SIGMATRON INTERNATIONAL, INC.
ANNUAL REPORT 2 0 1 8
ABOUT THE COMPANY
For over 20 years, SigmaTron International, Inc. (SII)
continues as an Electronic Manufacturing Services
(EMS) provider of printed circuit board assemblies
and completely assembled (box build) electronic
products serving customers in three diverse end-user
markets through a global network of seven
manufacturing facilities located in four countries:
United States, Mexico, China and Vietnam, with a
companywide International Procurement Office (IPO)
in Taiwan. The Company offers superior EMS value
from engineering, design and component sourcing
at internationally-competitive pricing, to manufacturing
and test.
ABOUT THE COVER In February 2018, SigmaTron (trading symbol:
SGMA) was featured on Nasdaq’s dramatic video tower at its
world headquarters, One Liberty Plaza, in New York’s City's
Times Square. The world’s first electronic stock market,
Nasdaq is a leading provider of trading exchange technology
and public company services with listings of over 3,000
public companies across six continents.
Cover Photo: © 2018 Nasdaq. All rights reserved.
TOTAL VALUE,
ELECTRONICS
ASSEMBLY
(in USD)
$1.4
TRILLION
IN 2016
$1.7
TRILLION
IN 2021
Source: New Venture
Research Corp., 2018
“A POSITIVE TREND
FOR EMS DURING
2017-2020 IS
SUPPORTED BY THE
RECOVERY OF DEMAND
FROM AUTOMOBILE,
INDUSTRIAL ELECTRONICS
AND CONSUMER
ELECTRONICS MARKET
SEGMENTS.”
– BEROE, INC., 2018
TO OUR STOCKHOLDERS,
SigmaTron’s 2018 fiscal year saw many highs and lows, both in the economy generally
and in our niche. The federal tax cut fueled an increase in domestic GDP to 3.61%,
with unemployment at the lowest levels in decades. This optimism was offset for
EMS companies by well-publicized component and labor shortages and uncertainty
associated with the Administration’s announcement of tariffs and possible trade policy
changes among the U.S., NAFTA members and China. While we report no material
effects this year, we hope an agreement is reached soon to lend stability to our
customers and our industry.
FY18 RESULTS AND OUR PRUDENT PATH
TO FUTURE GROWTH
The Company reported that FY18 revenues
increased to $278.1 million from $253.4
million in FY17, resulting in a net loss of
$3.2 million in FY18 compared to net
income of $1.3 million in FY17.
For the fourth quarter of FY18, revenues
increased to $68.2 million compared to
$65.9 million for the same quarter in FY17.
SII’s significant loss in the fourth quarter
drove an overall loss for the Company in
FY18. The fourth quarter loss was created
by two year-end events. Absent these two
factors, SII would have posted a pre-tax
profit of $505,000 for the fourth quarter
and $2.1 million for the year. We are headed
into FY19 with projected revenue growth
and continued momentum.
First, SII wrote off intangible assets of
$3.9 million that constitute goodwill created
when we acquired our Spitfire Controls
division in FY13 – a one-time, non-cash
expense with no real effect on our
operations going forward.
SIGMATRON GROWTH IN REVENUES
Dollars in Millions (USD)
$87 $168 $278
FY97
FY08
FY18
Second, SII foreclosed on, purchased and
subsequently sold the assets of Petzila, Inc.,
a start-up customer of four years, to Wagz,
Inc. As part of the conditions of sale, SII
received cash and common stock in Wagz,
plus a royalty for future sales of Petzila
products with potential future value.
SII’S COMPETITIVE STRENGTHS,
ONGOING STRATEGY
EMS excellence continues to guide our
decades-long, core strategy, our corporate
culture and our judgment. And this is
why some OEM market leaders repeatedly
cite SII’s global footprint and flexible
“One Source. Global Options®” philosophy
when selecting us as their provider of
choice. From its U.S. headquarters,
SII offers multi-disciplinary, multi-divisional
teams that build trust and longevity for
customers in each of our three vibrant
markets: industrial, consumer and
medical/life sciences.
We are singled out not only for our strategy,
but also for our workforce’s complete,
unequivocal dedication to excellence.
The development and deployment of EMS
solutions for the two programs featured
in this report demonstrate that, for
SII, our customers are the lifeblood of
our organization.
20 18 SIGMATRON INTERNATIONAL 1
"MANUFACTURING ACCOUNTS FOR 12% OF THE U.S. ECONOMIC OUTPUT AND EXPANDED
FOR EIGHT CONSECUTIVE MONTHS IN FY18." – THE WALL STREET JOURNAL, 2018
and key relationships with direct
and distribution partners, netting
transparency and multi-level
communications to minimize
the effects.
The division leverages front-end
design and engineering services
from our nearby Elgin facility
on through to fulfillment as
commercial-ready (packaged) EMS.
In FY19 and beyond, SII’s increasingly
sophisticated customers will
continue to demand internationally
competitive pricing and world-class
quality. While some industry
experts are optimistic that shortages
will dissipate by mid- to late 2019,
we plan to continue leveraging
our decades-long IPO’s operation
to address this ongoing situation.
We are confident to offer our
customers critical strategies
and resources to mitigate these
challenging times.
EGV advanced a number of
high-tech principles and
production controls, supporting
Design for Manufacturability
and Testability (DFx). In EGV
and companywide, heightened
automation helped offset certain
needs for direct labor. Looking
ahead, the division will focus on
business expansion for complete
product builds and expects a
steady stream of new and expanded
customer programs emerging
for production in FY19.
SIGMATRON UNITED STATES:
ELK GROVE VILLAGE AND
ELGIN, ILLINOIS;
UNION CITY, CALIFORNIA
ELK GROVE VILLAGE HEADQUARTERS
AND MANUFACTURING FACILITY
In FY18, Elk Grove Village (EGV)
again attracted, won and expanded
new business and across various SII
divisions, manifesting our position as
a total solutions, EMS provider. EGV
continues to offer personal, flexible
service through a Customer-Focused
Management Team.
As in prior years, EGV proved to
be a facility of choice for low-to-mid
volume EMS, with hallmarks of
high-mix and high-flexibility.
SII INFORMATION TECHNOLOGY
From its headquarters, SII’s IT
Services drives key differentiation
and value across divisions and
provides capabilities often
associated with much larger
organizations. At increased levels
in FY18, IT offered SII’s operations
proprietary systems, with real-time
24/7 process visibility from a central
point of contact. Customers again
cited our IT as being of high-value
and a differentiating strength. In
the year ahead, we will continue
investment in, and expansion of,
a number of high-tech systems.
EMS DRIVERS AND CONSTRAINTS:
SIGMATRON ADDRESSES
INDUSTRYWIDE MATERIAL
SHORTAGES, COMPONENT DELAYS
During the past two years and
especially FY18, the EMS industry
faced challenges of component
allocations and materials
delays—some extreme—that
also constricted the ability
to meet certain customers’
forecasted requirements. Factors
in the root cause are well
publicized: consolidation among
manufacturers and an overall
resumption of manufacturing
growth utilizing electronics.
SII’s expert teams, including
our Taiwan-based International
Procurement Office (IPO),
responded to develop alternate
suppliers and add new sources
of components, closing gaps at
SII and in customers’ supply
chains. Our IPO continued to
manage interdivisional needs for
comprehensive sourcing and
quality assurance from among
global component suppliers in
Southeast Asia. We leveraged
integrated material systems
2 SIGMATRON INTERNATIONAL 20 18
An in-use example of Muth’s
Blind Spot Detection Display mirrors.
MUTH MIRROR SYSTEMS
The world leader in mirror-based
LED safety technology.
Since 1992, Muth's engineering staff
led LED beyond glass mirror technology
and launched a revolution with the first
automotive Signal® Mirror. In 2006 Muth
invented LED mirror technology and is the
world leader in two specialized product
lines: signal and blind spot detection
display mirrors. The electronic assemblies
inside Muth’s Blind Spot Detection Display
(BSDD) mirrors that SII manufactures,
feature unique circuit boards and reflective
light technology that, when combined,
promote vehicle safety. An icon displays
when an object is in the driver’s blind spot.
With over 40 million mirrors shipped
to the world’s top auto manufacturers,
Muth requires an EMS provider to meet
its quality and flexibility standards as
manufactured volumes increase. In FY17,
Muth selected SII to manufacture PCBAs
for one of Muth’s most popular BSDD
mirrors. This program benefited by SII’s
ability to scale-up manufacturing to meet
millions-of-units, high-volume demand.
For the Ford program, Muth engineering
reviewed the existing design with
engineering teams in SII’s Union City,
California and Tijuana, Mexico divisions.
Key enhancements utilizing Design for
Manufacturability and Testability resulted
with SII’s teams in Elgin, Illinois and
International Procurement Office (IPO)
in Taipei, Taiwan providing comprehensive
design and quality documentation.
The BSDD mirror program expanded
SII’s automotive EMS capabilities to
next levels, while our “focused factory”
(dedicated assembly lines) benefited
Muth. SII’s “One Source” philosophy
was evident with wire harness and cable
assemblies built and manufactured in
volume, netting fewer supply chain steps.
With this dynamism, SII maintained
quality while lowering the costs of Muth’s
local products, a turnkey service SII
expects to continue in FY19 and beyond.
Photo: © 2018 Muth Mirror Systems, LLC. All rights reserved.
4 SIGMATRON INTERNATIONAL 20 1 8
SIGMATRON MEXICO: ACUÑA,
CHIHUAHUA AND TIJUANA
Again, in FY18, SII offered U.S.
and global customers the option
to manufacture a portion, or all,
of their complex, system-level
projects in our three Mexico
facilities. Based on strategic past
investments in our technology,
efficiency and workforce, these
divisions remain of substantial
value systemwide.
ACUÑA
SII’s Acuña operation is among
our largest, most established,
cost-effective and highly experienced
facilities in our global network. Acuña’s
combination of personalized customer
service and flexibility, in response to
fast-changing needs, remains among
the division’s ongoing strengths.
From Acuña, globally-recognized
market leaders benefited by program
migration from other N.A. divisions to
offer key support, especially for a
number of consumer and industrial
accounts. The division invested
in equipment in direct response
to customer programs that led to
expanded capacity.
Acuña drove expansion with a
significant number of programs that
launched in FY17 and FY18 and are
expected to continue in FY19 for
noteworthy customers in all three
markets we serve. Acuña expects to
build on past momentum, serving
new programs emerging from
gestation and will continue support
of interdivisional collaboration
for SII customers.
ELGIN, ILLINOIS, DESIGN AND
ENGINEERING CENTER
Our design and engineering
services deliver systems integration
and electronic controls that
align a customer’s performance
specifications to other mission-critical
program components. This year,
the division provided complex
program management support and
DFx services, helping to expand
business systemwide. Elgin invested
in enhanced 3D design software,
training and other equipment in
direct response to customer needs.
In FY19, the division plans to
further diversify its program mix
to include customers who value
high-quality development, field
reliability and delivery performance.
UNION CITY, CALIFORNIA
Union City (UC) continues to
support a regional customer base
and remains a gateway to SII’s
Mexico and China manufacturing
operations. In FY18, UC secured
new customers in target industries,
especially those who value early
development DFx services; complex,
cutting-edge assembly (box-build
and fulfillment technologies);
and scalability from the West Coast
to lower-cost divisions.
UC completed FDA-certification in
California in FY18 and expects to
achieve federal compliance as early
as FY19, allowing the division to
expand pursuit of medical device
customers. UC also achieved key
quality upgrades toward AS9001D,
the ISO standard for the international
aerospace industry. These gains
are expected to help UC expand
its key programs and attract
new businesses.
CHIHUAHUA
Chihuahua reported a modest, yet
steady increase in EMS programs
served in FY18, owing to recent
investments in technology and
process efficiencies. Chihuahua has
begun, and will continue, process
efficiencies by targeting select
equipment for upgrade, and adding
manufacturing and test software
platforms critical to customers
and prospects. In the year ahead,
Chihuahua plans to target new
business and to further diversify its
mix of EMS customers and markets.
TIJUANA
In FY18, Tijuana (TJ) took further steps
to advance as one of SII’s high-tech
manufacturing regions of choice for
customers based in N.A. TJ often
works with UC to enhance programs
in need of lower-cost production,
especially as manufacturing volumes
scale up. Amidst many new and
existing industrial programs, TJ
continued to invest in new, expanded
technologies and equipment. This
includes advanced test equipment
to support NPI and further process
enhancements supporting
high-volume runs.
20 18 SIGMATRON INTERNATIONAL 5
“THERE ARE ABUNDANT OPPORTUNITIES FOR EMS PROVIDERS THANKS TO INCREASES IN
COMPLEXITY AND EVOLVING MARKETS, SUCH AS THE INTERNET OF THINGS (IOT) SPACE.”
– FROST & SULLIVAN, 2018
The division implemented continuous
improvement programs to further
hone communications, plant
automation and finished goods
inspections. Suzhou added key
equipment, Customer Focus Teams
and a formalized design and
engineering unit in direct response
to a heightened demand for
localized support.
Based on initiatives begun in FY17,
Suzhou progressed toward
International Automotive Task
Force (IATF) 16949 certification
and is on target for compliance
by early FY19, with outreach to
prospective automotive customers
already underway. In the year ahead,
Suzhou will continue progress
in differentiation and business
expansion in local Chinese markets.
TAIPEI, TAIWAN: INTERNATIONAL
PROCUREMENT OFFICE (IPO)
For FY18, SII’s IPO in Taipei
continued to support all divisions’
needs for comprehensive sourcing,
procurement and quality from
among global component
suppliers in Southeast Asia.
Our IPO’s strengths differentiate
SII from other EMS providers
of our size, delivering high value
for customer programs that
require procurement of parts
and sourcing for initial programs
and furnishing flexibility as
programs ramp up.
IPO provides a tailored approach to
customers' materials and component
documentation and manages
communications for complex
regional business transactions. Our
IPO also offers a proprietary database
and transparency of comprehensive
inventory data, among other key
resources. In the year ahead, we
expect that procurement for EMS
will remain tight amidst key industry
drivers. We are at-the-ready to
minimize the effects.
BIÊN HÒA CITY, VIETNAM
Since SII’s FY12 acquisition, the SII
Vietnam operation has leveraged
a long history of EMS service
experience. This allows current and
future customers to capitalize on
strategically located, reduced-cost
manufacturing with valued insights
into the region’s strengths.
To mitigate certain customer
program delays, SII Vietnam drove
manufacturing of other programs
emerging from the pipeline in
FY18 that we expect to continue
in FY19. The operation will further
standardize and integrate its
systems, minimizing production
waste and inefficiency. Looking
ahead, SII Vietnam will continue to
augment our Asian operations in
support of customers’ needs with
highly experienced management
and program teams.
The division expects growth and
expansion in a number of customer
programs expected to emerge for
production in FY19 and beyond.
SIGMATRON ASIA: SUZHOU,
CHINA; TAIPEI, TAIWAN;
HO CHI MINH CITY, VIETNAM
SUZHOU, CHINA
For another year, our Suzhou facility
continued to drive important
differentiation within SII’s global
footprint. Reporting another standout
year, Suzhou offers customers a
modern 200,000-square-foot
facility with over 500 employees.
In FY18, Suzhou added multiple
new programs to its base
business, representing all three
SII market sectors.
Suzhou collaborated with our N.A.
divisions to transfer EMS programs
for customers who would benefit.
Also, Suzhou’s DFx support
extended across divisions and
resulted in production efficiencies,
especially for rapidly scaled,
mass-produced programs.
6 SIGMATRON INTERNATIONAL 20 1 8
SII Union City provides comprehensive
EMS for Mizuho OSI’s Hana® table with its
patented femoral lift and support system.
MIZUHO OSI
The market leader in specialty
surgical tables and patient positioning.
Based in the U.S. with operations
globally, Mizuho OSI® is a leading
manufacturer of specialty surgical
tables for spinal, orthopedic trauma
and imaging-based solutions.
Since 2005, Mizuho OSI’s Hana®
Orthopedic Table has been central to
the Company’s brand reputation and
is a state-of-the-art fracture table
used for thousands of patients. It’s
now considered desirable in at
least 10 surgical procedures.
In 2015, Mizuho OSI transitioned the
manufacturing of multiple product
lines to SII Union City (UC). In the years
since, we have extensively supported
programs, offering dedicated assembly
line capabilities across an expansive
portion of our plant floor.
UC’s unique depth of EMS experience
is led by SII personnel who offer 12
years of prior experience with Mizuho
OSI’s product lines, including support
preceding the customer’s initial launch
of its Hana® and Trios® lines.
Located an eighth-mile apart, the
optimum proximity of SII UC to Mizuho
OSI’s U.S. headquarters promotes many
synergies. Mizuho OSI’s personnel are
often onsite at SII and vice-versa, in
support of program goals for design
and engineering, supply chain sourcing,
high-mix manufacturing, quality, and
test. SII expects to continue leveraging
expertise in high-complexity PCBAs,
box–builds, and custom wire
harness-and-cable assemblies for
Mizuho OSI in FY19 and in the future.
Photo: © 2018 Mizuho OSI® All rights reserved.
As we look ahead, with a renewed
focus on expansion, we plan to
take full advantage of factors that
fuel optimism for ongoing
growth, including:
This increased line of credit is
earmarked to support our current
projected growth and establishes
a foundation for future growth
beyond FY19.
Rebound in the US Economy
In the last three months of our fiscal
year, the US Economy expanded
overall by 2.9%. Contributing factors
include corporate tax reduction,
continued accommodative financial
conditions that support increased
spending, and business investment.
Amidst optimism as the fiscal year
closed, SII’s customers reported
higher forecasted volumes and
began awarding new or ramped-up
programs for FY19 and beyond.
Growth in the EMS Industry
The industry in which we compete
continues to grow amidst a rising
year-over-year demand for EMS,
especially for automotive, medical/life
sciences and IoT applications.
Optimized Program Mix
In FY19 we expect to continue our
long-term strategy that involves a
focus on industrial and medical/life
sciences customers where margins
are attractive.
Against this backdrop, SII projects
increased revenue growth for FY19.
Subsequent to FY18 year-end,
we are pleased to report that U.S.
Bank NA has increased our line
of credit by $10 million, from
$35 million to $45 million, subject
to the terms of our agreement.
While economic optimism in FY19
for all EMS is being tampered by
materials shortages and uncertainty
due to the U.S. Administration’s
announcement of global trade
renegotiations, we plan to remain
vigilant and patient, and to promptly
address any adverse effects for
us and our customers.
We are confident that SII’s proven
positioning and accomplishments
of more than two decades, along with
our global footprint, local presence
and customized solutions, bode
well for our future.
As always at fiscal year-end, I want
to take this opportunity to thank
our dedicated team of employees
worldwide and others who contribute
to our success – SII’s customers,
supply-chain partners, professional
firms, our financial partners and
our Board of Directors.
Sincerely,
Gary R. Fairhead
President and
Chief Executive Officer
SigmaTron International, Inc.
August 17, 2018
MEASURED OPTIMISM
AND OPPORTUNITY FOR THE
YEAR AHEAD
After 20 years, SII remains proud
of what we have built, including
a growing customer portfolio of
global Fortune 500 industry leaders,
some retained for decades. We are
inspired by the opportunities that
lie ahead.
During FY18, notwithstanding
the goodwill (one-time expense)
for Spitfire and the loss from
the Petzila foreclosure and sale,
the Company continued to
grow and advance.
In FY19, SII will leverage international
economies of scale and synergies
among operating divisions to benefit
our increasingly sophisticated
and demanding customers. SII will
also continue to drive improvements
in our service culture and processes,
advance our equipment and
technologies and safeguard long-term
relationships while attracting
noteworthy new ones.
8 SIGMATRON INTERNATIONAL 20 18
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the fiscal year ended April 30, 2018.
Or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from ___________to___________.
Commission file number 0-23248
SIGMATRON INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
2201 Landmeier Rd., Elk Grove Village, IL
(Address of principal executive offices)
Registrant’s telephone number, including area code: 847-956-8000
Securities registered pursuant to Section 12(b) of the Act:
36-3918470
(I.R.S. Employer
Identification Number)
60007
(Zip Code)
Title of each class
Common Stock $0.01 par value per share
Name of each exchange on which registered
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. (cid:134)Yes (cid:58) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. (cid:134)Yes (cid:58) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(cid:58) Yes (cid:134) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). (cid:58) Yes (cid:134) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:58)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (cid:134) Accelerated filer (cid:134) Non-accelerated filer (cid:134) Smaller reporting company (cid:58)
Emerging growth company (cid:134)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. (cid:134)
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act.) (cid:134)Yes (cid:58) No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as
of October 31, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was
$35,764,422 based on the closing sale price of $9.61 per share as reported by Nasdaq Capital Market as of such
date.
The number of outstanding shares of the registrant’s Common Stock, $0.01 par value, as of July 20, 2018 was
4,230,008.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections or portions of the definitive proxy statement of SigmaTron International, Inc., for use in
connection with its 2018 annual meeting of stockholders, which the Company intends to file within 120 days of the
fiscal year ended April 30, 2018, are incorporated by reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM IB. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4. MINE SAFETY DISCLOSURES
PROPERTIES
LEGAL PROCEEDINGS
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
ITEM 6.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
ITEM 8.
ITEM 9.
MARKET RISKS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND
ITEM 14.
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART I
PART II
PART III
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 16.
10-K SUMMARY
SIGNATURES
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33
34
34
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35
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42
PART I
ITEM 1. BUSINESS
CAUTIONARY NOTE:
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc.
(“SigmaTron”), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V.,
Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls
(Cayman) Co. Ltd., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron
Electronic Technology Co., Ltd. (collectively, “SigmaTron China”) and international procurement office
SigmaTron Taiwan branch (collectively, the “Company”) and other Items in this Annual Report on Form 10-K
contain forward-looking statements concerning the Company’s business or results of operations. Words such as
“continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify forward-looking
statements. These forward-looking statements are based on the current expectations of the Company. Because
these forward-looking statements involve risks and uncertainties, the Company’s plans, actions and actual
results could differ materially. Such statements should be evaluated in the context of the risks and uncertainties
inherent in the Company’s business including, but not necessarily limited to, the Company’s continued
dependence on certain significant customers; the continued market acceptance of products and services offered
by the Company and its customers; pricing pressures from the Company’s customers, suppliers and the market;
the activities of competitors, some of which may have greater financial or other resources than the Company;
the variability of our operating results; the results of long-lived assets and goodwill impairment testing; the
variability of our customers’ requirements; the availability and cost of necessary components and materials; the
ability of the Company and our customers to keep current with technological changes within our industries;
regulatory compliance, including conflict minerals; the continued availability and sufficiency of our credit
arrangements; changes in U.S., Mexican, Chinese, Vietnamese or Taiwanese regulations affecting the
Company’s business; the turmoil in the global economy and financial markets; the stability of the U.S.,
Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; currency
exchange fluctuations; and the ability of the Company to manage its growth. These and other factors which
may affect the Company’s future business and results of operations are identified throughout the Company’s
Annual Report on Form 10-K, and as risk factors, may be detailed from time to time in the Company’s filings
with the Securities and Exchange Commission. These statements speak as of the date of such filings, and the
Company undertakes no obligation to update such statements in light of future events or otherwise unless
otherwise required by law.
