NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts and transactions 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 SigmaTron International Trading Co., wholly-owned foreign enterprises Suzhou SigmaTron Electronics Co. Ltd., and SigmaTron Electronic Technology Co., Ltd. (collectively, “SigmaTron China”), and its international procurement office, SigmaTron Taiwan. The functional currency of the Mexican, Vietnamese and Chinese subsidiaries and procurement branch is the U.S. dollar. Intercompany transactions are eliminated in the consolidated financial statements. The impact of currency fluctuation for the fiscal year ended April 30, 201
4
and April 30, 2013
resulted in a loss of approximately
$
128,000
and
$359
,000
respectively.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues an
d expenses during the reporting period.
Significant
estimates made in preparing the consolidated financial statements include depreciation and amortization periods, the allowance for doubtful accounts, reserves for inventory and valuation of long-lived assets. Actual results could materially differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid short-term investments maturing within three months of the purchase date.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Accounts Receivable
The majority of the Company’s accounts receivable are due from companies in the consumer electronics, gaming, fitness, industrial electronics, medical/life sciences, semiconductor, telecommunications and appliance industries. Credit is extended based on evaluation of a customer’s financial condition, and, generally, collateral is not required. Accounts receivable are due in accordance with agreed upon terms, and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payments terms are considered past due. The Company writes off accounts receivable when they are determined to be uncollectible.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts relates to receivables not expected to be collected from its customers. This allowance is based on management’s assessment of specific customer balances, considering the age of receivables and financial stability of the customer and a five year average of prior uncollectible amounts. If there is an adverse change in the financial condition of the Company’s customers, or if actual defaults are higher than provided for, an addition to the allowance may be necessary.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by
an average cost method
. In the event of an inventory write-down, the Company records expense to state the inventory at lower of cost or market. The Company establishes inventory reserves for valuation, shrinkage, and excess and obsolete inventory. The Company records provisions for inventory shrinkage based on historical experience to account for unmeasured usage or loss. Actual results differing from these estimates could significantly
affect the
Company’s
inventories
and
cost
of products sold. The Company records provisions for excess and obsolete inventories for the difference between the cost of inventory and its estimated realizable value based on assumptions about future product demand and market conditions. Actual product demand or market conditions could be different than that projected by management.
Property, Machinery and Equipment
Property, machinery and equipment are valued at cost. The Company provides for depreciation and amortization using the straight-line method over the estimated useful life of the assets:
|
|
Buildings
|
20
years
|
Machinery and equipment
|
5
-
12
years
|
Office equipment and software
|
3
-
5
years
|
Tools and dies
|
12
months
|
Leasehold improvements
|
term of lease
|
Expenses for repairs and maintenance are charged to selling and administrative expenses as incurred.
Deferred Financing Costs
Deferred financing costs consist of costs incurred to obtain the Company’s long-term debt and are amortized using the straight-line method over the term of the related debt. Deferred financing fees of
$
52,484
and
$
70,776
net of accumulated amortization of
$
332,352
and
$
270,983
as of April 30, 201
4
and 201
3
, respectively, are classified in other long-term assets on the Company’s balance sheet.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred income tax assets to an amount more likely than not to be realized.
A tax benefit from an uncertain tax position may only be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
The Company adjusts its tax liabilities when its judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities. These differences will be reflected as increase or decreases to income tax expense in the period in which they are determined.
Earnings per Share
Basic earnings per share are computed by dividing net income (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common stock equivalents such as stock options and restricted stock, had been exercised or vested. At April 30, 201
4
and 201
3
, there were
991
and
400,190
,
respectively
,
anti-dilutive common stock equivalents, which have been excluded from the calculation of diluted earnings per share
.
Revenue Recognition
Revenues from sales of the Companys’ electronic manufacturing services business are recognized when the finished good product is shipped to the customer. In general, and except for consignment inventory, it is the Companys’ policy to recognize revenue and related costs when the finished goods have been shipped from our facilities, which is also the same point that title passes under the terms of the purchase order. Finished goods inventory for certain customers is shipped from the Company to an independent warehouse for storage or shipped directly to the customer and stored in a segregated part of the customer’s own facility. Upon the customer’s request for finished goods inventory, the inventory is shipped to the customer if the inventory was stored off-site, or transferred from the segregated part of the customer’s facility for consumption or use by the customer. The Company recognizes revenue upon such shipment or transfer. The Company does not earn a fee for such arrangements. The Company from time to time may ship finished goods from its facilities, which is also the same point that title passes under the terms of the purchase order, and invoice the customer at the end of the calendar month. This is done only in special circumstances to accommodate a specific customer. Further, from time to time customers request the Company hold finished goods after they have been invoiced to consolidate finished goods for shipping purposes. The Company generally provides a
90
day warranty for workmanship only
, except for products with proprietary design
s
and does not have any installation, acceptance or sales incentives (although the Company has negotiated longer warranty terms in certain instances). The Company assembles and tests assemblies based on customers’ specifications. Historically, the amount of returns for workmanship issues has been de minimis under the Company’s standard or extended warranties.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Shipping and Handling Costs
The Company records shipping and handling costs as selling and administrative expenses. Customers are typically invoiced for shipping costs. Shipping and handling costs were not material to the financial statements for fiscal years 201
4
or 201
3
.
Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level
1:
Observable inputs such as quoted prices in active markets;
Level
2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level
3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to
develop its own
assumptions.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents
,
accounts receivable
, receivables, accounts payable and accrued expenses which approximate fair value at April 30, 201
4
, due to their short-term nature. The carrying amounts of the Company’s debt obligations approximate fair value based on future payments discounted at current interest rates for similar obligations or interest rates which fluctuate with the market.
The Company measured the net assets included in the Spitfire acquisition under the fair value standard (primarily using level 3 measurement inputs) including the contingent consideration. The Company currently does not have any other non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.
Goodwill
Goodwill represents the purchase price in excess of the fair value of assets acquired in business combinations. The Company assesses goodwill for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. T
he Company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value then the Company is not required to take further action. However, if the Company concludes otherwise, then it is required to perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, a second step of the test is required to determine if recorded goodwill is impaired. The Company also has the option to bypass the qualitative assessment for goodwill in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period.
