Overview:
The Company currently operates in one businessreportable segment as an independent provider of electronic manufacturing services (“EMS”). The EMS whichSegment includes printed circuit board assemblies, electro-mechanical subassemblies and completely assembled (box-build) electronic products.
Prior to the sale described below, which was effective April 1, 2023, the Company also operated in a second reportable segment as a provider of products to the pet technology (“Pet Tech”) market. The majority ownership interest in the Pet Tech Segment was sold effective as of April 1, 2023. The Pet Tech Segment offered electronic products such as the Freedom Smart Dog Collar™, a wireless, geo-mapped fence, and wellness system, and apparel and accessories.
Except as otherwise noted, the description of the Company’s business below reflects its continuing operations. Refer to Note M - Discontinued Operations, to the consolidated financial statements for activity associated with discontinued operations.
The Company provides manufacturing and assembly services ranging from the assembly of individual components to the assembly and testing of box-build electronic products. The Company has the ability to produce assemblies requiring mechanical as well as electronic capabilities. The products assembled by the Company are then incorporated into finished products sold in various industries, particularly industrial electronics, consumer electronics and medical/life sciences. In some instances, the Company manufactures and assembles the completed finished product for its customers.
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.bodies and (7) compliance reporting. 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 misleadingan unreliable 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 and nine monthssix month periods ended JanuaryOctober 31, 20182023 and 2017, respectively. October 31, 2022.
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 a smallpre-tax profit from continuing operations for the third fiscal quarterthree months ended JanuaryOctober 31, 2018. This2023 of $371,928. Pre-tax profit from continuing operations for the three months ended October 31, 2022 was the result$4,858,965. The Company recorded revenue of a slowing trend in revenue due to the holidays$98,691,684 and customers evaluating inventory levels. This coupled with the continued component shortages had the dual effect of lowing revenue and increasing inventory levels. The component shortages will continue into the fourth fiscal quarter. The component shortages have been driven by the overall stronger economy and increased emphasis on electric vehicles and server farms as well as cell phones. It takes a significant period of time to increase semiconductor manufacturing capacity so the Company expects it will continue to face headwinds$108,221,067 in the three month periods ended October 31, 2023 and October 31, 2022, respectively.
The Company reported a pre-tax profit from continuing operations for the six months ended October 31, 2023 of $479,892. Pre-tax profit from continuing operations for the six months ended October 31, 2022 was $8,988,601. The Company recorded revenue of $196,822,040 and $213,411,047 in the six month periods ended October 31, 2023 and October 31, 2022, respectively.
The impact of inflation and the continuing global supply chain disruptions in the electronic component marketplace during calendar 2018.have continued to be challenging. The Company has received more new opportunities from both currentcertain customers and prospective customersthat have lowered their demand, while others remain strong. The Company expects this uncertainty to remain short term as overallit expects customer requirements to pick up by fourth quarter of fiscal 2024. The Company has seen modest improvements to the economy seemssupply chain challenges that it has experienced over the last 18 months. The Company expects these challenges to be headingcontinue to improve for the six months remaining of fiscal 2024, based on what is known at this time.
The Company began its Pet Technology operations after the December 2021 acquisition of Wagz. During the fourth quarter of fiscal 2023, the Company exited its active involvement in a positive direction.the Pet Tech business that is conducted by Wagz through the sale by the Company of the majority ownership interest in Wagz, effective as of April 1, 2023.
Results of Operations:
Consolidated Results
The following table sets forth selective financial data as athe Company’s consolidated results of operations, including the percentage relationships of gross profit and expense items to net sales for the periods indicated.indicated:
| | | | | | | | |
| Three Months | | Three Months | | Nine Months | | Nine Months | |
| Ended | | Ended | | Ended | | Ended |
|
|
|
|
|
|
| January 31, | | January 31, | | January 31, | | January 31, |
| Three Months Ended |
| 2018 | | 2017 | | 2018 | | 2017 |
| October 31, |
| October 31, |
| (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) |
| 2023 |
| 2022 |
| | | | | | | |
|
|
|
|
|
|
Net sales | 100.0% | | 100.0% | | 100.0% | | 100.0% |
| $ | 98,691,684 |
| $ | 108,221,067 |
Operating expenses: | | | | | | | | |
Cost of products sold | 91.0 | | 90.9 | | 90.6 | | 90.8 |
|
| 89,003,929 |
|
| 94,914,988 |
As a percent of net sales | |
|
| 90.2% |
|
| 87.7% |
Gross profit | |
|
| 9,687,755 |
|
| 13,306,079 |
As a percent of net sales | |
|
| 9.8% |
|
| 12.3% |
Selling and administrative expenses | 8.6 | | 8.6 | | 8.2 | | 8.7 |
|
| 6,613,634 |
|
| 6,506,097 |
Total operating expenses | 99.6 | | 99.5 | | 98.8 | | 99.5 | |
Operating income | 0.4% | | 0.5% | | 1.2% | | 0.5% | |
As a percent of net sales | |
|
| 6.7% |
|
| 6.0% |
Operating income from continuing operations | |
|
| 3,074,121 |
|
| 6,799,982 |
| |
|
|
|
|
|
|
Other income | |
|
| 6,503 |
|
| 35,814 |
Interest expense, net | |
|
| (2,708,696) |
|
| (1,976,831) |
Income before income taxes from continuing operations | |
|
| 371,928 |
|
| 4,858,965 |
Income tax benefit (expense) | |
|
| (343,666) |
|
| (1,743,554) |
Income from continuing operations | |
| $ | 28,262 |
| $ | 3,115,411 |
| |
|
|
|
|
|
|
Discontinued operations: | |
|
|
|
|
|
|
Loss before taxes from discontinued operations | |
|
| - |
|
| (2,731,126) |
Tax benefit for discontinued operations | |
|
| - |
|
| 487,587 |
Net loss from discontinued operations | |
|
| - |
|
| (2,243,539) |
| |
|
|
|
|
|
|
Net income | |
| $ | 28,262 |
| $ | 871,872 |
Net Sales
Net sales increaseddecreased $9,529,383, or 8.8%, to $98,691,684 for the three month period ended JanuaryOctober 31, 2018 to $65,733,723 from $62,164,167 for the three month period ended January 31, 2017. Net sales increased for the nine month period ended January 31, 2018 to $209,917,090 from $187,509,084 for the same period in the prior year. Sales volume increased for the three and nine month periods ended January 31, 2018 as2023, compared to the prior year in the industrial electronics, fitness, gaming, auto and medical/life science marketplaces. During the three and nine month periods ended January 31, 2018, sales in the consumer electronics and appliance marketplaces decreased compared to the same period in the prior year. Sales in the first nine months increased due to increasing demand from existing and new customers.
Gross Profit
Gross profit dollars increased during the three month period ended January 31, 2018 to $5,897,340 or 9.0% of net sales compared to $5,686,959 or 9.1% of net sales$108,221,067 for the same period in the prior fiscal year. Gross profit increasedThe Federal Reserve has raised interest rates several times leading up to the current fiscal quarter, which has negatively affected customer demand in the consumer electronics and certain industrial electronics markets, but has not had the same effect in the medical/life science market. As a result, the Company’s sales decreased for the ninethree month period ended JanuaryOctober 31, 20182023, in the consumer electronics and industrial electronics markets, partially offset with an increase in net sales in the medical/life science market, compared to $19,757,962the same period in the prior fiscal year.