Overview
SigmaTron is a Delaware corporation, which was organized on November 16, 1993, and commenced operations
when it became the successor to all of the assets and liabilities of SigmaTron L.P., an Illinois limited
partnership, through a reorganization on February 8, 1994.
The Company operates in one business segment as an independent provider of electronic manufacturing
services (“EMS”), which includes printed circuit board assemblies and completely assembled (box-build)
electronic products. In connection with the production of assembled products, the Company also provides
services to its customers, including (1) automatic and manual assembly and testing of products; (2) material
sourcing and procurement; (3) manufacturing and test engineering support; (4) design services; (5) warehousing
and distribution services; and (6) assistance in obtaining product approval from governmental and other
regulatory bodies. The Company provides these manufacturing services through an international network of
facilities located in the United States, Mexico, China, Vietnam and Taiwan.
The Company provides manufacturing and assembly services ranging from the assembly of individual
components to the assembly and testing of box-build electronic products. The Company has the ability to
produce assemblies requiring mechanical as well as electronic capabilities. The products assembled by the
4
Company are then incorporated into finished products sold in various industries, particularly industrial
electronics, consumer electronics and medical/life sciences. In some instances the Company manufactures the
completed finished product for its customers.
The Company operates manufacturing facilities in Elk Grove Village, Illinois United States of America
(“U.S.”); Union City, California U.S.; Acuna, Chihuahua and Tijuana, Mexico; Suzhou, China; and Ho Chi
Minh City, Vietnam. In addition, the Company maintains an International Procurement Office (IPO) in Taipei,
Taiwan. The Company also provides design services in Elgin, Illinois. The Company has an information
technology office in Taichung, Taiwan.
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.
Products and Services
The Company provides a broad range of electronic and electromechanical manufacturing related outsourcing
solutions for its customers. These solutions incorporate the Company’s knowledge and expertise in the EMS
industry to provide its customers with an international network of manufacturing facilities, advanced
manufacturing technologies, complete supply chain management, responsive and flexible customer service, as
well as product design, test and engineering support. The Company’s EMS solutions are available from
inception of product concept through the ultimate delivery of a finished product. Such technologies and
services include the following:
Manufacturing and Testing Services: The Company’s core business is the assembly and testing of all
types of electronic printed circuit board assemblies (“PCBA”) and often incorporating these PCBAs into
electronic modules used in all types of devices and products that depend on electronics for their operation. This
assembly work utilizes state of the art manufacturing and test equipment to deliver highly reliable products to
the Company’s customers. The Company supports new product introduction (“NPI”), low volume / high mix as
well as high volume/ low mix assembly work at all levels of complexity. Assembly services include pin-
through-hole (“PTH”) components, surface mount (“SMT”) components, including ball grid array (“BGA”),
part-on-part components, conformal coating, parylene coating and others. Test services include and are not
limited to, in-circuit, automated optical inspection (“AOI”), functional, burn-in, hi-pot and boundary scan.
From simple component assembly through the most complicated industry testing, the Company offers most of
the services required to build electronic devices commercially available in the market today.
Design Services: To compliment the manufacturing services it offers its customers, the Company also
offers DFM, design for manufacturing and DFT, design for test review services to help customers ensure that
the products they have designed are optimized for production and testing. The Company also offers complete
product design services.
Supply Chain Management: The Company provides complete supply chain management for the
procurement of components needed to build customers’ products. This includes the procurement and
management of all types of electronic components and related mechanical parts such as plastics and metals.
The Company’s resources supporting this activity are provided both on a plant specific basis as well as globally
through its IPO in Taipei, Taiwan. Each of its sites is linked together using the same Enterprise Resource
Planning (“ERP”) system and custom IScore software tools with real-time on-line visibility for customer access.
The Company procures material from major manufacturers and distributors of electronic parts all over the
world.
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. In the past twelve months the component marketplace has
experienced shortages of various components, which in some cases has delayed delivery of product to
customers. 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
5
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.
Warehousing and Distribution: The Company provides both in-house and third party warehousing,
shipping, and customs brokerage for border crossings as part of its service offering. This includes international
shipping, drop shipments to the end customer, as well as, support of inventory optimization activities such as
kanban and consignment.
Green, Sustainability, and Social Responsible Initiatives: The Company supports initiatives that
promote sustainability, green environment and social responsibility. The Company requires its supply chain to
meet all government imposed requirements in these areas and helps its customers in achieving effective
compliance. Those include, but are not limited to, Restrictions of Hazardous Substances (“RoHS”), Restriction
of Chemicals (“REACH”) and Conflict Minerals regulations.
Manufacturing Location and Certifications: The Company’s manufacturing and warehousing
locations are strategically located to support our customers with locations in Elk Grove Village, Illinois U.S.;
Union City, California U.S.; Acuna, Chihuahua and Tijuana, Mexico; Suzhou, China and Ho Chi Minh City,
Vietnam. The Company’s ability to transition manufacturing to lower cost regions without jeopardizing
flexibility and service, differentiates it from many competitors. Manufacturing certifications and registrations
are location specific, and include ISO 9001:2008, ISO 9001:2015, ISO 14001:2004, ISO 14001:2015, ISOTS
16949, Medical ISO 13485:2003, Aerospace AS9100D and International Traffic in Arms Regulations (“ITAR”)
certifications.
Markets and Customers
The Company’s customers are in the industrial electronics, consumer electronics and medical/life sciences
industries. As of April 30, 2018, the Company had approximately 165 active customers ranging from Fortune
500 companies to small, privately held enterprises.
The following table shows, for the periods indicated, the percentage of net sales to the principal end-user
markets it serves.
Percent of Net Sales
Markets
Typical OEM Application
Industrial Electronics
Consumer Electronics
Medical/Life Sciences
Total
Health club equipment, gaming, controls, smart grid, IOT
connectivity
Appliances/white goods, automotive-vision systems,
E-writers
Operating tables, battery packs, dental equipment,
sterilizers
Fiscal
2018
%
Fiscal
2017
%
54.8
48.4
40.4
47.0
4.8
4.6
100% 100%
Reclassifications have been made to the above schedule for fiscal years 2018 and 2017. For the fiscal year
ended April 30, 2018, the Company’s largest two customers, Electrolux and Whirlpool Inc., accounted for
20.2% and 13.3%, respectively, of the Company’s net sales. For the fiscal year ended April 30, 2017,
Electrolux and Whirlpool Inc., accounted for 26.7% and 12.6%, respectively, of the Company’s net sales. The
Company believes that Electrolux and Whirlpool will continue to account for a significant percentage of the
Company’s net sales, although the percentage of net sales may vary from period to period.
6
Sales and Marketing
Many of the members of the Company’s senior management are actively involved in sales and marketing
efforts, and the Company has 4 direct sales employees. The Company markets its services through 8
independent manufacturers’ representative organizations that together currently employ 19 sales personnel in
the United States and Canada. Independent manufacturers’ representatives organizations receive variable
commissions based on orders received by the Company and are assigned specific accounts, not territories. In
addition, the Company markets itself through its website and tradeshows.
Mexico, Vietnam and China Operations
The Company’s wholly-owned subsidiary, Standard Components de Mexico, S.A, a Mexican corporation, is
located in Acuna, Coahuila Mexico, a border town across the Rio Grande River from Del Rio, Texas, and is 155
miles west of San Antonio. Standard Components de Mexico, S.A. was incorporated and commenced operation
in 1968 and had 819 employees at April 30, 2018. The Company’s wholly-owned subsidiary, AbleMex S.A. de
C.V., a Mexican corporation, is located in Tijuana, Baja California Mexico, a border town south of San Diego,
California. AbleMex S.A. de C.V. was incorporated and commenced operations in 2000. The operation had
336 employees at April 30, 2018. The Company’s wholly-owned subsidiary, Digital Appliance Controls de
Mexico S.A., a Mexican corporation, operates in Chihuahua, Mexico, located approximately 235 miles from El
Paso, Texas. Digital Appliance Controls de Mexico S.A. was incorporated and commenced operations in 1997.
The operation had 515 employees at April 30, 2018. The Company believes that one of the key benefits to
having operations in Mexico is its access to cost-effective labor resources while having geographic proximity to
the United States.
The Company’s wholly-owned foreign enterprises, Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron
Electronic Technology Co., Ltd., are located in Suzhou, China. The Company has entered into an agreement
with governmental authorities in the economic development zone of Wujiang, Jiangsu Province, Peoples
Republic of China, pursuant to which the Company became the lessee of a parcel of land of approximately 100
Chinese acres. The term of the land lease is 50 years. The Company built a manufacturing plant, office space
and dormitories on this site during 2004. In fiscal 2015, the China facility expanded and added 40,000 square
feet in warehouse and manufacturing. The total square footage of the facility is 202,000 and has 519 employees
as of April 30, 2018. Both SigmaTron China entities operate at this site.
The Company’s wholly-owned subsidiary, Spitfire Controls (Vietnam) Co. Ltd. is located in Amata Industrial
Park, Bien Hoa City, Dong Nai Province, Vietnam, and is 18 miles east of Ho Chi Minh City. Spitfire Controls
(Vietnam) Co. Ltd. was incorporated and commenced operation in 2005 and had 284 employees as of April 30,
2018.
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 fiscal year
ended April 30, 2018 resulted in net foreign currency transaction gains of approximately $125,000 compared to
net foreign currency losses of $508,000 in the prior year. In fiscal year 2018, the Company paid approximately
$49,170,000 to its foreign subsidiaries.
The consolidated financial statements as of April 30, 2018 include the accounts and transactions of SigmaTron,
its wholly-owned subsidiaries, Standard Components de Mexico, S.A., AbleMex S.A. de C.V., Digital
Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls (Cayman)
Co. Ltd., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron
Electronic Technology Co., Ltd., and international procurement office, SigmaTron Taiwan Branch. The
functional currency of the Company’s foreign subsidiaries operations is the U.S. Dollar. Intercompany
transactions are eliminated in the consolidated financial statements.
7
Competition
The EMS industry is highly competitive and subject to rapid change. Furthermore, both large and small
companies compete in the industry, and many have significantly greater financial resources, more extensive
business experience and greater marketing and production capabilities than the Company. The significant
competitive factors in this industry include price, quality, service, timeliness, reliability, the ability to source
raw components, and manufacturing and technological capabilities. The Company believes it can compete on
all of these factors.
Consolidation
As a result of consolidation and other transactions involving competitors and other companies in the Company’s
markets, the Company occasionally reviews potential transactions relating to its business, products and
technologies. Such transactions could include mergers, acquisitions, strategic alliances, joint ventures, licensing
agreements, co-promotion agreements, financing arrangements or other types of transactions. In the future, the
Company may choose to enter into these types of or other transactions at any time depending on available
sources of financing, and such transactions could have a material impact on the Company’s business, financial
condition or operations.
Governmental Regulations
The Company’s operations are subject to certain foreign government, U.S. federal, state and local regulatory
requirements relating to, among others, environmental, waste management, labor and health and safety
matters. Management believes that the Company’s business is operated in compliance with all such regulations,
which include European regulations known as RoHS and REACH. RoHS prohibits the use of lead, mercury
and certain other specified substances in products being sold into the European Union. The Company has
RoHS-dedicated manufacturing capabilities at all of its manufacturing operations. REACH imposes information
reporting requirements on all listed SVHCs (substances of very high concern). From time-to-time the
Company's customers request REACH required information and certifications on the assemblies the Company
manufactures for them. These requests require the Company to gather information from component suppliers to
verify the presence and level of mass of any SVHCs greater than 0.1% in the assemblies the Company
manufactures based on customer specifications. If any SVHCs are present at more than 0.1% of the mass of the
item, the specific concentration and mass of the SVHC must be reported to proper authorities by the Company's
customer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) introduced
reporting requirements for verification of whether the Company directly (or indirectly through suppliers of
components) is purchasing the minerals or metals gold, columbite-tantalite, cassiterite, wolframite and their
derivatives (tin, tungsten, and tantalum), that are being provided by sources in the conflict region of the
Democratic Republic of Congo (“DRC”). On May 23, 2018, the Company filed Form SD with the Securities
and Exchange Commission stating the Company’s supply chain remains DRC conflict undeterminable.
The Company’s costs of compliance with environmental laws, including conflict mineral reporting, is estimated
to be a total of approximately $1,500,000 for the three most recently completed fiscal years ending April 30,
2018. Additional or modified requirements may be imposed in the future. If such additional or modified
requirements are imposed, or if conditions requiring remediation are found to exist, the Company may be
required to incur additional expenditures.
Backlog
The Company relies on customers’ forecasted orders and purchase orders (firm orders) from its customers to
estimate backlog. The Company’s backlog of firm orders as of April 30, 2018 and 2017 was approximately
$219,100,000 and $209,540,000, respectively. The Company anticipates a significant portion of the backlog at
April 30, 2018 will ship in fiscal year 2019. Because customers may cancel or reschedule deliveries, backlog
may not be a meaningful indicator of future revenue. Variations in the magnitude and duration of contracts,
8
forecasts and purchase orders received by the Company and delivery requirements generally may result in
substantial fluctuations in backlog from period to period.
Employees
The Company employed approximately 2,993 full-time employees as of April 30, 2018, including 213 engaged
in engineering or engineering-related services, 2,396 in manufacturing and 384 in administrative and marketing
functions.
The Company has a labor contract with Chemical & Production Workers Union Local No. 30, AFL-CIO,
covering the Company’s workers in Elk Grove Village, Illinois which expires on November 30, 2018. The
Company’s Mexican subsidiary, Standard Components de Mexico S.A., has a labor contract with Sindicato De
Trabajadores de la Industra Electronica, Similares y Conexos del Estado de Coahuila, C.T.M. covering the
Company’s workers in Acuna, Mexico which expires on February 3, 2020. The Company’s subsidiary located
in Tijuana Mexico has a labor contract with Sindicato Mexico Moderno De Trabajadores De La, Baja
California, C.R.O.C. The contract does not have an expiration date. The Company’s subsidiary located in Ho
Chi Minh City, Vietnam, has a labor contract with CONG DOAN CO SO CONG TY TNHH Spitfire Controls
Vietnam. The contract expires February 5, 2019.
Since the time the Company commenced operations, it has not experienced any union-related work stoppages.
The Company believes its relations with its unions and its other employees are good.
9
Executive Officers of the Registrant
Name
Age
Position
Gary R. Fairhead
66
President and Chief Executive Officer. Gary R. Fairhead has been the
President of the Company since January 1990 and Chairman of the Board of
Directors of the Company since August 2011. Gary R. Fairhead is the
brother of Gregory A. Fairhead.
Linda K. Frauendorfer
57
Chief Financial Officer, Vice President of Finance, Treasurer and Secretary
since February 1994. Director of the Company since August 2011.
Gregory A. Fairhead
62
Executive Vice President and Assistant Secretary. Gregory A. Fairhead has
been the Executive Vice President since February 2000 and Assistant
Secretary since 1994. Mr. Fairhead was Vice President - Acuna Operations
for the Company from February 1990 to February 2000. Gregory A.
Fairhead is the brother of Gary R. Fairhead.
John P. Sheehan
57
Vice President, Director of Supply Chain and Assistant Secretary since
February 1994.
Daniel P. Camp
69
Vice President, Acuna Operations since 2007. Vice President - China
Operations from 2003 to 2007. General Manager / Vice President of Acuna
Operations from 1994 to 2003.
Rajesh B. Upadhyaya
63
Executive Vice President, West Coast Operations since 2005. Mr.
Upadhyaya was the Vice President of the Fremont Operations from 2001
until 2005.
Hom-Ming Chang
58
Vice President, China Operations since 2007. Vice President - Hayward
Materials / Test / IT from 2005 - 2007. Vice President of Engineering
Fremont Operation from 2001 to 2005.
ITEM 1A. RISK FACTORS
The following risk factors should be read carefully in connection with evaluating our business and the forward-
looking information contained in this Annual Report on Form 10-K. Any of the following risks could
materially adversely affect our business, operations, industry or financial position or our future financial
performance. While the Company believes it has identified and discussed below the key risk factors affecting
its business, there may be additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may adversely affect its business, operations, industry, financial
position and financial performance in the future.
The Company’s ability to secure and maintain sufficient credit arrangements is key to its continued
operations.
Prior to March 31, 2017 the Company had a senior secured credit facility with Wells Fargo, N.A. with a
revolving credit limit up to $30,000,000. The credit facility was collateralized by substantially all of the
Company’s domestically located assets and the Company had pledged 65% of its equity ownership interest in
some of its foreign entities. Prior to its payoff and termination, the Wells Fargo, N.A. senior secured credit
facility was due to expire on October 31, 2018. On March 31, 2017, the Company paid the balance outstanding
under the senior revolving credit facility in the amount of $22,232,914. The remaining deferred financing costs
of $68,475 were expensed in the fourth quarter of fiscal 2017.
10
On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with U.S. Bank,
National Association (“U.S. Bank”), which expires on March 31, 2022. The credit facility is collateralized by
substantially all of the Company’s domestically located assets. The facility allows the Company to choose
among interest rates at which it may borrow funds: the bank fixed rate of four percent or LIBOR plus one and
one half percent (effectively 3.83% at April 30, 2018). Interest is due monthly. Under the senior secured credit
facility, the Company may borrow up to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of
the eligible receivable borrowing base plus a percentage of the eligible inventory borrowing base (the
“Borrowing Base”). Deferred financing costs of $34,971 and $207,647 were capitalized in the twelve month
period ending April 30, 2018 and the fourth quarter of fiscal 2017, respectively, which are amortized over the
term of the agreement. As of April 30, 2018 and April 30, 2017 the unamortized amount included in other
assets was $192,502 and $204,186, respectively. As of April 30, 2018, there was $29,279,631 outstanding and
$5,720,369 of unused availability under the U.S. Bank facility compared to an outstanding balance of
$23,178,429 and $11,821,571 of unused availability at April 30, 2017. At April 30, 2018, the Company was in
compliance with its financial covenant and other restricted covenants under the credit facility.
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The
amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 less
reserves or (ii) 90% of the Company’s Borrowing Base, except that the 90% limitation will expire if the
Company’s actual revolving loans for the first 90 days after the amendment’s effective date are less than 80% of
the Company’s Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of 1.2 to 1.0 for
four consecutive quarters. The amendment also imposes sublimits on categories of inventory equal to
$17,500,000 on raw materials and $25,000,000 on finished goods.
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron
Electronics Co., Ltd. could borrow up to 5,000,000 Renminbi and the facility was collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a
fixed interest rate of 6.67%. The facility was due to expire on August 3, 2017. The credit facility was closed as
of March 1, 2017.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic
Technology Co., Ltd. could borrow up to 9,000,000 Renminbi and the facility was collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a
fixed interest rate of 6.09%. The term of the facility extended to February 7, 2018. The credit facility was
closed as of February 11, 2018. There was no outstanding balance under the facility at April 30, 2017.
On February 12, 2018, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic
Technology Co., Ltd. can borrow up to 5,000,000 Renminbi and the facility is collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a
fixed interest rate of 6.09%. The term of the facility extends to February 7, 2019. There was no outstanding
balance under the facility at April 30, 2018.
The Company anticipates that its credit facilities, cash flow from operations and leasing resources are adequate
to meet its working capital requirements and capital expenditures for fiscal year 2019. In addition, in the event
the Company desires to expand its operations, its business grows more rapidly than expected, the current
economic climate deteriorates, customers delay payments, or the Company desires to consummate an
acquisition, additional financing resources may be necessary in the current or future fiscal years. There is no
assurance that the Company will be able to obtain equity or debt financing at acceptable terms, or at all, in the
future. There is no assurance that the Company will be able to retain or renew its credit agreements in the
future, or that any retention or renewal will be on the same terms as currently exist.
11
Adverse changes in the economy or political conditions could negatively impact the Company’s business,
results of operations and financial condition.
The Company’s sales and gross margins depend significantly on market demand for its customers’ products.
The uncertainty in the U.S. and international economic and political environments could result in a decline in
demand for our customers’ products in any industry. Further, any adverse changes in tax rates and laws
affecting our customers could result in decreasing gross margins. Any of these factors could negatively impact
the Company’s business, results of operations and financial condition.
The Company experiences variable operating results.
The Company’s results of operations have varied and may continue to fluctuate significantly from period to
period, including on a quarterly basis. Consequently, results of operations in any period should not be
considered indicative of the results for any future period, and fluctuations in operating results may also result in
fluctuations in the price of the Company’s common stock.
The Company’s quarterly and annual results may vary significantly depending on numerous factors, many of
which are beyond the Company’s control. Some of these factors include:
- changes in sales mix to customers
- changes in availability and rising component costs
- volume of customer orders relative to capacity
- market demand and acceptance of our customers’ products
- price erosion within the EMS marketplace
- capital equipment requirements needed to remain technologically competitive
- volatility in the U.S. and international economic and financial markets
The Company’s customer base is concentrated.
Sales to the Company’s five largest customers accounted for 50.2% and 55.2% of net sales for the fiscal years
ended April 30, 2018 and 2017, respectively. For the year ended April 30, 2018, two customers accounted for
20.2% and 13.3% of net sales of the Company, and 6.0% and 2.9%, respectively, of accounts receivable at April
30, 2018. For the year ended April 30, 2017, two customers accounted for 26.7% and 12.6% of net sales of the
Company and 8.4% and 4.2%, respectively, of accounts receivable at April 30, 2017. Significant reductions in
sales to any of the Company’s major customers or the loss of a major customer could have a material impact on
the Company’s operations. If the Company cannot replace cancelled or reduced orders, sales will decline,
which could have a material impact on the results of operations. There can be no assurance that the Company
will retain any or all of its largest customers. This risk may be further complicated by pricing pressures and
intense competition prevalent in our industry.
If any of the Company’s customers have financial difficulties, the Company could encounter delays or defaults
in the payment of amounts owed for accounts receivable and inventory obligations. This could have a
significant adverse impact on the Company’s results of operations and financial condition.
Most of the Company’s customers do not commit to long-term production schedules, which makes it difficult
to schedule production and achieve maximum efficiency at the Company’s manufacturing facilities and
manage inventory levels.
