NOTE 1 NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
We manufacture wire harnesses, cables and electromechanical assemblies, printed circuit boards and higher-level assemblies for a wide range of commercial and defense industries. We provide a full "turn-key" contract manufacturing service to our customers. All products are built to the customer's design specifications. We also provide engineering services separate from the manufacture of a product and repair service on circuit boards used in machines in the medical industry.
Our manufacturing facilities are located in Bemidji, Blue Earth, Merrifield, Milaca, Mankato and Baxter, Minnesota as well as Augusta, Wisconsin and Monterrey, Mexico. Products are sold to customers both domestically and internationally.
A summary of our significant accounting policies follows:
Principles of Consolidation
The consolidated financial statements include the accounts of our wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also affect the reported amounts of revenue and expense during the reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, allowance for doubtful accounts, realizability of deferred tax assets and fair value of acquired assets and assumed liabilities. Actual results could differ from those estimates.
Cash
For purposes of reporting cash flows, we consider cash to be short-term, highly liquid interest-bearing accounts readily convertible to cash and whose original maturity is three months or less.
Accounts Receivable and Allowance for Doubtful Accounts
We grant credit to customers in the normal course of business. Accounts receivable are unsecured and are presented net of an allowance for uncollectible accounts. The allowance for uncollectible accounts was $122,000 and $86,000 at December 31, 2011 and 2010, respectively. We determine our allowance by considering a number of factors, including the length of time accounts receivable are past due, our previous loss history, the customers' current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for uncollectible accounts.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value). Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs.
Inventories are as follows:
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
Raw materials |
|
$ |
13,056,955 |
|
$ |
11,277,741 |
|
Work in process |
|
|
3,202,002 |
|
|
3,477,236 |
|
Finished goods |
|
|
3,880,764 |
|
|
2,395,843 |
|
Reserves |
|
|
(1,110,128 |
) |
|
(1,042,047 |
) |
|
|
|
|
|
|
Total |
|
$ |
19,029,593 |
|
$ |
16,108,773 |
|
|
|
|
|
|
|
Property, Equipment and Depreciation
Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated use lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives, as follows:
|
|
|
Buildings |
|
39 Years |
Leasehold improvements |
|
3-7 Years |
Manufacturing equipment |
|
3-7 Years |
Office and other equipment |
|
3-7 Years |
Property and equipment at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
2011 |
|
2010 |
|
Land |
|
$ |
260,000 |
|
$ |
260,000 |
|
Building and Leasehold Improvements |
|
|
6,370,570 |
|
|
6,316,133 |
|
Manufacturing Equipment |
|
|
14,156,261 |
|
|
11,816,653 |
|
Office and Other Equipment |
|
|
4,240,137 |
|
|
3,523,526 |
|
Accumulated Depreciation |
|
|
(15,943,094 |
) |
|
(14,758,769 |
) |
|
|
|
|
|
|
Net Property and Equipment |
|
$ |
9,083,874 |
|
$ |
7,157,543 |
|
|
|
|
|
|
|
Assets Held for Sale
Assets held for sale consist of property related to closed facilities that are currently being marketed for disposal. Assets held for sale are reported at the lower of their carrying value or estimated fair value less costs to sell. At December 31, 2011, land of $12,500 and one building, net of accumulated depreciation, of $244,003 are classified as held for sale and shown in Other Assets on the balance sheet. At December 31, 2010, land of $27,000 and two buildings, net of accumulated depreciation, of $405,000 were classified as held for sale and shown in Other Assets on the balance sheet. We recognized impairment charges of $53,000 and $56,000 related to one of these buildings during the years ended December 31, 2011 and 2010, respectively. The sale of this building was finalized December 15, 2011.
Finite Life Intangible Assets
Finite life intangible assets are primarily related to acquired customer base and bond issuance costs and are amortized on a straight-line basis over their estimated useful lives. Finite life intangible assets at December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
Remaining
Lives
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization
Amount |
|
Net Book
Value
Amount |
|
Bond Issue Costs |
|
|
10 |
|
$ |
79,373 |
|
$ |
29,105 |
|
$ |
50,268 |
|
Customer Base |
|
|
1 |
|
|
676,557 |
|
|
665,278 |
|
|
11,279 |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
$ |
755,930 |
|
$ |
694,383 |
|
$ |
61,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Remaining
Lives
(Years) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization
Amount |
|
Net Book
Value
Amount |
|
Bond Issue Costs |
|
|
11 |
|
$ |
79,373 |
|
$ |
23,814 |
|
$ |
55,559 |
|
Customer Base |
|
|
2 |
|
|
676,557 |
|
|
529,966 |
|
|
146,591 |
|
Other intangibles |
|
|
0 |
|
|
28,560 |
|
|
28,560 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
$ |
784,490 |
|
$ |
582,340 |
|
$ |
202,150 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to these assets was as follows:
|
|
|
|
|
Year ended December 31, 2011 |
|
$ |
140,603 |
|
Year ended December 31, 2010 |
|
|
141,399 |
|
Estimated future annual amortization expense related to these assets for the years ending December 31, is as follows:
|
|
|
|
|
2012 |
|
|
17,000 |
|
2013 |
|
|
5,000 |
|
2014 |
|
|
5,000 |
|
2015 |
|
|
5,000 |
|
2016 |
|
|
5,000 |
|
Thereafter |
|
|
25,000 |
|
|
|
|
|
|
|
$ |
62,000 |
|
|
|
|
|
Impairment Analysis
We evaluate property and equipment and intangible assets with finite lives for impairment and for propriety of the related amortization periods, to determine whether adjustments to these amounts or useful lives are required based on current events and circumstances. The evaluation is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to the asset's estimated fair value. In 2011 and 2010, we recorded an impairment charge of approximately $53,000 and $56,000, respectively on a building held for sale. The building was sold on December 15, 2011.