Costs of products sold
Cost of products sold decreased $5,911,059, or 9.4%6.2%, to $89,003,929 (90.2% of net salessales) for the three month period ended October 31, 2023, compared to $17,276,218 or 9.2%$94,914,988 (87.7% of net salessales) for the same period in the prior fiscal year. The increase in gross profitcost of products sold as a percentage of sales is primarily due to higher labor costs and other fixed manufacturing costs, primarily due to continued
inflationary pressures, for the ninethree month period ended JanuaryOctober 31, 2018 was primarily the result of increased sales2023, than in the majority of marketplaces the Company serves compared to the same period in the prior year and product mix. fiscal year.
Selling and Administrative ExpensesGross profit margin
Selling and administrative expenses increased to $5,637,680 or 8.6%Gross profit margin was 9.8% of net sales, for the three month period ended JanuaryOctober 31, 20182023, compared to $5,353,020 or 8.6% of net sales12.3% for the same period in the prior fiscal year. The net increasedecrease in sellinggross margins as a percentage of sales is primarily due to higher labor and administrative expenses forother fixed manufacturing costs during the three month period ended JanuaryOctober 31, 2018 was driven by increases in general office salaries and insurance expenses. The increase in the foregoing selling and administrative expenses was partially offset by a decrease in amortization expense, bonus expense and other general administrative expenses. Selling and
SigmaTron International, Inc.
January 31, 2018
administrative expenses increased to $17,192,099 or 8.2% of net sales for the nine month period ended January 31, 20182023, compared to $16,268,296 or 8.7% of net sales for the same period in the prior fiscal year. The net increase in selling
Selling and administrative expenses for the nine month period ended January 31, 2018 was driven by increases in sales and purchasing salaries, legal fees and commissions. The increase in the foregoing selling
Selling and administrative expenses was partially offset by a decrease in accounting fees and miscellaneous general and administrative expenses.
Interest Expense
Interest expense increased $107,537, or 1.7% to $423,584$6,613,634 (6.7% of net sales) for the three month period ended JanuaryOctober 31, 20182023, compared to $273,439 for the same period in the prior fiscal year. Interest expense for the nine month period ended January 31, 2018 was $1,077,654 compared to $793,220$6,506,097 (6.0% of net sales) for the same period in the prior fiscal year. The increase in interestselling and administrative expenses is primarily due to an increase in accounting fees, partially offset with a decrease in bonus expense.
Interest expense, net
Interest expense, net, increased to $2,708,696 for the three and nine month periodsperiod ended JanuaryOctober 31, 2018 was due to increased loan obligations and higher interest rates2023, compared to $1,976,831 for the same period in the prior fiscal year. Interest expense for future quarters may fluctuate depending onThe increase relates to increased interest rates and borrowings levels.
Income Tax Expense
The income tax benefit was $147,210 for the three month period ended JanuaryOctober 31, 20182023.
Income tax benefit/expense
Income tax expense decreased $1,399,888 to an income tax expense of $343,666 for the three month period ended October 31, 2023, compared to an income tax expense of $136,888$1,743,554 for the same period in the prior fiscal year. The effective tax rate increased to 92.40% for the three month period ended October 31, 2023, compared to 35.88% for the same period in the prior fiscal year. The decrease in income tax expense for the three month period ended JanuaryOctober 31, 20182023 compared to the same period in the previous year is the result of lower pretax income recognizeddue to decreased taxable earnings in the U.S. The Company’s effective tax rate was 127.0% and 153.74% for the quarters ended January 31, 2018 and 2017, respectively. The effective tax rate for thecurrent quarter ended January 31, 2018 is lower than the quarter ended January 31, 2017 due to less income recognized in high tax rate jurisdictions for the period ended January 31, 2018. Income tax expense was $466,092 for the nine month period ended January 31, 2018 compared to income tax expense of $210,470 for the same period in the prior year. The Company’s effective tax rate was 28.8% and 61.45% for the nine months ended January 31, 2018 and 2017, respectively. The effective tax rate is lower for the nine month period ended January 31, 2018 compared to the same period in the previous yearyear. The increase in effective tax rate is due to discrete expense recognizedvariations in the period ended January 31, 2017 relatedincome earned by jurisdiction and as compared to the increaseprevious quarter in valuation allowance associated with a foreign tax credit. Due to the Tax Cuts and Jobs Act, the Company’s federal statutory income tax rate for the current fiscal year is approximately 30.4%.year.
On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 34% to 21% and imposing a mandatory one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred.
Due to the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
SigmaTron International, Inc.
January 31, 2018
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates for certain effects of the Tax Act and recorded provisional amounts in its financial statements as of January 31, 2018. As the Company collects and prepares necessary calculations of cumulative earnings and profits, tax pools and amounts held in cash or other specified assets, as well as interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company may make adjustments to the provisional amounts. Those adjustments may materially impact its provision for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to complete its accounting for the tax effects of the Tax Act in fiscal year 2019.
In connection with the Company’s initial analysis of the impact of the Tax Act, a discrete tax expense of approximately $58,000 has been recorded as a provisional estimate in the period ending January 31, 2018.
Provisional Amounts
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s deferred tax balance resulted in a decrease in income tax expense of $510,000.
Prior to the enactment of Tax Act, the Company had not recorded U.S. income taxes on the undistributed earnings of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries have been indefinitely reinvested, and as a result, no deferred tax liability was previously recorded. In light of the Tax Act and the one-time transition tax, for the period ended January 31, 2018, the Company recorded a provisional amount for its one-time transition tax liability for the cumulative undistributed earnings of its foreign subsidiaries, resulting in an increase in income tax expense of $568,000 at January 31, 2018.
The one-time transition tax is based on total post-1986 earnings and profits (E&P) that the Company previously deferred from U.S. income taxes. The entire amount of the transition tax liability, except for $95,000, is recorded as a long-term liability. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
Net Income
Net income increasedfrom continuing operations
Net income decreased $3,087,149, to $31,338$28,262 for the three month period ended JanuaryOctober 31, 20182023, compared to net loss of $47,852$3,115,411 for the same period in the prior fiscal year. The decreased net income primarily relates to lower sales and higher interest expense due to increased interest rates, partially offset by a decrease in bonus expense.
Net income increased to $1,150,335loss from discontinued operations
Net loss from discontinued operations was $2,243,539 for the ninethree month period ended JanuaryOctober 31, 2018 compared2022. The net loss from discontinued operations consisted of operational losses from the Pet Tech Segment.
EMS Segment
The following table sets forth the Company’s results of operations for the EMS Segment, including the percentage relationships of gross profit and expense items to net income of $132,040sales for the same period in the prior fiscal year. Basic and diluted earnings per shareperiods indicated:
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| October 31, |
| October 31, |
|
| 2023 |
| 2022 |
|
|
|
|
|
|
|
Net sales |
| $ | 98,691,684 |
| $ | 108,221,067 |
Cost of products sold |
|
| 89,003,929 |
|
| 94,914,988 |
As a percent of net sales |
|
| 90.2% |
|
| 87.7% |
Gross profit |
|
| 9,687,755 |
|
| 13,306,079 |
As a percent of net sales |
|
| 9.8% |
|
| 12.3% |
Selling and administrative expenses |
|
| 6,613,634 |
|
| 6,506,097 |
As a percent of net sales |
|
| 6.7% |
|
| 6.0% |
Operating income |
| $ | 3,074,121 |
| $ | 6,799,982 |
Net Sales
Net sales decreased $9,529,383, or 8.8%, to $98,691,684 for the third quarter of 2018 were $0.01 each, compared to basic and diluted loss per share of $0.01 each for the same period in the prior fiscal year. Basic and diluted earnings per share for the ninethree month period ended JanuaryOctober 31, 2018 were $0.27 each,2023, compared to basic and diluted earnings per share of $0.03 each$108,221,067 for the same period in the prior fiscal year. The increasesFederal Reserve has raised interest rates several times leading up to the current fiscal quarter, which has negatively affected customer demand in the consumer electronics and certain industrial electronics markets, but has not had the same effect in the medical/life science market. As a result, the Company’s sales decreased for the three month period ended October 31, 2023, in the consumer electronics and industrial electronics markets, partially offset with an increase in net income and earnings per share aresales in the medical/life science market, compared to the same period in the prior fiscal year.