The volume and timing of sales to the Company’s customers may vary due to:
- customers’ attempts to manage their inventory
- variation in demand for the Company’s customers’ products
- design changes, or
- acquisitions of or consolidation among customers
Many of the Company’s customers do not commit to firm production schedules. The Company’s inability to
forecast the level of customer orders with certainty can make it difficult to schedule production and maximize
12
utilization of manufacturing capacity and manage inventory levels. The Company could be required to increase
or decrease staffing and more closely manage other expenses in order to meet the anticipated demand of its
customers. Orders from the Company’s customers could be cancelled or delivery schedules could be deferred
as a result of changes in our customers’ demand, thereby adversely affecting the Company’s results of
operations in any given quarter.
The Company and its customers may be unable to keep current with the industry’s technological changes.
The market for the Company’s manufacturing services is characterized by rapidly changing technology and
continuing product development. The future success of the Company’s business will depend in large part upon
our customers’ ability to maintain and enhance their technological capabilities, develop and market
manufacturing services which meet changing customer needs and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely basis.
Our customers have competitive challenges, including rapid technological changes, pricing pressure and
decreasing demand from their customers, which could adversely affect their business and the Company’s.
Factors affecting the industries that utilize our customers’ products could negatively impact our customers and
the Company. These factors include:
- increased competition among our customers and their competitors
- the inability of our customers to develop and market their products
- recessionary periods in our customers’ markets
- the potential that our customers’ products become obsolete
- our customers’ inability to react to rapidly changing technology
Any such factor or a combination of factors could negatively impact our customers’ need for or ability to pay
for our products, which could, in turn, affect the Company’s results of operations.
Adverse market conditions could reduce our future sales and earnings per share.
Uncertainty over the erosion of global consumer confidence amidst concerns about volatile energy costs,
geopolitical issues, the availability and cost of credit, declining asset values, inflation, rising unemployment,
and the stability and solvency of financial institutions, financial markets, businesses, and sovereign nations has
slowed global economic growth and resulted in recessions in many countries, including in the United States,
Europe and certain countries in Asia over the past several years. The economic recovery of recent years is
fragile and recessionary conditions may return. Any of these potential negative economic conditions may
reduce demand for the Company’s customers’ products and adversely affect the Company’s sales.
Consequently, the Company’s past operating results, earnings and cash flows may not be indicative of the
Company’s future operating results, earnings and cash flows.
Customer relationships with start-up companies present more risk.
A small portion of the Company’s current customer base is comprised of start-up companies. Customer
relationships with start-up companies may present heightened risk due to the lack of product history. Slow
market acceptance of their products could result in demand fluctuations causing inventory levels to rise.
Further, the current economic environment could make it difficult for such emerging companies to obtain
additional funding. This may result in additional credit risk including, but not limited to, the collection of trade
account receivables and payment for their inventory. If the Company does not have adequate allowances
recorded, the results of operations may be negatively affected.
The Company faces intense industry competition and downward pricing pressures.
The EMS industry is highly fragmented and characterized by intense competition. Many of the Company’s
competitors have greater experience, as well as greater manufacturing, purchasing, marketing and financial
resources than the Company. Competition from existing or potential new competitors may have a material
adverse impact on the Company’s business, financial condition or results of operations. The introduction of
13
lower priced competitive products, significant price reductions by the Company’s competitors or significant
pricing pressures from its customers could adversely affect the Company’s business, financial condition, and
results of operations.
The Company has foreign operations that may pose additional risks.
The Company has substantial manufacturing operations in multiple countries. Therefore, the Company’s
foreign businesses and results of operations are dependent upon numerous related factors, including the stability
of the foreign economies, the political climate, relations with the United States, prevailing worker wages, the
legal authority of the Company to operate and expand its business in a foreign country, and the ability to
identify, hire, train and retain qualified personnel and operating management in Mexico, China and Vietnam.
The Company obtains many of its materials and components through its IPO in Taipei, Taiwan. The
Company’s access to these materials and components is dependent on the continued viability of its Asian
suppliers.
Approximately 14.0% of the total non-current consolidated assets of the Company are located in foreign
jurisdictions outside the United States as of April 30, 2018 and 2017.
Disclosure and internal controls may not detect all errors or fraud.
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, believe that
the Company’s disclosure controls and internal controls may not prevent all errors and all fraud. The
Company’s disclosure controls and internal controls can provide only reasonable assurance that the procedures
will meet the control objectives. Controls are limited in their effectiveness by human error, including faulty
judgments in decision-making. Further, controls can be circumvented by collusion of two or more people or by
management override of controls.
Inadequate internal control over financial reporting could result in a reduction in the value of our common
stock.
If the Company identifies and reports a material weakness in its internal control over financial reporting,
shareholders and the Company’s lenders could lose confidence in the reliability of the Company’s financial
statements. This could have a material adverse impact on the value of the Company’s stock and the Company’s
liquidity.
There is a risk of fluctuation of various currencies integral to the Company’s operations.
The Company purchases some of its material components and funds some of its operations in foreign
currencies. From time to time the currencies fluctuate against the U.S. Dollar. Such fluctuations could have a
material impact on the Company’s results of operations and performance. The impact of currency fluctuations
for the year ended April 30, 2018 resulted in net foreign currency transaction gains of approximately $125,000
compared to net foreign currency losses of $508,000 in the prior year. These fluctuations are expected to
continue and could have a negative impact on the Company’s results of operations. The Company did not, and
is not expected to, utilize derivatives or hedge foreign currencies to reduce the risk of such fluctuations.
The availability of raw components or an increase in their price may affect the Company’s operations and
profits.
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 buying power from suppliers. The Company does not enter into long-term purchase agreements
with major or single-source suppliers, but the Company frequently places cancellable scheduled purchase orders
14
with suppliers that extend out as far as one year. The current component market place is tight, with lead times
for many common components extending out 36 weeks or more. The Company’s orders for components are
always based on the changing needs of its customers.
The Company depends on management and skilled personnel.
The Company depends significantly on its President/CEO and other executive officers. The Company’s
employees generally are not bound by employment agreements and the Company cannot assure that it will
retain its executive officers or skilled personnel. The loss of the services of any of these key employees could
have a material impact on the Company’s business and results of operations. In addition, despite significant
competition, continued growth and expansion of the Company’s EMS business will require that the Company
attract, motivate and retain additional skilled and experienced personnel. The Company’s future growth
depends on the contributions and abilities of key executives and skilled, experienced employees. The
Company’s future growth also depends on its ability to recruit and retain high-quality employees. A failure to
obtain or retain the number of skilled employees necessary to support the Company’s efforts, a loss of key
employees or a significant shortage of skilled, experienced employees could jeopardize its ability to meet its
growth targets.
Favorable labor relations are important to the Company.
The Company currently has labor union contracts with its employees constituting approximately 45% and 50%
of its workforce for fiscal years 2018 and 2017, respectively. Although the Company believes its labor relations
are good, any labor disruptions, whether union-related or otherwise, could significantly impair the Company’s
business, substantially increase the Company’s costs or otherwise have a material impact on the Company’s
results of operations.
Failure to comply with environmental regulations could subject the Company to liability.
The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and
disposal of hazardous chemicals used during its manufacturing process. To date, the cost to the Company of
such compliance has not had a material impact on the Company’s business, financial condition or results of
operations. However, there can be no assurance that violations will not occur in the future as a result of human
error, equipment failure or other causes. Further, the Company cannot predict the nature, scope or effect of
environmental legislation or regulatory requirements that could be imposed or how existing or future laws or
regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as
more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by the
Company and could have a material impact on the Company’s business, financial condition and results of
operations. Any failure by the Company to comply with present or future regulations could subject it to future
liabilities or the suspension of production which could have a material negative impact on the Company’s
results of operations.
Conflict minerals regulations may cause the Company to incur additional expenses and could increase the
cost of components contained in its products and adversely affect its inventory supply chain.
The Dodd-Frank Act, and the rules promulgated by the Securities and Exchange Commission (“SEC”)
thereunder, requires the Company to determine and report annually whether any conflict minerals contained in
our products originated from the DRC or an adjoining country. The Dodd-Frank Act and these rules could affect
our ability to source components that contain conflict minerals at acceptable prices and could impact the
availability of conflict minerals, since there may be only a limited number of suppliers of conflict-free conflict
minerals. Our customers may require that our products contain only conflict-free conflict minerals, and our
revenues and margins may be negatively impacted if we are unable to meet this requirement at a reasonable
price or are unable to pass through any increased costs associated with meeting this requirement. Additionally,
the Company may suffer reputational harm with our customers and other stakeholders if our products are not
conflict-free. The Company could incur significant costs in the event we are unable to manufacture products
that contain only conflict-free conflict minerals or to the extent that we are required to make changes to
products, processes, or sources of supply due to the foregoing requirements or pressures.
15
The price of the Company’s stock is volatile.
The price of the Company’s common stock historically has experienced significant volatility due to fluctuations
in the Company’s revenue and earnings, other factors relating to the Company’s operations, the market’s
changing expectations for the Company’s growth, overall equity market conditions and other factors unrelated
to the Company’s operations. In addition, the limited float of the Company’s common stock and the limited
number of market makers also affect the volatility of the Company’s common stock. Such fluctuations are
expected to continue in the future.
An adverse change in the interest rates for our borrowings could adversely affect our results of operations.
The Company pays interest on outstanding borrowings under its senior secured credit facility and certain other
long-term debt obligations at interest rates that fluctuate. An adverse change in the Company’s interest rates
could have a material adverse effect on its results of operations.
Changes in securities laws and regulations may increase costs.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and listing
requirements subsequently adopted by Nasdaq in response to Sarbanes-Oxley, have required changes in
corporate governance practices, internal control policies and securities disclosure and compliance practices of
public companies. More recently the Dodd-Frank Act requires changes to our corporate governance,
compliance practices and securities disclosures. Compliance following the implementation of these rules has
increased our legal, financial and accounting costs. The Company expects increased costs related to these new
regulations to continue, including, but not limited to, legal, financial and accounting costs. These developments
may result in the Company having difficulty in attracting and retaining qualified members of the board or
qualified officers. Further, the costs associated with the compliance with and implementation of procedures
under these laws and related rules could have a material impact on the Company’s results of operations.
Any litigation, even where a claim is without merit, could result in substantial costs and diversion of
resources.
In the past, the Company has been notified of claims relating to various matters including intellectual property
rights, contractual matters, labor issues or other matters arising in the ordinary course of business. In the event
of any such claim, the Company may be required to spend a significant amount of money and resources, even
where the claim is without merit. Accordingly, the resolution of such disputes, even those encountered in the
ordinary course of business, could have a material adverse effect on the Company’s business, consolidated
financial conditions and results of operations.
If the security of the Company’s systems is breached or otherwise subjected to unauthorized access, the
Company’s reputation may be severely harmed and it may be exposed to liability.
The Company’s system stores confidential information which includes its financial information, its customers’
proprietary email distribution lists, product information, supplier information, and other critical data. Any
accidental or willful security breaches or other unauthorized access could expose the Company to liability for
the loss of such information, adverse regulatory action by federal and state governments, time-consuming and
expensive litigation and other possible liabilities as well as negative publicity, which could severely damage the
Company’s reputation. If security measures are breached because of third-party action, employee error,
malfeasance or otherwise, or if design flaws in its software are exposed and exploited, and, as a result, a third
party obtains unauthorized access to any of its customers’ data, its relationships with its customers may be
severely damaged, and the Company could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are not recognized until they are
launched against a target, the Company and its third-party hosting facilities may be unable to anticipate these
techniques or to implement adequate preventive measures. In addition, many states have enacted laws requiring
companies to notify customers of data security breaches involving their data. These mandatory disclosures
regarding a security breach often lead to widespread negative publicity, which may cause the Company’s
customers to lose confidence in the effectiveness of its data security measures. Any security breach whether
16
actual or perceived, could harm the Company’s reputation, could cause it to lose customers and may negatively
impact its ability to acquire new customers.
With the increased use of technologies such as the Internet to conduct business, a company is susceptible to
operational, information security and related risks. In general, cyber incidents can result from deliberate attacks
or unintentional events. Cyberattacks include, but are not limited to, gaining unauthorized access to digital
systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or
sensitive information, corrupting data, or causing operational disruption (e.g., ransomware attacks).
Cyberattacks may also be carried out in a manner that does not require gaining unauthorized access, such as
causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended
users). Cyber incidents affecting the Company or its service providers have the ability to cause disruptions and
impact business operations, potentially resulting in financial losses, interference with the Company’s ability to
conduct business in the ordinary course, violations of applicable privacy and other laws, regulatory fines,
penalties, reputational damage, reimbursement or other compensation costs, additional compliance costs and, in
extreme cases, have caused companies to cease doing business. Cyber events also can affect counterparties or
clients with which the Company does business, governmental and other regulatory authorities, banks, insurance
companies and other financial institutions, among others. In addition, substantial costs may be incurred in order
to prevent any cyber incidents in the future. While the Company has established risk management systems to
prevent such cyber incidents, there are inherent limitations in such systems including the possibility that the
Company has not prepared for certain risks that have not been or are not possible to have been identified.
Further, the Company may be able to influence, but cannot control, the cyber security plans and systems put in
place by its service providers or any other third parties whose operations may affect the Company. The
Company could be negatively impacted as a result.
Changes in US trade policy, including the imposition of tariffs and the resulting consequences, may have a
material adverse impact on our business and results of operations.
The US government has indicated its intent to adopt a new approach to trade policy and in some cases to
renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements. It has also
initiated tariffs on certain foreign goods, including steel and aluminum and other raw materials utilized by the
Company. Changes in US trade policy could result in one or more of US trading partners adopting responsive
trade policy making it more difficult or costly for us to import our products from those countries. This in turn
could require us to increase prices to our customers which may reduce demand, or, if we are unable to increases
prices, result in lowering our margin on products sold.
China and the European Union have imposed tariffs on US products in retaliation for new US tariffs.
Additional tariffs could be imposed by China and the European Union in response to proposed increased tariffs
on products imported from China and the European Union. There is also a concern that the imposition of
additional tariffs by the United States could result in the adoption of tariffs by other countries. The resulting
trade war could have a significant adverse effect on world trade and the world economy. To the extent that
trade tariffs and other restrictions imposed by the United States increase the price of, or limit the amount of
steel, aluminum and other raw materials utilized by the Company imported into the United States, the costs of
our raw materials may be adversely affected and the demand from our customers for products and services may
be diminished, which could adversely affect our revenues and profitability.
We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impact on our
business. The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental
action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our
products, our costs, our customers, our suppliers, and the US economy, which in turn could adversely impact
our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
At April 30, 2018, the Company, operating in one business segment as an independent EMS provider, had
manufacturing facilities located in Elk Grove Village, Illinois U.S., Union City, California U.S., Acuna,
Chihuahua and Tijuana, Mexico, Ho Chi Minh City, Vietnam and Suzhou, China. In addition, the Company
provides materials procurement services through its Elk Grove Village, Illinois U.S., Union City, California
U.S, and Taipei, Taiwan offices. The Company provides design services in Elgin, Illinois U.S. The Company
has an information technology office in Taichung, Taiwan.
Certain information about the Company’s manufacturing, warehouse, purchasing and design facilities is set
forth below:
Location
Square
Feet
Services Offered
Owned/Leased
Suzhou, China
202,000 Electronic and electromechanical manufacturing
solutions
Elk Grove Village, IL 124,300 Corporate headquarters and electronic and
electromechanical manufacturing solutions
*
***
Owned
Union City, CA
117,000 Electronic and electromechanical manufacturing
Leased
solutions
Acuna, Mexico
115,000 Electronic and electromechanical manufacturing
solutions
Owned
**
Chihuahua, Mexico
113,000 Electronic and electromechanical manufacturing
Leased
solutions
Tijuana, Mexico
112,100 Electronic and electromechanical manufacturing
Leased
solutions
Ho Chi Minh City,
Vietnam
24,475 Electronic and electromechanical manufacturing
Leased
solutions
Del Rio, TX
44,000 Warehousing and distribution
Taipei, Taiwan
4,685 International procurement office
Taichung, Taiwan
1,650 Information technology office
Elgin, IL
45,000 Design services
San Diego, CA
30,240 Warehousing and distribution
Leased
Leased
Leased
Owned
Leased
*The Company’s Suzhou, China building is owned by the Company and the land is leased from the Chinese
government for a 50 year term.
**A portion of the facility is leased and the Company has an option to purchase it.
***Total square footage includes 70,000 square feet of dormitories.
18
The Union City and San Diego, California, Tijuana and Chihuahua, Mexico, Ho Chi Minh City, Vietnam and
Del Rio, Texas properties are occupied pursuant to leases of the premises. The lease agreements for the Del
Rio, Texas properties expire December 2019. The lease agreement for the San Diego, California property
expires August 2019. The lease agreement for the Union City, California property expires March 2021. The
Chihuahua, Mexico lease expires July 2019. The Tijuana, Mexico lease expires November 2018. The lease
agreement for the Ho Chi Minh City, Vietnam property expires July 2020. The Company’s manufacturing
facilities located in Acuna, Mexico, Elgin, Illinois and Elk Grove Village, Illinois are owned by the Company,
except for a portion of the facility in Acuna, Mexico, which is leased. The Company has an option to buy the
leased portion of the facility in Acuna, Mexico. The properties in Elk Grove Village, Illinois and Elgin, Illinois
are financed under separate mortgage loan agreements. The Company leases the IPO office in Taipei, Taiwan
to coordinate Far East purchasing activities. The Company leases the information technology office in
Taichung, Taiwan. The Company believes its current facilities are adequate to meet its current needs. In
addition, the Company believes it can find alternative facilities to meet its needs in the future, if required.
ITEM 3. 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
19
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company’s common stock is traded on the NASDAQ Capital Market System under the symbol SGMA.
The following table sets forth the range of quarterly high and low sales price information for the common stock
for the periods ended April 30, 2018 and 2017.
Common Stock as Reported
by NASDAQ
Period
High
Low
Fiscal 2018
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Fiscal 2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
$ 9.03
11.61
9.71
8.59
$ 5.45
5.50
6.81
6.20
$ 5.26
8.39
6.94
5.34
$ 4.01
4.34
5.25
5.42
As of July 20, 2018, there were approximately 29 holders of record of the Company’s common stock, which
does not include shareholders whose stock is held through securities position listings. The Company estimates
there to be approximately 2,739 beneficial owners of the Company’s common stock.
The Company has not paid cash dividends on its common stock since completing its February 1994 initial
public offering and does not intend to pay any dividends in the foreseeable future. So long as any indebtedness
remains unpaid under the Company’s revolving loan facility, the Company is prohibited from paying or
declaring any dividends on any of its capital stock, except stock dividends, without the written consent of the
lender under the facility.
20
Equity Compensation Plan Information
For information concerning securities authorized for issuance under our equity compensation plans, see Part III,
Item 12 of this Annual Report, under the caption “Security Ownership of Certain Beneficial Owners and
Management and Related Stockholders Matters” as well as the Company’s audited financial statements and
notes thereto, including Note N, filed herewith and all such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information
required by this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to historical financial information, this discussion of the business of SigmaTron International, Inc.
(“SigmaTron”), its wholly-owned subsidiaries Standard Components de Mexico S.A., AbleMex, S.A. de C.V.,
Digital Appliance Controls de Mexico, S.A. de C.V., Spitfire Controls (Vietnam) Co. Ltd., Spitfire Controls
(Cayman) Co. Ltd., wholly-owned foreign enterprises Wujiang SigmaTron Electronics Co., Ltd. and SigmaTron
Electronic Technology Co., Ltd. (collectively, “SigmaTron China”) and international procurement office
SigmaTron Taiwan branch (collectively, the “Company”) and other Items in this Annual Report on Form 10-K
contain forward-looking statements concerning the Company’s business or results of operations. Words such as
“continue,” “anticipate,” “will,” “expect,” “believe,” “plan,” and similar expressions identify forward-looking
statements. These forward-looking statements are based on the current expectations of the Company. Because
these forward-looking statements involve risks and uncertainties, the Company’s plans, actions and actual
results could differ materially. Such statements should be evaluated in the context of the risks and uncertainties
inherent in the Company’s business including, but not necessarily limited to, the Company’s continued
dependence on certain significant customers; the continued market acceptance of products and services offered
by the Company and its customers; pricing pressures from the Company’s customers, suppliers and the market;
the activities of competitors, some of which may have greater financial or other resources than the Company;
the variability of our operating results; the results of long-lived assets and goodwill impairment testing; the
variability of our customers’ requirements; the availability and cost of necessary components and materials; the
ability of the Company and our customers to keep current with technological changes within our industries;
regulatory compliance, including conflict minerals; the continued availability and sufficiency of our credit
arrangements; changes in U.S., Mexican, Chinese, Vietnamese or Taiwanese regulations affecting the
Company’s business; the turmoil in the global economy and financial markets; the stability of the U.S.,
Mexican, Chinese, Vietnamese and Taiwanese economic, labor and political systems and conditions; currency
exchange fluctuations; and the ability of the Company to manage its growth. These and other factors which
may affect the Company’s future business and results of operations are identified throughout the Company’s
Annual Report on Form 10-K, and as risk factors, may be detailed from time to time in the Company’s filings
with the Securities and Exchange Commission. These statements speak as of the date of such filings, and the
Company undertakes no obligation to update such statements in light of future events or otherwise unless
otherwise required by law.
Overview
The Company operates in one business segment as an independent provider of EMS, which includes printed
circuit board assemblies and completely assembled (box-build) electronic products. In connection with the
production of assembled products, the Company also provides services to its customers, including (1) automatic
and manual assembly and testing of products; (2) material sourcing and procurement; (3) manufacturing and
test engineering support; (4) design services; (5) warehousing and distribution services; and (6) assistance in
obtaining product approval from governmental and other regulatory bodies. The Company provides these
manufacturing services through an international network of facilities located in the United States, Mexico,
China, Vietnam and Taiwan.
21
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. In the past twelve months the component marketplace has experienced shortages
of various components, which in some cases has delayed delivery of product to customers. The loss of any such
suppliers could have a material impact on the Company’s results of operations. Further, the Company could
operate at a cost disadvantage compared to competitors who have greater direct buying power from suppliers.
The Company does not enter into long-term purchase agreements with major or single-source suppliers. The
Company believes that short-term purchase orders with its suppliers provides flexibility, given that the
Company’s orders are based on the changing needs of its customers.
Sales can be a misleading indicator of the Company’s financial performance. Sales levels can vary
considerably among customers and products depending on the type of services (turnkey versus consignment)
rendered by the Company and the demand by customers. Consignment orders require the Company to perform
manufacturing services on components and other materials supplied by a customer, and the Company charges
only for its labor, overhead and manufacturing costs, plus a profit. In the case of turnkey orders, the Company
provides, in addition to manufacturing services, the components and other materials used in assembly. Turnkey
contracts, in general, have a higher dollar volume of sales for each given assembly, owing to inclusion of the
cost of components and other materials in net sales and cost of goods sold. Variations in the number of turnkey
orders compared to consignment orders can lead to significant fluctuations in the Company’s revenue and gross
margin levels. Consignment orders accounted for less than 1% of the Company’s revenues for each of the fiscal
years ended April 30, 2018 and 2017.