The Company performed its annual goodwill impairment test as of February 1,
2014
and determined that
no
impairment existed as of
that date
.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
–
Continued
Intangible
Assets
Intangible assets are comprised of finite life intangible assets including patents, trade names, backlog, non-compete agreements, and customer relationships. Finite life intangible assets are amortized on a straight line or accelerated basis over their estimated useful lives of
five
years for patents,
20
year for trade names,
1
year for backlog,
7
years for non-compete
agreements
and
15
years for customer relationships.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including amortizable intangible assets for impairment. Property, machinery and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment. If events or changes in circumstances occur that indicate possible impairment, the Company’s impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of its assets and liabilities. This analysis requires management judgment with respect to changes in technology, the continued success of product lines, and future volume, revenue and expense growth rates. The Company conducts annual reviews for idle and underutilized equipment, and review business plans for possible impairment. Impairment occurs when the carrying value of the assets exceeds the future undiscounted cash flows expected to be earned by the use of the asset group. When impairment is indicated, the estimated future cash flows are then discounted to determine the estimated fair value of the asset or asset group and an impairment charge is recorded for the difference between the carrying value and the estimated fair value.
Stock Incentive Plans
Under the Company’s stock option plans, options to acquire shares of common stock have been made available for grant to certain employees and directors. Each option granted has an exercise price of not less than
100%
of the market value of the common stock on the date of grant. The contractual life of each option is generally
10
years. The vesting of the grants varies according to the individual options granted. The Company measures the cost of employee services received in exchange for an equity award based on the grant date fair value and records that cost over the respective vesting period of the award.
New Accounting Standards
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)."
ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations.
Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations.
This new accounting guidance is effective for annual periods beginning after December 15, 2014.
The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers."
This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted.
Accordingly,
the Company
will adopt this ASU on May 1, 2017.
Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and
the Company is
currently evaluating which transition approach to use and the full impact this ASU will have on our future financial statements.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company’s allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Beginning Balance
|
|
$
|
150,000
|
|
$
|
164,103
|
|
|
Bad debt expense
|
|
|
-
|
|
|
-
|
|
|
Write-offs
|
|
|
-
|
|
|
(14,103)
|
|
|
|
|
$
|
150,000
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
NOTE D - INVENTORIES
Inventories consist of the following at April 30:
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
Finished products
|
$
|
18,553,112
|
|
$
|
13,167,117
|
Work-in-process
|
|
3,126,596
|
|
|
2,959,144
|
Raw materials
|
|
33,853,653
|
|
|
36,288,580
|
|
|
55,533,361
|
|
|
52,414,841
|
Less obsolescence reserve
|
|
1,804,984
|
|
|
1,770,100
|
|
$
|
53,728,377
|
|
$
|
50,644,741
|
Changes in the Company’s inventory obsolescence reserve are as follows:
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
Beginning balance
|
$
|
1,770,100
|
|
$
|
1,878,100
|
Provision for obsolescence
|
|
34,884
|
|
|
-
|
Write-offs
|
|
-
|
|
|
(108,000)
|
|
$
|
1,804,984
|
|
$
|
1,770,100
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE E - PROPERTY, MACHINERY AND EQUIPMENT, NET
Property, machinery and equipment consist of the following at April 30:
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Land and buildings
|
$
|
14,707,780
|
|
$
|
12,366,119
|
Machinery and equipment
|
|
55,040,676
|
|
|
51,999,266
|
Office equipment and software
|
|
7,413,077
|
|
|
6,806,305
|
Leasehold improvements
|
|
2,539,193
|
|
|
2,482,038
|
Equipment under capital leases
|
|
4,130,416
|
|
|
1,376,799
|
|
|
|
|
|
|
|
|
83,831,142
|
|
|
75,030,527
|
|
|
|
|
|
|
Less Accumulated depreciation
|
|
|
|
|
|
and amortization, including
|
|
|
|
|
|
amortization of assets under
|
|
|
|
|
|
capital leases of
$729,723
|
|
|
|
|
|
and $
324,244
at April 30,
|
|
|
|
|
|
2014 and 2013, respectively
|
|
51,138,234
|
|
|
46,463,475
|
|
|
|
|
|
|
Property, machinery and
|
|
|
|
|
|
equipment, net
|
|
|
|
|
|
|
$
|
32,692,908
|
|
$
|
28,567,052
|
Depreciation expense was
$4,791,663
and
$4,375,397
for the years ended April 30, 201
4
and 201
3
, respectively.
NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The changes in carrying amount of goodwill for the fiscal year
s
ended April 30 are as follows:
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
Beginning balance
|
$
|
3,222,899
|
|
$
|
-
|
Spitfire acquisition
|
|
-
|
|
|
3,222,899
|
Ending balance
|
$
|
3,222,899
|
|
$
|
3,222,899
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS - Continued
Other Intangible Assets
Intangible assets subject to amortization are summarized as of April 30, 201
4
as follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
-
|
|
|
2,395,000
|
|
|
2,395,000
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
13.08
|
|
|
4,690,000
|
|
|
256,311
|
Backlog
|
-
|
|
|
22,000
|
|
|
22,000
|
Trade names
|
18.08
|
|
|
980,000
|
|
|
93,909
|
Non-compete agreements
|
5.08
|
|
|
50,000
|
|
|
13,685
|
Patents
|
3.08
|
|
|
400,000
|
|
|
153,341
|
Total
|
|
|
$
|
8,912,000
|
|
$
|
3,309,246
|
Intangible assets subject to amortization are summarized as of April 30, 201
3
as follows:
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Gross
|
|
|
|
|
Amortization
|
|
Carrying
|
|
Accumulated
|
|
Period (Years)
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
Other intangible assets – Able
|
-
|
|
$
|
375,000
|
|
$
|
375,000
|
Customer relationships – Able
|
.2
|
|
|
2,395,000
|
|
|
2,383,923
|
Spitfire:
|
|
|
|
|
|
|
|
Non-contractual customer relationships
|
14.1
|
|
|
4,690,000
|
|
|
58,685
|
Backlog
|
.1
|
|
|
22,000
|
|
|
20,163
|
Trade names
|
19.1
|
|
|
980,000
|
|
|
44,913
|
Non-compete agreements
|
6.1
|
|
|
50,000
|
|
|
6,545
|
Patents
|
4.1
|
|
|
400,000
|
|
|
73,337
|
Total
|
|
|
$
|
8,912,000
|
|
$
|
2,962,566
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE F - GOODWILL AND OTHER INTANGIBLE ASSETS - Continued
Estimated aggregate amortization expense for
the Company’s
intangible assets, which become fully amortized in 2032, for the remaining fiscal years is as follows:
|
|
|
|
|
For the fiscal year ending April 30:
|
2015
|
|
$
|
428,610
|
|
2016
|
|
|
470,899
|
|
2017
|
|
|
490,010
|
|
2018
|
|
|
435,043
|
|
2019
|
|
|
423,721
|
|
Thereafter
|
|
|
3,354,471
|
|
|
|
$
|
5,602,754
|
Amortization expense was
$346,680
and
$279,491
for the years ended April 30, 2014 and 2013, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE G - ACQUISITION
Spitfire Control, Inc.