Preferred Stock
Preferred stock issued is non-cumulative and nonconvertible. The holders of the preferred stock are entitled to a non-cumulative dividend of 12% when and as declared. In liquidation, holders of preferred stock have preference to the extent of $1.00 per share plus dividends accrued but unpaid. No preferred stock dividends were declared or paid during the years ended December 31, 2011 and 2010.
Revenue Recognition
We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services, which are short term in nature, is recognized upon completion of the engineering process, providing standalone fair value to our customers. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs, and the repaired products are shipped back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) Topic 805, "Business Combinations". We recognize amounts for identifiable assets acquired and liabilities assumed equal to their estimated acquisition date fair values. We hired a third party valuation specialist to determine the value of property and equipment acquired. Transaction and integration costs associated with business combinations are expensed as incurred. Any excess of the acquisition price over the estimated fair value of net assets acquired is recorded as goodwill while any excess of the estimated fair value of net assets acquired over the acquisition price is recorded in current earnings as a gain.
Product Warranties
We provide limited warranty for the replacement or repair of defective product at no cost to our customers within a specified time period after the sale. We make no other guarantees or warranties, expressed or implied, of any nature whatsoever as to the goods including, without limitation, warranties to merchantability, fit for a particular purpose or non-infringement of patent or the like unless agreed upon in writing. We estimate the costs that may be incurred under our limited warranty and reserve based on actual historical warranty claims coupled with an analysis of unfulfilled claims at the balance sheet date. Our warranty claims costs are not material given the nature of our products and services which normally result in repair and return in the same accounting period.
Advertising
Advertising costs are charged to operations as incurred. The total amount charged to expense was $157,000 and $167,000 for the years ended December 31, 2011 and 2010, respectively.
Income Taxes
We account for income taxes under the asset and liability method. Deferred income tax assets and liabilities are recognized annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments approximate their fair values. The carrying amounts for cash, accounts receivable, accounts payable, accrued liabilities and the line of credit approximate fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to us for bank loans with similar terms and average maturities, the carrying value of our long-term debt approximates its fair value.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value framework requires the categorization of assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability.
Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. We endeavor to use the best available information in measuring fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2010, our only asset or liability accounted for at fair value was our interest rate swap which was included in Other Long-Term Liabilities. The interest rate swap expired in 2011. We determined that the fair value of the swap, based on LIBOR and swap rates, fell within Level 2 in the fair value hierarchy.
Stock-Based Compensation
We account for stock-based compensation in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, Compensation—Stock Compensation. Stock-based compensation expense was $27,000 ($.01 per diluted common share) for 2011 and $32,000 ($.01 per diluted common share) for 2010. See Note 7 for additional information.
Derivative Financial Instruments
On June 28, 2006, we entered into an interest rate swap agreement to effectively convert our industrial revenue bond debt from a variable rate to a fixed rate. The swap expired June 2011. The change in market value of an interest rate swap is recognized in the statements of income by a charge or credit to interest expense. Further information related to our interest rate swap is disclosed in Note 3.
Net Income Per Common Share
Basic net income per common share is computed using the weighted-average number of common shares outstanding. For the years ended December 31, 2011 and 2010, no outstanding options were included in the computation of per-share amounts as the effect of all stock-based awards were antidilutive.
Enterprise-Wide Disclosures
Our results of operations for the years ended December 31, 2011 and 2010 represent a single reportable segment referred to as Contract Manufacturing within the EMS industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers' requirements. We share resources for sales, marketing, information services, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.
Export sales represent approximately 6% of consolidated net sales for each of the years ended December 31, 2011 and 2010.
Net sales by our major EMS industry markets for the year ended December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
(in thousands)
|
|
2011 |
|
2010 |
|
Aerospace and Defense |
|
$ |
16,478 |
|
$ |
16,152 |
|
Medical |
|
|
33,378 |
|
|
29,329 |
|
Industrial |
|
|
64,380 |
|
|
54,339 |
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
114,236 |
|
$ |
99,820 |
|
|
|
|
|
|
|
Noncurrent assets, excluding deferred taxes, by country are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
Mexico |
|
Total |
|
2011 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
8,811,273 |
|
$ |
272,601 |
|
$ |
9,083,874 |
|
Other assets |
|
|
393,056 |
|
|
7,726 |
|
|
400,782 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
6,965,816 |
|
$ |
191,727 |
|
$ |
7,157,543 |
|
Other assets |
|
|
708,659 |
|
|
7,726 |
|
|
716,385 |
|
Foreign Currency Transactions
During the fourth quarter of 2010, we reevaluated the functional currency for our operations in Mexico and determined that the functional currency is the U.S. Dollar. As a result, the Company is no longer recording translation adjustments related to assets and liabilities or income and expense items that are transacted in the local currency as a component of accumulated other comprehensive loss in shareholders' equity. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense). |