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.
For fiscal year 2019 the Company currently expects a significant amount of revenue growth. Several new
customers that were added during fiscal year 2018 are starting to ramp up during the first quarter of fiscal 2019
and that ramp is expected to continue through the fiscal year. Current customers are also continuing to forecast
higher volumes and have awarded the Company new programs which should contribute to the Company’s
projected growth. The percentage of overall business in the appliance market continues to decline as non-
appliance business grows. The Company values its relationships in the appliance marketplace, but the business
is not as attractive as in industrial and medical markets. The Company expects that trend to continue.
Regarding the overall industry, the Company continues to see a volatile electronic component marketplace
which continues to cause production disruptions for our operations and our customers. Unfortunately, the
Company does not see that improving in the short term as the manufacturers of certain components do not
appear to be expanding capacity. In addition, the labor market continues to tighten in North America as well as
the Asia-Pacific region. Layered on top of those issues is the continuing trade negotiations between the United
States and NAFTA members as well as with China. This also creates a volatile marketplace.
Critical Accounting Policies:
Management Estimates and Uncertainties - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Significant estimates made in
preparing the consolidated financial statements include depreciation and amortization periods, the allowance for
doubtful accounts, reserves for inventory, lower of cost or market adjustment for inventory, contingent
consideration, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation of
goodwill and long-lived assets. Actual results could materially differ from these estimates.
Revenue Recognition - Revenues from sales of the Company's 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 Company's policy to recognize revenue and related costs when the finished
22
goods have been shipped from its facilities, which is also the same point in time that title passes under the terms
of the purchase order and control passes to the customer. 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 to the customer. 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 in time 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 to hold finished goods after they have been invoiced to
consolidate finished goods for shipping purposes. The Company generally provides a warranty for
workmanship, unless the assembly was designed by the Company, in which case it warrants assembly/design.
The Company 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.
Inventories - Inventories are valued at cost. Cost is determined by an average cost method and the
Company allocates labor and overhead to work-in-process and finished goods. In the event of an inventory
write-down, the Company records expense to state the inventory at lower of cost or net realizable value. 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. 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. For convenience, the Company records these inventory reserves against the inventory cost
through a contra asset rather than through a new cost basis. Upon a subsequent sale or disposal of the impaired
inventory, the corresponding reserve is relieved to ensure the cost basis of the inventory reflects any reductions.
Actual results differing from these estimates could significantly affect the Company’s inventories and cost of
products sold as the inventory is sold or otherwise relieved.
Goodwill - Goodwill represents the purchase price in excess of the fair value of assets acquired in
business combinations. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 350, “Intangibles – Goodwill and Other,” requires the Company to assess goodwill and other
indefinite-lived intangible assets for impairment at least annually in the absence of an indicator of possible
impairment and immediately upon an indicator of possible impairment. The 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 (the “step 2” requirement). 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. For fiscal 2017, the Company performed its annual goodwill impairment test as of February
1, 2017 and determined no impairment existed as of that date. The step one analysis was performed using a
combination of a market approach and an income approach based on a discounted cash flow analysis.
For fiscal year 2018, the Company early adopted the guidance contained in Accounting Standards Update
(ASU) No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price allocation to
measure goodwill impairment. Beginning with its February 1, 2018 goodwill impairment testing, goodwill
impairment is the amount by which the Company’s single reporting unit carrying value exceeds its fair value,
not to exceed the recorded amount of goodwill. To estimate the fair value of the Company’s equity, the
Company used both a market approach based on the guideline companies’ method, and an income approach
23
based on a discounted cash flow analysis. The value indicated by both methods was weighted to arrive at a
concluded value. The carrying value of the Company’s equity was greater than the fair value of the Company
based on the valuation analysis by an amount greater than the recorded amount of the goodwill. In the fourth
quarter of fiscal 2018, the Company’s forecasted future cash flow declined from prior estimates. The Company
is experiencing declining margins due to pricing pressures from vendors and customers. Also at this time,
electronic component manufacturers began allocating components to their customers which required the
Company to increase its investment in working capital. The decline in the forecasted cash flow resulted in a
lower estimate of the fair value of the Company’s reporting unit causing the Company to take an impairment
charge on all of its goodwill. The Company has begun taking steps to improve its margins and has negotiated
an increase in its revolving credit facility to address its working capital needs. Accordingly, the Company
recognized a full goodwill impairment charge of $3,222,899.
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 basis over their estimated useful lives of 5 years for patents, 20 years for trade
names, 1 year for backlog and 7 years for non-compete agreements except for customer relationships which are
amortized on an accelerated basis over their estimated useful life of 15 years.
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 first performs an impairment
review 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. If the carrying value exceeds the undiscounted cash flows, the Company
records an impairment, if any, for the difference between the estimated fair value of the asset group and its
carrying value. The Company further conducts annual reviews for idle and underutilized equipment, and
reviews business plans for possible impairment. As a result of the analysis performed in the fourth quarter of
fiscal 2018, the Company determined that the carrying value of the trade name intangible asset was not
recoverable and recorded a fourth quarter charge of $690,107 for the entire carrying amount. The Company’s
analysis did not indicate that any of its other long-lived assets were impaired.
Income Tax - The Company’s income tax expense, deferred tax assets and liabilities and reserves for
unrecognized tax benefits reflect management’s best assessment of estimated future taxes to be paid. The
Company is subject to income taxes in both the U.S. and several foreign jurisdictions. Significant judgments
and estimates by management are required in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be
in effect when the differences are expected to reverse. In evaluating the Company’s ability to recover its
deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive
and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income,
tax planning strategies and recent financial operations. In projecting future taxable income, the Company
begins with historical results and changes in accounting policies, and incorporates assumptions including the
amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and
the implementation of feasible and prudent tax planning strategies. These assumptions require significant
judgment and estimates by management about the forecasts of future taxable income and are consistent with the
plans and estimates the Company uses to manage the underlying businesses. In evaluating the objective
evidence that historical results provide, the Company considers three years of cumulative operating income
and/or loss. Valuation allowances are established when necessary to reduce deferred income tax assets to an
amount more likely than not to be realized. The Company established a valuation allowance of $78,100 related
to its foreign tax credit carry-forward at April 30, 2017. The Company did not change the previous valuation
allowance or establish any new valuation allowances at April 30, 2018.
24
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of
complex tax laws and regulations in a multitude of jurisdictions across its global operations. Changes in tax
laws and rates could also affect recorded deferred tax assets and liabilities in the future. Except as noted below,
management is not aware of any such changes that would have a material effect on the Company’s results of
operations, cash flows or financial position.
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 increases or decreases to income tax expense in the period in which they
are determined.
Reclassifications - Certain reclassifications have been made to the previously reported 2017 financial
statements to conform to the 2018 presentation. There was no change to net income.
New Accounting Standards:
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts
with Customers" (Topic 606) which supersedes the revenue recognition requirements in ASC 605, “Revenue
Recognition”. In summary, the core principle of this standard, along with various subsequent amendments, is
that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. Additionally, the new standard requires enhanced disclosures about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies
to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and
significant judgments in measurements and recognition. The standard, as amended, was effective for annual
periods beginning after December 15, 2017, including interim periods within that reporting period. Companies
have the option of using either a full or modified retrospective approach in applying this standard.
To plan for the adoption of the standard, the Company conducted an analysis to determine the impact the new
standard would have on its consolidated financial statements. This analysis included reviewing 1) contract
terms and existing accounting policies to determine the financial impact of the standard, 2) data availability and
system reports to meet the additional disclosure requirements of the standard, 3) any practical expedients the
Company could elect upon adoption and 4) the control environment and internal processes to ensure the
appropriate controls are in place. As part of implementation efforts we reviewed and modified our standard
manufacturing agreement and invoice terms and conditions to emphasize that title, risk of loss and control of the
finished goods products we sell transfers to our customers upon shipment.
The Company adopted the ASU on May 1, 2018 using the modified retrospective transition method, applying
the guidance to those contracts which were not completed as of that date. The Company’s adoption of ASC 606
did not result in any changes in accounting requiring a transition adjustment to retained earnings.
Pursuant to the Company’s adoption of the standard, it is in the process of expanding its disclosures in the
consolidated financial statements for revenue recognition, assets and liabilities relating to contracts with
customers, the nature of the Company’s performance obligations and the manner by which the Company
determines and allocates transaction prices to its performance obligations, and the significant judgments
inherent in its revenue recognition policies. The Company also is in the process of implementing enhancements
to its internal controls to support the Company’s ability to sustain compliance with the standard after adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The new standard establishes a right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases
with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
25
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified
retrospective transition approach is required for capital leases and operating leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. While the Company is still evaluating the impact of its pending adoption of the
new standard on its consolidated financial statements, the Company expects that upon adoption in the fiscal
year ending April 30, 2020, it will recognize ROU assets and lease liabilities and the amounts could be material.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting”, a new accounting standard update intended to
simplify several aspects of the accounting for share-based payment transactions including: income tax
consequences, classification of awards as either equity or liabilities and classification on the statement of cash
flows. Specifically, the update requires that excess tax benefits and tax deficiencies (the difference between the
deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be
recognized as income tax expense or benefit in the consolidated statements of operations, introducing a new
element of volatility to the provision for income taxes. This update is effective for fiscal years beginning after
December 15, 2016. Early adoption is permitted. The Company adopted the ASU on May 1, 2017. Effective
with the adoption of the ASU all share-based awards continue to be accounted for as equity awards, excess tax
benefits recognized on stock-based compensation expense are reflected in the consolidated statements of
operations as a component of the provision for income taxes on a prospective basis, excess tax benefits
recognized on stock-based compensation expense are classified as an operating activity in the consolidated
statements of cash flows on a prospective basis and the Company has elected to continue to estimate expected
forfeitures over the course of a vesting period. The adoption of the ASU had no material impact on the retained
earnings, other components of equity or net assets as of the beginning of the period of adoption.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking
approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including
trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of
historical information, current information and reasonable and supportable forecasts. This ASU also expands
the disclosure requirements to enable users of financial statements to understand the entity’s assumptions,
models and methods for estimating expected credit losses. For public business entities, ASU 2016-13 is
effective for annual and interim reporting periods beginning after December 15, 2019, and the guidance is to be
applied using the modified-retrospective approach. Earlier adoption is permitted for annual and interim
reporting periods beginning after December 15, 2018. The Company is currently evaluating the new guidance
and has not determined the impact this ASU may have on its consolidated financial statements.
In August 2016, the FASB issued ASU Update No. 2016-15, “Statement of Cash Flows- Classification of
Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in practice in how certain
transactions are classified in the statements of cash flows. This update will be effective for fiscal years
beginning after December 15, 2017 (the Company’s fiscal year ending April 30, 2019), and interim periods
within those fiscal years. Early adoption is permitted, provided that all of the amendments are adopted in the
same period. The guidance requires application using a retrospective transition method. The Company plans to
adopt the ASU in its fiscal year ending April 30, 2019. The Company does not expect the impact of the
adoption of this ASU to have a material impact on the Company’s consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical
purchase price allocation to measure goodwill impairment. Goodwill impairment will now be the amount by
which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill.
This guidance is effective for public companies for annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2019, and early adoption is permitted. The Company early adopted this
guidance in the third quarter of its fiscal year ending April 30, 2018 and is applying this guidance to all future
tests.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the
Definition of a Business,” which clarifies the definition of a business when evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this ASU
26
is effective for annual periods beginning after December 15, 2017, including interim periods within those
periods. The Company adopted this ASU in the fourth quarter of its fiscal year ending April 30, 2018. The
Company will apply the clarified definition of a business, as applicable, from the period of adoption.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income.” The guidance permits entities to reclassify tax effects stranded in
Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is
effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is
permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The
Company plans to adopt this ASU in the first quarter of its fiscal year ending April 30, 2019 and is currently
evaluating the impact that its adoption may have on its consolidated financial statements.
In May 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118, regarding the accounting implications of the recently issued
Tax Cuts and Jobs Act (the “Act”). This standard is effective immediately. The update clarifies that in a
company’s financial statements that include the reporting period in which the Act was enacted, the company
must first reflect the income tax effects of the Act in which the accounting under GAAP is complete. These
amounts would not be provisional amounts. The company would also report provisional amounts for those
specific income tax effects for which the accounting under GAAP is incomplete but a reasonable estimate can
be determined. The Company has recorded a provisional amount which it believes is a reasonable estimate of
the effects of the Act on the Company’s financial statements as of April 30, 2018. Technical corrections or other
forthcoming guidance could change how the Company interprets provisions of the Act, which may impact its
effective tax rate and could affect its deferred tax assets, tax positions and/or its tax liabilities.
27
Results of Operations:
FISCAL YEAR ENDED APRIL 30, 2018 COMPARED
TO FISCAL YEAR ENDED APRIL 30, 2017
The following table sets forth the percentage relationships of expense items to net sales for the years indicated:
Net sales
Operating expenses:
Cost of products sold
Selling and administrative expenses
Impairment of goodwill and intangible asset
Loss on settlement of receivable and disposal of related
assets
Total operating expenses
Operating (loss) income
Fiscal Years
2018
100.0%
90.4
8.3
1.4
0.9
101.0
-1.0%
2017
100.0%
90.1
8.6
0.0
0
98.7
1.3%
Net sales increased 9.8% to $278,131,709 in fiscal year 2018 from $253,370,175 in the prior year. The
Company’s sales increased in fiscal year 2018 in industrial electronics and medical/life science marketplaces as
compared to the prior year. The increase in sales dollars for these marketplaces was partially offset by a
decrease in sales dollars in the consumer electronics marketplace. Revenues started an upward trend during the
fourth fiscal quarter of fiscal year 2018. The Company remains optimistic that revenues in fiscal year 2019 will
continue to increase.
The Company’s sales in a particular industry are driven by the fluctuating forecasts and end-market demand of
the customers within that industry. Sales to customers are subject to variations from period to period depending
on customer order cancellations, the life cycle of customer products and product transition. Sales to the
Company’s five largest customers accounted for 50.2% and 55.2% of net sales for fiscal years 2018 and 2017,
respectively.
Gross profit increased to $26,602,918, or 9.6% of net sales, in fiscal year 2018 compared to $25,175,308 or
9.9% of net sales, in the prior fiscal year. The increase in gross profit dollars for fiscal year 2018 was the result
of increased sales and product mix. Margin pressures continue from both customers and vendors and will likely
continue in fiscal year 2019.
Selling and administrative expenses increased in fiscal year 2018 to $23,089,939, or 8.3% of net sales compared
to $21,909,110, or 8.6% of net sales, in fiscal year 2017. The increase in selling and administrative dollars was
attributable to sales salaries, purchasing salaries, commissions, bad debt expense and amortization expense.
The increase in the foregoing selling and administrative expenses were partially offset by a decrease in
accounting professional fees, bonus expense and other general administrative expenses. Selling and
administrative expenses decreased as a percent of net sales due to an increase in net sales in fiscal year 2018
compared to the prior year.
During fiscal year 2018 the Company recorded a goodwill and intangible asset impairment in the amount of
$3,913,006 and the write off of the account receivable and note receivable related to a customer in the amount
of $2,509,423. See Note E- Related Parties and Note G – Goodwill and Intangible Asset.
Other income decreased in fiscal year 2018 to $144,574 compared to other income of $367,338 in the prior
fiscal year. The decrease in other income is due to the Company recording in fiscal year 2017 an insurance
28
recovery gain in the amount of $276,967 to other income related to a claim in excess of book value for
replacement machinery and equipment destroyed in a fire at one of its plants.
Interest expense, net, increased to $1,537,446 in fiscal year 2018 compared to $1,135,853 in fiscal year 2017.
Interest expense increased primarily due to the increased borrowings under the Company’s banking
arrangements and mortgage obligations. Interest expense for fiscal year 2019 may increase if interest rates or
borrowings, or both, increase during fiscal year 2019.
In fiscal year 2018, the Company had an income tax benefit of $1,060,452 compared to income tax expense of
$1,107,477 in fiscal year 2017. The effective rate for the years ended April 30, 2018 and 2017 was 24.6% and
44.3%, respectively. The decrease in income tax expense is due to a decrease in pre-tax income in the current
year and a reduction in the U.S. tax rate as a result of the Tax Act. The decrease in the effective rate for the
year ended April 30, 2018 is due to a reduction in the U.S. tax rate as a result of the Tax Act, the impact of the
transition tax and an unfavorable 4.0% adjustment for realized and unrealized currency gains, losses, and the
remeasurement of certain items to the Company’s functional currency. Due to the Tax Cuts and Jobs Act, the
Company’s federal statutory income tax rate for the current fiscal year is approximately 30.4%.
The Company reported net loss of $3,241,870 in fiscal year 2018 compared to a net income of $1,390,206 for
fiscal year 2017. Basic and diluted loss per share for fiscal year 2018 were $0.77 each, compared to basic and
diluted earnings per share of $0.33 each for the year ended April 30, 2017.
Liquidity and Capital Resources:
Operating Activities.
Cash flow used in operating activities was $4,717,084 for the fiscal year ended April 30, 2018 compared to cash
flow used in operating activities of $53,761 for the prior fiscal year. Cash flow used in operating activities was
primarily the result of an increase in inventory in the amount of $13,415,555. The increase in inventory is the
result of an increase in customer orders and in some cases orders being pushed out. Further, capacity issues in
the component industry are making it difficult to obtain some components to complete assemblies for shipping.
Cash flow used in operating activities was partially offset by the result of an increase in accounts payable, a
decrease in prepaid expenses and other assets. Net cash used in operating activities was partially offset by the
non-cash effects of a goodwill impairment, tradename impairment, the write off of the account receivable and
note receivable related to Petzila and depreciation and amortization.
Cash flow used in operating activities was $53,761 for the fiscal year ended April 30, 2017. Cash flow used in
operating activities was primarily the result of an increase in accounts receivable and inventory. Inventories
increased primarily due to additional customer orders and the start up of new programs. The increase in
accounts payable was the result of timing of payment to vendors. Net cash used in operations was partially
offset by a decrease in income taxes receivable. Net cash used in operating activities was partially offset by net
income excluding the non-cash effects of depreciation and amortization.
Investing Activities.
In fiscal year 2018, the Company purchased in cash $3,731,370 in machinery and equipment to be used in the
ordinary course of business. The Company anticipates it may purchase up to $6,000,000 in machinery and
equipment in fiscal year 2019 although there is no guaranty the Company will not exceed such amount. The
Company plans to fund the majority of purchases by lease or loan transactions. There is no assurance that the
Company will be able to obtain debt financing at acceptable terms, or at all, in the future.
In fiscal year 2017, the Company purchased in cash $3,505,486 in machinery and equipment to be used in the
ordinary course of business. The Company purchases were funded by the bank line of credit.
Financing Activities.
Cash provided by financing activities was $6,676,729 for the fiscal year ended April 30, 2018 compared to cash
provided by financing activities of $2,727,303 in fiscal year 2017. Cash provided by financing activities was
29
primarily the result of net borrowings under the line of credit and proceeds under building notes. Proceeds
under building notes was due to the mortgage agreements on December 21, 2017 with U.S. Bank to refinance
the Company’s corporate headquarters and its Illinois manufacturing facility and the Company’s engineering
and design center in Elgin, Illinois.
Cash provided by financing activities was $2,727,303 for the fiscal year ended April 30, 2017. Cash provided
by financing activities in fiscal year 2017 was primarily the result of increased net borrowings under the credit
facility, equipment notes and sale leaseback agreements.
Financing Summary.
Notes Payable - Banks
Prior to March 31, 2017 the Company had a senior secured credit facility with Wells Fargo, N.A. with a
revolving credit limit up to $30,000,000. The credit facility was collateralized by substantially all of the
Company’s domestically located assets and the Company had pledged 65% of its equity ownership interest in
some of its foreign entities. Prior to its payoff and termination, the Wells Fargo, N.A. senior secured credit
facility was due to expire on October 31, 2018. On March 31, 2017, the Company paid the balance outstanding
under the senior revolving credit facility in the amount of $22,232,914. The remaining deferred financing costs
of $68,475 were expensed in the fourth quarter of fiscal 2017.
On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with U.S. Bank,
which expires on March 31, 2022. The credit facility is collateralized by substantially all of the Company’s
domestically located assets. The facility allows the Company to choose among interest rates at which it may
borrow funds: the bank fixed rate of four percent or LIBOR plus one and one half percent (effectively 3.83% at
April 30, 2018). Interest is due monthly. Under the senior secured credit facility, the Company may borrow up
to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base
plus a percentage of the eligible inventory borrowing base (the “Borrowing Base”). Deferred financing costs of
$34,971 and $207,647 were capitalized in the twelve month period ending April 30, 2018 and the fourth quarter
of fiscal 2017, respectively, which are amortized over the term of the agreement. As of April 30, 2018 and
April 30, 2017 the unamortized amount included in other assets was $192,502 and $204,186, respectively. As
of April 30, 2018, there was $29,279,631 outstanding and $5,720,369 of unused availability under the U.S.
Bank facility compared to an outstanding balance of $23,178,429 and $11,821,571 of unused availability at
April 30, 2017. At April 30, 2018, the Company was in compliance with its financial covenant and other
restricted covenants under the credit facility.
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The
amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 less
reserves or (ii) 90% of the Company’s Borrowing Base, except that the 90% limitation will expire if the
Company’s actual revolving loans for the first 90 days after the amendment’s effective date are less than 80% of
the Company’s Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of 1.2 to 1.0 for
four consecutive quarters. The amendment also imposes sublimits on categories of inventory equal to
$17,500,000 on raw materials and $25,000,000 on finished goods.
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron
Electronics Co., Ltd. could borrow up to 5,000,000 Renminbi and the facility was collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a
fixed interest rate of 6.67%. The facility was due to expire on August 3, 2017. The credit facility was closed as
of March 1, 2017.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic
Technology Co., Ltd. could borrow up to 9,000,000 Renminbi and the facility was collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest was payable monthly and the facility had a
fixed interest rate of 6.09%. The term of the facility extended to February 7, 2018. The credit facility was
closed as of February 11, 2018. There was no outstanding balance under the facility at April 30, 2017.
30
On February 12, 2018, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd.,
entered into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic
Technology Co., Ltd. can borrow up to 5,000,000 Renminbi and the facility is collateralized by Wujiang
SigmaTron Electronics Co., Ltd.’s manufacturing building. Interest is payable monthly and the facility bears a
fixed interest rate of 6.09%. The term of the facility extends to February 7, 2019. There was no outstanding
balance under the facility at April 30, 2018.