The Purchase Agreement
SigmaTron signed a Purchase Agreement on May 31, 2012 with Spitfire Control, Inc., an Illinois corporation (“Seller”), regarding the acquisition of certain assets of the Seller by the Company (the “Transaction”). Prior to the date of the Purchase Agreement, the Seller and its affiliates were customers and strategic partners of the Company, with such relationships dating back to 1994.
Seller, on its own and through its subsidiaries Digital Appliance Controls de Mexico, S.A. de C.V., a Mexico corporation (“DAC”), and Spitfire Controls (Cayman) Co. Ltd., a Cayman Islands exempted company (“Cayman”), their subsidiaries and Seller’s affiliated entities, was engaged in the business of the design, manufacture, sale and distribution of electrical or electronic controls for appliances (the “Business”).
The acquired assets consisted of (i) all of the equity securities of DAC and Cayman and (ii) all of the assets used by or useful in the conduct of the Business. In addition the Company also obtained from the Seller an agreement not to compete against the Business as it is operated by the Company after the closing of the Transaction.
In consideration, the Company agreed to pay a purchase price consisting of: (i) the satisfaction and release of the account payable of
$16,455,000
owed by Seller to the Company; (ii) future payments, which are based upon the annual post-closing performance of the Business during each of the Company’s fiscal years 2013 through 2019; and (iii) the issuance of
50,000
shares of restricted common stock of SigmaTron,
12,500
of which vested upon the closing of the Transaction and
12,500
of which will vest on each of the first, second and third anniversaries of the closing of the Transaction.
In addition to the foregoing, the Company agreed to assume (i) the Seller’s obligations under certain specified contracts and Governmental Authorizations (as defined in the Purchase Agreement), (ii) specified trade accounts payable and accrued expenses of the Seller as agreed upon by the parties and (iii) specified inter-company payables involving the Seller, DAC, Cayman and/or their subsidiaries and associated companies. Further, each of DAC and Cayman retained the liabilities associated with its respective operations, which is customary in transactions involving the purchase or sale of all of the equity securities of an entity. As a result, the Company indirectly acquired such liabilities.
The Credit Amendment
Concurrent with the Transaction, the Company entered into amendments of its credit facility with Wells Fargo (“the Credit Amendment”). The Credit Amendment modified certain financial covenant thresholds applicable to the Company, added property acquired in the Transaction as collateral for the loan to the Company, permitted the Company to acquire certain inter-company payables involving the Seller, DAC, Cayman or the subsidiaries and associated companies and permitted the Company to discharge and release the account payable owed by the Seller to the Company in partial consideration for the Transaction.
Reasons for the Transaction
The Company believes its acquisition of the Business will allow a comprehensive approach to solving major appliance producers’ issues with integrating electronics into their platforms. The acquisition also added
two
manufacturing operations in locations that the Company believes will augment the Company’s international footprint. In addition, the acquisition of the Business will allow the Company to offer design services for the first time in specific markets. In conjunction with the acquisition, professional fees incurred during fiscal 2013 were
$803,006
and
were recorded as selling and administrative expenses.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE G - ACQUISITION - Continued
The acquisition was recorded using the purchase method of accounting, and on the date of the acquisition, the Company assessed the fair value of the acquired assets and assumed liabilities (primarily using level 3 measurement inputs) and an allocated purchase price of
$18,944,307
. The allocation of the purchase considerations was based upon estimates made by the Company with the assistance of independent valuation specialists. The revised purchase price allocation as of May 31, 2012, was as follows:
|
|
|
|
|
|
|
Estimated Fair Value
|
|
Cash
|
|
$
|
1,142,597
|
|
Current Assets
|
|
|
10,074,168
|
|
Property, machinery and equipment
|
|
|
1,400,250
|
|
Current liabilities
|
|
|
(3,037,607)
|
|
Customer relationships
|
|
|
4,690,000
|
|
Backlog
|
|
|
22,000
|
|
Trade names
|
|
|
980,000
|
|
Non-compete agreements
|
|
|
50,000
|
|
Patents
|
|
|
400,000
|
|
Goodwill
|
|
|
3,222,899
|
|
Total Net Assets
|
|
$
|
18,944,307
|
|
The amounts allocated to relationships, backlog, trade names, non-compete agreements and patents are estimated by the Company based on the analysis performed by independent valuation specialists, primarily through the use of discounted cash flow techniques. Appraisal assumptions utilized under these methods include a forecast of estimated future net cash flows, as well as discounting the future net cash flows to their present value. Acquired intangible assets are being amortized over the estimated useful lives as set forth in the following table:
|
|
|
|
|
|
|
|
Method
|
|
Life
|
|
Customer relationships
|
|
Accelerated
|
|
15
Years
|
|
Backlog
|
|
Straight-line
|
|
1
Year
|
|
Trade names
|
|
Straight-line
|
|
20
Years
|
|
Non-compete agreements
|
|
Straight-line
|
|
7
Years
|
|
Patents
|
|
Straight-line
|
|
5
Years
|
|
Goodwill
|
|
N/A
|
|
Indefinite
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE G - ACQUISITION - Continued
The estimated asset lives are determined based on projected future economic benefits and expected life cycles of the acquired intangible assets. The amount assigned to goodwill is not being amortized, but will be tested for impairment annually or under circumstances that may indicate a potential impairment. Goodwill is deductible for federal income tax purposes over a period of 15 years.
