In addition to historical financial information, this discussion of the business
of SigmaTron International, Inc. ("SigmaTron"), its wholly-owned subsidiaries
Standard Components de Mexico S.A., AbleMex, S.A. de C.V., Digital Appliance
Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire
Controls (Cayman) Co. Ltd., and Wagz, Inc. ("Wagz"), wholly-owned foreign
enterprises Wujiang SigmaTron Electronics Co., Ltd. and Wujiang SigmaTron
Electronic Technology Co., Ltd. and international procurement office SigmaTron
International Inc. Taiwan Branch (collectively, the "Company") and other Items
in this Quarterly Report on Form 10-Q contain forward-looking statements
concerning the Company's business or results of operations. Words such as
"continue," "anticipate," "will," "expect," "believe," "plan," and similar
expressions identify forward-looking statements. These forward-looking
statements are based on the current expectations of the Company. Because these
forward-looking statements involve risks and uncertainties, the Company's plans,
actions and actual results could differ materially. Such statements should be
evaluated in the context of the direct and indirect risks and uncertainties
inherent in the Company's business including, but not necessarily limited to,
the risks inherent in any merger, acquisition or business combination (including
the December 31, 2021 acquisition of Wagz); the Company's continued dependence
on certain significant customers; the continued market acceptance of products
and services offered by the Company and its customers; pricing pressures from
the Company's customers, suppliers and the market; the activities of
competitors, some of which may have greater financial or other resources than
the Company; the variability of the Company's operating results; the results of
long-lived assets and goodwill impairment testing; the ability to achieve the
expected benefits of acquisitions as well as the expenses of acquisitions; the
collection of aged account receivables; the variability of the Company's
customers' requirements; the impact of inflation on the Company's operating
results; the availability and cost of necessary components and materials; the
impact acts of war may have to the supply chain; the ability of the Company and
its customers to keep current with technological changes within its industries;
regulatory compliance, including conflict minerals; the continued availability
and sufficiency of the Company's credit arrangements; the costs of borrowing
under the Company's senior and subordinated credit facilities, including under
the rate indices that replaced LIBOR, including recently increasing interest
rates; the ability to meet the Company's financial and restrictive covenants
under its loan agreements; changes in U.S., Mexican, Chinese, Vietnamese or
Taiwanese regulations affecting the Company's business; the turmoil in the
global economy and financial markets; the spread of COVID-19 and variants
(commonly known as "COVID-19") which has threatened the Company's financial
stability by causing a disruption to the Company's global supply chain, and
caused plant closings or reduced operations thus reducing output at those
facilities; the continued availability of scarce raw materials, exacerbated by
global supply chain disruptions, necessary for the manufacture of products by
the Company; the stability of the U.S., Mexican, Chinese, Vietnamese and
Taiwanese economic, labor and political systems and conditions; global business
disruption caused by the Russia invasion of Ukraine and related sanctions;
currency exchange fluctuations; and the ability of the Company to manage its
growth. These and other factors which may affect the Company's future business
and results of operations are identified throughout the Company's Annual Report
on Form 10-K, and as risk factors, may be detailed from time to time in the
Company's filings with the Securities and Exchange Commission. These statements
speak as of the date of such filings, and the Company undertakes no obligation
to update such statements in light of future events or otherwise unless
otherwise required by law.
?
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SigmaTron International, Inc.
October 31, 2022
Overview:
The Company operates in two reportable segments as an independent provider of
EMS, and as a provider of products to the Pet Tech market.
The EMS segment includes printed circuit board assemblies, electro-mechanical
subassemblies and completely assembled (box-build) electronic products.
In connection with the production of assembled products, the EMS segment
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; (6) assistance in obtaining product approval from
governmental and other regulatory bodies and (7) compliance reporting. The
Company provides these services through an international network of facilities
located in the United States, Mexico, China, Vietnam and Taiwan.
The Pet Tech reportable segment offers electronic products such as the Freedom
Smart Dog Collar™, a wireless geo-mapped fence and wellness system, along with
apparel and accessories. The EMS segment produces the Freedom Smart Dog Collar™
sold by the Pet Tech segment.
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 an 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 six month periods ended
October 31, 2022 and October 31, 2021.
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.
On December 31, 2021, the Company acquired 100% of the stock of Wagz under the
terms of the Agreement and Plan of Merger dated July 19, 2021, as amended by the
First Amendment to Agreement and Plan of Merger dated December 7, 2021 (the
"Merger Agreement"). Wagz has
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SigmaTron International, Inc.