Notes Payable - Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of $2,500,000, with Wells
Fargo, N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois
manufacturing facility. On November 24, 2014, the Company refinanced the mortgage agreement with Wells
Fargo, N.A. The note required the Company to pay monthly principal payments in the amount of $9,500, bore
an interest rate of LIBOR plus two and one-quarter percent and was payable over a sixty month period. A final
payment of approximately $2,289,500 was due on or before November 8, 2019. On December 21, 2017, the
Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of
$2,498,500, using proceeds from the U.S. Bank mortgage agreement. The outstanding balance was $2,574,500
at April 30, 2017.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with
U.S. Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois
manufacturing facility. The note requires the Company to pay monthly principal payments in the amount of
$17,333, bears interest at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred
financing costs of $74,066 were capitalized in fiscal year 2018 which are amortized over the term of the
agreement. As of April 30, 2018 the unamortized amount included in other assets was $66,945. A final
payment of approximately $4,347,778 is due on or before March 31, 2022. The outstanding balance was
$5,148,000 at April 30, 2018.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of $1,275,000, with Wells
Fargo, N.A. to finance the property that serves as the Company’s engineering and design center in Elgin,
Illinois. The Wells Fargo, N.A. note required the Company to pay monthly principal payments in the amount of
$4,250, bore interest at a fixed rate of 4.5% per year and was payable over a sixty month period. A final
payment of approximately $1,030,000 was due on or before October 2018. On December 21, 2017, the
Company repaid its Wells Fargo, N.A. mortgage agreement for the remaining amount outstanding of
$1,062,500, using proceeds from the U.S. Bank mortgage agreement. The outstanding balance was $1,096,500
at April 30, 2017.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with
U.S. Bank to refinance the property that serves as the Company’s engineering and design center in Elgin,
Illinois. The note requires the Company to pay monthly principal payments in the amount of $6,000, bears
interest at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred financing costs
of $65,381 were capitalized in the fiscal year 2018 which are amortized over the term of the agreement. As of
April 30, 2018 the unamortized amount included in other assets was $59,094. A final payment of
approximately $1,505,000 is due on or before March 31, 2022. The outstanding balance was $1,782,000 at
April 30, 2018.
Notes Payable - Equipment
On November 1, 2016, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to
finance the purchase of equipment in the amount of $596,987. The term of the agreement extends to November
1, 2021 with average quarterly payments of $35,060 beginning on February 1, 2017 and a fixed interest rate of
6.65%. The balance outstanding under this note agreement was $447,741 and $567,138 at April 30, 2018 and
April 30, 2017, respectively.
On February 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to
finance the purchase of equipment in the amount of $335,825. The term of the agreement extends to February 1,
2022 with average quarterly payments of $20,031 beginning on May 1, 2017 and a fixed interest rate of 7.35%.
31
The balance outstanding under this note agreement was $268,660 and $335,825 at April 30, 2018 and April 30,
2017, respectively.
On June 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to
finance the purchase of equipment in the amount of $636,100. The term of the agreement extends to June 1,
2022 with average quarterly payments of $37,941 beginning on September 1, 2017 and a fixed interest rate of
7.35%. The balance outstanding under this note agreement was $540,685 at April 30, 2018.
On October 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to
finance the purchase of equipment in the amount of $307,036. The term of the agreement extends to November
1, 2022 with average quarterly payments of $18,314 beginning on February 1, 2018 and a fixed interest rate of
7.35%. The balance outstanding under this note agreement was $291,684 at April 30, 2018.
Capital Lease and Sale Leaseback Obligations
From October 2013 through June 2017, the Company entered into various capital lease and sales leaseback
agreements with Associated Bank, National Association to purchase equipment totaling $6,893,596. The terms
of the lease agreements extend to September 2018 through May 2022 with monthly installment payments
ranging from $1,455 to $40,173 and a fixed interest rate ranging from 3.75% to 4.90%. The balance
outstanding under these capital lease agreements was $2,923,524 and $3,627,760 at April 30, 2018 and April
30, 2017, respectively. The net book value of the equipment under these leases was $4,799,827 and $4,713,044
at April 30, 2018 and April 30, 2017, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT
Finance LLC to purchase equipment totaling $2,512,051. The terms of the lease agreements extend to March
2019 through July 2020 with monthly installment payments ranging from $1,931 to $12,764 and a fixed interest
rate ranging from 5.65% through 6.50%. The balance outstanding under these capital lease agreements was
$984,031 and $1,448,269 at April 30, 2018 and April 30, 2017, respectively. The net book value of the
equipment under these leases was $1,736,688 and $1,946,026 at April 30, 2018 and April 30, 2017,
respectively.
From September 2017 through April 2018, the Company entered into various capital lease and sales leaseback
agreements with First American Equipment Finance to purchase equipment totaling $3,011,387. The terms of
the lease agreements extend to August 2021 through April 2022 with monthly installment payments ranging
from $6,716 to $20,093 and a fixed interest rate ranging from 5.82% through 7.23%. The balance outstanding
under these capital lease agreements was $2,688,029 at April 30, 2018. The net book value of the equipment
under these leases was $2,808,209 at April 30, 2018.
Operating Leases
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent
approximately 117,000 square feet of manufacturing and office space. Under the terms of the lease agreement,
the Company receives incentives over the life of the lease, which extends through March 2021. The amount of
the deferred rent income recorded for the fiscal year ended April 30, 2018 was $103,599 compared to $79,575
in fiscal year 2017. In addition, the landlord provided the Company tenant incentives of $418,000, which are
being amortized over the life of the lease. The balance of deferred rent at April 30, 2018 was $447,073
compared to $550,672 at April 30, 2017.
On May 31, 2012, the Company entered into a lease agreement in Tijuana, MX, to rent approximately 112,000
square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives
incentives over the life of the lease, which extends through November 2018. The amount of the deferred rent
income for the fiscal year ended April 30, 2018 was $139,437 compared to $127,967 in fiscal year 2017. The
balance of deferred rent at April 30, 2018 was $85,527 compared to $224,964 at April 30, 2017.
Other
The Company provides funds for salaries, wages, overhead and capital expenditure items as necessary to
operate its wholly-owned Mexican, Vietnamese and Chinese subsidiaries and the Taiwan IPO. The Company
32
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 fiscal year
ended April 30, 2018 resulted in net foreign currency transaction gains of approximately $125,000 compared to
net foreign currency losses of $508,000 in the prior year. In fiscal year 2018, the Company paid approximately
$49,170,000 to its foreign subsidiaries.
The Company anticipates that its credit facilities, cash flow from operations and leasing resources are adequate
to meet its working capital requirements and capital expenditures for fiscal year 2019. In addition, in the event
the Company desires to expand its operations, its business grows more rapidly than expected, the current
economic climate deteriorates, customers delay payments, or the Company desires to consummate an
acquisition, additional financing resources may be necessary in the current or future fiscal years. There is no
assurance that the Company will be able to obtain equity or debt financing at acceptable terms, or at all, in the
future. There is no assurance that the Company will be able to retain or renew its credit agreements in the
future, or that any retention or renewal will be on the same terms as currently exist.
The impact of inflation on the Company’s net sales, revenues and income from operations for the past two fiscal
years has been minimal.
Off-balance Sheet Transactions:
The Company has no off-balance sheet transactions.
Tabular Disclosure of Contractual Obligations:
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange Act, the
Company is not required to provide the information required by this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As a smaller reporting company, as defined in Rule 10(f)(1) of Regulation S-K under the Exchange Act, the
Company is not required to provide the information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 15(a) of this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls:
The Company’s management, including its President and Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15(d)-
15(e)) as of April 30, 2018. The Company’s disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and its President and Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the
reasonable assurance level as of April 30, 2018.
33
Internal Controls:
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal controls
over financial reporting are designed to provide reasonable assurance regarding the reliability of financial
reporting and preparation of financial statements for external purposes in accordance with U.S. GAAP. Under
the supervision and with the participation of the Company’s management, including its Chief Executive Officer
and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control – Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. On May 14, 2013, COSO issued an
updated version of its Internal Control - Integrated Framework (the “2013 Framework”) which officially
superseded the 1992 Framework on December 15, 2014. Originally issued in 1992, the framework helps
organizations design, implement and evaluate the effectiveness of internal control concepts and simplify their
use and application. Neither COSO, the Securities and Exchange Commission or any other regulatory body has
mandated adoption of the 2013 Framework by a specified date. The Company implemented the 2013
Framework in the fourth fiscal quarter of 2018. Based on the Company’s evaluation, management concluded
that its internal controls over financial reporting were effective at the reasonable assurance level as of April 30,
2018.
This annual report does not include an attestation report of the Company’s registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission
that permit the Company to provide only management’s report in this annual report.
There has been no change in the Company’s internal control over financial reporting during the quarter ended
April 30, 2018, that has materially affected or is reasonably likely to materially affect, its internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy
statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of
the Company’s fiscal year ended April 30, 2018.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the Company’s definitive proxy
statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of
the Company’s fiscal year ended April 30, 2018.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to the Company’s definitive proxy
statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of
the Company’s fiscal year ended April 30, 2018.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required under this item is incorporated herein by reference to the Company’s definitive proxy
statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of
the Company’s fiscal year ended April 30, 2018.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this item is incorporated herein by reference to the Company’s definitive proxy
statement, to be filed with the Securities and Exchange Commission not later than 120 days after the close of
the Company’s fiscal year ended April 30, 2018.
35
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
The financial statements are listed in the Index to Financial Statements filed as part of this Annual Report on
Form 10-K beginning on Page F-1.
(a)(2)
Financial statement schedules are omitted because they are not applicable or required.
(a)(3) and (b)
The exhibits required by Item 601 of Regulations S-K are listed in the Index to Exhibits filed as part of this
Annual Report on Form 10-K beginning on Page 37.
ITEM 16. 10-K SUMMARY
None.
36
Index to Exhibits
Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.1 to
Registration Statement on Form S-1, File No. 33-72100, dated February 9, 1994. (P)(Rule 311)
Amended and Restated By-laws of the Company, adopted on September 24, 1999, incorporated
herein by reference to Exhibit 3.2 to the Company’s Form 10-K for the fiscal year ended April
30, 2000.
Form of 1993 Stock Option Plan, incorporated herein by reference to Exhibit 10.4 to the
Company’s Registration Statement on Form S-1, File No. 33-72100.* (P)(Rule 311)
Form of Incentive Stock Option Agreement for the Company’s 1993 Stock Option Plan ,
incorporated herein by reference to Exhibit 10.5 to the Company’s Registration Statement on
Form S-1, File No. 33-72100.* (P)(Rule 311)
Form of Non-Statutory Stock Option Agreement for the Company’s 1993 Stock Option Plan,
incorporated herein by reference to Exhibit 10.6 to the Company’s Registration Statement on
Form S-1, File No. 33-72100.* (P)(Rule 311)
2004 Employee Stock Option Plan, incorporated herein by reference to Appendix B to the
Company’s 2004 Proxy Statement filed on August 16, 2004. *
SigmaTron International, Inc. 2011 Employee Stock Option Plan dated September 16, 2011,
incorporated herein by reference to Exhibit 10.14 to the Company’s Registration Statement on
Form S-8 filed on December 14, 2011.*
Purchase Agreement between SigmaTron International, Inc., and its nominees and Spitfire
Control, Inc., dated as of May 31, 2012, incorporated herein by reference to Exhibit 2.1 to the
Company’s Form 8-K filed on June 4, 2012.
SigmaTron International, Inc. 2013 Employee Stock Purchase Plan dated September 20, 2013,
incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on
September 25, 2013.*
SigmaTron International, Inc. 2013 Non-Employee Director Restricted Stock Plan dated
September 20, 2013, incorporated herein by reference to Exhibit 10.1 to the Company’s Form
8-K filed on September 25, 2013.*
Mortgage and Assignment of Rents and Leases executed as of October 24, 2013, by SigmaTron
International, Inc., to Wells Fargo Bank, National Association, incorporated herein by
reference to Exhibit 10.18 to the Company’s Form 10-Q filed on December 13, 2013.
Master Lease Agreement # 2170 entered into between Associated Bank, National Association,
a national banking association and SigmaTron International, Inc., dated October 3, 2013,
incorporated herein by reference to Exhibit 10.20 to the Company’s Form 10-Q filed on
December 13, 2013.
SigmaTron International, Inc. Amended and Restated Change in Control Severance Payment
Plan dated March 11, 2014, incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 8-K/A filed on March 14, 2014.*
3.1
3.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
37
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Master Lease Number 81344 entered into between CIT Finance LLC and SigmaTron
International, Inc., dated March 6, 2014, incorporated herein by reference to Exhibit 10.17 to
the Company’s Form 10-K filed on July 24, 2014.
Schedule # 1217927 to Master Lease Agreement Number 81344 entered into between CIT
Finance LLC and SigmaTron International, Inc. dated May 7, 2014, incorporated herein by
reference to Exhibit 10.1 to the Company’s Form 10-Q filed on September 11, 2014.
Schedule # 1223197 to Master Lease Agreement Number 81344 entered into by and between
CIT Finance LLC and SigmaTron International, Inc. dated August 1, 2014, incorporated herein
by reference to Exhibit 10.1 to the Company’s Form 10-Q filed on December 12, 2014.
Lease No. 003 is an attachment to Master Lease No. 2170 dated October 17, 2013 by and
between Associated Bank, National Association and SigmaTron International, Inc. dated
September 22, 2014, incorporated herein by reference to Exhibit 10.2 to the Company’s Form
10-Q filed on December 12, 2014.
Lease No. 004 is an attachment to Master Lease No. 2170 dated October 17, 2013 by and
between Associated Bank, National Association and SigmaTron International, Inc. dated
September 22, 2014, incorporated herein by reference to Exhibit 10.3 to the Company’s Form
10-Q filed on December 12, 2014.
Lease No. 005 is an attachment to Master Lease No. 2170 dated October 17, 2013 by and
between Associated Bank, National Association and SigmaTron International, Inc. dated
September 22, 2014, incorporated herein by reference to Exhibit 10.4 to the Company’s Form
10-Q filed on December 12, 2014.
Schedule # 1246045 to Master Lease Agreement Number 81344 entered into by and between
CIT Finance LLC and SigmaTron International, Inc. dated October 27, 2014, incorporated
herein by reference to Exhibit 10.5 to the Company’s Form 10-Q filed on December 12, 2014.
First Amendment to Third Amended and Restated Credit Agreement entered into as of March
7, 2015, by and between SigmaTron International, Inc. and Wells Fargo Bank, National
Association, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed
on March 12, 2015.
Lease No. 006 is an attachment to Master Lease No. 2170 dated October 17, 2013 by and
between Associated Bank, National Association and SigmaTron International, Inc. dated
January 16, 2015, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-
Q filed on March 16, 2015.
Schedule # 1284094 to Master Lease Agreement Number 81344 entered into by and between
CIT Finance LLC and SigmaTron International, Inc. dated June 2, 2015, incorporated herein by
reference to Exhibit 10.29 to the Company’s Form 10-K filed on July 24, 2015.
Lease No. 007 is an attachment to Master Lease No. 2170 dated October 17, 2013 by and
between Association Bank, National Association and SigmaTron International, Inc. dated
December 22, 2015, incorporated herein by reference to Exhibit 10.1 to the Company’s Form
10-Q filed on March 15, 2016.
SigmaTron International, Inc. Employee Bonus Plan for Fiscal Year 2017 dated June 2, 2016,
incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 6,
2016.*
SigmaTron International, Inc. 2013 Employee Stock Purchase Plan disclosed on Form 8-K
dated September 20, 2013, has been terminated effective as of August 15, 2016, incorporated
herein by reference to the Company’s Form 8-K filed on August 15, 2016.*
38
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
Lease No. 009, entered into July 15, 2016, is an attachment to Master Lease No. 2170 dated
October 17, 2013 by and between Associated Bank, National Association and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-
Q filed on September 13, 2016.
Lease No. 010, entered into August 8, 2016, is an attachment to Master Lease No. 2170 dated
October 17, 2013 by and between Associated Bank, National Association and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-
Q filed on December 12, 2016.
Promissory Note, entered into November 1, 2016, by and between ENGENCAP FIN, S.A. DE
C.V., SOFOM, E.N.R. and SigmaTron International, Inc., incorporated herein by reference to
Exhibit 10.1 to the Company’s Form 10-Q filed on March 14, 2017.
SigmaTron International, Inc. Employee Bonus Plan for Fiscal Year 2018 dated April 21, 2017,
incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 25,
2017*
Promissory Note, entered into January 5, 2017, by and between ENGENCAP FIN, S.A. DE
C.V., SOFOM, E.N.R. and SigmaTron International, Inc., incorporated herein by reference to
Exhibit 10.29 to the Company’s Form 10-K filed on July 24, 2017.
Lease No. 011, entered into May 8, 2017, is an attachment to Master Lease No. 2170 dated
October 17, 2013 by and between Associated Bank, National Association and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.30 to the Company’s Form
10-K filed on July 24, 2017.
Lease No. 012, entered into May 8, 2017, is an attachment to Master Lease No. 2170 dated
October 17, 2013 by and between Associated Bank, National Association and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.31 to the Company’s Form
10-K filed on July 24, 2017.
Loan and Security Agreement between SigmaTron International, Inc. and U.S. Bank National
Association dated March 31, 2017, incorporated herein by reference to Exhibit 10.32 to the
Company’ Form 10-K filed on July 24, 2017.
Promissory Note, entered into June 1, 2017, by and between ENGENCAP FIN, S.A. DE C.V.,
SOFOM, E.N.R. AND SigmaTron International, Inc., incorporated herein by reference to
Exhibit 10.1 to the Company’s Form 10-Q filed on September 13, 2017.
Lease No. 013, entered into July 6, 2017, is an attachment to Master Lease No. 2170 dated
October 17, 2013 by and between Associated Bank, National Association and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-
Q filed on September 13, 2017.
Lease No. 1, entered into September 13, 2017, is an attachment to Master Lease No. 2017389
dated August 15, 2017 by and between First American Commercial Bancorp, Inc. and
SigmaTron International, Inc., incorporated herein by reference to Exhibit 10.1 to the
Company’s Form 10-Q filed on December 12, 2017.
Lease No. 2, entered into October 9, 2017, is an attachment to Master Lease No. 2017389 dated
August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-
Q filed on December 12, 2017.
39
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
21.0
23.1
24.0
31.1
Promissory Note, entered into October 12, 2017, by and between ENGENCAP FIN, S.A. DE
C.V., SOFOM, E.N.R. and SigmaTron International, Inc., incorporated herein by reference to
Exhibit 10.3 to the Company’s Form 10-Q filed on December 12, 2017.
Real Property mortgage (Cook County, Illinois) made as of the 21st day of December, 2017, is
made and executed by SigmaTron International, Inc. (“Mortgagor”) and U.S. Bank National
Association (“Lender”), incorporated herein by reference to Exhibit 10.1 to the Company’s
Form 10-Q filed on March 14, 2018.
Real Property mortgage (Kane County, Illinois) made as of the 21st day of December, 2017, is
made and executed by SigmaTron International, Inc. (“Mortgagor”) and U.S. Bank National
Association (“Lender”), incorporated herein by reference to Exhibit 10.2 to the Company’s
Form 10-Q filed on March 14, 2018.
Lease No. 3, entered into December 20, 2017, is an attachment to Master Lease No. 2017389
dated August 15, 2017 by and between First American Commercial Bancorp, Inc. and
SigmaTron International, Inc., incorporated herein by reference to Exhibit 10.3 to the
Company’s Form 10-Q filed on March 14, 2018.
Lease No. 4, entered into January 9, 2018, is an attachment to Master Lease No. 2017389 dated
August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron
International, Inc., incorporated herein by reference to Exhibit 10.4 to the Company’s Form 10-
Q filed on March 14, 2018.
Asset Purchase Agreement effective April 30, 2018 between SigmaTron International, Inc. and
Wagz, Inc., incorporated herein by reference to Exhibit 99.1 to the Company’s Form 8-K/A
filed on May 4, 2018.
SigmaTron International, Inc. Employee Bonus Plan for Fiscal Year 2019 dated July 12, 2018,
incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 16,
2018.*
Amendment No.1 to Amended and Restated Loan and Security Agreement entered into as of
July 16, 2018, by and between SigmaTron International, Inc., and U.S. Bank National
Association incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed
on July 17, 2018.
Lease No. 5, entered into March 15, 2018, is an attachment to Master Lease No. 2017389 dated
August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron
International, Inc.**
Lease No. 6, entered into April 20, 2018, is an attachment to Master Lease No. 2017389 dated
August 15, 2017 by and between First American Commercial Bancorp, Inc. and SigmaTron
International, Inc.**
Subsidiaries of the Registrant, incorporated herein by reference to Exhibit 21 to the Company’s
Form 10-K for the fiscal year ended April 30, 2014, filed on July 24, 2014.
Consent of BDO USA, LLP.**
Power of Attorney of Directors and Executive Officers (included on the signature page of this
Form 10-K for the fiscal year ended April 30, 2018).**
Certification of Principal Executive Officer of the Company Pursuant to Rule 13a-14(a) under
the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
40
31.2
32.1
32.2
Certification of Principal Financial Officer of the Company Pursuant to Rule 13a-14(a) under
the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
Certification by the Principal Executive Officer of SigmaTron International, Inc. Pursuant to
Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).**
Certification by the Principal Financial Officer of SigmaTron International, Inc. Pursuant to
Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350).**
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Scheme Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Indicates management contract or compensatory plan.
** Filed herewith
(c) Exhibits
The Company hereby files as exhibits to this Report the exhibits listed in Item 15(a)(3) above, which are
attached hereto or incorporated herein.
41
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SIGMATRON INTERNATIONAL, INC.
By: /s/ Gary R. Fairhead
Gary R. Fairhead, President and Chief Executive Officer,
Principal Executive Officer and Director
Dated: July 24, 2018
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and officers of SigmaTron
International, Inc., a Delaware corporation, which is filing an Annual Report on Form 10-K with the Securities
and Exchange Commission under the provisions of the Securities Exchange Act of 1934 as amended, hereby
constitute and appoint Gary R. Fairhead and Linda K. Frauendorfer, and each of them, each of their true and
lawful attorneys-in fact and agents, with full power of substitution and resubstitution, for him and in his name,
place and stead, in all capacities, to sign any or all amendments to the report to be filed with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as each of them might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities, and on the dates indicated.
Signature
Title
/s/ Gary R. Fairhead
Gary R. Fairhead
Chairman of the Board of Directors,
President and Chief Executive Officer,
(Principal Executive Officer) and Director
/s/ Linda K. Frauendorfer
Linda K. Frauendorfer
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal
Accounting Officer) and Director
/s/ Thomas W. Rieck
Thomas W. Rieck
/s/ Dilip S. Vyas
Dilip S. Vyas
/s/ Paul J. Plante
Paul J. Plante
/s/ Barry R. Horek
Barry R. Horek
/s/ Bruce J. Mantia
Bruce J. Mantia
Director
Director
Director
Director
Director
42
Date
July 24, 2018
July 24, 2018
July 24, 2018
July 24, 2018
July 24, 2018
July 24, 2018
July 24, 2018
INDEX TO FINANCIAL STATEMENTS
SigmaTron International, Inc. and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2
Page
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
F-5
F-6
F-7
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
SigmaTron International, Inc.