The Company’s estimate of the fair value of the contingent consideration (
$2,320,000
as of the acquisition date) was based on expected operating results of the Business through fiscal 2019 and the specific terms of when such consideration would be earned. Those terms provide for additional consideration to be paid to Seller or its owner based on a percentage of sales and pre-tax profits over those years in excess of certain minimums. The Company discounted expected payments by its weighted average cost of capital of
11.5%
. Payments are to be made quarterly each year and adjusted after each year end audit. The Company made
four quarterly payments of $65,000 each in fiscal 2014 and made
three quarterly payments of
$65,000
each in fiscal 2013. As of April 30, 201
4
, the Company had not changed its estimated aggregate consideration expected to be earned under this arrangement. Any changes in the Company’s estimate will be reflected as a change in the contingent consideration liability and as additional or credits to selling and administrative expenses, as will changes in the current fair value caused by the continual decrease in the discount period between the current balance sheet date and the estimated payout dates. Such fair value changes were not material during fiscal
2014 or
2013. The value of the 50,000 shares of restricted stock issued as part of the purchase price was
$169,011
based on the trading price of the Company’s common stock on the acquisition date discounted by
15%
to account for the restrictions associated with that issuance.
Due to the acquisition of Spitfire, effective June 1, 2012, the Company discontinued selling to Spitfire and instead began selling directly to Spitfire’s former customers.
The results of the Business for the period June 1, 2012 through April 30, 2013 have been included in the consolidated financial statement for the twelve month period ended April 30, 2013 and includes sales of
$26,779,273
and a net loss of
$2,513,151
. Offsetting some of such sales are the sales that SigmaTron would have recorded to Spitfire had SigmaTron not acquired the Business.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE H - LONG-TERM DEBT
Note Payable - Bank
The Company has a senior secured credit facility with Wells Fargo with a credit limit up to
$30,000,000
and an initial term through
September 30, 2013
. The facility allows the Company to choose among interest rates at which it may borrow funds. The credit facility is collateralized by substantially all of the domestically located assets of the Company and the Company has pledged
65%
of its equity ownership interest in some of its foreign entities. The Company is required to be in compliance with several financial covenants. In conjunction with Spitfire acquisition, two of the financial covenants required by terms of the senior secured credit facility were amended as of May 31, 2012. During the quarter ended October 31, 2013, the Company renewed its senior secured credit facility. The facility was revised to extend the term of the agreement to
October 31, 2015
, amend its capital expenditure covenant, terminate the unused line fee and reduced its borrowing interest rates. The
renewed
facility allows the Company to choose among interest rates at which it may borrow funds. The interest rate is prime rate (effectively,
3.25%
at April 30, 2014) or LIBOR plus
two
and a half percent (effectively,
2.75%
at April 30, 2014), which is paid monthly.
In April 2013, the Company again amended its credit agreement and renegotiated two of the financial covenants required by the terms of the Company’s senior secured credit facility. At April 30, 2014, the Company was in compliance with its amended financial covenants. As of April 30, 2014, there was a
$23,000,000
outstanding balance and
$7,000,000
of unused availability under the credit facility, assuming the Company remained in compliance with its financial covenants.
Capital Lease Obligations
On August 20, 2010 and October 26, 2010, the Company entered into two capital leasing transactions (a lease finance agreement and a sale leaseback agreement) with Wells Fargo Equipment Finance, Inc., to purchase equipment totaling
$1,150,582
. The term of the lease finance agreement, with an initial principal payment of
$315,252
, extends to September 2016 with monthly payments of
$4,973
and a fixed interest rate of
4.28%
. The term of the sale leaseback agreement, with an initial principal payment of
$835,330
, extends to August 2016 with monthly payments of
$13,207
and a fixed interest rate of
4.36%
. At April 30, 2014,
$136,561
and
$338,562
was outstanding under the lease finance and sale leaseback agreements, respectively. The net book value at April 30, 2014 for the equipment under each of the lease finance agreement and sale leaseback agreement was
$221,114
and
$550,583
, respectively.
On November 29, 2010, the Company entered into a capital lease with Wells Fargo Equipment Finance, Inc., to purchase equipment totaling
$226,216
. The term of the lease agreement extends to October 2016 with monthly payments of
$3,627
and a fixed interest rate of
4.99%
. At April 30, 2014, the balance outstanding under the capital lease agreement was
$102,099
. The net book value of the equipment under this lease at April 30, 2014 was
$159,528
.
The total amount outstanding at April 30, 2014 for the three remaining equipment lease transactions discussed above was
$577,222
. The Company had two other capital leases not discussed above, one of which was paid in full in August 2011 and the other was paid in full in November 2011. The total net book value of the equipment under these other leases at April 30, 2014 was
$388,106
.
On October 3, 2013, the Company entered into two capital leases (sale leaseback agreements) with Associated Bank, National Association to finance equipment purchased in June 2012 in the amount of
$2,281,354
. The term of the first agreement, with an initial principal amount of
$2,201,637
, extends to September 2018 with monthly payments of
$40,173
and a fixed interest rate of
3.75%
. The term of the second agreement, with an initial principal payment amount of
$79,717
, extends to September 2018 with monthly payments of
$1,455
and a fixed interest rate of
3.75%
. At April 30, 2014,
$1,959,381
and
$70,945
was outstanding under the first and second agreements, respectively. The net book value at April 30, 2014 of the equipment under each of the two agreements was
$1,828,038
and
$68,092
, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE H - LONG-TERM DEBT- Continued
Capital Lease Obligations
- Continued
On March 6, 2014, the Company entered into a capital lease agreement with CIT Finance LLC to purchase equipment in the amount of
$589,082
. The term of the lease extends to March 2019 with monthly payments of
$10,441
and a fixed interest rate of
$5.65%
. At April 30, 2014, the balance outstanding under the capital lease agreement was
$581,415
. The net book value of the equipment under the lease of April 30, 2014 was
$573,338
.