October 31, 2022
developed and brought to market a high tech pet collar and has multiple other
products in development. Wagz is an IoT company which both owns intellectual
property and secures recurring revenue through subscriptions for its services.
The results of Wagz have been included in the Company's consolidated
financial results since the date of acquisition. The total consideration for the
acquisition of Wagz was $23,656,233. The Company began its Pet Tech operations
after the December 2021 acquisition of Wagz.
The Company reported a solid quarter, despite the challenges presented by the
ongoing global supply chain issues. Pre-tax income for the three months ended
October 31, 2022 was $2,127,839, which included an expected pre-tax loss of
$2,731,126 for Wagz, our Pet Tech segment IoT start-up business acquired in
December 2021. Pre-tax income for the three months ended October 31, 2021 was
$4,663,717. The Company recorded revenue of $108,676,743 and $100,216,614 in the
three month periods ended October 31, 2022 and October 31, 2021, respectively.
The backlog for the EMS segment remains strong and growing for the three month
period ending October 31, 2022. Despite the continuing challenges in the
electronic component marketplace, sales are running at record levels for the
Company. The Company continues to see strength in the industrial marketplace.
Existing customers are slowly launching new products and the Company has several
new opportunities that look promising. Unfortunately, it sees no end in sight to
the supply chain challenges that we have been dealing with for at least 18
months and few of the semiconductor companies are suggesting otherwise. The
challenges will certainly continue for the balance of fiscal 2023, based on what
is known at this time. This causes inventory to grow significantly and puts
pressure on cash flow. It also leads to manufacturing inefficiencies due to the
uncertainty of when parts will be received.
The Pet Tech segment, had a $2,731,126 pre-tax loss for the three month period
ending October 31, 2022. The segment continues to make progress on the design
and engineering front with the performance of the Freedom Smart Dog Collar™, as
well as a new product that will be introduced early next year. It is also
working on related products, with several large OEM's and interest in the Pet
Tech industry remains strong.
The Company reported a solid six month period ending October 31, 2022, despite
the challenges presented by the ongoing global supply chain issues. Pre-tax
income for the six month period ended October 31, 2022 was $4,033,914, which
included an expected pre-tax loss of $4,954,687 for Wagz, our Pet Tech segment
IoT start-up business acquired in December 2021. Pre-tax income for the six
month period ended October 31, 2021 was $14,217,378, which included forgiveness
of the Company's Small Business Administration Paycheck Protection Program Loan
in the amount of $6,282,973. The Company recorded revenue of $214,249,599 and
$185,956,048 in the six month periods ended October 31, 2022 and October 31,
2021, respectively.
The backlog for the EMS segment remains strong and growing for the six month
period ending October 31, 2022. Despite the continuing challenges in the
electronic component marketplace, sales are running at record levels for the
Company. The Company continues to see strength in the industrial marketplace.
Existing customers are slowly launching new products and the Company has several
new opportunities that look promising. Unfortunately, it sees no end in sight to
the supply chain challenges that we have been dealing with for at least 18
months and few of the semiconductor companies are suggesting otherwise. The
challenges will certainly continue for the balance of fiscal 2023, based on what
is known at this time. This causes inventory to grow significantly and puts
pressure on cash flow. It also leads to manufacturing inefficiencies due to the
uncertainty of when parts will be received.
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SigmaTron International, Inc.
October 31, 2022
The Pet Tech segment, had a $4,954,687 pre-tax loss for the six month period
ending October 31, 2022 as anticipated. The segment continues to make progress
on the design and engineering front with the performance of the Freedom Smart
Dog Collar™, as well as a new product that will be introduced early next year.
It is also working on related products, with several large OEM's and interest in
the Pet Tech industry remains strong.
Results of Operations:
Consolidated Results
The following table sets forth the Company's consolidated results of operations
for the periods indicated.
Three Months Ended
October 31, October 31,
2022 2021
Net sales $ 108,676,743 $ 100,216,614
Cost of products sold 95,362,730 88,439,028
Gross profit 13,314,013 11,777,586
Selling and administrative expenses 9,245,157 6,805,756
Operating income
4,068,856 4,971,830
Other income (35,814) (36,562)
Interest expense, net 1,976,831 344,675
Income before income tax expense 2,127,839 4,663,717
Income tax expense 1,255,967 1,513,512
Net income $ 871,872 $ $3,150,205
Net Sales
Net sales increased $8,460,129, or 8.4%, to $108,676,743 for the three month
period ended October 31, 2022, compared to $100,216,614 for the same period in
the prior fiscal year. The Federal Reserve has raised interest rates several
times during the current fiscal quarter, which has negatively affected customer
demand in the consumer electronics markets, but has not had the same effect in
the industrial electronics and medical/life science markets. As a result, the
Company's sales increased for the three month period ended October 31, 2022, in
industrial electronics and medical/life science compared to the same period in
the prior fiscal year. The increase in sales was partially offset by a decrease
in sales in consumer electronics. Net sales were higher due to certain customer
price increases implemented as a result of increased raw material and other
operating costs that occurred during the three month period ended October 31,
2022, as compared to the same period last fiscal year.