Elk Grove Village, Illinois
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sigmatron International, Inc. (the
“Company”) and subsidiaries as of April 30, 2018 and 2017, the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company and
subsidiaries at April 30, 2018 and 2017, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
BDO USA, LLP
We have served as the Company’s auditor since 2006.
Chicago, Illinois
July 24, 2018
F-2
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2018 and 2017
C
ASSETS
2018
2017
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of
$300,000 and $100,000 at April 30, 2018 and 2017,
respectively
Inventories, net
Prepaid expenses and other assets
Refundable and prepaid income taxes
Note receivable
Other receivables
$
1,721,599
$
3,493,324
26,638,367
86,929,793
1,948,748
1,655,409
-
1,135,810
26,656,871
73,571,238
2,971,087
339,791
887,531
1,112,071
Total current assets
120,029,726
109,031,913
PROPERTY, MACHINERY AND EQUIPMENT, NET
35,288,997
33,008,714
OTHER LONG-TERM ASSETS
Intangible assets, net
Goodwill
Deferred income taxes
Other assets
3,088,085
-
1,109,681
1,713,481
4,213,235
3,222,899
236,087
1,472,816
Total other long-term assets
5,911,247
9,145,037
TOTAL ASSETS
$
161,229,970
$
151,185,664
The accompanying notes are an integral part of these statements.
F-3
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS – CONTINUED
APRIL 30, 2018 and 2017
LIABILITIES AND STOCKHOLDERS’ EQUITY
2018
2017
CURRENT LIABILITIES
Trade accounts payable
Accrued expenses
Accrued wages
Income taxes payable
Current portion of long-term debt
Current portion of capital lease obligations
Current portion of contingent consideration
Current portion of deferred rent
Total current liabilities
Long-term debt,
less current portion
Capital lease obligations,
less current portion
Contingent consideration,
less current portion
Income taxes payable
Other long-term liabilities
Deferred rent, less current portion
Deferred income taxes
Total long-term liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 500,000 shares
authorized, none issued or outstanding
Common stock, $.01 par value; 12,000,000 shares
authorized, 4,215,258 and 4,195,813 shares issued
and outstanding at April 30, 2018 and 2017, respectively
Capital in excess of par value
Retained earnings
Total stockholders’ equity
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these statements.
F-4
$
$
49,326,402
2,930,792
3,730,755
-
655,190
2,320,538
213,460
201,349
46,160,395
2,322,055
4,489,602
69,868
351,562
1,711,204
286,240
220,288
59,378,486
55,611,214
36,783,879
27,192,246
4,297,846
3,364,825
-
498,000
1,130,557
331,251
-
237,578
-
991,017
555,348
1,361,291
43,041,533
33,702,305
102,420,019
89,313,519
-
-
41,896
23,132,017
35,636,038
41,702
22,952,535
38,877,908
58,809,951
61,872,145
$
161,229,970
$
151,185,664
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended April 30, 2018 and 2017
Net sales
Cost of products sold
Gross profit
Selling and administrative expenses
Impairment of goodwill and intangible asset
Loss on settlement of receivable and disposal of related
assets
2018
2017
$
278,131,709
$
253,370,175
251,528,791
228,194,867
26,602,918
25,175,308
23,089,939
3,913,006
2,509,423
21,909,110
-
-
Operating (loss) income
(2,909,450)
3,266,198
Other income
Interest expense
(144,574)
1,537,446
(367,338)
1,135,853
(Loss) income before income taxes
(4,302,322)
2,497,683
Income tax (benefit) expense
(1,060,452)
1,107,477
NET (LOSS) INCOME
(Loss) earnings per common share
Basic
Diluted
Weighted-average shares of common
stock outstanding
Basic
Diluted
$
$
$
(3,241,870)
(0.77)
(0.77)
$
$
$
1,390,206
0.33
0.33
4,205,483
4,186,183
4,205,483
4,213,592
The accompanying notes are an integral part of these statements.
F-5
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended April 30, 2018 and 2017
Capital in
Preferred Common excess of par
Retained
stockholders’
Total
stock
stock
value
earnings
equity
Balance at May 1, 2016
$
-
41,560
22,546,616
37,487,702
60,075,878
Recognition of stock-based
compensation
Exercise of stock options
Vesting of restricted
stock
Employee stock purchases
Excess tax expense on stock options
and awards
Net income
Balance at April 30, 2017
Recognition of stock-based
compensation
Exercise of stock options
Net loss
-
-
-
-
-
-
-
-
-
-
-
12
332,783
4,308
113
60,536
8,330
(38)
17
-
-
-
-
-
-
-
332,783
4,320
60,649
8,347
(38)
-
1,390,206
1,390,206
41,702
22,952,535
38,877,908
61,872,145
-
194
-
83,659
95,823
-
-
83,659
96,017
-
(3,241,870)
(3,241,870)
Balance at April 30, 2018
$
- $ 41,896 $
23,132,017 $ 35,636,038 $ 58,809,951
The accompanying notes are an integral part of these statements.
F-6
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended April 30, 2018 and 2017
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization
Stock-based compensation
Restricted stock expense
Increase in allowance for doubtful accounts
Increase in inventory obsolescence reserve
Loss on settlement of receivable and disposal of related assets
Impairment of goodwill
Impairment of intangible asset
Deferred income tax (benefit) expense
Amortization of intangible assets
Amortization of financing fees
Fair value adjustment of contingent consideration
Loss from disposal or sale of machinery and equipment
Gain from involuntary conversion on non-monetary assets due to fire
Changes in assets and liabilities
Accounts receivable
Inventories
Prepaid expenses and other assets
Refundable and prepaid income taxes
Income taxes payable
Trade accounts payable
Deferred rent
Accrued expenses and wages
Net cash used in operating activities
Cash flows from investing activities
Purchases of machinery and equipment
Net cash used in investing activities
Cash flows from financing activities
Advances on notes receivable
Proceeds from the exercise of common stock options
Proceeds from Employee stock purchases
Proceeds under equipment note
Proceeds under sale leaseback agreements
Tax expense on stock options and awards
Payments of contingent consideration
Payments under capital lease and sale leaseback agreements
Payments under equipment note
Proceeds under building notes payable
Payments under building notes payable
Borrowings under lines of credit
Payments under lines of credit
Payments of financing fees
Net cash provided by financing activities
Change in cash
F-7
2018
2017
$
(3,241,870) $
1,390,206
5,118,297
83,659
-
200,000
-
2,509,423
3,222,899
690,107
(2,234,885)
435,043
63,669
(84,344)
20,011
-
(1,716,793)
(13,415,555)
1,761,070
(1,315,618)
428,132
3,166,007
(243,036)
(163,300)
(4,717,084)
(3,731,370)
(3,731,370)
(880,000)
96,017
-
943,136
-
-
(226,014)
(2,144,866)
(297,328)
7,000,000
(3,741,000)
15,912,446
(9,811,244)
(174,418)
6,676,729
(1,771,725)
4,708,876
332,783
60,649
-
300,000
-
-
-
2,641
490,010
111,981
(353,591)
58,456
(276,967)
(8,812,643)
(6,222,216)
(1,092,816)
435,056
69,868
9,148,609
(207,542)
(197,121)
(53,761)
(3,505,486)
(3,505,486)
-
4,320
8,347
932,812
904,027
(38)
(273,672)
(1,610,356)
(29,850)
-
(165,000)
94,123,100
(90,958,740)
(207,647)
2,727,303
(831,944)
SigmaTron International, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS – Continued
Years ended April 30, 2018 and 2017
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
3,493,324
1,721,599
$
4,325,268
3,493,324
Supplementary disclosures of cash flow information
Cash paid for interest
Cash paid for income taxes
Purchase of machinery and equipment financed
under capital leases
Financing of insurance policy
The accompanying notes are an integral part of these statements.
2018
2017
$
1,435,067
2,053,779
$
994,583
603,091
3,687,221
152,730
1,189,701
157,805
F-8
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2018 and 2017
NOTE A - DESCRIPTION OF THE BUSINESS
SigmaTron International, Inc., its subsidiaries, foreign enterprises and international procurement office (collectively,
the “Company”) operates in one business segment as an independent provider of electronic manufacturing services
(“EMS”), which includes printed circuit board assemblies and completely assembled (box-build) electronic products.
In connection with the production of assembled products, the Company also provides services to its customers,
including (1) automatic and manual assembly and testing of products; (2) material sourcing and procurement; (3)
manufacturing and test engineering support; (4) design services; (5) warehousing and distribution services; and (6)
assistance in obtaining product approval from governmental and other regulatory bodies. As of April 30, 2018, the
Company provided these manufacturing services through an international network of facilities located in the United
States, Mexico, China, Vietnam and Taiwan. Approximately 14.0% of the total non-current consolidated assets of the
Company are located in foreign jurisdictions outside the United States as of April 30, 2018 and 2017.
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 fluctuations for the fiscal year ended April 30, 2018 resulted in net
foreign currency transaction gains of approximately $125,000 compared to net foreign currency losses of $508,000 in
the prior year.
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 and expenses during the reporting period.
Significant estimates made in preparing the consolidated financial statements include depreciation and amortization
periods, the allowance for doubtful accounts, reserves for inventory, lower of cost or market adjustment for inventory,
contingent consideration, deferred taxes, uncertain tax positions, valuation allowance for deferred taxes and valuation
of goodwill and 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 with original maturities within
three months of the purchase date.
F-9
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Accounts Receivable
The majority of the Company’s accounts receivable are due from companies in the industrial electronics, consumer
electronics and medical/life sciences 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.
The Company has arrangements with various financial institutions to sell certain eligible accounts receivable balances
from specific customers. The accounts receivable balances sold are at the election of the Company and the Company
incurred fees for such sales, which were not material for the year ended April 30, 2018 or 2017. The accounts
receivable balances are derecognized at the time of sale, as the Company does not have continuing involvement after
the point of sale. During the years ended April 30, 2018 and 2017, the Company sold without recourse trade
receivables of approximately $78,000,000 and $95,000,000, respectively. Cash proceeds from these agreements are
reflected as operating activities included in the change in accounts receivable in the Company's consolidated
statements of cash flows.
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 cost. Cost is determined by an average cost method and the Company allocates labor and
overhead to work-in-process and finished goods. In the event of an inventory write-down, the Company records
expense to state the inventory at lower of cost or net realizable value. 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. 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. For convenience, the Company records these
inventory reserves against the inventory cost through a contra asset rather than through a new cost basis. Upon a
subsequent sale or disposal of the impaired inventory, the corresponding reserve is relieved to ensure the cost basis of
the inventory reflects any reductions. Actual results differing from these estimates could significantly affect the
Company’s inventories and cost of products sold as the inventory is sold or otherwise relieved.
F-10
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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
Machinery and equipment
Office equipment and software
Tools and dies
Leasehold improvements
20 years
5-12 years
3-5 years
12 months
lesser of lease term or useful life
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 effective interest method over the term of the related debt. Deferred financing fees of $319,332 and $208,583 net
of accumulated amortization of $75,585 and $11,916, respectively, as of April 30, 2018 and 2017, respectively, are
deducted from long term debt on the Company’s balance sheet.
Income Taxes
The Company’s income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits
reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes
in both the U.S. and several foreign jurisdictions. Significant judgments and estimates by management are required
in determining the consolidated income tax expense assessment.
Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax
basis of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. In evaluating the Company’s ability to recover its deferred tax assets
within the jurisdiction from which they arise, the Company considers all available positive and negative evidence,
including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and
recent financial operations. In projecting future taxable income, the Company begins with historical results and
changes in accounting policies, and incorporates assumptions including the amount of future state, federal and foreign
pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax
planning strategies. These assumptions require significant judgment and estimates by management about the forecasts
of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying
businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of
cumulative operating income and/or loss. Valuation allowances are established when necessary to reduce deferred
income tax assets to an amount more likely than not to be realized.
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax
laws and regulations in a multitude of jurisdictions across its global operations. Changes in tax laws and rates could
also affect recorded deferred tax assets and liabilities in the future. Except as noted below, management is not aware
of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial
position.
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.
F-11
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes - Continued
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 increases 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 (loss) (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. There were 109,402 and 285,000 anti-dilutive
common stock equivalents at April 30, 2018 and April 30, 2017, respectively, which have been excluded from the
calculation of diluted earnings per share.
Twelve Months Ended
April 30,
2018
2017
$
(3,241,870)
$
1,390,206
4,205,483
-
4,186,183
27,409
4,205,483
4,213,592
$
$
(0.77)
(0.77)
$
$
0.33
0.33
Net (loss) income
Weighted-average shares
Basic
Effect of dilutive stock options
Diluted
Basic (loss) earnings per share
Diluted (loss) earnings per share
Revenue Recognition
Revenues from sales of the Company's 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 Company's policy
to recognize revenue and related costs when the finished goods have been shipped from its facilities, which is also the
same point in time that title passes under the terms of the purchase order and control passes to the customer. 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 to the customer. 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 in time 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
F-12
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Revenue Recognition - Continued
customers request the Company hold finished goods after they have been invoiced to consolidate finished goods for
shipping purposes. The Company generally provides a warranty for workmanship, unless the assembly was designed
by the Company, in which case it warrants assembly/design. The Company 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.
Shipping and Handling Costs
The Company records shipping and handling costs for goods shipped to customers as selling and administrative
expenses. Customers are typically invoiced for shipping costs and such amounts are included in net sales. Shipping
and handling costs were not material to the financial statements for fiscal years 2018 or 2017.
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, note receivable, other
receivables, accounts payable and accrued expenses which approximate fair value at April 30, 2018 and 2017, 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 contingent consideration included in the fiscal 2013 Spitfire acquisition under the fair
value standard (primarily using level 3 measurement inputs). The contingent consideration continues to be measured
and reported at fair value at each period end. 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.
The Company entered into an Asset Purchase Agreement with Wagz, Inc. (Wagz) whereby the Company sold assets
to Wagz for $350,000 cash, 600,000 shares of Wagz Class C Common Stock and an earn-out based on sales by Wagz
generated from use of the assets through July 31, 2022. The earn-out is $6.00 per unit of a product specified in the
asset purchase agreement and any upgrade to such product. The fair value of the non-cash consideration consisted of
$600,000 for the 600,000 shares of Wagz common stock which is recorded within other assets. The Company
determined the fair value of the equity using the price per common share received by Wagz in a recent financing
transaction, a level 3 input. The Company did not assign any value to the earn-out because any receipts from the earn-
out are contingent upon Wagz selling the product specified in the asset purchase agreement between the Company
and Wagz.
F-13
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Goodwill
Goodwill represents the purchase price in excess of the fair value of assets acquired in business combinations.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350, “Intangibles –
Goodwill and Other,” requires the Company to assess goodwill and other indefinite-lived intangible assets for
impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator
of possible impairment. The 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 (the “step 2” requirement). 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. For fiscal 2017, the Company performed its annual goodwill impairment test
as of February 1, 2017 and determined no impairment existed as of that date. The step one analysis was performed
using a combination of a market approach and an income approach based on a discounted cash flow analysis.
For fiscal year 2018, the Company early adopted the guidance contained in Accounting Standards Update (ASU) No.
2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which
removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment.
Beginning with its February 1, 2018 goodwill impairment testing, goodwill impairment is the amount by which the
Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill.
To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline
companies’ method, and an income approach based on a discounted cash flow analysis. The value indicated by both
methods was weighted to arrive at a concluded value. The carrying value of the Company’s equity was greater than
the fair value of the Company based on the valuation analysis by an amount greater than the recorded amount of the
goodwill. In the fourth quarter of fiscal 2018, the Company’s forecasted future cash flow declined from prior
estimates. The Company is experiencing declining margins due to pricing pressures from vendors and customers.
Also at this time, electronic component manufacturers began allocating components to their customers which required
the Company to increase its investment in working capital. The decline in the forecasted cash flow resulted in a lower
estimate of the fair value of the Company’s reporting unit causing the Company to take an impairment charge on all
of its goodwill. The Company has begun taking steps to improve its margins and has negotiated an increase in its
revolving credit facility to address its working capital needs. Accordingly, the Company recognized a full goodwill
impairment charge of $3,222,899.
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 basis over their
estimated useful lives of 5 years for patents, 20 years for trade names, 1 year for backlog and 7 years for non-compete
agreements except for customer relationships which are amortized on an accelerated basis over their estimated useful
life of 15 years.
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
F-14
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Impairment of Long-Lived Assets - Continued
Company first performs an impairment review 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. If the carrying value exceeds the undiscounted cash flows, the
Company records an impairment, if any, for the difference between the estimated fair value of the asset group and its
carrying value. The Company further conducts annual reviews for idle and underutilized equipment, and reviews
business plans for possible impairment. As a result of the analysis performed in the fourth quarter of fiscal 2018, the
Company determined that the carrying value of the trade name intangible asset was not recoverable and recorded a
charge of $690,107 for the entire carrying amount. The Company’s analysis did not indicate that any of its other long-
lived assets were impaired.
Settlement of Receivable, Related Sale of Assets and Investments
As more fully described in Note E – Related Parties, the Company has recorded an investment in Wagz, a privately
held company whose equity does not have a readily determinable fair value. As permitted by ASC 321, Investments
- Equity Securities, paragraph 321-35-2, the Company has elected to carry its investment in Wagz equity at its cost
minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for
identical or a similar investment of the same issuer until the investment no longer qualifies to be measured under
paragraph 321-35-2. The balance at fiscal year ended April 30, 2018 was $600,000 which is recorded under other
assets. For the fiscal year ended April 30, 2018, the Company has not recognized any impairment of this investment.
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.
Reclassifications
Certain reclassifications have been made to the previously reported 2017 financial statements to conform to the 2018
presentation. There was no change to net income.
New Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with
Customers" (Topic 606) which supersedes the revenue recognition requirements in ASC 605, “Revenue
Recognition”. In summary, the core principle of this standard, along with various subsequent amendments, is that an
entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the
new standard requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from customer contracts, including revenue recognition policies to identify performance obligations,
assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurements and
recognition. The standard, as amended, was effective for annual periods beginning after December 15, 2017,
including interim periods within that reporting period. Companies have the option of using either a full or modified
retrospective approach in applying this standard.
F-15
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards – Continued
To plan for the adoption of the standard, the Company conducted an analysis to determine the impact the new standard
would have on its consolidated financial statements. This analysis included reviewing 1) contract terms and existing
accounting policies to determine the financial impact of the standard, 2) data availability and system reports to meet
the additional disclosure requirements of the standard, 3) any practical expedients the Company could elect upon
adoption and 4) the control environment and internal processes to ensure the appropriate controls are in place. As part
of implementation efforts we reviewed and modified our standard manufacturing agreement and invoice terms and
conditions to emphasize that title, risk of loss and control of the finished goods products we sell transfers to our
customers upon shipment.
The Company adopted the ASU on May 1, 2018 using the modified retrospective transition method, applying the
guidance to those contracts which were not completed as of that date. The Company’s adoption of ASC 606 did not
result in any changes in accounting requiring a transition adjustment to retained earnings.
Pursuant to the Company’s adoption of the standard, it is in the process of expanding its disclosures in the consolidated
financial statements for revenue recognition, assets and liabilities relating to contracts with customers, the nature of
the Company’s performance obligations and the manner by which the Company determines and allocates transaction
prices to its performance obligations, and the significant judgments inherent in its revenue recognition policies. The
Company also is in the process of implementing enhancements to its internal controls to support the Company’s ability
to sustain compliance with the standard after adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The new standard establishes a right-of-use (ROU)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern
of expense recognition in the income statement. The new standard is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach
is required for capital leases and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. While the
Company is still evaluating the impact of its pending adoption of the new standard on its consolidated financial
statements, the Company expects that upon adoption in the fiscal year ending April 30, 2020, it will recognize ROU
assets and lease liabilities and the amounts could be material.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting”, a new accounting standard update intended to
simplify several aspects of the accounting for share-based payment transactions including: income tax consequences,
classification of awards as either equity or liabilities and classification on the statement of cash flows. Specifically,
the update requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes
and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit
in the consolidated statements of operations, introducing a new element of volatility to the provision for income taxes.
This update is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company
adopted the ASU on May 1, 2017. Effective with the adoption of the ASU all share-based awards continue to be
accounted for as equity awards, excess tax benefits recognized on stock-based compensation expense are reflected in
the consolidated statements of operations as a component of the provision for income taxes on a prospective basis,
excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the
consolidated statements of cash flows on a prospective basis and the Company has elected to continue to estimate
expected forfeitures over the course of a vesting period. The adoption of the ASU had no material impact on the
retained earnings, other components of equity or net assets as of the beginning of the period of adoption.
F-16
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards - Continued
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking approach, based on
expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The
estimate of expected credit losses will require entities to incorporate considerations of historical information, current
information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable
users of financial statements to understand the entity’s assumptions, models and methods for estimating expected
credit losses. For public business entities, ASU 2016-13 is effective for annual and interim reporting periods beginning
after December 15, 2019, and the guidance is to be applied using the modified-retrospective approach. Earlier adoption
is permitted for annual and interim reporting periods beginning after December 15, 2018. The Company is currently
evaluating the new guidance and has not determined the impact this ASU may have on its consolidated financial
statements.
In August 2016, the FASB issued ASU Update No. 2016-15, “Statement of Cash Flows- Classification of Certain
Cash Receipts and Cash Payments,” which is intended to reduce diversity in practice in how certain transactions are
classified in the statements of cash flows. This update will be effective for fiscal years beginning after December 15,
2017 (the Company’s fiscal year ending April 30, 2019), and interim periods within those fiscal years. Early adoption
is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application
using a retrospective transition method. The Company plans to adopt the ASU in its fiscal year ending April 30, 2019.
The Company does not expect the impact of the adoption of this ASU to have a material impact on the Company’s
consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment,” which removes the step 2 requirement to perform a hypothetical purchase price
allocation to measure goodwill impairment. Goodwill impairment will now be the amount by which a reporting unit's
carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. This guidance is effective for
public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019, and early adoption is permitted. The Company early adopted this guidance in the third quarter of its fiscal year
ending April 30, 2018 and is applying this guidance to all future tests.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition
of a Business,” which clarifies the definition of a business when evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. For public companies, this ASU is effective for annual
periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted
this ASU in the fourth quarter of its fiscal year ending April 30, 2018. The Company will apply the clarified definition
of a business, as applicable, from the period of adoption.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated
Other Comprehensive Income.” The guidance permits entities to reclassify tax effects stranded in Accumulated Other
Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and
interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim
periods and can be applied retrospectively or in the period of adoption. The Company plans to adopt this ASU in the
first quarter of its fiscal year ending April 30, 2019 and is currently evaluating the impact that its adoption may have
on its consolidated financial statements.