Note Payable - Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of
$2,500,000
with Wells Fargo to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing facility. The Company repaid the prior Bank of America mortgage, which equaled
$2,565,413
, as of January 8, 2010, using proceeds from the Wells Fargo mortgage and senior secured credit facility. The Wells Fargo note bears interest at a fixed rate of
6.42%
per year and is amortized over a
sixty
month period. A final payment of approximately
$2,000,000
is due on or before
January 8, 2015
. The outstanding balance as of April 30, 2014 was
$2,075,017
.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of
$1,275,000
, with Wells Fargo to finance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The Wells Fargo note requires the Company to pay monthly principal payments in the amount of
$4,250
and bears interest at a fixed rate of
4.5%
per year and is payable over a
sixty
month period. A final payment of approximately
$1,030,000
is due on or before
October 2018
. The outstanding balance as of April 30, 2014 was
$1,249,500
.
The aggregate amount of debt maturing (excluding capital lease obligations) in each of the next two fiscal years and thereafter is as follows:
|
|
|
|
|
Fiscal Year
|
Total
|
|
|
|
|
|
|
|
2015
|
$
|
2,126,017
|
|
|
2016
|
|
23,051,000
|
|
|
Thereafter
|
|
1,147,500
|
|
|
|
$
|
26,324,517
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
As of April 30, 2014 and 2013
,
the Company had recorded
$525,739
and
$487,236
, respectively
,
for seniority premiums.
See Note O - Leases, Page F-29
for future maturities under capital lease obligations.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE I - TIJUANA, MX OPERATION MOVE
During the first quarter of fiscal year 2013, the Company relocated its Tijuana, MX operation to a new facility within Tijuana, MX. The Company incurred a total of approximately
$424,000
in relocation expenses as a result of the move during fiscal 2013, of which, approximately
$399,000
of the relocation expenses were included in cost of products sold and consist primarily of moving expenses related to equipment, the write-off of leasehold improvements and the restoration of the prior Tijuana facility. Of the total relocation expenses, approximately
$25,000
was recorded in selling and administrative expenses.
NOTE J - ACCRUED EXPENSES AND WAGES
Accrued expenses and wages consist of the following at April 30:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Wages
|
|
$
|
1,812,049
|
|
$
|
1,656,540
|
|
Bonuses
|
|
|
510,159
|
|
|
316,500
|
|
Foreign wages
|
|
|
1,704,821
|
|
|
1,660,860
|
|
Interest
|
|
|
69,467
|
|
|
58,765
|
|
Commissions
|
|
|
48,043
|
|
|
61,288
|
|
Professional fees
|
|
|
262,755
|
|
|
209,532
|
|
Foreign accruals
|
|
|
1,941,995
|
|
|
1,970,143
|
|
Other
|
|
|
203,785
|
|
|
187,091
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,553,074
|
|
$
|
6,120,719
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE K - INCOME TAX
U.S. and foreign income (loss) before income tax expense for the years ended April 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(545,501)
|
|
$
|
(2,443,040)
|
|
Foreign
|
|
|
3,330,325
|
|
|
3,257,364
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,784,824
|
|
$
|
814,324
|
|
(Benefit) p
rovision for Income Taxes
The income tax provision for the years ended April 30 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(203,951)
|
|
$
|
(125,215)
|
|
State
|
|
|
28,726
|
|
|
66,525
|
|
Foreign
|
|
|
664,591
|
|
|
701,220
|
|
Total Current
|
|
|
489,366
|
|
|
642,530
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
|
365,008
|
|
|
(552,921)
|
|
State
|
|
|
64,952
|
|
|
(181,220)
|
|
Foreign
|
|
|
(1,053,193)
|
|
|
412,974
|
|
Total Deferred
|
|
|
(623,233)
|
|
|
(321,167)
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(133,867)
|
|
$
|
321,363
|
|
|
|
|
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE K - INCOME TAX - Continued
(Benefit) p
rovision for Income Taxes - Continued
The difference between the income tax provision and the amounts computed by applying the statutory Federal income tax rates to income before tax expense for the years ended April 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
U.S Federal provision:
|
|
|
|
|
|
|
|
At statutory rate
|
|
$
|
951,623
|
|
$
|
276,870
|
|
State taxes
|
|
|
61,828
|
|
|
(75,700)
|
|
Foreign tax differential
|
|
|
(465,835)
|
|
|
25,024
|
|
Foreign profit sharing
|
|
|
(60,626)
|
|
|
-
|
|
Foreign dividends
|
|
|
295,522
|
|
|
37,639
|
|
Insurance reserves
|
|
|
(83,280)
|
|
|
-
|
|
Impact of tax legislation
|
|
|
(828,175)
|
|
|
-
|
|
Impact of foreign permanent items
|
|
|
(25,099)
|
|
|
-
|
|
Transaction costs
|
|
|
-
|
|
|
26,118
|
|
Other
|
|
|
20,175
|
|
|
31,412
|
|
|
|
|
|
|
|
|
|
Other Total
|
|
$
|
(133,867)
|
|
$
|
321,363
|
|
The Company realized a distribution of approximately
$3,006,825
from foreign subsidiaries based in Mexico. The U.S. income tax on the distribution was
$333,128
which is reflected in the Company’s tax provision for the fiscal year ended April 30, 2014. The distribution from the foreign subsidiaries based in Mexico does not change the Company’s intentions to indefinitely reinvest the income from the Company’s foreign subsidiaries. The Company’s intent is to keep unrepatriated funds indefinitely reinvested outside of the United States and current plans do not demonstrate a need to fund U.S. operations.