Costs of products sold
Cost of products sold increased $6,923,702, or 7.8%, to $95,362,730 (87.7% of
net sales) for the three month period ended October 31, 2022, compared to
$88,439,028 (88.2% of net sales) for the same period in the prior fiscal year.
The slight decrease in cost of products sold as a percentage of sales is due to
customer price increases, partially offset with higher material, logistics and
other operating
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SigmaTron International, Inc.
October 31, 2022
costs as a result of higher sales volumes and the impact of global supply chain
disruptions that caused factory inefficiencies. Labor costs and other
manufacturing costs were higher for the three month period ended October 31,
2022, than in the same period in the prior fiscal year, primarily due to
inflationary pressures.
Gross profit
Gross profit margin was 12.3% of net sales, for the three month period ended
October 31, 2022, compared to 11.8% for the same period in the prior fiscal
year. The increase in gross margins as a percentage of sales is due to customer
price increases, partially offset with high material, labor and other
manufacturing costs during the second quarter of fiscal 2023, compared to the
second quarter of fiscal 2022.
Selling and administrative expenses
Selling and administrative expenses increased $2,439,401, or 35.8% to $9,245,157
(8.5% of net sales) for the three month period ended October 31, 2022, compared
to $6,805,756 (6.8% of net sales) for the same period in the prior fiscal year.
Of the $2,439,401 increase, $2,739,060 relates to the Wagz business, acquired on
December 31, 2021, and therefore, comparable information is not available for
the three months ended October 31, 2021. In addition, selling and administrative
expenses increased for the three month period ended October 31, 2022, due to an
increase in financing fees and higher costs due to inflationary pressures, which
was partially offset with a decrease in bonus expense.
Interest expense, net
Interest expense, net, increased to $1,976,831 for the three month period ended
October 31, 2022, compared to $344,675 for the same period in the prior fiscal
year. The increase relates to higher average debt levels as well as increased
interest rates for the three month period ended October 31, 2022.
Income tax expense
Income tax expense decreased $257,545 to $1,255,967 for the three month period
ended October 31, 2022, compared to $1,513,512 for the same period in the prior
fiscal year. The effective tax rate increased to 59.03% for the three month
period ended October 31, 2022, compared to 32.45% for the same period in the
prior fiscal year due primarily to an increase in valuation allowance during the
three month period ended October 31, 2022.
Net Income
Net income decreased $2,278,333, or 72.3%, to $871,872 for the three month
period ended October 31, 2022, compared to $3,150,205 for the same period in the
prior fiscal year. The decreased net income primarily relates to losses incurred
for the Pet Tech segment (acquired December 31, 2021), and higher interest
expense due to higher average debt levels and increased interest rates during
the second quarter of fiscal 2023, compared to the second quarter of fiscal
2022.
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SigmaTron International, Inc.
October 31, 2022
EMS Segment
The following table sets forth the Company's results of operations for the EMS
segment for the periods indicated.
Three Months Ended
October 31, October 31,
2022 2021
Net sales $ 108,221,067 $ 100,216,614
Cost of products sold 94,914,988 88,439,028
Gross profit 13,306,079 11,777,586
Selling and administrative expenses 6,506,097 6,805,756
Operating income
$ 6,799,982 $ 4,971,830
Net Sales
Net sales increased $8,004,453, or 8.0%, to $108,221,067 for the three month
period ended October 31, 2022, compared to $100,216,614 for the same period in
the prior fiscal year. The Federal Reserve has raised interest rates several
times during the current fiscal quarter, which has negatively affected customer
demand in the consumer electronics markets, but has not had the same effect in
the industrial electronics and medical/life science markets. As a result,the
Company's sales increased for the three month period ended October 31, 2022, in
industrial electronics and medical/life science compared to the prior year. The
increase in sales was partially offset by a decrease in sales in consumer
electronics. Net sales were higher due to certain customer price increases
implemented as a result of increased raw material and other operating costs that
occurred during the three month period ended October 31, 2022, as compared to
the same period last fiscal year.