Costs of products sold
Cost of products sold decreased $5,911,059, or 6.2%, to $89,003,929 (90.2% of net sales) for the three month period ended October 31, 2023, compared to $94,914,988 (87.7% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales is primarily due to higher labor costs and other fixed manufacturing costs, primarily due to continued inflationary pressures, for the three month period ended October 31, 2023, than in the same period in the prior fiscal year.
Gross profit
Gross profit margin was 9.8% of net sales, for the three month period ended October 31, 2023, compared to 12.3% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales is primarily due to higher labor and other fixed manufacturing costs during the three month period ended October 31, 2023, compared to the same period in the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses increased $107,537, or 1.7% to $6,613,634 (6.7% of net sales) for the three month period ended October 31, 2023, compared to $6,506,097 (6.0% of net sales) for the
same period in the prior fiscal year. The increase in selling and administrative expenses is primarily due to an increase in accounting fees, partially offset with a decrease in bonus expense.
Operating income
Operating income decreased $3,725,861, to $3,074,121 (3.1% of net sales) for the three month period ended October 31, 2023, compared to operating income of $6,799,982 (6.3% of net sales) for the same period in the prior fiscal year. The decrease was primarily due to lower sales and higher labor and other fixed manufacturing costs.
Pet Tech Segment
The Company sold the majority ownership interest in Wagz on April 28, 2023, effective as of April 1, 2023. The Company still owns 19 % of Wagz common stock as a passive investment as of October 31, 2023. However, the Company determined that due to financial uncertainty of Wagz after the Company’s sale, the Wagz Loan was uncollectable and the 19% ownership interest was fully reserved, in each case as of April 30, 2023.The activity for fiscal 2023 has been classified as discontinued operations in the Consolidated Statements of Operations.
The following table sets forth the results of operations described above, mainly fromfor the Pet Tech Segment, including the percentage relationships of gross profit and expense items to net sales for the periods indicated:
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| October 31, |
| October 31, |
|
| 2023 |
| 2022 |
|
|
|
|
|
|
|
Net sales |
| $ | - |
| $ | 455,676 |
Cost of products sold |
|
| - |
|
| 447,742 |
As a percent of net sales |
|
| - |
|
| 98.3% |
Gross profit |
|
| - |
|
| 7,934 |
As a percent of net sales |
|
| - |
|
| 1.7% |
Selling and administrative expenses |
|
| - |
|
| 2,739,060 |
As a percent of net sales |
|
| - |
|
| 601.1% |
Operating loss |
| $ | - |
| $ | (2,731,126) |
Net sales
There were no sales for the three month period ended October 31, 2023 compared to $455,676 for the same period in the prior fiscal year. Sales for the prior period were primarily comprised of hardware and accessories, as well as recurring subscription revenue.
Cost of products sold
There were no cost of products sold for the three month period ended October 31, 2023, compared to $447,742 (98.3% of net sales) for the same period in the prior fiscal year.
Gross profit margin
There was no gross profit margin of net sales for the three month period ended October 31, 2023 compared to gross profit margin of 1.7% for the same period in the prior fiscal year.
Selling and administrative expenses
There were no selling and administrative expenses for the three month period ended October 31, 2023, compared to $2,739,060 for the same period in the prior fiscal year. Selling and administrative costs were primarily comprised of research and development costs for new products expected to have launched in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Operating loss
There was no operating loss for the three month period ended October 31, 2023, compared to $2,731,126 for the same period in the prior fiscal year.
Consolidated Results
The following table sets forth the Company’s consolidated results of operations, including the percentage relationships of gross profit and expense items to net sales for the periods indicated:
|
|
|
|
|
|
|
|
| Six Months Ended |
|
|
| October 31, |
|
| October 31, |
|
|
| 2023 |
|
| 2022 |
|
|
|
|
|
|
|
Net sales |
| $ | 196,822,040 |
| $ | 213,411,047 |
Cost of products sold |
|
| 177,483,065 |
|
| 188,527,748 |
As a percent of net sales |
|
| 90.2% |
|
| 88.3% |
Gross profit |
|
| 19,338,975 |
|
| 24,883,299 |
As a percent of net sales |
|
| 9.8% |
|
| 11.7% |
Selling and administrative expenses |
|
| 13,456,439 |
|
| 13,035,939 |
As a percent of net sales |
|
| 6.8% |
|
| 6.1% |
Operating income from continuing operations |
|
| 5,882,536 |
|
| 11,847,360 |
|
|
|
|
|
|
|
Other income |
|
| 25,130 |
|
| 71,630 |
Interest expense, net |
|
| (5,427,774) |
|
| (2,930,389) |
Income before income taxes from continuing operations |
|
| 479,892 |
|
| 8,988,601 |
Income tax benefit (expense) |
|
| (189,531) |
|
| (2,751,850) |
Income from continuing operations |
| $ | 290,361 |
| $ | 6,236,751 |
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
Loss before taxes from discontinued operations |
|
| - |
|
| (4,954,687) |
Tax benefit for discontinued operations |
|
| - |
|
| 966,483 |
Net loss from discontinued operations |
|
| - |
|
| (3,988,204) |
|
|
|
|
|
|
|
Net income |
| $ | 290,361 |
| $ | 2,248,547 |
Net Sales
Net sales decreased $16,589,007, or 7.8%, to $196,822,040 for the six month period ended October 31, 2023, compared to $213,411,047 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current and prior fiscal year, which has negatively affected customer demand in the consumer electronics and certain industrial electronics markets, but has not had the same effect in the medical/life science market. As a result, the Company’s sales decreased for the six month period ended October 31, 2023, in the consumer electronics and industrial electronics markets, partially offset with an increase in net sales.sales in the medical/life science market, compared to the same period in the prior fiscal year.
Costs of products sold
Cost of products sold decreased $11,044,683, or 5.9%, to $177,483,065 (90.2% of net sales) for the six month period ended October 31, 2023, compared to $188,527,748 (88.3% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales is primarily due to higher labor costs and other fixed manufacturing costs, primarily due to continued inflationary pressures, for the six month period ended October 31, 2023, than in the same period in the prior fiscal year.
Gross profit margin
Gross profit margin was 9.8% of net sales, for the six month period ended October 31, 2023, compared to 11.7% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales is primarily due to higher labor and other fixed manufacturing costs during the six month period ended October 31, 2023, compared to the same period in the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses increased $420,500, or 3.2% to $13,456,439 (6.8% of net sales) for the six month period ended October 31, 2023, compared to $13,035,939 (6.1% of net sales) for the same period in the prior fiscal year. The increase in selling and administrative expenses is primarily due to an increase in accounting fees, partially offset with a decrease in bonus expense.
Interest expense, net
Interest expense, net, increased to $5,427,774 for the six month period ended October 31, 2023, compared to $2,930,389 for the same period in the prior fiscal year. The increase relates to increased interest rates for the six month period ended October 31, 2023.
Income tax benefit/expense
Income tax expense decreased $2,562,319 to an income tax expense of $189,531 for the six month period ended October 31, 2023, compared to an income tax expense of $2,751,850 for the same period in the prior fiscal year. The effective tax rate increased to 39.49% for the six month period ended October 31, 2023, compared to 30.61% for the same period in the prior fiscal year. The decrease in income tax expense for the six month period ended October 31, 2023 compared to the same period in the previous year is due to decreased taxable earnings in the current year compared to the previous year. The increase in effective tax rate is due to variations in income earned by jurisdiction.