Effective January 2014, the Mexican federal income tax law changes were enacted eliminating the statutory income tax rate reduction scheduled to start in 2014, and leaving the
30%
statutory income tax rate in effect for future years. In addition, the Entrepreneurial Tax of Unique Rate (flat tax) was appealed as of January 31, 2014. The Company has revalued its deferred income tax assets and liabilities as a result of the tax reform, which resulted in a net discrete tax benefit for the period of
$
828,175
.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE K - INCOME TAX - Continued
Deferred Tax Assets and Liabilities
Significant temporary differences that result in deferred tax assets and liabilities at April 30, are as follow:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
Federal & State NOL carryforwards
|
|
$
|
-
|
|
$
|
620,284
|
|
Foreign NOL carryforwards
|
|
|
98,254
|
|
|
85,690
|
|
Reserves and accruals
|
|
|
944,454
|
|
|
437,069
|
|
Stock based compensation
|
|
|
137,343
|
|
|
125,946
|
|
Inventories
|
|
|
1,340,302
|
|
|
1,116,638
|
|
Other intangible assets
|
|
|
338,014
|
|
|
366,459
|
|
Deferred rent
|
|
|
293,242
|
|
|
297,550
|
|
Allowance for doubtful accounts
|
|
|
61,515
|
|
|
60,795
|
|
Other
|
|
|
305,335
|
|
|
166,111
|
|
Total Gross Deferred Tax Assets
|
|
|
3,518,459
|
|
|
3,276,542
|
|
Less: Valuation allowance
|
|
|
(101,691)
|
|
|
(87,328)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
3,416,768
|
|
$
|
3,189,214
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
(474,768)
|
|
$
|
(277,190)
|
|
Property, machinery & equipment
|
|
|
(3,384,821)
|
|
|
(3,567,695)
|
|
Undistributed foreign earnings
|
|
|
(249,846)
|
|
|
-
|
|
Deferred flat tax liability (net)
|
|
|
-
|
|
|
(660,230)
|
|
Total Deferred Tax Liabilities
|
|
$
|
(4,109,435)
|
|
$
|
(4,505,115)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset/(Liability)
|
|
$
|
(692,667)
|
|
$
|
(1,315,901)
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE K - INCOME TAX - Continued
Deferred Tax Assets and Liabilities - Continued
The above amounts are classified in the Consolidated Balance Sheets at April 30, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Current assets:
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
2,524,993
|
|
$
|
1,630,809
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(3,217,660)
|
|
|
(2,946,710)
|
|
Net Deferred Tax Asset/(Liability)
|
|
$
|
(692,667)
|
|
$
|
(1,315,901)
|
|
The Company has not recorded U.S. income taxes for a significant portion of undistributed earnings of the Company’s foreign subsidiaries, since these earnings have been, and under current plans will continue to be, permanently reinvested in these foreign subsidiaries. The cumulative amount of unremitted earnings for which U.S. income taxes have not been recorded is
approximately
$12,300,000
as of April 30, 2014. The amount of U.S. income taxes on these earnings is impractical to compute.
During fiscal year 2014, the Company recorded a
$249,846
deferred tax liability related to
$3,006,825
undistributed earnings from foreign subsidiaries based in Mexico, that are not considered permanently reinvested. The U.S. income tax on the distribution was $333,128 which is reflected in the Company’s tax provision for the fiscal year ended April 30, 2014. The distribution from the foreign subsidiaries based in Mexico does not change the Company’s intentions to indefinitely reinvest the income from the Company’s foreign subsidiaries. The Company’s intent is to keep unrepatriated funds indefinitely reinvested outside of the United States and current plans do not demonstrate a need to fund U.S. operations.
In fiscal
year 2014, income tax (benefit) was
($133,867)
compared to
$321,363
in income tax expense in the fiscal year 2013. The effective rate for the years ended April 30, 2014 and 2013 was
(4.8%)
and
39.5%
, respectively. The decrease in the effective rate for the year ended April 30, 2014 is due to the foreign tax rate differential and the impact of recent tax legislation in Mexico which became effective on January 1, 2014.
Unrecognized Tax Benefits
The Company has not identified any uncertain tax positions or expects any to be taken in the Company’s tax returns. For the fiscal year ended April 30, 2014 and 2013, the amount of consolidated worldwide liability for uncertain tax positions that impacted the Company’s effective tax rate was
$0
for each year.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE K - INCOME TAX - Continued
Other
Interest related to tax positions taken in the Company’s tax returns are recorded in income tax expense in the Consolidated Statements of Income. The Company did not record penalties in the Consolidated Statements of Income.
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to state, local or foreign examinations by tax authorities for fiscal years before 2009. The Company is no longer subject to U.S. Federal examinations by tax authorities for fiscal years before 2011.
NOTE L - 401(k) RETIREMENT SAVINGS PLAN
The Company sponsors 401(k) retirement savings plans, which are available to all non-union U.S. employees. The Company may elect to match participant contributions up to
$300
per participant
annually. The Company contributed
$93,452
and
$93,795
to the plans during the fiscal years ended April
30, 201
4
and 201
3
,
respectively. The Company paid total expenses of
$6,850
and
$6,675
for the fiscal years ended April 30, 201
4
and 201
3
, respectively, relating to costs associated with the administration of the plans.
NOTE M-
EMPLOYEE STOCK PURCHASE PLAN
The Company implemented
an
employee stock purchase plan,
(“
ESPP
”)
, for all eligible employees
on February 1, 2014
.
Under the ESPP, employees may purchase shares of the
Company
’s common stock at three-month intervals at
85%
of
the lower of the
fair market value
of the Company’s common stock on the first day or the last day of the offering period
(calculated in the manner provided in the plan). Employees purchase such stock using payroll deductions, which may not
be less than
1%
nor ex
ceed
15%
of their total
gross
compensation. Shares of common stock are offered under the ESPP through a series of successive offering periods. The plan imposes certain limitations upon an employee’s right to acquire common stock, including the following: (i)
termination of employment for any reason immediately terminates the employee’s participation in the plan
, (ii) no employee may be granted rights to purchase more than
$25,000
worth of common stock for each calendar year that such rights are at any time outstanding, and (iii) the maximum number of shares of common stock purchasable in total by all participants in the ESPP on any purchase date is limited to
500,000
shares. The number of shares of common stock reserved for issuance under the plan automatically increases
on the first day of the Company’s fiscal years by
25,000
shares
.