Costs of products sold
Cost of products sold increased $6,475,960, or 7.3%, to $94,914,988 (87.7% of
net sales) for the three month period ended October 31, 2022, compared to
$88,439,028 (88.2% of net sales) for the same period in the prior fiscal year.
The slight decrease in cost of products sold as a percentage of sales is due to
customer price increases, partially offset with higher material, logistics and
other operating costs as a result of higher sales volumes and the impact of
global supply chain disruptions that caused factory inefficiencies. Labor costs
and other manufacturing costs were higher for the three month period ended
October 31, 2022, than in the same period in the prior fiscal year, primarily
due to inflationary pressures.
Gross profit
Gross profit margin was 12.3% of net sales, for the three month period ended
October 31, 2022, compared to 11.8% for the same period in the prior fiscal
year. The increase in gross margins as a percentage of sales is due to customer
price increases, partially offset with higher material, labor and other
manufacturing costs during the second quarter of fiscal 2023, compared to the
second quarter of fiscal 2022.
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SigmaTron International, Inc.
October 31, 2022
Selling and administrative expenses
Selling and administrative expenses decreased $299,659, or 4.4% to $6,506,097
(6.0% of net sales) for the three month period ended October 31, 2022, compared
to $6,805,756 (6.8% of net sales) for the same period in the prior fiscal year.
Selling and administrative expenses decreased for the three month period ended
October 31, 2022, due to a decrease in bonus expense, partially offset by an
increase in financing fees.
Operating income
Operating income increased $1,828,152, or 36.8%, to $6,799,982 (6.3% of net
sales) for the three month period ended October 31, 2022, compared to $4,971,830
(5.0% of net sales) for the same period in the prior fiscal year. The increase
was primarily due to higher sales, partially offset by higher material,
logistics and other operating costs.
Pet Tech Segment
Wagz was acquired on December 31, 2021, and therefore does not have comparable
financial results for the three month period ended October 31, 2021.
The following table sets forth the Company's consolidated results of operations
for the Pet Tech segment for the periods indicated.
Three Months Ended
October 31, October 31,
2022 2021
Net sales $ 455,676 $ -
Cost of products sold 447,742 -
Gross profit 7,934 -
Selling and administrative expenses 2,739,060 -
Operating loss $ (2,731,126) $ -
Net sales
Net sales were $455,676 for the three month period ended October 31, 2022. Sales
for the period are primarily comprised of hardware and accessories, as well as
recurring subscription revenue.
Cost of products sold
Cost of products sold was $447,742 (98.3% of net sales) for the three month
period ended October 31, 2022.
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SigmaTron International, Inc.
October 31, 2022
Gross profit
Gross profit margin was $7,934 (1.7% of net sales) for the three month period
ended October 31, 2022.?
Selling and administrative expenses
Selling and administrative expenses were $2,739,060 for the three month period
ended October 31, 2022. Selling and administrative costs are primarily comprised
of research and development costs for new products expected to launch in fiscal
2024, selling and marketing expenses, as well as general and administrative
expenses.
Operating loss
Operating loss for the three month period ended October 31, 2022 was $2,731,126.
Consolidated Results
The following table sets forth the Company's consolidated results of operations
for the periods indicated.
Six Months Ended
October 31, October 31,
2022 2021
Net sales $ 214,249,599 $ 185,956,048
Cost of products sold 189,250,551 164,595,984
Gross profit 24,999,048 21,360,064
Selling and administrative expenses 18,106,375 12,916,771
Impairment of notes receivable and investment - -
Operating income 6,892,673 8,443,293
Gain on extinguishment of long-term debt - (6,282,973)
Other income (71,630) (73,703)
Interest expense, net 2,930,389 582,591
Income before income tax expense 4,033,914 14,217,378
Income tax expense 1,785,367 2,270,457
Net income $ $2,248,547 $ $11,946,921
Net Sales
Net sales increased $28,293,551, or 15.2%, to $214,249,599 for the six month
period ended October 31, 2022, compared to $185,956,048 for the same period in
the prior fiscal year. The Federal Reserve has raised interest rates several
times during the first six months of fiscal 2023, which has negatively affected
customer demand in the consumer electronics markets, but has not had the same
effect in the industrial electronics and medical/life science markets. As a
result, the Company's sales increased for the six month period ended October 31,
2022, in industrial electronics and medical/life science compared to the same
period in the prior fiscal year. The increase in sales was partially offset by a
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SigmaTron International, Inc.