Net income from continuing operations
Net income decreased $5,946,390, to $290,361 for the six month period ended October 31, 2023, compared to $6,236,751 for the same period in the prior fiscal year. The decreased net income primarily relates to lower sales, higher interest expense due to increased interest rates, partially offset by a decrease in bonus expense.
Net loss from discontinued operations
Net loss from discontinued operations was $3,988,204 for the six month period ended October 31, 2022. The net loss from discontinued operations consisted of operational losses from the Pet Tech Segment.
EMS Segment
The following table sets forth the Company’s results of operations for the EMS Segment, including the percentage relationships of gross profit and expense items to net sales for the periods indicated:
|
|
|
|
|
|
|
|
| Six Months Ended |
|
|
| October 31, |
|
| October 31, |
|
|
| 2023 |
|
| 2022 |
|
|
|
|
|
|
|
Net sales |
| $ | 196,822,040 |
| $ | 213,411,047 |
Cost of products sold |
|
| 177,483,065 |
|
| 188,527,748 |
As a percent of net sales |
|
| 90.2% |
|
| 88.3% |
Gross profit |
|
| 19,338,975 |
|
| 24,883,299 |
As a percent of net sales |
|
| 9.8% |
|
| 11.7% |
Selling and administrative expenses |
|
| 13,456,439 |
|
| 13,035,939 |
As a percent of net sales |
|
| 6.8% |
|
| 6.1% |
Operating income |
| $ | 5,882,536 |
| $ | 11,847,360 |
Net Sales
Net sales decreased $16,589,007, or 7.8%, to $196,822,040 for the six month period ended October 31, 2023, compared to $213,411,047 for the same period in the prior fiscal year. The Federal Reserve has raised interest rates several times during the current and prior fiscal year, which has negatively affected customer demand in the consumer electronics and certain industrial electronics markets, but has not had the same effect in the medical/life science market. As a result, the Company’s sales decreased for the six month period ended October 31, 2023, in the consumer electronics and industrial electronics markets, partially offset with an increase in net sales in the medical/life science market, compared to the same period in the prior fiscal year.
Costs of products sold
Cost of products sold decreased $11,044,683, or 5.9%, to $177,483,065 (90.2% of net sales) for the six month period ended October 31, 2023, compared to $188,527,748 (88.3% of net sales) for the same period in the prior fiscal year. The increase in cost of products sold as a percentage of sales is primarily due to higher labor costs and other fixed manufacturing costs, primarily due to continued
inflationary pressures, for the six month period ended October 31, 2023, than in the same period in the prior fiscal year.
Gross profit margin
Gross profit margin was 9.8% of net sales, for the six month period ended October 31, 2023, compared to 11.7% for the same period in the prior fiscal year. The decrease in gross margins as a percentage of sales is primarily due to higher labor and other fixed manufacturing costs during the six month period ended October 31, 2023, compared to the same period in the prior fiscal year.
Selling and administrative expenses
Selling and administrative expenses increased $420,500, or 3.2% to $13,456,439 (6.8% of net sales) for the six month period ended October 31, 2023, compared to $13,035,939 (6.1% of net sales) for the same period in the prior fiscal year. The increase in selling and administrative expenses is primarily due to an increase in accounting fees.
Operating income
Operating income decreased $5,964,824, or 50.3%, to $5,882,536 (3.0% of net sales) for the six month period ended October 31, 2022, compared to $11,847,360 (5.6% of net sales) for the same period in the prior fiscal year. The decrease was primarily due to lower sales and higher labor and other fixed manufacturing costs.
Pet Tech Segment
The Company sold the majority ownership interest in Wagz on April 28, 2023, effective as of April 1, 2023. The Company still owns 19% of Wagz common stock as a passive investment as of October 31, 2023. However, the Company determined that due to financial uncertainty of Wagz after the Company’s sale, the Wagz Loan was uncollectable and the 19% ownership interest was fully reserved, in each case as of April 30, 2023.The activity for fiscal 2023 has been classified as discontinued operations in the Consolidated Statements of Operations.
The following table sets forth the results of operations for the Pet Tech Segment, including the percentage relationships of gross profit and expense items to net sales for the periods indicated:
|
|
|
|
|
|
|
|
| Six Months Ended |
|
|
| October 31, |
|
| October 31, |
|
|
| 2023 |
|
| 2022 |
|
|
|
|
|
|
|
Net sales |
| $ | - |
| $ | 838,552 |
Cost of products sold |
|
| - |
|
| 722,803 |
As a percent of net sales |
|
| - |
|
| 86.2% |
Gross profit |
|
| - |
|
| 115,749 |
As a percent of net sales |
|
| - |
|
| 13.8% |
Selling and administrative expenses |
|
| - |
|
| 5,070,436 |
As a percent of net sales |
|
| - |
|
| 604.7% |
Operating loss |
| $ | - |
| $ | (4,954,687) |
Net sales
There were no sales for the six month period ended October 31, 2023 compared to $838,552 for the same period in the prior fiscal year. Sales for the prior period were primarily comprised of hardware and accessories, as well as recurring subscription revenue.
Cost of products sold
There were no cost of products sold for the six month period ended October 31, 2023, compared to $722,803 (86.2% of net sales) for the same period in the prior fiscal year.
Gross profit margin
There was no gross profit margin of net sales for the six month period ended October 31, 2023 compared to gross profit margin of 13.8% for the same period in the prior fiscal year.
Selling and administrative expenses
There were no selling and administrative expenses for the six month period ended October 31, 2023, compared to $5,070,436 for the same period in the prior fiscal year. Selling and administrative costs were primarily comprised of research and development costs for new products expected to have launched in fiscal 2024, selling and marketing expenses, as well as general and administrative expenses.
Operating loss
There was no operating loss for the six month period ended October 31, 2023, compared to $4,954,687 for the same period in the prior fiscal year.
Liquidity and Capital Resources:
Operating Activities.
Cash flow provided by operating activities from continuing operations was $15,766,616 for the six months ended October 31, 2023, compared to cash flow used in operating activities of $19,915,415 for the same period in the prior fiscal year. Cash flow provided by operating activities from continuing operations was primarily the result of a decrease in inventory in the amount of $19,214,849 and a decrease in accounts receivable in the amount of $5,244,132. Cash flow from operating activities from continuing operations was offset by a decrease in accounts payable in the amount of $4,930,511 and a decrease in deferred revenue in the amount of $4,140,944. The decrease in inventory is the result of improvement in the component marketplace which has allowed the Company to complete assemblies for shipping. The decrease in accounts receivable is a result of lower accounts receivable balances due to lower volumes during the six months ended October 31, 2023, as compared to the same period in the prior year.
Cash flow used in operating activities from continuing operations was $7,237,982$19,915,415 for the ninesix months ended JanuaryOctober 31, 2018. During the first nine months of fiscal year 2018, cash2022. Cash flow used in operating activities was primarily the result of an increase in both inventory and accounts receivable in the amount of $12,686,282$11,193,619 and $6,352,982, respectively and a decrease in accrued expenses and wages of $1,354,361. Further, capacity issuesaccounts payable in the component industry are making it difficult to obtain some components to complete assemblies for shipping. The increase in inventory is the resultamount of $15,946,950. Cash flow from operating activities
was offset by an increase in customer ordersdeferred revenue in the amount of $2,026,825 and in some cases orders being pushed out. Cash flow used in operating activities was partially offset by the result of an increase in accounts payable,a decrease in prepaid expenses and other net income andassets in the non-cash effectsamount of depreciation and amortization.$3,569,825.