During fiscal year 2014,
2,158
shares were issued under the ESPP and the Company recorded
$4,151
in compensation expense.
NOTE
N
- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of uncollateralized accounts receivable.
For the year ended April 30, 2014, two customers accounted for
31.6%
and
12.0%
of net sales of the Company, and
11.2%
and
4.5%
of accounts receivable at April 30, 2014.
For the year ended April 30, 2013, two customers accounted for
26.8%
and
9.6%
of net sales of the Company and
11.0%
and
6.4%
of accounts receivable at April 30, 2013.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
O
- LEASES
The Company leases certain facilities under various operating leases expiring at various date
s
through March 2021. The Company also leases various machinery and equipment under capital leases.
Future minimum lease payments under leases with terms of one year or more are as follows:
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
Years ending April 30,
|
|
Leases
|
|
|
Leases
|
|
|
|
|
|
|
|
|
2015
|
$
|
886,507
|
|
$
|
1,660,708
|
|
2016
|
|
886,507
|
|
|
1,339,800
|
|
2017
|
|
711,072
|
|
|
1,375,399
|
|
2018
|
|
624,824
|
|
|
1,387,694
|
|
2019
|
|
381,898
|
|
|
1,078,434
|
|
Thereafter
|
|
-
|
|
|
1,215,571
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
$
|
3,490,808
|
|
$
|
8,057,606
|
|
|
|
|
|
|
|
|
Less amounts representing interest
|
|
301,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,188,962
|
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion
|
|
765,961
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Portion
|
$
|
2,423,001
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
O
- LEASES - Continued
Rent expense incurred under operating leases was
$1,981,977
and
$1,679,467
for the years ended April 30, 201
4
and 201
3
, respectively.
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent 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 was
$17,770
for the fiscal year ended April 30, 201
4
compared to deferred rent
income
of
$2,140
recorded as of April 30, 201
3
. In addition, the landlord provided the Company tenant incentives of
$418,000
, which
are
being amortized over the life of the lease.
On May 8, 2012, the Company entered into a lease agreement in Tijuana, MX, for manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives over the life of the lease, which extends through November 2018. The amount of the deferred rent expense recorded for the fiscal year ended April 30, 201
4 and April 30, 2013 was
$97,619
and
$362,796
, respectively.
NOTE
P
- STOCK OPTIONS
The Company has stock option plans (“Option Plans”) under which certain employees and non-employee directors may acquire up to
1,753,500
shares of common stock. Options available for grant under the employee plans total
1,357,500
, with the non-employee director plans allowing for a total of
396,000
options available for grant. All Option Plans have been approved by the Company’s shareholders. At April 30, 201
4
, the Company has
400,914
shares available for future issuance to employees under the employee plan
s
and
60,000
under the non-employee director plan
s
. The Option Plans are interpreted and administered by the Compensation Committee of the Board of Directors. The maximum term of options granted under the Option Plans is generally
10
years. Options granted under the Option Plans are either incentive stock options or nonqualified options. Each
o
ption under the Option Plans is exercisable for one share of stock. Options forfeited under the Option Plans are available for reissuance. Options granted under these plans are granted at an exercise price equal to the fair market value of a share of the Company’s common stock on the date of grant.
The Company granted
25,000
options to employees in fiscal year 2014. The weighted average grant date fair value of the options granted was
$3.02
The Company recognized approximately
$30,200
in compensation expense in fiscal year 2014. The balance of unrecognized compensation expense at April 30, 2014 was approximately
$44,215
.
In fiscal year 2013,
115,000
options were granted to employees. The weighted average grant date value of the options granted was
$3.60
. The Company recognized approximately
$54,860
and
$189,305
of compensation expense in fiscal years 2014 and 2013, respectively. The balance of unrecognized compensation expense at April 30, 2014 and 2013 was
approximately
$13,800
and
$70,600
, respectively.
The Company offered to purchase
395,190
Eligible Options (as defined below) from Eligible Holders (as defined below) upon the terms stated in Schedule TO (“TO”) filed with the SEC on October 1, 2013. The stock options subject to the TO were those options to purchase
SigmaTron
common stock which had not expired or terminated prior to the Expiration Time (as defined below) having the grant dates and exercise prices set forth in the TO (the “
Eligible Options
”). Eligible Options, all of which were fully vested, were granted under the following Company stock option plans: 1993 Stock Option Plan, 2004 Employee Stock Option Plan, 2000 Directors’ Stock Option Plan and 2004 Directors’ Stock Option Plan.
“
Eligible Holders
” were: (a) those current or former employees, including all officers, who hold Eligible Options as of the Expiration Time; and (b) all current or former directors of the Company who hold Eligible Options as of the Expiration Time. “
Expiration Time
” means 11:59 p.m., Eastern Time, on October 29, 2013.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
P
- STOCK OPTIONS
- Continued
The Company offered to pay a cash amount ranging from
$0.18
to
$1.35
per Eligible Option, totaling up to
$301,500
, as specifically set forth in the TO. Each Eligible Holder who participated in the TO received cash payment (subject to tax and other withholding for employees) for each properly tendered Eligible Option promptly following the Expiration Time.
The Company made this offer subject to the terms and conditions stated in the TO and
394,200
Eligible Options were tendered and purchased for a total cash payment of
$300,410
.
On October 1, 2013, the Company granted
1,500
shares to each non-employee director pursuant to the 2013 Non-Employee Director Restricted Stock Plan. A total of
7,500
restricted shares were granted and the shares vest
ed
in six months from the date of grant. The Company
recognized approximately
$39,700
in compensation expense
in fiscal year 2014.
There was
no
unrecognized compensation expense related to the 7,500 shares of restricted stock at
April 30,
2014.
The Company issued
25,000
shares of restricted stock on June 1, 2012, of which
8,330
vested in June 2012 and
8,330
vested in June 2013. The Company recognized approximately
$1
5,325
and
$71,500
in compensation expense
for the years ended April 30, 2014 and 2013, respectively.