October 31, 2022
decrease in sales in consumer electronics. Net sales were higher due to certain
customer price increases implemented as a result of increased raw material and
other operating costs that occurred during the six month period ended October
31, 2022, as compared to the same period last fiscal year
Costs of products sold
Cost of products sold increased $24,654,567, or 15.0%, to $189,250,551 (88.3% of
net sales) for the six month period ended October 31, 2022, compared to
$164,595,984 (88.5% of net sales) for the same period in the prior fiscal year.
The slight decrease in cost of products sold as a percentage of sales is due to
customer price increases, partially offset with higher material, logistics and
other operating costs as a result of higher sales volumes and the impact of
global supply chain disruptions that caused factory inefficiencies. Labor costs
and other manufacturing costs were higher for the six month period ended October
31, 2022, than in the same period in the prior fiscal year, primarily due to
inflationary pressures.
Gross profit
Gross profit margin was 11.7% of net sales, for the six month period ended
October 31, 2022, compared to 11.5% for the same period in the prior fiscal
year. The increase in gross margins as a percentage of sales is due to customer
price increases, partially offset with high material, labor and other
manufacturing costs during the first half of fiscal 2023, compared to the first
half of fiscal 2022.
Selling and administrative expenses
Selling and administrative expenses increased $5,189,604, or 40.2% to
$18,106,375 (8.5% of net sales) for the six month period ended October 31, 2022,
compared to $12,916,771 (6.9% of net sales) for the same period in the prior
fiscal year. Of the $5,189,604 increase, $5,070,436 relates to the Wagz
business, acquired on December 31, 2021, and therefore, comparable information
is not available for the six months ended October 31, 2021. In addition, selling
and administrative expenses increased for the six month period ended October 31,
2022, due to an increase in other professional fees related to the new and
amended credit agreements finalized during the first quarter of fiscal year
2023, an increase in financing fees and higher costs due to inflationary
pressures, which was partially offset with a decrease in bonus expense.
Interest expense, net
Interest expense, net, increased to $2,930,389 for the six month period ended
October 31, 2022, compared to $582,591 for the same period in the prior fiscal
year. The increase relates to higher average debt levels as well as increased
interest rates for the six month period ended October 31, 2022.
Income tax expense
Income tax expense decreased $485,090 to $1,785,367 for the six month period
ended October 31, 2022, compared to $2,270,457 for the same period in the prior
fiscal year. The effective tax rate increased to 44.26% for the three month
period ended October 31, 2022, compared to 15.97% for the same period in the
prior year is due primarily to tax exempt income recognized in the previous
year.
The decrease in income tax expense for the six month period ended October 31,
2022 compared to the same period in the previous year is due to a decrease in
income recognized in the current year compared to the previous year.
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SigmaTron International, Inc.
October 31, 2022
Net Income
Net income decreased $9,698,374, or 81.2%, to $2,248,547 for the six month
period ended October 31, 2022, compared to $11,946,921 for the same period in
the prior fiscal year. A substantial part of the decrease in net income was
attributable to the one-time extinguishment of the PPP Loan in the amount of
$6,282,973 that was recorded as income during the six month period ended October
31, 2021. In addition, net income decreased for the six month period ended
October 31, 2022, due to the Wagz Pet Tech segment, which incurred a loss of
$4,954,687 during the period, which did not have activity in the first half of
fiscal 2022.
EMS Segment
The following table sets forth the Company's results of operations for the EMS
segment for the periods indicated.
Six Months Ended
October 31, October 31,
2022 2021
Net sales $ 213,411,047 $ 185,956,048
Cost of products sold 188,527,748 164,595,984
Gross profit 24,883,299 21,360,064
Selling and administrative expenses 13,035,939 12,916,771
Operating income
$ 11,847,360 $ 8,443,293
Net Sales
Net sales increased $27,454,999, or 14.8%, to $213,411,047 for the six month
period ended October 31, 2022, compared to $185,956,048 for the same period in
the prior fiscal year. The Federal Reserve has raised interest rates several
times during the current fiscal quarter, which has negatively affected customer
demand in the consumer electronics markets, but has not had the same effect in
the industrial electronics and medical/life science markets. As a result, the
Company's sales increased for the six month period ended October 31, 2022, in
industrial electronics and medical/life science compared to the prior year. The
increase in sales was partially offset by a decrease in sales in consumer
electronics. Net sales were higher due to certain customer price increases
implemented as a result of increased raw material and other operating costs that
occurred during the six month period ended October 31, 2022, as compared to the
six months ended October 31, 2021.
