ZTEST Electronics Monthly Corporate Update for September 2002
ZTEST Electronics Inc. (TSXVE: YZT) wholly-owned subsidiary Permatech Electronics Corp. is an ISO 9002 certified Electronic Manufacturing Services (EMS) provider founded in 1982. Permatech offerings include Materials Management, Printed Circuit Board (PCB) Assembly, Testing and Design services. Permatech operates from a 20,000 square foot facility in North York, Ontario, Canada.
Manufacturing Industry Activity and the EMS Sector
On October 1st, 2002 the Institute for Supply Management, http://www.ism.ws/ISMReport/ROB102002.cfm, reported that economic activity in the manufacturing sector declined in September after seven consecutive months of growth and the overall economy grew for the 11th consecutive month. The Purchasing Managers' Index (PMI) was calculated at 49.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. Comments from purchasing and supply executives express concern about energy prices and particularly the possible impact of a war with Iraq. Others indicate recovery is ongoing in their industry, but the rate is slow, with many executives concerned about demand in the short term.
Looking at indicators which relate specifically to the Electronics Manufacturing (EMS) sector, the Semiconductor Industry Association, http://www.semichips.org/pre_release.cfm?ID=238, on October 1st, 2002 reported that global chip sales equalled $11.9 billion in August, a 2.2% sequential increase over the $11.7 billion level reached in July. On a year-to-year basis, chip sales in August were up 14% from August of 2001, the first double-digit increase from the industry's cyclical low in 2001. Printed Circuit Board (PCB) assembly relates directly to semi-conductor chip sales as the PCB is populated with semi-conductors and other components. Therefore it is typically understood that increased semi-conductor chips sales will lead to higher PCB assembly.
Currently the majority of PCB assembly is being performed by the Original Equipment Manufacturers (OEM) rather then outsourced to EMS providers like Permatech. However trends show that the ratio of OEM to EMS assembly have moved toward greater outsourcing over the past three years, with that trend expected to increase in the future. The chart below shows the dollar value of EMS assembly in a given year and the penetration rate that represents as a percentage of the total market include OEM assembly.
Source: Technology Forecasters
With Permatech's long operating history, it has built a core base of customers who provide a stream of consignment and turnkey assembly orders. This core customer base is well diversified in the Medical, Power, Computer, Telecommunication, Wireless, Industrial and Consumer Electronics markets, limiting therefore the company's exposure to any one industry. The charts below show on a rolling six-month basis:
The proportion of revenue generated by each market served
The proportion of revenue attributed to turnkey vs. consignment business,
New Business Development
As disclosed in the press release on September 23, 2002, Permatech has entered into a long term manufacturing agreement with a leading provider of point-of-sale terminals. The terms of this agreement call for Permatech to manufacture, including component procurement, and test the client's product. The contract is estimated to be in the $800,000 range for the first year of the agreement, with an expected increase thereafter.
In September, Permatech delivered the first pre-production runs for two out of three boards for a new customer in the safety equipment industry. In addition to the regular assembly, ZTEST also performed the layout for the Printed Circuit Boards (PCBs). The delivery of the third board is scheduled for October. It is anticipated that, subject to market acceptance for this product, Permatech will be involved in regular production runs in the future.
Permatech has also delivered a small pilot for an instrumentation company looking to outsource its board manufacturing requirements.
Permatech has recently invested in state-of-the-art production technology to enhance their service offering and appeal to a wider base of customers. In September, the Company added a DEK Printing Machines Ltd. solder paste printer, which can verify the quality of solder paste deposit on a Printed Circuit Board.