Investing Activities.
Cash flow provided by operatingused in investing activities from continuing operations was $870,388$405,413 for the ninesix months ended JanuaryOctober 31, 2017.2023. During the first ninesix months of fiscal year 2017, cash flow provided by operating activities was primarily the result of an increase in accounts payable, net income and the non-cash effects of depreciation and amortization. The increase in accounts payable was the result of timing of payments to vendors. Cash flow provided by operating activities was partially offset by a decrease in accrued expenses and an increase in accounts receivable and inventory. The increases were the result of transactions in the ordinary course of business.
Investing Activities.
During the first nine months of fiscal year 2018,2024, the Company purchased $3,651,304$405,413 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 additionalfuture purchases of machinery and equipment purchases in fiscal year 2018. The Company anticipates purchases will be funded by lease transactions and its senior secured credit facility.transactions. However, there is no assurance that the Company will be able to obtain funding for leases at acceptable terms, if at all, in the future.
Cash used in investing activities from continuing operations was $178,001 for the six months ended October 31, 2022. During the first ninesix months of fiscal year 2017,2023, the Company purchased $3,213,323$178,001 in machinery and equipment used in the ordinary course of business. The Company made additional machinery
Financing Activities.
Cash used in financing activities from continuing operations of $12,930,306 for the six months ended October 31, 2023, was primarily the result of net payments under the line of credit and equipment purchases of $292,163 during the balance of fiscal year 2017.term loan agreement.
Financing Activities.
Cash provided by financing activities was $9,939,256from continuing operations of $23,443,457 for the ninesix months ended JanuaryOctober 31, 2018. Cash provided by financing activities2022, was primarily the result of net borrowings under the line of credit and proceeds under building notes.term loan agreement.
Cash provided by financingLiquidity from Discontinued Operations
During the six months ended October 31, 2022 cash used in discontinued operations from operating activities was $1,114,904 for$3,922,035, primarily related to Pet Tech Segment operations. During the ninesix months ended JanuaryOctober 31, 2017. Cash provided by financing2022, cash used in investing activities primarily for capital expenditures was primarily the result of net borrowings under the line of credit.$93,996.
SigmaTron International, Inc.
January 31, 2018
Financing Summary.
Notes Payable – BanksSecured lenders
On March 31, 2017,January 29, 2021, the Company entered into a $35,000,000 seniorCredit Agreement (the “JPM Agreement”) with JPMorgan Chase Bank, N.A. (“Lender” or “JPM”), pursuant to which Lender provided the Company with a secured credit facility with U.S. Bank, N.A., which expires on March 31, 2022.consisting of a revolving loan facility and a term loan facility (collectively, the “Facility”).
On July 18, 2022, SigmaTron, Wagz and Lender amended and restated the JPM Agreement by entering into an Amended and Restated Credit Agreement (as so amended and restated, the “JPM Credit Agreement”). Wagz and its property were released from the JPM Credit Agreement, effective April 1, 2023, pursuant to the JPM Waiver (as defined below) effective as of April 1, 2023. The credit facility is collateralized by substantially all of the Company’s domestically located assets. The facilityFacility, as amended, allows the Company to choose among interest rates at which it may borrow funds: the fixed rate of four percent or LIBOR plus one and one half percent (effectively 3.204% at January 31, 2018). Interest is due monthly. Under the senior secured credit facility, the Company may borrowon a revolving basis up to the lesser of (i) $35,000,000$70,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base plus a percentage of the inventory borrowing base.base minus any reserves established by Lender (the “Revolving Commitment”). The maturity date of the Facility is July 18, 2027. Deferred financing costs of $34,971
$177,119 and $207,647$332,139 were capitalized induring the ninesix month period ending Januaryended October 31, 20182023 and during the fourth quarter of fiscal 2017,year ended April 30, 2023, respectively, which are amortized over the term of the agreement.JPM Credit Agreement. As of JanuaryOctober 31, 2018 and April 30, 2017 the unamortized amount included in other assets was $204,789 and $204,186, respectively. As of January 31, 2018,2023, there was $31,446,765$39,907,771 outstanding and $3,553,235$13,403,925 of unused availability under the creditrevolving loan facility agreement compared to an outstanding balance of $23,178,429$51,134,699 and $11,821,571$11,539,183 of unused availability at April 30, 2017. At2023. As of October 31, 2023 and April 30, 2023, the unamortized amount offset against outstanding debt was $659,532 and $572,191, respectively.
Under the JPM Credit Agreement, a minimum Fixed Charge Coverage Ratio (“FCCR”) financial covenant of 1.10x is applicable only during an FCCR trigger period which occurs when (a) commencing on the Effective Date (as defined in the JPM Credit Agreement) and ending when the Term Loan Obligations (as defined in the JPM Credit Agreement) have been paid in full and (b) following the payment in full of the Term Loan Obligations, (i) an event of default (as defined in the JPM Credit Agreement) has occurred and is continuing, and Lender has elected to impose a FCCR trigger period upon notice to the Company or (ii) availability falls below the greater of (y) 10% of the Revolving Commitment and (z) the outstanding principal amount of the term loans. In addition, prior to the amendment to the JPM Credit Agreement pursuant to the JPM Waiver (as discussed below under “Waiver, Consent and Amendment to Credit Agreements”),the JPM Credit Agreement imposed a financial covenant that required the Company to maintain a leverage ratio of Total Debt to EBITDA (each as defined in the JPM Credit Agreement) for any twelve month period ending on the last day of a fiscal quarter through the maturity of the revolving Facility not to exceed a certain amount, which ratio (a) ranged from 5.00-to-1 for fiscal quarters beginning with the fiscal quarter ending on January 31, 2018,2023 to 3.00-to-1 for the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio (as defined in the JPM Credit Agreement) as of the end of the applicable fiscal quarter is less than or equal to 1.50-to-1) and (b) ranged from 5.50-to-1 for the fiscal quarter ending on January 31, 2023 to 4.00-to-1 for the fiscal quarters beginning with the fiscal quarter ending on July 31, 2026 (if the Term Loan Borrowing Base Coverage Ratio as of the end of the applicable fiscal quarter is greater than 1.50-to-1).
In addition, the JPM Credit Agreement imposes a cash dominion period if there is an event of default or if availability is less than 10% of the Revolving Commitment, and such requirement continues until there is no event of default and availability is greater than 10% of the Revolving Commitment, in each case for 30 consecutive days. Based on this criteria, the total debt balances for the Facility were required to be classified as a current liability on the Consolidated Balance Sheet at April 30, 2023.
In connection with the entry into the JPM Credit Agreement, Lender and TCW Asset Management Company LLC, as administrative agent under the Term Loan Agreement (as defined below), entered into the Intercreditor Agreement, dated July 18, 2022, and acknowledged by SigmaTron and Wagz (the “ICA”), to set forth and govern the lenders’ respective lien priorities, rights and remedies under the JPM Credit Agreement and the Term Loan Agreement.
The Facility under the JPM Credit Agreement is secured by: (a) a first priority security interest in SigmaTron’s (i) accounts receivable and inventory (excluding Term Priority Mexican Inventory (as defined in the ICA) and certain inventory in transit, (ii) deposit accounts, (iii) proceeds of business interruption insurance that constitute ABL BI Insurance Share (as defined in the ICA), (iv) certain other property, including payment intangibles, instruments, equipment, software and hardware and similar systems, books and records, to the extent related to the foregoing, and (v) all proceeds of the foregoing, in each case, now owned or hereafter acquired (collectively, the “ABL Priority Collateral”); and (b) a second priority security interest in Term Priority Collateral (as defined below) other than (i)
real estate and (ii) the equity interests of SigmaTron’s foreign subsidiaries (unless such a pledge is requested by Lender).