Costs of products sold
Cost of products sold increased $23,931,764, or 14.5%, to $188,527,748 (88.3% of
net sales) for the six month period ended October 31, 2022, compared to
$164,595,984 (88.5% of net sales) for the same period in the prior fiscal year.
The slight decrease in cost of products sold as a percentage of sales is due to
customer price increases, partially offset with higher material, logistics and
other operating costs as a result of higher sales volumes and the impact of
global supply chain disruptions that caused factory inefficiencies. Labor costs
and other manufacturing costs were higher for the six month period ended October
31, 2022, than in the same period in the prior fiscal year, primarily due to
inflationary pressures.
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SigmaTron International, Inc.
October 31, 2022
Gross profit
Gross profit margin was 11.7% of net sales, for the six month period ended
October 31, 2022, compared to 11.5% for the same period in the prior fiscal
year. The increase in gross margins as a percentage of sales is due to customer
price increases, partially offset with higher material, labor and other
manufacturing costs during the first half of fiscal 2023, compared to the first
half of fiscal 2022.
Selling and administrative expenses
Selling and administrative expenses increased $119,168, or 0.9% to $13,035,939
(6.1% of net sales) for the six month period ended October 31, 2022, compared to
$12,916,771 (6.9% of net sales) for the same period in the prior fiscal year.
Selling and administrative expenses increased for the six month period ended
October 31, 2022, due to an increase in other professional fees, related to the
new and amended credit agreements finalized during the first quarter of fiscal
year 2023, an increase in financing fees and higher costs due to inflationary
pressures, which was partially offset with a decrease in bonus expense.
Operating income
Operating income increased $3,404,067, or 40.3%, to $11,847,360 (5.6% of net
sales) for the six month period ended October 31, 2022, compared to $8,443,293
(4.5% of net sales) for the same period in the prior fiscal year. The increase
was primarily due to higher sales, partially offset by higher material,
logistics and other operating costs.
Pet Tech Segment
Wagz was acquired on December 31, 2021, and therefore does not have comparable
financial results for the six month period ended October 31, 2021.
The following table sets forth the Company's results of operations for the Pet
Tech segment for the periods indicated.
Six Months Ended
October 31, October 31,
2022 2021
Net sales $ 838,552 $ -
Cost of products sold 722,803 -
Gross profit 115,749 -
Selling and administrative expenses 5,070,436 -
Operating loss $ (4,954,687) $ -
Net sales
Net sales were $838,552 for the six month period ended October 31, 2022. Sales
for the period are primarily comprised of hardware and accessories, as well as
recurring subscription revenue. The Pet Tech segment experienced supply chain
issues, causing certain inventory shortages during the first quarter of fiscal
year 2023, which negatively affected hardware sales. Those specific supply chain
issues were resolved in late June 2022.
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SigmaTron International, Inc.
October 31, 2022
Cost of products sold
Cost of products sold was $722,803 (86.2% of net sales) for the six month period
ended October 31, 2022.
Gross profit
Gross profit margin was $115,749 (25.4% of net sales) for the six month period
ended October 31, 2022.?
Selling and administrative expenses
Selling and administrative expenses were $5,070,436 for the six month period
ended October 31, 2022. Selling and administrative costs are primarily comprised
of research and development costs for new products expected to launch in fiscal
2024, selling and marketing expenses, as well as general and administrative
expenses.
Operating loss
Operating loss for the six month period ended October 31, 2022 was $4,954,687.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $23,837,450 for the six months ended
October 31, 2022, compared to cash flow used in operating activities of
$10,669,736 for the same period in the prior fiscal year. Cash flow used in
operating activities was primarily the result of an increase in both inventory
and accounts receivable in the amount of $11,151,049 and $6,437,933,
respectively and a decrease in accounts payable in the amount of $15,703,401.
Cash flow from operating activities was offset by an increase in deferred
revenue in the amount of $2,026,825. The increase in inventory is the result of
an increase in inventory purchases to satisfy customer orders. Further, capacity
issues in the component marketplace made it difficult to obtain some components
to complete assemblies for shipping. The increase in accounts receivable is the
result of an increase in net sales.
Cash flow used in operating activities was $10,669,736 for the six months ended
October 31, 2021, which included the effect of the extinguishment of the PPP
Loan debt. Cash flow used in operating activities was primarily the result of an
increase in both inventory and accounts receivable in the amount of $35,078,520
and $16,341,244, respectively. Cash flow from operating activities was offset by
an increase in accounts payable and deferred revenue in the amount of
$24,062,801 and $6,366,871, respectively.