F-17
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
New Accounting Standards - Continued
In May 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118, regarding the accounting implications of the recently issued Tax
Cuts and Jobs Act (the “Act”). This standard is effective immediately. The update clarifies that in a company’s
financial statements that include the reporting period in which the Act was enacted, the company must first reflect the
income tax effects of the Act in which the accounting under GAAP is complete. These amounts would not be
provisional amounts. The company would also report provisional amounts for those specific income tax effects for
which the accounting under GAAP is incomplete but a reasonable estimate can be determined. The Company has
recorded a provisional amount which it believes is a reasonable estimate of the effects of the Act on the Company’s
financial statements as of April 30, 2018. Technical corrections or other forthcoming guidance could change how the
Company interprets provisions of the Act, which may impact its effective tax rate and could affect its deferred tax
assets, tax positions and/or its tax liabilities.
NOTE C - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company’s allowance for doubtful accounts are as follows:
Beginning Balance
Bad debt expense
Write-offs
$
2018
100,000
200,000
-
$
300,000
2017
100,000
-
-
100,000
$
$
F-18
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE D - INVENTORIES
Inventories consist of the following at April 30:
2018
2017
Finished products
Work-in-process
Raw materials
Less obsolescence reserve
$
$
20,404,849
2,075,465
65,652,411
88,132,725
1,202,932
86,929,793
Changes in the Company’s inventory obsolescence reserve are as follows:
Beginning balance
Provision for obsolescence
Write-offs
2018
1,264,924
-
(61,992)
1,202,932
$
$
$
$
$
$
20,291,768
1,795,852
52,748,542
74,836,162
1,264,924
73,571,238
2017
1,212,532
300,000
(247,608)
1,264,924
F-19
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE E - RELATED PARTIES
In March, 2015, two of the Company’s executive officers invested in a start-up customer, Petzila, Inc. (“Petzila”).
The executive officers’ investments constituted less than 2% (individually and in aggregate) of the outstanding
beneficial ownership of Petzila, according to information provided by Petzila to the executive officers. As of April
2018, Petzila owed the Company approximately $3,652,800, consisting of an outstanding note receivable of
$2,117,500 and account receivable of $1,535,300, compared to an outstanding note receivable and account receivable
of approximately $888,000 and $1,271,000, respectively, at April 30, 2017. As of April 2018, inventory on hand
related to this customer approximated $211,000 compared to $310,000 at April 30, 2017. Sales to this customer have
not been material for fiscal year 2018 or 2017.
On January 29, 2016, the Company entered into a memorandum of understanding with Petzila. Under the subsequent
agreement, effective January 29, 2016, the then outstanding account receivable of approximately $888,000 was
converted into a short-term promissory note. The promissory note bore interest at the rate of 8% per annum, payable
at the maturity of the promissory note. The promissory note was scheduled to mature at the earlier of October 31,
2016, or within 10 days after the customer obtains certain equity financing, or at the closing of a sale of substantially
all of Petzila’s stock or assets. As additional consideration, the Company received warrants under the agreement. The
warrants were ten years in duration and at an exercise price of $0.01 per share and for a number of shares determined
pursuant to the warrant, expected to be, at a minimum, approximately 1% of Petzila’s then - outstanding equity
securities. The Company believed the warrants had nil value. Further, the Company was granted a security interest
in Petzila’s accounts receivable and authority to access and be a signatory on its deposit accounts.
On December 6, 2016, the Company extended the maturity of the promissory note to July 31, 2017. The promissory
note continued to bear interest at the rate of 8% per annum, payable monthly. As consideration, the Company received
additional warrants under the agreement, which the Company believed had nil value.
On August 25, 2017, effective as of July 31, 2017, the Company and Petzila entered into a new forbearance agreement.
The Company agreed to extend the maturity of the promissory note and forbear exercising its remedies until the earliest
of a capital raise, the sale of Petzila, or October 31, 2017, and to fund Petzila’s operations while Petzila explored its
options by advancing a maximum of $315,000 through October 31, 2017, pursuant to a new promissory note that bore
interest at 8% per annum. Additionally, should Petzila’s business be sold at a price exceeding $5,000,000 and the
amount necessary to pay its creditors, the Company would receive a fee in addition to the debt owed to the Company.
The forbearance period and maturity date of the notes were set to expire on the earliest of a capital raise, the sale of
Petzila or October 31, 2017, but the Company had a unilateral right to extend the forbearance period and maturity of
the notes and to make additional advances and did so as discussed further below.
The Company’s right to receive the sale fee was an embedded derivative to the note receivable, which was required
to be separated for accounting purposes. On July 31, 2017, the fair values of the new instruments received were as
follows: note receivable $887,531, warrants $0 and embedded derivative $0. After their initial recording at fair value,
the note receivable and warrants were recorded at amortized cost. The embedded derivative will be recorded at fair
value at each reporting period, with changes in value recognized as a gain or loss in the consolidated statement of
operations. There was no gain or loss on the extinguishment, as the pre and post extinguishment fair values were
consistent and there were no capitalized costs related to the extinguished instruments to expense.
During the time from November l, 2017 through February 28, 2018, Petzila prepared and distributed a confidential
information memorandum to potential buyers of its business, negotiated with interested buyers, and participated in
due diligence. During that time, in an effort to enhance its secured position, the Company continued to provide
working capital of $105,000 each month and extended on a monthly basis the forbearance period and maturity of the
notes. Petzila continued with its efforts to negotiate a sale of its business to a third party.
F-20
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE E - RELATED PARTIES - Continued
During the time from March 1, 2018 through April 30, 2018, the Company continued to provide working capital of
$145,000. Petzila continued with its efforts to negotiate a sale of its business to a third party.
On April 30, 2018 the Company foreclosed on its security interest and held a public sale of the assets in accordance
with the requirements of Article 9 of the California Uniform Commercial Code. The Company acquired all of the
assets of Petzila as the winning bidder at the public sale by a credit bid of $3,500,000, the aggregate amount of Petzila’s
liability to the company.
Concurrent with the foreclosure sale, the Company entered into an Asset Purchase Agreement with Wagz, Inc. (Wagz)
whereby the Company sold the assets to Wagz for $350,000 cash, 600,000 shares of Wagz common stock and an earn-
out based on sales by Wagz generated from use of the assets through July 31, 2022. The earn-out is $6.00 per unit of
a product specified in the asset purchase agreement and any upgrade to such product.
Accordingly, the Company recognized the fair value of the assets received from Wagz and derecognized the
receivables from Petzila. The fair value of the assets received from Wagz was approximately $950,000; therefore, the
Company recognized a loss of approximately $2,509,423 in its consolidated statement of operations for the year ended
April 30, 2018.
The fair value of the non-cash consideration consisted of $600,000 for the 600,000 shares of Wagz common stock
which is recorded within other assets. The Company determined the fair value of the equity using the price per
common share received by Wagz in a recent financing transaction, a level 3 input. The Company did not assign any
value to the earn-out because any receipts from the earn-out are highly uncertain and contingent upon Wagz selling
the product specified in the asset purchase agreement between the Company and Wagz.
F-21
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE F - PROPERTY, MACHINERY AND EQUIPMENT, NET
Property, machinery and equipment consist of the following at April 30:
Land and buildings
Machinery and equipment
Office equipment and software
Leasehold improvements
Equipment under capital leases
Less accumulated depreciation
and amortization, including
amortization of assets under
capital leases of $3,072,310
and $2,093,544 at April 30,
2018 and 2017, respectively
Property, machinery and
equipment, net
2018
2017
$
17,072,098 $
61,746,650
10,670,918
2,673,100
12,417,034
16,969,769
59,795,532
9,601,149
2,622,870
8,752,613
104,579,800
97,741,933
69,290,803
64,733,219
$
35,288,997 $
33,008,714
Depreciation and amortization expense of property, machinery and equipment was $5,118,297 and $4,708,876 for
the years ended April 30, 2018 and 2017, respectively.
F-22
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE G - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The carrying amount of tax deductible goodwill for the fiscal years ended April 30, 2018 and 2017 is as follows:
Beginning balance
Impairment
Ending balance
Intangible Assets
2018
3,222,899
(3,222,899)
-
$
$
2017
3,222,899
-
3,222,899
$
$
Intangible assets subject to amortization are summarized as of April 30, 2018 as follows:
Weighted Average
Remaining
Amortization
Period (Years)
Gross
Carrying
Amount
Accumulated
Amortization
Other intangible assets – Able
Customer relationships – Able
Spitfire:
Non-contractual customer relationships
Backlog
Trade names
Non-compete agreements
Patents
Total
-
-
9.08
-
14.08
1.08
-
$
375,000 $
2,395,000
375,000
2,395,000
4,690,000
22,000
-
50,000
400,000
7,932,000 $
1,609,670
22,000
-
42,245
400,000
4,843,915
$
For fiscal year 2018, the Company early adopted the guidance contained in Accounting Standards Update (ASU) No.
2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which
removes the step 2 requirement to perform a hypothetical purchase price allocation to measure goodwill impairment.
Beginning with its February 1, 2018 goodwill impairment testing, goodwill impairment is the amount by which the
Company’s single reporting unit carrying value exceeds its fair value, not to exceed the recorded amount of goodwill.
To estimate the fair value of the Company’s equity, the Company used both a market approach based on the guideline
companies’ method, and an income approach based on a discounted cash flow analysis. The value indicated by both
methods was weighted to arrive at a concluded value. The carrying value of the Company’s equity was greater than
the fair value of the Company based on the valuation analysis by an amount greater than the recorded amount of the
goodwill. In the fourth quarter of fiscal 2018, the Company’s forecasted future cash flow declined from prior
estimates. The Company is experiencing declining margins due to pricing pressures from vendors and customers.
Also at this time, electronic component manufacturers began allocating components to their customers which required
the Company to increase its investment in working capital. The decline in the forecasted cash flow resulted in a lower
estimate of the fair value of the Company’s reporting unit causing the Company to take an impairment charge on all
of its goodwill. The Company has begun taking steps to improve its margins and has negotiated an increase in its
revolving credit facility to address its working capital needs. Accordingly, the Company recognized a full goodwill
impairment charge of $3,222,899.
F-23
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE G - GOODWILL AND INTANGIBLE ASSETS - Continued
Intangible Assets - Continued
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 first performs an impairment review 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. If the carrying value exceeds the undiscounted cash flows, the
Company records an impairment, if any, for the difference between the estimated fair value of the asset group and its
carrying value. The Company further conducts annual reviews for idle and underutilized equipment, and reviews
business plans for possible impairment. As a result of the analysis performed in the fourth quarter of fiscal 2018, the
Company determined that the carrying value of the trade name intangible asset was not recoverable and recorded a
charge of $690,107 for the entire carrying amount. The Company’s analysis did not indicate that any of its other long-
lived assets were impaired.
Intangible assets subject to amortization are summarized as of April 30, 2017 as follows:
Weighted Average
Remaining
Amortization
Period (Years)
Gross
Carrying
Amount
Accumulated
Amortization
Other intangible assets – Able
Customer relationships – Able
Spitfire:
Non-contractual customer relationships
Backlog
Trade names
Non-compete agreements
Patents
Total
-
-
10.08
-
15.08
2.08
0.08
$
375,000 $
2,395,000
375,000
2,395,000
4,690,000
22,000
980,000
50,000
400,000
8,912,000 $
1,237,410
22,000
240,897
35,105
393,353
4,698,765
$
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:
(cid:3)
(cid:3)
(cid:3)
2019
2020
2021
2022
2023
Thereafter
F-24
(cid:3)
(cid:3)
(cid:3)
$
$
374,725
362,410
354,203
346,582
339,128
1,311,037
3,088,085
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE G - GOODWILL AND INTANGIBLE ASSETS - Continued
Intangible Assets - Continued
Amortization expense was $435,043 and $490,010 for the years ended April 30, 2018 and 2017, respectively.
In conjunction with the May 2012 acquisition of Spitfire, an estimate of the fair value of the contingent consideration,
$2,320,000, was recorded based on expected operating results through fiscal 2019 and the specific terms of when such
consideration would be earned. Those terms provide for additional consideration to be paid based on a percentage of
sales and pre-tax profits over those years in excess of certain minimums. Payments are made quarterly each year and
adjusted after each year-end audit. The Company decreased the estimated remaining payments expected to be paid
under the agreement, which resulted in a decrease of $353,591 and $84,344 to the contingent consideration liability
for the fiscal years ended April 30, 2018 and 2017, respectively. Any change in the Company’s estimate is reflected
as a change in the contingent consideration liability and as additional charges or credits to selling and administrative
expenses. The Company made payments totaling $226,014 and $273,672 for the years ended April 30, 2018 and
2017, respectively. As of April 30, 2018, the contingent consideration liability was $213,460 compared to $523,818
at April 30, 2017.
NOTE H - LONG-TERM DEBT
Note Payable - Bank
Prior to March 31, 2017 the Company had a senior secured credit facility with Wells Fargo, N.A. with a revolving
credit limit up to $30,000,000. The credit facility was collateralized by substantially all of the Company’s
domestically located assets and the Company had pledged 65% of its equity ownership interest in some of its foreign
entities. Prior to its payoff and termination, the Wells Fargo, N.A. senior secured credit facility was due to expire on
October 31, 2018. On March 31, 2017, the Company paid the balance outstanding under the senior revolving credit
facility in the amount of $22,232,914. The remaining deferred financing costs of $68,475 were expensed in the fourth
quarter of fiscal 2017.
On March 31, 2017, the Company entered into a $35,000,000 senior secured credit facility with U.S. Bank, National
Association (“U.S. Bank”), which expires on March 31, 2022. The credit facility is collateralized by substantially all
of the Company’s domestically located assets. The facility allows the Company to choose among interest rates at
which it may borrow funds: the bank fixed rate of four percent or LIBOR plus one and one half percent (effectively
3.83% at April 30, 2018). Interest is due monthly. Under the senior secured credit facility, the Company may borrow
up to the lesser of (i) $35,000,000 or (ii) an amount equal to a percentage of the eligible receivable borrowing base
plus a percentage of the eligible inventory borrowing base (the “Borrowing Base”). Deferred financing costs of
$34,971 and $207,647 were capitalized in the twelve month period ending April 30, 2018 and the fourth quarter of
fiscal 2017, respectively, which are amortized over the term of the agreement. As of April 30, 2018 and April 30,
2017 the unamortized amount included in other assets was $192,502 and $204,186, respectively. As of April 30,
2018, there was $29,279,631 outstanding and $5,720,369 of unused availability under the U.S. Bank facility compared
to an outstanding balance of $23,178,429 and $11,821,571 of unused availability at April 30, 2017. At April 30, 2018,
the Company was in compliance with its financial covenant and other restricted covenants under the credit facility.
On July 16, 2018, the Company and U.S. Bank entered into an amendment of the revolving credit facility. The
amended revolving credit facility allows the Company to borrow up to the lesser of (i) $45,000,000 less reserves or
(ii) 90% of the Company’s Borrowing Base, except that the 90% limitation will expire if the Company’s actual
revolving loans for the first 90 days after the amendment’s effective date are less than 80% of the Company’s
Borrowing Base and the Company maintains a Fixed Charge Coverage Ratio of 1.2 to 1.0 for four consecutive
quarters. The amendment also imposes sublimits on categories of inventory equal to $17,500,000 on raw materials
and $25,000,000 on finished goods.
F-25
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE H - LONG-TERM DEBT - Continued
Note Payable - Bank - Continued
On August 4, 2015, the Company’s wholly-owned subsidiary, Wujiang SigmaTron Electronics Co., Ltd., entered into
a credit facility with China Construction Bank. Under the agreement Wujiang SigmaTron Electronics Co., Ltd. could
borrow up to 5,000,000 Renminbi and the facility was collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s
manufacturing building. Interest was payable monthly and the facility had a fixed interest rate of 6.67%. The facility
was due to expire on August 3, 2017. The credit facility was closed as of March 1, 2017.
On March 24, 2017, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered
into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd.
could borrow up to 9,000,000 Renminbi and the facility was collateralized by Wujiang SigmaTron Electronics Co.,
Ltd.’s manufacturing building. Interest was payable monthly and the facility had a fixed interest rate of 6.09%. The
term of the facility extended to February 7, 2018. The credit facility was closed as of February 11, 2018. There was
no outstanding balance under the facility at April 30, 2017.
On February 12, 2018, the Company’s wholly-owned subsidiary, SigmaTron Electronic Technology Co., Ltd., entered
into a credit facility with China Construction Bank. Under the agreement SigmaTron Electronic Technology Co., Ltd.
can borrow up to 5,000,000 Renminbi and the facility is collateralized by Wujiang SigmaTron Electronics Co., Ltd.’s
manufacturing building. Interest is payable monthly and the facility bears a fixed interest rate of 6.09%. The term of
the facility extends to February 7, 2019. There was no outstanding balance under the facility at April 30, 2018.
Notes Payable - Buildings
The Company entered into a mortgage agreement on January 8, 2010, in the amount of $2,500,000, with Wells Fargo,
N.A. to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing
facility. On November 24, 2014, the Company refinanced the mortgage agreement with Wells Fargo, N.A. The note
required the Company to pay monthly principal payments in the amount of $9,500, bore an interest rate of LIBOR
plus two and one-quarter percent and was payable over a sixty month period. A final payment of approximately
$2,289,500 was due on or before November 8, 2019. On December 21, 2017, the Company repaid its Wells Fargo,
N.A. mortgage agreement for the remaining amount outstanding of $2,498,500, using proceeds from the U.S. Bank
mortgage agreement. The outstanding balance was $2,574,500 at April 30, 2017.
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $5,200,000, with U.S.
Bank to refinance the property that serves as the Company’s corporate headquarters and its Illinois manufacturing
facility. The note requires the Company to pay monthly principal payments in the amount of $17,333, bears interest
at a fixed rate of 4.0% per year and is payable over a fifty-one month period. Deferred financing costs of $74,066
were capitalized in fiscal year 2018 which are amortized over the term of the agreement. As of April 30, 2018 the
unamortized amount included in other assets was $66,945. A final payment of approximately $4,347,778 is due on
or before March 31, 2022. The outstanding balance was $5,148,000 at April 30, 2018.
The Company entered into a mortgage agreement on October 24, 2013, in the amount of $1,275,000, with Wells
Fargo, N.A. to finance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The
Wells Fargo, N.A. note required the Company to pay monthly principal payments in the amount of $4,250, bore
interest at a fixed rate of 4.5% per year and was payable over a sixty month period. A final payment of approximately
$1,030,000 was due on or before October 2018. On December 21, 2017, the Company repaid its Wells Fargo, N.A.
mortgage agreement for the remaining amount outstanding of $1,062,500, using proceeds from the U.S. Bank
mortgage agreement. The outstanding balance was $1,096,500 at April 30, 2017.
F-26
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE H - LONG-TERM DEBT - Continued
Notes Payable - Buildings - Continued
The Company entered into a mortgage agreement on December 21, 2017, in the amount of $1,800,000, with U.S.
Bank to refinance the property that serves as the Company’s engineering and design center in Elgin, Illinois. The note
requires the Company to pay monthly principal payments in the amount of $6,000, bears interest at a fixed rate of
4.0% per year and is payable over a fifty-one month period. Deferred financing costs of $65,381 were capitalized in
the fiscal year 2018 which are amortized over the term of the agreement. As of April 30, 2018 the unamortized amount
included in other assets was $59,094. A final payment of approximately $1,505,000 is due on or before March 31,
2022. The outstanding balance was $1,782,000 at April 30, 2018.
Notes Payable - Equipment
On November 1, 2016, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to
finance the purchase of equipment in the amount of $596,987. The term of the agreement extends to November 1,
2021 with average quarterly payments of $35,060 beginning on February 1, 2017 and a fixed interest rate of 6.65%.
The balance outstanding under this note agreement was $447,741 and $567,138 at April 30, 2018 and April 30, 2017,
respectively.
On February 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance
the purchase of equipment in the amount of $335,825. The term of the agreement extends to February 1, 2022 with
average quarterly payments of $20,031 beginning on May 1, 2017 and a fixed interest rate of 7.35%. The balance
outstanding under this note agreement was $268,660 and $335,825 at April 30, 2018 and April 30, 2017, respectively.
On June 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance the
purchase of equipment in the amount of $636,100. The term of the agreement extends to June 1, 2022 with average
quarterly payments of $37,941 beginning on September 1, 2017 and a fixed interest rate of 7.35%. The balance
outstanding under this note agreement was $540,685 at April 30, 2018.
On October 1, 2017, the Company entered into a secured note agreement with Engencap Fin S.A. DE C.V. to finance
the purchase of equipment in the amount of $307,036. The term of the agreement extends to November 1, 2022 with
average quarterly payments of $18,314 beginning on February 1, 2018 and a fixed interest rate of 7.35%. The balance
outstanding under this note agreement was $291,684 at April 30, 2018.
Capital Lease and Sale Leaseback Obligations
From October 2013 through June 2017, the Company entered into various capital lease and sales leaseback agreements
with Associated Bank, National Association to purchase equipment totaling $6,893,596. The terms of the lease
agreements extend to September 2018 through May 2022 with monthly installment payments ranging from $1,455 to
$40,173 and a fixed interest rate ranging from 3.75% to 4.90%. The balance outstanding under these capital lease
agreements was $2,923,524 and $3,627,760 at April 30, 2018 and April 30, 2017, respectively. The net book value
of the equipment under these leases was $4,799,827 and $4,713,044 at April 30, 2018 and April 30, 2017, respectively.
From April 2014 through July 2015, the Company entered into various capital lease agreements with CIT Finance
LLC to purchase equipment totaling $2,512,051. The terms of the lease agreements extend to March 2019 through
July 2020 with monthly installment payments ranging from $1,931 to $12,764 and a fixed interest rate ranging from
5.65% through 6.50%. The balance outstanding under these capital lease agreements was $984,031 and $1,448,269
at April 30, 2018 and April 30, 2017, respectively. The net book value of the equipment under these leases was
$1,736,688 and $1,946,026 at April 30, 2018 and April 30, 2017, respectively.
F-27
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE H - LONG-TERM DEBT - Continued
Capital Lease and Sale Leaseback Obligations - Continued
From September 2017 through April 2018, the Company entered into various capital lease and sales leaseback
agreements with First American Equipment Finance to purchase equipment totaling $3,011,387. The terms of the
lease agreements extend to August 2021 through April 2022 with monthly installment payments ranging from $6,716
to $20,093 and a fixed interest rate ranging from 5.82% through 7.23%. The balance outstanding under these capital
lease agreements was $2,688,029 at April 30, 2018. The net book value of the equipment under these leases was
$2,808,209 at April 30, 2018.