On July 18, 2022, SigmaTron, Wagz and TCW Asset Management Company LLC, as administrative agent (the “Agent), and other Lenders party thereto (collectively, “TCW Lenders,” together with the Agent, “TCW”) entered into a Credit Agreement (the “Term Loan Agreement”) pursuant to which TCW made a term loan to the Company in the principal amount of $40,000,000 (the “TCW Term Loan”). Wagz and its property were released from the Term Loan Agreement, effective April 1, 2023, pursuant to the TCW Waiver (as defined below) effective as of April 1, 2023. The TCW Term Loan bears interest at a rate per annum based on SOFR, plusthe Applicable Margin of 7.50% (each as defined in the Term Loan Agreement). The TCW Term Loan has a SOFR floor of 1.00%. The maturity date of the TCW Term Loan is July 18, 2027. The amount outstanding as of October 31, 2023, was $39,333,301 compared to an outstanding balance of $39,833,301 at April 30, 2023. Deferred financing costs of $163,179 and $1,233,894 were capitalized during the six month period ended October 31, 2023 and fiscal year ended April 30, 2023, respectively. As of October 31, 2023 and April 30, 2023, the unamortized amount offset against outstanding debt was $1,061,945 and $1,036,367, respectively.
The Term Loan Agreement imposes financial covenants, including covenants requiring the Company to maintain a minimum Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) of 1.10-to-1 and maintain the same leverage ratio of Total Debt to EBITDA as described above under the JPM Credit Agreement. The Company is required to make quarterly repayments of the principal amount of the TCW Term Loan in amounts equal to $250,000 per fiscal quarter for the quarters beginning October 31, 2022 and $500,000 per fiscal quarter for quarters beginning October 31, 2024. The Term Loan Agreement also requires mandatory annual repayments equal to 50% of Excess Cash Flow (as defined in the Term Loan Agreement).
The TCW Term Loan is secured by: (a) a first priority security interest in all property of SigmaTron that does not constitute ABL Priority Collateral, which includes: (i) SigmaTron’s real estate other than SigmaTron’s Del Rio, Texas, warehouses, (ii) SigmaTron’s machinery, equipment and fixtures (but excluding ABL Priority Equipment (as defined in the ICA)), (iii) the Term Priority Mexican Inventory (as defined in the ICA), (iv) SigmaTron’s stock in its direct and indirect subsidiaries, (v) SigmaTron’s general intangibles (excluding any that constitute ABL Priority Collateral), goodwill and intellectual property, (vi) the proceeds of business interruption insurance that constitute Term BI Insurance Share (as defined in the ICA), (vii) tax refunds, and (viii) all proceeds thereof, in each case, now owned or hereafter acquired (collectively, the “Term Priority Collateral”); and (b) a second priority security interest in all collateral that constitutes ABL Priority Collateral. Also, SigmaTron’s three Mexican subsidiaries pledged all of their assets as security for the TCW Term Loan.
Waiver, Consent and Amendment to Credit Agreements
OnMarch2,2023, the Company received notices of default from both JPM and TCW. The Notices indicated the occurrence of certain events of default under the JPM Credit Agreement and the Term Loan Agreement (togetherwiththeJPMCredit Agreement the “Credit Agreements”). Inaddition,theCompanyreceivedadelinquencynotificationletterfromNasdaqindicatingthat theCompanywasnotincompliancewiththecontinuedlistingrequirementsofNasdaqforfailingtotimelyfiletheCompany’sForm10-Qforthefiscal quarterendedJanuary31,2023.ThisnotificationalsoconstitutedadefaultundertheCreditAgreements. The Nasdaq delinquency was remedied on May 19, 2023.
The JPM Notice indicated that the Lender was informed of the occurrence of events of defaults and the continuation thereof under the JPM Credit Agreement as a result of the Company’s failure to maintain a FCCR for the twelve month period ended January 31, 2023 of at least 1.10x as required underthe JPM Credit Agreement (the “JPM Covenant Defaults”).
The TCW Notice indicated that Agent and TCW Lenders were informed of the occurrence of events of default and the continuation thereof under the Term Loan Agreement (described below) as a result of the Company permitting the Total Debt to EBITDA Ratio for the twelve month period ended on January 31, 2023 to be greater than 5.00:1.00 in violation of the Term Loan Agreement and the Company’s failure to maintain FCCR as required under the JPM Credit Agreement (the “TCW Covenant Defaults” and together with the JPM Covenant Defaults, the “Defaults”).
As a result of the Defaults, the Company was not in compliance with its financial covenants under the Credit Agreements as of January 31, 2023. Due to theNotices received on March 2, 2023, fromeachofJPMandTCW, the total debt balances for both the Facility and the TCW Term Loan had been classified as a current liability on the Condensed Consolidated Balance Sheet as of January 31, 2023.
OnApril28,2023,theCompanyenteredinto(i)a Waiver,ConsentandAmendment No.1tothe JPM CreditAgreement(“JPMWaiver”)with WagzandJPM,aslender, which waived certain events of default under and amended certain terms of theJPMCreditAgreementand(ii)a Waiver,Consent andAmendmentNo.1totheCreditAgreement(“TCW Waiver” and together with the JPM Waiver, the “Waivers”)withWagz and TCW(collectivelywithJPM,the“LenderParties”), which waived certain events of default under and amended certain terms ofthe Term Loan Agreement.The Company was in compliance with its revised financial covenant and other restricted covenants under the credit facility.Credit Agreements as of October 31, 2023.
Pursuanttothe Waivers,theCompanyhasagreed,amongotherthings,to (i)ifrequestedbytheAgent,effectacorporaterestructuringthatwouldcreateanewholdingcompanystructuretoownalloftheCompany’sstock throughamergerpursuanttoSection251(g)oftheGeneralCorporationLawoftheStateofDelaware,afterwhichtheholdingcompanywouldcontinue asthepubliccompany,becomeaguarantorundertheCreditAgreementsandpledgetotheLenderPartiesalloftheequityoftheCompany (the “Corporate Restructuring”),(ii)engagea financialadvisortoreviewcertainoftheCompany’sfinancialreportingtoJPMandtheAgentandparticipateinweeklyconferencecallswiththe advisor,JPMandtheAgenttodiscussandprovideupdatesontheCompany’sliquidityandoperations,(iii)extendthe WagzLoan,(iv) paytoJPManamendmentfeeintheamountof$70,000,paidincash,and(v)paytotheTCWLendersanamendmentfeeof$395,000andadefaultrate feeof$188,301,bothofwhichwerepaidinkindbybeingaddedtotheprincipalofthe TCW TermLoan. The Company engaged a financial advisor in April 2023 and developed cashflow modeling tools. The financial advisor engagement was completed in September 2023.