Investing Activities.
Cash used in investing activities was $271,997 for the six months ended October
31, 2022. During the first six months of fiscal year 2023 the Company purchased
$271,997 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
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SigmaTron International, Inc.
October 31, 2022
facilities. The Company anticipates purchases will be funded by lease
transactions. However, there is no assurance that such increased business will
be obtained or 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 was $7,069,854 for the six months ended
October 31, 2021. During the first six months of fiscal year 2022, the Company
purchased $3,107,854 in machinery and equipment used in the ordinary course of
business. The Company made additional machinery and equipment purchases of
$1,641,685 during the balance of fiscal year 2022. During the first six months
of fiscal year 2022 the Company made advances of $3,962,000 to Wagz.
Financing Activities.
Cash provided by financing activities of $23,443,457 for the first six months
ended October 31, 2022, was primarily the result of net borrowings under the
line of credit and term loan agreement.
Cash provided by financing activities of $16,650,707 for the first six months
ended October 31, 2021, was primarily the result of net borrowings under the
line of credit.
Financing Summary.
Notes Payable - Secured lenders
On January 29, 2021, the Company entered into a Credit Agreement (the
"Agreement") with JPMorgan Chase Bank, N.A. ("Lender"), pursuant to which Lender
provided the Company with a secured credit facility 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 Agreement
by entering into an Amended and Restated Credit Agreement (as so amended and
restated, the "Credit Agreement"). The Facility, as amended, allows the Company
to borrow on a revolving basis up to the lesser of (i) $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 minus any reserves established by
Lender. The maturity date of the Facility was extended to July 18, 2027.
Deferred financing costs of $296,802 and $128,733 were capitalized during the
six month period ended October 31, 2022 and during the fiscal year ended April
30, 2022, respectively, which are amortized over the term of the Agreement. As
of October 31, 2022, there was $48,916,746 outstanding and $19,150,939 of unused
availability under the revolving Facility compared to an outstanding balance of
$51,392,158 and $5,691,855 of unused availability at April 30, 2022. As of
October 31, 2022 and April 30, 2022, the unamortized amount offset against
outstanding debt was $604,006 and $393,503, respectively.
Under the 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 and ending when the Term
Loan Obligations 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 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 (a) 10% of the revolving commitment and (b) the outstanding principal amount
of the term loans. In addition, the Credit Agreement imposes a financial
covenant that requires the Company to maintain a leverage ratio of Total Debt to
EBITDA (each as defined in the Credit Agreement) for any twelve month period not
to exceed a certain amount for each fiscal quarter through the maturity of the
revolving Facility, which
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SigmaTron International, Inc.
October 31, 2022
ratio (a) ranges from 5.75-to-1 for the fiscal quarter ending on October 31,
2022 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 Credit Agreement) is less
than or equal to 1.50-to-1) and (b) ranges from 5.75-to-1 for the fiscal quarter
ending on October 31, 2022 to 4.00-to-1 for the fiscal quarter ending on July
18, 2027 (if the Term Loan Borrowing Base Coverage Ratio is greater than or
equal to 1.50-to-1).
In connection with the closing of the 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
Credit Agreement and the Term Loan Agreement.
The Facility under the Credit Agreement is secured by: (a) a first priority
security interest in SigmaTron's and Wagz's (i) accounts 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, and other Lenders party thereto (collectively, "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"). The TCW Term Loan bears interest at a rate per annum based on
SOFR, plus the 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,
2022, was $39,750,000. Deferred financing costs of $1,191,099 were capitalized
during the six month period ended October 31, 2022. As of October 31, 2022, the
unamortized amount offset against outstanding debt was $1,115,453.
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 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 and Wagz that does not constitute ABL Priority Collateral,
which includes: (i) SigmaTron's and Wagz's real estate other than SigmaTron's
Del Rio, Texas, warehouses, (ii) SigmaTron's and Wagz'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 and Wagz'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
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SigmaTron International, Inc.
October 31, 2022
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.
On July 18, 2022, a portion of the proceeds of the TCW Term Loan was used to pay
in full the term loan principal amount of $5,000,000 (the "FILO Term Loan") that
Lender extended to the Company under the Agreement on April 25, 2022.
