January 31, 2020).  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



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Note E - Long-term Debt - Continued 



amendment also imposes sublimits on categories of inventory of $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 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 January 31, 2020, there was $25,397,088 outstanding and $11,849,825 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.  Deferred financing costs of $3,317 and $50,184 were capitalized during the three and nine month periods ended January  31, 2020,  respectively, which are amortized over the term of the agreement.  As of January  31, 2020 and April 30, 2019, the unamortized amount offset against outstanding debt was $197,402 and $209,162, respectively.    



On July 16, 2018, 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.  On February 27, 2020 the 90% limitation expired due to the Company loans being less than 80% of the Company’s Borrowing Base and maintaining a Fixed Charge Coverage Ratio of 1.2 to 1.0 for four consecutive quarters. 



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 January  31, 2020, and the facility is collateralized by Wujiang SigmaTron Electronic 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 January  31, 2020 and April 30, 2019.



At January 31, 2020, 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.

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Note E - Long-term Debt - Continued 



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  January 31, 2020 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $37,033 and $50,142, respectively.  A final payment of approximately $4,347,778 is due on or before March 31, 2022.  The outstanding balance was $4,784,000 and $4,940,000 at January, 31 2020 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 January 31, 2020 and April 30, 2019, the unamortized amount included as a reduction to long-term debt was $32,690 and $44,006, respectively.  A final payment of approximately $1,505,000 is due on or before March 31, 2022.  The outstanding balance was $1,656,000 and $1,710,000 at January, 31 2020 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 at fixed interest rates ranging from 6.65% to 8.00%.

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Note E - Long-term Debt - Continued 



Annual maturities of the Company’s debt, net of deferred financing fees for the remaining periods as of January  31, 2020, are as follows:







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 May 2023, with monthly installment payments ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 9.40%.  





Note F - Income Tax



The income tax benefit was $102,731 for the three month period ended January 31, 2020 compared to an income tax benefit of $5,607 for the same period in the prior fiscal year.  The Company’s effective tax rate was 32.13% and 0.93% for the three month period ended January 31, 2020 and 2019, respectively.  The income tax expense was $460,490 for the nine month period ended January 31, 2020 compared to an income tax expense of $923,379 for the same period in the prior fiscal year.  The Company’s effective tax rate was 36.40% and (100.10)% for the nine month period ended January 31, 2020 and 2019, respectively.  The increase in income tax benefit and effective tax rate for the three month period ended January 31, 2020 compared to the same period in the previous year is due primarily to greater losses recognized in the current period that are expected to be benefitted as compared to the previous year.  The decrease in income tax expense and change in effective tax rate for the nine month period ended January 31, 2020 compared to the same period in the previous year is due primarily to the valuation allowance established on certain deferred tax assets related to foreign net operating loss carryforwards in the previous year. 



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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, 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:







During the three and nine month periods ending January 31, 2020,  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 January 31, 2020.  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 January 31, 2020, with an expected duration of greater than one year.

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Note H - Critical Accounting Policies - Continued

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.



In January of 2020, three of its foreign subsidiaries paid dividends to SigmaTron International totaling $7,100,000. The Company does not anticipate incurring any U.S. or foreign tax liability related to the dividends. With the exception of these dividends the Company has not changed its plans to indefinitely reinvest the earnings of the Company’s foreign subsidiaries. The remaining cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is $3,311,000 as of January 31, 2020. 



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’s valuation allowance was $1,385,611 and $1,294,605 as of January 31, 2020 and April 30, 2019, respectively.



Revisions - Previously reported cash flows from financing activities for the nine month period ended January 31, 2019 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 on 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.

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Note H - Critical Accounting Policies - Continued



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:





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 small reporting companies, ASU 2016-13 is effective for annual and interim reporting periods beginning after December 15, 2022, 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

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Note H - Critical Accounting Policies - Continued



evaluating the new guidance and has not determined the impact this ASU may have on its consolidated financial statements.



Note I - 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.

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Note I - Leases - Continued



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



The components of lease expense for the three and nine month periods ended January 31, 2020,  are as follows:







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





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Note I - Leases - Continued



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







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







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Note I - Leases - Continued



The future minimum lease payments due under operating and capital leases and sale leaseback arrangements under the previous leases standard as of April 30, 2019, were as follows:









Note J - Investments



On April 30, 2018, the Company entered into an Asset Purchase Agreement with Wagz, Inc. (“Wagz”), whereby the Company sold certain assets to Wagz for $350,000 cash, in exchange for 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.  As of January 31, 2020 and April 30, 2019 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.