The WaiversalsoamendedtheCreditAgreementsto,amongotherthings,(x)requirethattheCompanymaintainaminimumof$2.5millioninrevolver availabilityundertheJPMCreditAgreement,(y)modifythedefinitionofEBITDAtoallowadjustmentstoaccountfor Wagzoperatinglosses, impairmentchargesrelatingtothewrite-downofthe Wagzbusiness,the Wagz Loan andnetassetsoftheCompanyand Wagz,and expensesrelatingtothe Waivers,theCompany’ssale of the majority ownership interest in Wagz under theSPA,and(z)modifytheexistingTotalDebttoEBITDARatios(asdefinedinthe CreditAgreements)asfollows:
|
|
|
|
|
Fiscal Quarter |
| Total Debt to EBITDA Ratio* (as amended) |
| Total Debt to EBITDA Ratio* (prior to amendment) |
|
|
|
|
|
October 31,2023 |
| 4.50:1.0 |
| 4.25:1.0 |
January 31, 2024 |
| 4.50:1.0 |
| 4.00:1.0 |
April 30, 2024 |
| 4.50:1.0 |
| 4.00:1.0 |
July 31, 2024 |
| 4.25:1.0 |
| 3.75:1.0 |
October 31, 2024 |
| 4.00:1.0 |
| 3.75:1.0 |
* Assumesthe TermLoanBorrowingBaseCoverageRatio(asdefinedintheTerm LoanAgreement)islessthanorequalto1.50:1.0.
The Company was in compliance with its revised financial covenants under the Credit Agreements as of October 31, 2023.
In addition, duringthePIKPeriod(defined in the Term Loan Agreement),pursuant to the TCW Waiver, if the Total Debt to EBITDA Ratio for the trailing twelve monthperiodasoftheendofathird fiscal quarter exceedstheratiosthatwereineffectpriortotheamendment(assetforthinthefarrightcolumnofthetableabove)forthat fiscal quarter,thentheApplicableMarginundertheTerm LoanAgreement inrespectoftheoutstanding TCW TermLoanwouldincreasebyanamountequalto1.0%perannumforthefiscalquarter,withsuch interestbeingpaidinkind.Furthermore,theJPM WaivermodifiedthedefinitionofApplicableMarginfromafixedamountequalto2.00%toanamount thatvariesfrom2.00%(forrevolveravailabilitygreaterthanorequalto$20.0million),to2.50%(forrevolveravailabilitygreaterthanorequalto$10.0 million),to3.00%(forrevolveravailabilitylessthan$10.0million),andfixedtheApplicableMarginat3.00%forsixmonthsstartingApril1,2023.
Inexchangeforsuchagreements,theLenderPartieswaivedalloftheexistingeventsofdefaultundertheCreditAgreements throughMarch31,2023,consentedtothesaleof WagzandreleasedWagzanditspropertyandtheCompany’s81% ownership interestin Wagz thatwassoldtoBuyer(asdisclosedabove)fromthelienoftheLenderParties.
Inconnectionwiththe Waivers,theCompanyexiteditsactiveinvolvementinthePet Techbusinessthatisconductedby Wagzthrough thesalebytheCompanyofthemajorityownership interestin Wagz,effective as of April1,2023.
On August 4, 2015,June 15, 2023, the Company entered into (i) Amendment No. 2 to the Credit Agreement (the “JPM Amendment No. 2”) by and among the Company and Lender, with respect to the JPM Credit Agreement and (ii) Amendment No. 2 to the Credit Agreement (“TCW Amendment No. 2”) by and among the Company and TCW with respect to the Term Loan Agreement. The JPM Amendment No. 2 and TCW Amendment No. 2 (together, the “Amendments”) amended the Credit Agreements to extend the date, from May 31, 2023 to July 31, 2023, after which the Agent may request that the Company effect the Corporate Restructuring.
On March 15, 2019, the Company’s wholly-owned subsidiary,foreign enterprise, Wujiang SigmaTron Electronics Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron Electronics Co., Ltd. could borrow up to 5,000,000 Renminbi and the facility was collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a fixed interest rate of 6.67%. The facility was due to expire on August 3, 2017. The credit facility was closed as of March 1, 2017.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. On January 26, 2021, the agreement was amended and expired in accordance with its terms on January 6, 2022. On January 17, 2022, the agreement was renewed, and expired in accordance with its terms on December 23, 2022. On February 17, 2023, the agreement was renewed, and is scheduled to expire on February
7, 2024. Under the agreement Wujiang SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,00010,000,000 Renminbi, approximately $1,400,000 as of October 31, 2023, and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 6.09%. The term of the facility extends to February 7, 2018.3.35% per annum. There was no outstanding balance under the facility at JanuaryOctober 31, 2018 or2023 and April 30, 2017. The credit facility was closed as of February 11, 2018. 2023.
On February 12, 2018, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd. can borrow up to 5,000,000 Renminbi and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 6.09%. The term of the facility extends to February 7, 2019.
Notes Payable – Buildings
The Company entered into a mortgage agreement on January 8, 2010,March 3, 2020, in the amount of $2,500,000,$556,000, with Wells Fargo, N.A.The Bank and Trust SSB to refinancefinance the purchase of the property that serves as the Company’s corporate headquarterswarehousing and its Illinois manufacturing facility. On November 24, 2014, the Company refinanced the mortgage
agreement with Wells Fargo, N.A. The note required the Company to pay monthly principal payments in the amount of $9,500, bore an interest rate of LIBOR plus two and one-quarter percent and was payable over a sixty month period. A final payment of approximately $2,289,500 was due
SigmaTron International, Inc.
January 31, 2018
on or before November 8, 2019. On December 21, 2017, the Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of $2,498,500, using proceeds from the U.S. Bank, N.A. mortgage agreement.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S. Bank, N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. The note requires the Company to pay monthly
principal payments in the amount of $17,333, bears interest at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred financing costs of $62,650 were capitalized in the third quarter of fiscal 2018 which are amortized over the term of the agreement. As of January 31, 2018 the unamortized amount included in other assets was $60,240. A final payment of approximately $4,347,778 is due on or before March 31, 2022. The outstanding balance was $5,200,000 at January 31, 2018.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of $1,275,000, with Wells Fargo, N.A. to finance the property that serves as the Company’s engineering and designdistribution center in Elgin, Illinois. The Wells Fargo, N.A. note required the Company to pay monthly principal payments in the amount of $4,250, bore interest at a fixed rate of 4.5% per year and was payable over a sixty month period. A final payment of approximately $1,030,000 was due on or before October 2018. On December 21, 2017, the Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of $1,062,500, using proceeds from the U.S. Bank, N.A. mortgage agreement.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with U.S. Bank, N.A. to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois.Del Rio, Texas. The note requires the Company to pay monthly principalinstallment payments in the amount of $6,000, bears interest$6,103. Interest accrues at a fixed rate of 4.0%5.75% per year until March 3, 2025, and adjusts thereafter, on an annual basis, equal to 1.0% over the Prime Rate as published by The Wall Street Journal. The note is payable over a fifty-one120 month period. Deferred financing costs of $54,303 were capitalized in the third quarter of fiscal 2018 which are amortized over the term of the agreement. As of January 31, 2018 the unamortized amount included in other assets was $52,215. A final payment of approximately $1,505,000 is due on or before March 31, 2022. The outstanding balance was $1,800,000$392,220 and $417,143 at JanuaryOctober 31, 2018. 2023 and April 30, 2023, respectively.
Notes Payable – Equipment
On November 1, 2016, theThe Company routinely entered into a secured note agreementagreements with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $596,987.equipment. The termterms of the outstanding secured note agreement, extends to November 1, 2021 with average quarterly payments of $35,060 beginning on February 1, 2017 andwhich had a fixed interest rate of 6.65%. 8.00% per annum, matured on May 1, 2023, and the final quarterly installment payment of $9,310 was paid.
The balance outstanding under this note agreement was $477,590 and $567,138 at January 31, 2018 and April 30, 2017, respectively.
On February 1, 2017, the Company enteredroutinely enters into a secured note agreementagreements with Engencap Fin S.A. DE C.V.FGI Equipment Finance LLC to finance the purchase of equipment in the amount of $335,825. The term of the agreement extends to February 1, 2022 with average quarterly payments of $20,031 beginning on May 1, 2017 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $285,451 and $335,825 at January 31, 2018 and April 30, 2017, respectively.