On April 23, 2020, the Company received a PPP loan from U.S. Bank, as lender,
pursuant to the Paycheck Protection Program of the CARES Act, as administered by
the U.S. Small Business Administration (the "SBA") in the amount of $6,282,973
(the "PPP Loan"). The PPP Loan was scheduled to mature on April 23, 2022. The
Company was notified of the forgiveness of the PPP Loan by the SBA on July 9,
2021 and all principal and accrued interest were forgiven. The accounting for
the forgiveness is reflected in the Company's Statements of Income, in the six
months ended October 31, 2021, as a non-cash gain upon extinguishment of
long-term debt.
On March 15, 2019, the Company's wholly-owned foreign enterprise, Wujiang
SigmaTron Electronic Technology Co., Ltd., entered into a credit facility with
China Construction Bank. On January 26, 2021, the agreement was amended and
terminated on January 6, 2022. On January 17, 2022, the agreement was renewed,
and is scheduled to expire on December 23, 2022. Under the agreement Wujiang
SigmaTron Electronic Technology Co., Ltd. can borrow up to 9,000,000 Renminbi,
approximately $1,254,000 as of October 31, 2022, 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 3.8% per annum. There was no outstanding balance under the facility at
October 31, 2022 compared to an outstanding balance of $438,219 at April 30,
2022.
Notes Payable - Buildings
The Facility also included two term loans, in the aggregate principal amount of
$6,500,000. A final aggregate payment of approximately $4,368,444 was due on or
before January 29, 2026. On July 18, 2022, a portion of the proceeds of the TCW
Term Loan was used to pay in full both term loans extended by Lender. The
outstanding balance was $0 at October 31, 2022 compared to an outstanding
balance of $5,994,445 at April 30, 2022.
The Company entered into a mortgage agreement on March 3, 2020, in the amount of
$556,000, with The Bank and Trust SSB to finance the purchase of the property
that serves as the Company's warehousing and distribution center in Del Rio,
Texas. The note requires the Company to pay monthly installment payments in the
amount of $6,103. Interest accrues at a fixed rate of 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
120 month period. The outstanding balance was $441,361 and $464,895 at October
31, 2022 and April 30, 2022, 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 the outstanding
secured note agreements mature from November 1, 2022 through May 1, 2023, with
quarterly installment payments ranging from $9,676 to $16,762 and a fixed
interest rate ranging from 7.35% to 8.00% per annum.
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SigmaTron International, Inc.
October 31, 2022
The Company routinely enters into secured note agreements with FGI Equipment
Finance LLC to finance the purchase of equipment. The terms of the outstanding
secured note agreements mature from March 2025 through October 2027, with
quarterly installment payments ranging from $10,723 to $69,439 and a fixed
interest rate ranging from 8.25% to 9.25% per annum.
Finance Lease and Sales Leaseback Obligations
The Company enters into various finance lease and sales leaseback agreements.
The terms of the outstanding lease agreements mature through October 1, 2026,
with monthly installment payments ranging from $2,874 to $33,706 and a fixed
interest rate ranging from 7.09% to 12.73% per annum.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure
items as necessary to operate its wholly-owned Mexican, Vietnamese and Chinese
subsidiaries and the Taiwan IPO. The Company provides funding in U.S. Dollars,
which are exchanged for Pesos, Dong, Renminbi, and New Taiwan dollars. The
fluctuation of currencies from time to time, without an equal or greater
increase in inflation, could have a material impact on the financial results of
the Company. The impact of currency fluctuations for the six month period ended
October 31, 2022, resulted in net foreign currency transaction losses of
$797,459 compared to net foreign currency losses of approximately $121,400 for
the same period in the prior year. During the six months of fiscal year 2023,
the Company paid approximately $33,630,000 to its foreign subsidiaries for
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 $11,255,000 as of October
31, 2022.
Conditions surrounding COVID-19 change rapidly and additional impacts of which
the Company is not currently aware may arise. Based on past performance and
current expectations, the Company believes that the existing sources of
liquidity, including current cash, will provide sufficient resources to meet
known capital requirements and working capital needs through the next twelve
months.
The impact of inflation and the continuing global supply chain disruptions in
the electronic component marketplace have been challenging. Prices for raw
materials necessary for production have fluctuated significantly in the past and
the Company is currently experiencing upward pricing pressure on raw materials.
The Company anticipates supply chain and raw material price volatility will
continue during fiscal 2023.
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
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SigmaTron International, Inc.
October 31, 2022
Tabular Disclosure of Contractual Obligations:
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K
under the Exchange Act, the Company is not required to provide the information
required by this item.
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SIGMATRON INTERNATIONAL, INC. 