The balance of unrecognized compensation expense related to the Company’s restricted stoc
k award was approximately
$1,750
and
$1
7,050
at
April 30
, 2014 and 2013, respectively.
During the quarter ended July 31, 2012, the Company issued
50,000
shares of restricted stock as additional consideration in conjunction with the May 31, 2012 Spitfire acquisition.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
Expected stock price volatility
|
|
78%
|
|
|
75%
|
Average risk-free interest rate
|
|
4.49%
|
|
|
.72%
|
Weighted-average expected life of options
|
|
6.0
years
|
|
|
5.5
years
|
Option-valuation models require the input of highly subjective assumptions. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing method does not necessarily provide a reliable single measure of the fair value of the Company’s stock options. When the Company does grant stock options, it uses the U.S. Treasury yield in effect at the time of the option grant to calculate the risk-free interest rate and the simplified method to calculate the weighted-average expected life, due to limited history. The expected dividend, volatility and forfeitures rates of options are based on historical experience and expected future results. The vesting period of the stock options ranges from
three
to
five
years.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
P
- STOCK OPTIONS
- Continued
The table below summarizes option activity through April 30, 201
4
:
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Number of
|
|
|
securities to be
|
|
|
|
|
options
|
|
|
issued upon
|
|
|
Weighted-
|
|
exercisable
|
|
|
exercise of
|
|
|
average
|
|
at end
|
|
|
outstanding options
|
|
|
exercise price
|
|
of year
|
Outstanding at April 30, 2012
|
|
410,192
|
|
$
|
9.16
|
|
410,192
|
Options granted during 2013
|
|
115,000
|
|
|
3.60
|
|
|
Options exercised during 2013
|
|
(10,000)
|
|
|
3.99
|
|
|
Outstanding at April 30, 2013
|
|
515,192
|
|
|
8.02
|
|
438,142
|
Options granted during 2014
|
|
25,000
|
|
|
4.24
|
|
|
Options exercised during 2014
|
|
(43,586)
|
|
|
3.64
|
|
|
Options expired during 2014
|
|
(850)
|
|
|
4.24
|
|
|
Options repurchased during 2014
|
|
(394,200)
|
|
|
9.34
|
|
|
Outstanding at April 30, 2014
|
|
101,554
|
|
$
|
3.88
|
|
48,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value is calculated as the positive difference between the market price of the Company’s common stock and the exercise price of the underlying options. During the fiscal years ended April 30, 201
4
and 201
3
, the aggregate intrinsic value of options exercised was
$291,025
and
$1,400,
respectively. As of April 30, 201
4
and 201
3
, the aggregate intrinsic value of in the money options outstanding was
$653,803
and
$60,950
, respectively.
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
P
- STOCK OPTIONS - Continued
Information with respect to stock o
ptions outstanding at April 30, 2014
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
|
Number
|
|
Weighted-average
|
|
Weighted-
|
|
|
|
outstanding at
|
|
remaining
|
|
average
|
|
|
|
April 30, 2014
|
|
contract life
|
|
exercise price
|
Range of exercise prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.60-5.40
|
|
100,563
|
|
7.71
years
|
$
|
3.83
|
$
|
9.17-11.56
|
|
991
|
|
1.38
years
|
|
9.17
|
|
|
|
|
|
|
|
|
|
|
|
101,554
|
|
|
$
|
3.88
|
Information with respect to stock options outstanding and exercisable at April 30,
2014
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable
|
|
|
|
Number
|
|
Weighted-average
|
|
Weighted-
|
|
|
|
outstanding at
|
|
remaining
|
|
average
|
|
|
|
April 30, 2014
|
|
contract life
|
|
exercise price
|
Range of exercise prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.60-5.40
|
|
47,313
|
|
9.76
years
|
$
|
3.89
|
$
|
9.17-11.56
|
|
991
|
|
1.38
years
|
|
9.17
|
|
|
|
|
|
|
|
|
|
|
|
48,304
|
|
|
$
|
3.99
|
|
|
|
|
|
|
|
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
Q
- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal year 201
4
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
2014
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
56,166,061
|
|
$
|
56,577,287
|
|
$
|
54,175,196
|
|
$
|
55,567,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
|
|
|
1,240,339
|
|
|
949,811
|
|
|
(130,182)
|
|
|
724,856
|
tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
967,464
|
|
|
784,654
|
|
|
743,794
|
|
|
422,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.24
|
|
$
|
0.20
|
|
$
|
0.19
|
|
$
|
0.11
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.24
|
|
$
|
0.19
|
|
$
|
0.18
|
|
$
|
0.10
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares- Basic
|
|
|
3,961,232
|
|
|
3,961,232
|
|
|
3,966,814
|
|
|
3,988,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares- Diluted
|
|
|
4,011,001
|
|
|
4,037,627
|
|
|
4,088,695
|
|
|
4,107,736
|
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2014 and 2013
NOTE
Q
- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
The following is a summary of unaudited quarterly financial data for fiscal year 201
3
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
2013
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
47,629,229
|
|
$
|
52,729,395
|
|
$
|
46,758,568
|
|
$
|
51,322,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
|
|
|
|
|
|
|
|
|
|
|
|
|
tax (benefit) expense
|
|
|
(147,844)
|
|
|
506,545
|
|
|
(479,124)
|
|
|
934,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(93,144)
|
|
|
482,834
|
|
|
(216,776)
|
|
|
320,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.02)
|
|
$
|
0.13
|
|
$
|
(0.06)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.02)
|
|
$
|
0.12
|
|
$
|
(0.06)
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares- Basic
|
|
|
3,922,478
|
|
|
3,930,402
|
|
|
3,930,402
|
|
|
3,938,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares- Diluted
|
|
|
3,922,478
|
|
|
4,002,264
|
|
|
3,930,402
|
|
|
4,027,881
|
NOTE
R
- LITIGATION
As of April 30, 201
4
, the Company was not a party to any material legal proceedings.
From time to time the Company is involved in legal proceedings, claims or investigations that are incidental to the conduct of the Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including management’s assessment of the merits of any particular claim, the Company does not expect that these legal proceedings or claims will have any material adverse impact on its future consolidated financial position or results of operations.