On June 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $636,100. The term of the agreement extends to June 1, 2022 with average quarterly payments of $37,941 beginning on September 1, 2017
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January 31, 2018
and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $572,490 at January 31, 2018.
On October 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the purchase of equipment in the amount of $307,036. The term of the agreement extends to November 1, 2022 with average quarterly payments of $18,314 beginning on February 1, 2018 and a fixed interest rate of 7.35%. The balance outstanding under this note agreement was $307,036 at January 31, 2018.
Capital Lease and Sales Leaseback Obligations
From October 2013 through June 2017, the Company entered into various capital lease and sales leaseback agreements with Associated Bank, National Association to purchase equipment totaling $6,893,596.equipment. The terms of the leaseoutstanding secured note agreements extend to September 2018mature from March 2025 through May 2022August 2028, with monthlyquarterly installment payments ranging from $1,455$10,723 to $40,173 and a fixed interest rate ranging from
3.75% to 4.90%. The balance outstanding under these capital lease agreements was $3,269,797 and $3,627,760 at January 31, 2018 and April 30, 2017, respectively. The net book value of the equipment under these leases was $4,941,712 and $4,713,044 at January 31, 2018 and April 30, 2017, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT Finance LLC to purchase equipment totaling $2,512,051. The terms of the lease agreements extend to March 2019 through July 2020 with monthly installment payments ranging from $1,931 to $12,764$69,439 and a fixed interest rate ranging from 5.65% through 6.50%. 8.25% to 11.75% per annum.
Finance Lease Obligations
The balance outstanding under these capital lease agreements was $1,102,655 and $1,448,269 at January 31, 2018 and April 30, 2017, respectively. The net book value of the equipment under these leases was $1,789,022 and $1,946,026 at January 31, 2018 and April 30, 2017, respectively.
From September 2017 through January 2018, the Company enteredenters into various capital sales leaseback agreements with First American Equipment Finance to purchase equipment totaling $2,263,412.finance lease agreements. The terms of the outstanding lease agreements extend to August 2021mature through January 2022September 1, 2027, with monthly installment payments ranging from $8,198$2,874 to $20,093$33,706 and a fixed interest rate ranging from 5.82% through 7.00%. The balance outstanding under these capital lease agreements was $2,083,514 at January 31, 2018. The net book value of the equipment under these leases was $2,137,388 at January 31, 2018.7.09% to 12.73% per annum.
Operating LeasesOther
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent approximately 117,000 square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through March 2021. The amount of the deferred rent income recorded for the three and nine month periods ended January 31, 2018 was $25,383 and $76,148, respectively. The amount of the deferred rent income recorded for the three and nine month periods ended January 31, 2017 was $19,395 and $58,184, respectively. In addition, the landlord provided the Company tenant incentives of $418,000, which are being amortized over the life of the lease. The balance of deferred rent at January 31, 2018 was $474,525 compared to $550,672 at April 30, 2017.
On May 31, 2012, the Company entered into a lease agreement in Tijuana, MX, to rent approximately 112,000 square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through November 2018. The
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January 31, 2018
amount of the deferred rent income for the three and nine month periods ended January 31, 2018 was $35,629 and $102,782, respectively. The amount of the deferred rent income for the three and nine month periods ended January 31, 2017 was $32,671 and $94,390, respectively. The balance of deferred rent at January 31, 2018 was $122,181 compared to $224,964 at April 30, 2017.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to operate its wholly-owned Mexican, VietnamVietnamese and Chinese subsidiaries and the Taiwan international procurement office.IPO. The Company provides funding as needed, in U.S. dollars,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 fluctuationfluctuations for the ninesix month period ended JanuaryOctober 31, 20182023, resulted in anet foreign currency transaction gainlosses of $119,289$461,859 compared to anet foreign currency transaction losslosses of approximately $161,470$797,459 for the same period in the prior year. Foreign currency gains or losses are recorded in the cost of products sold. During the first ninesix months of fiscal year 2018,2024, the Company’s U.S. operationsCompany paid approximately $38,190,000$31,040,000 to its foreign subsidiaries for services provided.manufacturing services. All intercompany balances have been eliminated upon consolidation.
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 $0$14,561,000 as of JanuaryOctober 31, 2018. 2023.
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 fiscal year 2018. In addition,the next 12 months. However, in the event customers 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, customers delay payments, or the Company desires to consummate an acquisition, additional financing resources may be necessary in the current or future fiscal years.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 onand the Company’s net sales, revenues and income from operations forcontinuing global supply chain disruptions in the past two fiscal years has been minimal.
Off-balance Sheet Transactions:
electronic component marketplace have continued to be challenging. The Company has no off-balance sheet transactions.certain customers that have lowered their demand, while others remain strong. The Company expects this uncertainty to remain short term as it expects customer requirements to pick up by third quarter for fiscal 2024. The Company has seen modest improvements to the supply chain challenges that it has experienced over the last 18 months. The Company expects these challenges to continue to improve for fiscal 2024, based on what is known at this time.
Tabular Disclosure of Contractual Obligations: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 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.
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January 31, 2018
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”), and Rules 13a-15(e) and 15(d)-15(e)) thereunder) as of JanuaryOctober 31, 2018.2023. 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 JanuaryOctober 31, 2018.2023.
Internal Controls:
There has been no change in the Company’s internal control over financial reporting during the threesix months ended JanuaryOctober 31, 2018,2023, 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. None of COSO, the Securities and Exchange Commission or any other regulatory body has mandated adoption of the 2013 Framework by a specified date. We are currently performing an analysis to evaluate what changes to our control environment, if any, would be needed to successfully implement the 2013 Framework. Until such time as such analysis and any related transition to the 2013 Framework is complete, we will continue to use the 1992 Framework in connection with our assessment of internal control. The Company anticipates the transition will be completed in fiscal year 2018.
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.
Item 1A. Risk Factors.
As a smaller reporting company, as defined in Item 10(f)(1)There have been no material changes to the Company’s risk factors since the filing of Regulation S-K under the Exchange Act,Company’s annual report on Form 10-K for the Company is not required to provide the information required by this item. fiscal year ended April 30, 2023.
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January 31, 2018
Item2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.None beyond what was previously disclosed.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6.Exhibits.
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10.131.1
| Real property mortgage (Cook County, Illinois) made as of the 21st day of December, 2017, is made and executed by SigmaTron International, Inc. (“Mortgagor”) and U.S. Bank National Association (“Lender”)
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10.2
| Real property mortgage (Kane County, Illinois) made as of the 21st day of December, 2017, is made and executed by SigmaTron International, Inc. (“Mortgagor”) and U.S. Bank National Association (“Lender”)
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10.3
| Lease No. 3, entered into December 20, 2017, is an attachment to Master Lease No. 2017389 dated August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron International, Inc.
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10.4
| Lease No. 4, entered into January 9, 2018, is an attachment to Master Lease No. 2017389 dated August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron International, Inc.
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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). |
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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). |
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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). |
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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). |
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101.INS | Inline XBRL Instance Document (the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document) |
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101.SCH | Inline XBRL Taxonomy Extension SchemeSchema Document |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) |
SIGNATURES:
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.
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/s/ Gary R. Fairhead |
| March 14, 2018December 11, 2023
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Gary R. Fairhead |
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President and CEO (Principal Executive Officer)
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/s/ Linda K. FrauendorferJames J. Reiman |
| March 14, 2018December 11, 2023
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Linda K. FrauendorferJames J. Reiman
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Chief Financial Officer, Secretary and Treasurer |
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(Principal Financial Officer and Principal |
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Accounting Officer) |
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