The aggregate amount of debt, net of deferred financing fees, maturing in each of the following fiscal years and
thereafter is as follows:
Fiscal Year
2019
2020
2021
2022
(cid:3)
(cid:3)
Total
(cid:3)
(cid:3)
655,190 (cid:3)
655,190 (cid:3)
655,190 (cid:3)
35,473,499 (cid:3)
37,439,069 (cid:3)
(cid:3)
$
$
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
See Note M - Leases, Page F-35 for future maturities under capital lease obligations.
Other Long-Term Liabilities
As of April 30, 2018 and 2017, the Company had recorded $1,130,557 and $991,017, respectively, for seniority
premiums and retirement accounts related to benefits for employees, $1,052,082 and $913,827 of which, respectively,
are for the Company’s foreign subsidiaries.
F-28
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE I - ACCRUED EXPENSES AND WAGES
Accrued expenses consist of the following at April 30:
Interest
Commissions
Professional fees
Other - Purchases
Other
2018
2017
$
$
121,845
187,936
322,377
156,634
2,142,000
$
2,930,792
$
90,639
143,738
419,801
117,069
1,550,808
2,322,055
Accrued wages consist of the following at April 30:
2018
2017
$
1,945,142
467,306
1,318,307
$
1,785,078
819,207
1,885,317
$
3,730,755
$
4,489,602
Wages
Bonuses
Foreign wages
(cid:3)
F-29
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE J - INCOME TAX
U.S. and foreign (loss) income before income tax (benefit) expense for the years ended April 30 are as follows:
2018
2017
$
$
(5,906,596)
1,604,274
(4,302,322)
$
$
1,326,266
1,171,417
2,497,683
Domestic
Foreign
Income Tax Provision
The income tax (benefit) expense for the years ended April 30 consists of the following:
Current
Federal
State
Foreign
Total Current
Deferred
Federal
State
Foreign
Total Deferred
Income tax
2018
2017
$
433,291
28,296
712,846
1,174,433
$
501,226
13,697
589,913
1,104,836
(1,551,921)
(240,647)
(442,317)
(2,234,885)
(54,213)
59,884
(3,030)
2,641
$
(1,060,452)
$
1,107,477
F-30
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE J - INCOME TAX - Continued
Income Tax Provision - Continued
The difference between the income tax (benefit) expense 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:
U.S Federal Provision:
At statutory rate
State taxes
Change in valuation allowance
Foreign tax differential
Impact of state tax rate change
Impact of foreign permanent items
Tax law changes
Foreign currency exchange gain/loss
Foreign inflation adjustment
Stock based compensation
2018
2017
$
(1,325,872)
(151,508)
-
60,302
3,670
23,106
581,222
(172,062)
(129,227)
49,917
$
849,215
42,643
78,100
(89,885)
5,920
7,171
28,599
328,239
(61,707)
(80,818)
Provision for income taxes
$
(1,060,452)
$
1,107,477
F-31
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the deferred tax assets and liabilities for federal, state and foreign income taxes
are as follows:
Deferred Tax Assets
Federal, foreign & state NOL carryforwards
Foreign tax credit
Reserves and accruals
Stock based compensation
Inventory
Other intangibles
Deferred rent
Allowance for doubtful accounts
Other DTA
Federal benefit of state
Total Gross Deferred Tax Assets
Less: Valuation allowance
Net Deferred Tax Assets
Deferred Tax Liabilities
Other assets
Property, machinery & equipment
Prepaids
Federal benefit of state
Total Deferred Tax Liabilities
Net Deferred Tax Asset (Liability)
2018
2017
$
730,561
78,100
598,364
314,221
869,471
834,512
114,171
76,500
-
-
3,615,900
(78,100)
29,168
78,100
723,313
462,156
1,177,067
206,736
211,509
38,360
13,839
45,589
2,985,837
(78,100)
3,537,800
$
2,907,737
(3,485)
(2,198,332)
(203,924)
(22,378)
(2,428,119)
1,109,681
$
$
$
(318,830)
(3,441,393)
(272,718)
-
(4,032,941)
(1,125,204)
$
$
$
$
$
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including, but
not limited to: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing rules related to uses
and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus
depreciation that will allow for full expensing of qualified property; (4) creating a new limitation on deductible interest
expense; (5) eliminating the corporate alternative minimum tax; and (6) new tax rules related to foreign operations.
Due to the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond
F-32
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities - Continued
one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance
with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting
under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act
is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should
continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the
enactment of the Tax Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the
Company has made reasonable estimates for certain effects of the Tax Act and recorded provisional amounts in its
financial statements as of April 30, 2018. As the Company collects and prepares necessary calculations of cumulative
earnings and profits, tax pools and amounts held in cash or other specified assets, as well as interprets the Tax Act and
any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the
Company may make adjustments to the provisional amounts. Those adjustments may materially impact its provision
for income taxes and effective tax rate in the period in which the adjustments are made. The Company expects to
complete its accounting for the tax effects of the Tax Act in fiscal year 2019.
In connection with the Company’s initial analysis of the impact of the Tax Act, we recognized a provisional amount
of $566,000, which is included as a component of income tax expense.
Provisional Amounts
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to
reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act
and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise
to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the Company’s
deferred tax balance resulted in an increase in income tax expense of $25,000 for the year ended April 30, 2018.
Prior to the enactment of Tax Act, the Company had not recorded U.S. income taxes on the undistributed earnings of
the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries have been indefinitely reinvested, and
as a result, no deferred tax liability was previously recorded. In light of the Tax Act and the one-time transition tax,
for the period ended January 31, 2018, the Company recorded a provisional amount for its one-time transition tax
liability for the cumulative undistributed earnings of its foreign subsidiaries, resulting in an increase in income tax
expense of $541,000 for the year ended April 30, 2018.
The one-time transition tax is based on total post-1986 earnings and profits (E&P) that the Company previously
deferred from U.S. income taxes. The entire amount of the transition tax liability, except for $70,000, is recorded as
a long-term liability. The Company has not yet completed its calculation of the total post-1986 E&P for these foreign
subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified
assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously
deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.
As of April 30, 2018 the Company had a net operating loss carryforward for federal income tax purposes of
approximately $1,068,000 which is carried forward indefinitely. The Company has state net operating loss carry-
forwards totaling approximately $976,000 at April 30, 2018, that will begin to expire in fiscal year April 30, 2025.
The Company had foreign net operating loss carryforwards of $1,825,000 as of April 30, 2018 which will begin to
expire in 2023. The Company recognizes a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion, or all, of a deferred tax asset will not be realized. The Company determined it
is more likely than not that it will realize the deferred tax assets due to the reversal of deferred tax liabilities and
F-33
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE J - INCOME TAX - Continued
Deferred Tax Assets and Liabilities - Continued
forecast of future earnings. The deferred tax assets exceed the deferred tax liabilities and based on the reversing pattern
in addition to the forecast of future earnings, the Company has concluded that all of the deferred tax liabilities are
expected to reverse within the period of time available to fully utilize all the deferred tax assets. Therefore, the
Company has concluded that a valuation allowance is not required as of April 30, 2018, related to net operating loss
carryforwards. The Company has established a valuation allowance of $78,100 related to its foreign tax credit carry-
forward. The Company’s estimate of cumulative taxable income during the foreign tax credit carryforward period is
insufficient to support that the tax benefit from the foreign tax credit is more likely than not to be realized.
As a result of the Tax Act, the historic undistributed earnings of the Company’s foreign subsidiaries will be taxed in
the U.S. via the one-time repatriation tax in fiscal 2018. As a result of this transition tax, the Company may repatriate
its cash and cash equivalents held by its foreign subsidiaries without such funds being subject to further U.S. income
tax liability. Certain unrepatriated foreign earnings remain subject to local country withholding taxes upon
repatriation. The Company continues to apply its permanent reinvestment assertion on the cumulative amount of
unremitted earnings of $13,085,000 as of April 30, 2018 from its foreign subsidiaries.
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, 2018 and 2017, the amount of consolidated worldwide liability for uncertain tax
positions that impacted the Company’s effective tax rate was $0 for each year.
Other
Interest and penalties related to tax positions taken in the Company’s tax returns are recorded in income tax expense
and miscellaneous selling, general and administrative expense, respectively, in the consolidated statements of
operations. For the fiscal year ended April 30, 2018 and 2017, the amount included in the Company’s balance sheet
for such liabilities was $0 for each year.
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 tax years before fiscal year
2015. The Internal Revenue Service previously concluded an audit of the Company’s fiscal year 2013 tax return, and
a no change letter was issued.
NOTE K - 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
$90,744 and $91,686 to the plans during the fiscal years ended April 30, 2018 and 2017, respectively. The Company
incurred total expenses of $12,700 and $8,000 for the fiscal years ended April 30, 2018 and 2017, respectively, relating
to costs associated with the administration of the plans.
F-34
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE L - 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, 2018, two customers accounted for 20.2% and
13.3% of net sales of the Company, and 6.0% and 2.9%, respectively, of accounts receivable at April 30, 2018. For
the year ended April 30, 2017, two customers accounted for 26.7% and 12.6% of net sales of the Company and 8.4%
and 4.2%, respectively, of accounts receivable at April 30, 2017. Further, the Company has $1,325,149 in cash in
China as of April 30, 2018. Effective May 1, 2015, China implemented a deposit insurance program to insure up to
approximately $81,000 in deposits, under certain circumstances. Funds above this amount are not insured by a
guaranteed deposit insurance system.
NOTE M - LEASES
The Company leases certain facilities and office space under various operating leases expiring at various dates
through April 2023. 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:
Years ending April 30,
2019
2020
2021
2022
2023
Capital
Leases
Operating
Leases
$
$
2,685,337
2,041,239
1,618,137
874,589
12,244
2,326,475
1,860,538
1,371,245
707,338
685,986
Total future minimum lease payments
$
7,231,546
$
6,951,582
Less amounts representing interest
Less Current Portion
Long Term Portion
613,162
6,618,384
2,320,538
$
4,297,846
F-35
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE M - LEASES - Continued
Rent expense incurred under operating leases was $2,391,328 and $2,363,778 for the years ended April 30, 2018 and
2017, respectively.
In September 2010, the Company entered into a real estate lease agreement in Union City, CA, to rent approximately
117,000 square feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives
incentives over the life of the lease, which extends through March 2021. The amount of the deferred rent income
recorded for the fiscal year ended April 30, 2018 was $103,599 compared to $79,575 in fiscal year 2017. In addition,
the landlord provided the Company tenant incentives of $418,000, which are being amortized over the life of the lease.
The balance of deferred rent at April 30, 2018 was $447,073 compared to $550,672 at April 30, 2017.
On May 31, 2012, the Company entered into a lease agreement in Tijuana, MX, to rent approximately 112,000 square
feet of manufacturing and office space. Under the terms of the lease agreement, the Company receives incentives
over the life of the lease, which extends through November 2018. The amount of the deferred rent income for the
fiscal year ended April 30, 2018 was $139,437 compared to $127,967 in fiscal year 2017. The balance of deferred
rent at April 30, 2018 was $85,527 compared to $224,964 at April 30, 2017.
NOTE N - STOCK COMPENSATION AND EQUITY TRANSACTIONS
The Company has stock option plans (“Option Plans”) under which certain employees and non-employee directors
may acquire shares of common stock. All Option Plans have been approved by the Company’s shareholders. At April
30, 2018, the Company has 117,914 shares available for future issuance to employees under the employee plans and
none are available under the non-employee director plans. 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 option 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 Company recognized approximately $0
and $3,500 in compensation expense in fiscal year 2018 and 2017, respectively. The balance of unrecognized
compensation expense was $0 at April 30, 2018 and 2017.
The Company granted 285,000 options to employees in fiscal year 2016. The Company recognized approximately
$83,700 and $325,700 in compensation expense in fiscal year 2018 and 2017, respectively. The balance of
unrecognized compensation expense was approximately $0 and $83,700 at April 30, 2018 and 2017, respectively.
In October 2017 and 2016, the Company issued 12,500 and 11,250 shares of restricted stock pursuant to the 2013
Non-Employee Director Restricted Stock Plan, which fully vested on April 1, 2018 and 2017, respectively. The
Company recognized $0 and $60,649 in compensation expense in fiscal year 2018 and 2017, respectively. The balance
of unrecognized compensation expense related to the Company’s restricted stock award was $0 at April 30, 2018 and
2017.
F-36
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE N - STOCK COMPENSATION AND EQUITY TRANSACTIONS - Continued
The table below summarizes option activity through April 30, 2018:
Number of
securities to be
issued upon
exercise of
outstanding options
367,963
(1,200)
366,763
(19,445)
347,318 $
Weighted-
average
exercise
price
5.84
3.60
5.85
4.94
5.90
Number of
options
exercisable
at end
of year
172,513
269,863
347,318
Outstanding at April 30, 2016
Options exercised during 2017
Outstanding at April 30, 2017
Options exercised during 2018
Outstanding at April 30, 2018
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, 2018 and 2017, the aggregate
intrinsic value of options exercised was $35,820 and $2,172, respectively. As of April 30, 2018 and 2017, the
aggregate intrinsic value of in the money options outstanding was $305,396 and $135,151, respectively.
Information with respect to stock options outstanding and exercisable at April 30, 2018 follows:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Options outstanding and exercisable
Number
outstanding at
April 30, 2018
Weighted-average
remaining
contract life
Weighted-
average
exercise price
Range of exercise prices
$ 3.60-6.45
347,318
6.69 years
As of April 30, 2018 there were no non-vested stock options.
347,318
$
$
5.90
5.90
The Company implemented an employee stock purchase plan (“ESPP”) for all eligible employees on February 1,
2014. The ESPP reserved 500,000 shares of common stock for issuance to employees. In addition, 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. The ESPP was terminated effective August 15, 2016. Final purchases under the ESPP
were completed on August 31, 2016. There were 0 and 1,658 shares issued under the ESPP and the Company recorded
$0 and $3,559 in compensation expense, for fiscal years ended April 30, 2018 and 2017, respectively.
F-37
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE O - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal year 2018:
2018
Net sales
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 71,224,293 $ 72,959,074 $ 65,733,723 $ 68,214,619
Gross profit
6,757,054
7,103,568
5,897,340
6,844,956
Income (loss) before income
taxes (1), (2)
580,845
1,151,454
(115,872)
(5,918,749)
Net income (loss)
382,882
736,115
31,338
(4,392,205)
Earnings (loss) per share
Basic
Earnings (loss) per share
Diluted
$
0.09 $
0.17 $
0.01 $
(1.04)
$
0.09 $
0.17 $
0.01 $
(1.04)
Weighted average shares- Basic
4,195,985
4,201,442
4,209,566
4,215,258
Weighted average shares- Diluted
4,269,501
4,326,854
4,356,509
4,215,258
1.) The Company records inventory reserves for valuation and shrinkage throughout the year based on historical
data. In the fourth quarter of fiscal 2018 physical inventory results were completed resulting in an increase
in income before income taxes of approximately $1,500,000.
2.) The Company recognized a full goodwill impairment charge of $3,222,899, an impairment of intangible
assets in the amount of $690,107 and the write off of the account receivable and note receivable related to
Petzila in the amount of $2,509,423.
The aggregate after-tax effect for the above adjustments in the fourth quarter of fiscal 2018 was a decrease to basic
earnings (loss) per share of $0.55.
F-38
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE O - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
The following is a summary of unaudited quarterly financial data for fiscal year 2017:
2017
Net sales
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 59,184,975 $ 66,159,586 $ 62,164,167 $ 65,861,447
Gross profit (1)
5,770,234
5,818,669
5,686,959
7,899,446
Income before income
taxes (1), (2), (3)
226,858
26,616
89,036
2,155,173
Net income (loss)
146,597
33,295
(47,852)
1,258,166
Earnings (loss) per share
Basic
Earnings (loss) per share
Diluted
$
0.04 $
0.01 $
(0.01) $
0.30
$
0.03 $
0.01 $
(0.01) $
0.30
Weighted average shares- Basic
4,183,955
4,185,752
4,186,813
4,188,279
Weighted average shares- Diluted
4,214,535
4,225,874
4,186,813
4,207,266
1.) Due to a fire at one of the Company’s plants during 2017, the Company recorded expense of approximately
$230,000 in prior quarters in costs of goods sold that was realized as an insurance recovery during the fourth
quarter of 2017 as recovery was considered probable. As part of this settlement, a gain of approximately
$277,000 was also recorded in the fourth quarter of fiscal 2017 due to the insurance claim exceeding the net
book value of the replacement machinery and equipment destroyed.
2.) The Company records inventory reserves for valuation and shrinkage throughout the year based on historical
data. In the fourth quarter of fiscal 2017 physical inventory results were completed and the Company adjusted
the estimate which increased income before income taxes by approximately $780,000.
3.) As discussed in Note G, during the fourth quarter of fiscal 2017 the Company recorded a change in estimate
related to Contingent Consideration which increased income before income tax expense in the amount of
approximately $247,000.
The aggregate after-tax effect for the above adjustments in the fourth quarter of fiscal 2017 was an increase to basic
earnings per share of $0.21.
F-39
SigmaTron International, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
April 30, 2018 and 2017
NOTE P - LITIGATION
From time to time the Company is involved in legal proceedings, claims, or investigations that are incidental to the
Company’s business. In future periods, the Company could be subjected to cash cost or non-cash charges to earnings
if any of these matters are resolved on unfavorable terms. However, although the ultimate outcome of any legal matter
cannot be predicted with certainty, based on present information, including management’s assessment of the merits
of any particular claim, the Company does not expect these legal proceedings or claims will have any material adverse
impact on its future consolidated financial position or results of operations.
F-40
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INDUSTRY-SPECIFIC EXPERTISE.
SIGMATRON’S DIVERSE
MARKETS SERVED.
Providing a global network of
manufacturing options to diverse
markets is our reality today and
for the future. Whether new or
established, our customers represent
industry sectors that are crucial in
today’s global EMS and design
services markets valued at $348
billion (2016). The following table
shows the percentage of SII’s
net sales to our three, principal
end-user markets served in FY18.
48.1%
47.1%
4.8%
INDUSTRIAL
Customer programs include: Motor
controls, power supplies, lighting
products, scales, routers, joysticks,
automotive, telecommunications
and semiconductor equipment.
CONSUMER
Customer programs include:
Household appliance controls,
computers and tablets, gaming
machines and lighting displays,
personal grooming, safety detectors,
fitness treadmills, exercise bikes
and cross trainers.
MEDICAL/LIFE SCIENCES
Customer programs include:
Clinical diagnostic systems,
equipment and instruments.
UNITED STATES
ASIA
MEXICO
Manufacturing/Design
Manufacturing
Manufacturing
SigmaTron International, Inc.
Corporate Headquarters
Midwest Operations
Elk Grove Village, Illinois
West Coast Operations
Union City, California
Design and Engineering Center
Elgin, Illinois
Warehouses
Del Rio, Texas
El Paso, Texas
San Diego, California
SigmaTron International, Inc.
China Operations
Suzhou, China
SigmaTron International, Inc.
Mexico Operations:
Acuña Operations
Chihuahua Operations
Tijuana Operations
SigmaTron International, Inc.
Vietnam Operations
Biên Hòa City, Vietnam
International
Procurement Office
SigmaTron International, Inc.
Taiwan Procurement Office
Taipei City, Taiwan
ONE SOURCE. GLOBAL OPTIONS.®
For an EMS provider of its size,
SigmaTron offers an extraordinary
global footprint. With strategic
locations in the U.S. and low-cost
regions in Asia and Mexico,
we are large enough to embrace the
most complex programs, yet small
enough to partner closely with our
customers as we drive projects from
beginning to end. Our proprietary
IT infrastructure and local program
managers allow us to respond in
real time and to provide single-source
efficiency to meet the market
demands of our increasingly
sophisticated customers.
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Firm: Ackerly Communications, LLC Copywriting/Art Direction: Mary Ackerly Design: Tatjana Jovancevic Proofreading: Deborah Livingstone Printer: Dreamworks GC, LLC
CORPORATE OFFICES
SigmaTron International, Inc.
2201 Landmeier Road
Elk Grove Village, IL 60007
Tel 847.956.8000
Fax 847.956.9801
INVESTOR RELATIONS
800.700.9095
www.sigmatronintl.com
OFFICERS
Gary R. Fairhead*
Chairman of the Board,
President and
Chief Executive Officer
Linda K. Frauendorfer*
Chief Financial Officer,
Vice President, Finance,
Treasurer and Secretary
Gregory A. Fairhead*
Executive Vice President
and Assistant Secretary
John P. Sheehan*
Vice President,
Director of Supply Chain
and Assistant Secretary
Daniel P. Camp*
Vice President,
Acuña Operations
Rajesh B. Upadhyaya*
Executive Vice President,
West Coast Operations
Hom-Ming Chang*
Vice President,
China Operations
Curtis W. Campbell
Vice President of Sales,
West Coast Operations
Yousef M. Heidari
Vice President,
Engineering
Dennis P. McNamara
Vice President,
Engineering
James E. Barnes
Vice President of Operations,
Elk Grove Village and Acuña
Thomas F. Rovtar
Vice President,
Information Technology
Keith D. Wheaton
Vice President,
Business Development
West Coast Operations
*Executive Officers
BOARD OF DIRECTORS
Gary R. Fairhead
Chairman of the Board,
President and Chief
Executive Officer,
SigmaTron International, Inc.
Linda K. Frauendorfer
Chief Financial Officer,
Vice President, Finance,
Treasurer and Secretary
SigmaTron International, Inc.
Thomas W. Rieck 1,3
Partner,
Rieck and Crotty, P.C.
Dilip S. Vyas 2,3,4
Independent Consultant
Paul J. Plante 1,2
President and Owner
Florida Fresh Vending, LLC
CORPORATE INFORMATION
Bruce J. Mantia2
Retired Partner
Ernst & Young LLP
Barry R. Horek1,3
Retired Partner
Ernst & Young LLP
1 Member of the Audit Committee
2 Member of the
Compensation Committee
3 Member of the
Nominating Committee
4 Lead Director
SEC Counsel
Greenberg Traurig, LLP
77 West Wacker Drive
Chicago, Illinois 60601
Corporate Counsel
Howard & Howard
Attorneys PLLC
200 South Michigan Avenue
Chicago, Illinois 60604
Independent
Public Accountants
BDO USA, LLP
330 North Wabash Avenue
Chicago, Illinois 60611
Form 10-K
If you would like a free copy of
the Form 10-K report filed with
the Securities and Exchange
Commission, please call
Linda K. Frauendorfer at the
SigmaTron corporate office,
1.800.700.9095.
Stock Transfer Agent
and Registrar
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Stock Information
The Company’s common stock
has been trading on the Nasdaq
System under the symbol SGMA
since the Company’s initial public
offering in February 1994.
The Company has 4 million
shares of common stock
outstanding.
The Company has not paid
cash dividends on its common
stock since completing its
February 1994 initial public
offering and does not intend
to pay any dividends in the
foreseeable future.