Industry tax-exempt organizations collectively take in more than $100 million a year. Where does it go?

Question: Which is the largest industry association? Answer: It depends on your definition of “largest.”

If the number of members is measured, for instance, the International Microelectronics and Packaging Society is tops by a wide margin. If annual revenues are considered, Semiconductor Equipment and Materials International laps the field. And if computed by assets, SEMI and the now-split Electronics Industries Alliance leave the others in their tax-free dust.

Electronics trade associations took in more than $110 million in revenues during fiscal 2006. The growth of the sector has led Circuits Assembly to look at the finances of the industry’s leading tax-exempt organizations. In a first-of-its-kind study, we reviewed the IRS Form 990 filings from tax years 2004 to 2006 for a variety of not-for-profits, among them the American Electronics Association (AeA), American Competitiveness Institute (ACI), IPC, IMAPS, EIA, Electronic Components, Assemblies and Materials Association (ECA), the International Electronics Manufacturing Initiative (iNEMI), the Jedec Solid State Technology Association (Jedec), the Semiconductor Industry Association (SIA), SEMI and the Surface Mount Technology Association (SMTA). (Certain other trade groups and professional societies, such as the Surface Mount Equipment Manufacturers Association, were not reviewed, either because they have been absorbed into other entities, or have not been required to file because their income is less than $25,000.)

The entities, save for two, are classified by the IRS as 501(c)(6) tax-exempt organizations, which includes such entities as business leagues, chambers of commerce, and real estate boards. The exceptions, ACI and IMAPS, are listed as a 501(c)(3), Public Charity, a classification for organizations founded to support a host of practices involving religion, education, charity, science, or testing for public safety, among others.

Only one, SIA, publishes an annual financial report, although SEMI includes a report on its annual finances in its member magazine, and SMTA makes its report available at its annual member meeting or upon request. AeA follows a novel approach: It breaks its membership into 17 regional councils, with a director assigned to each council. Three times a year, AeA provides revenue, expense and asset information to the directors, whom “we expect to keep the members up-to-date,” says AeA’s senior vice president of domestic policy and congressional affairs John Palafoutas.

Going Up

The past three years have been good to very good for most electronics companies. The same can be said of the trade groups. In terms of annual revenues, almost each firm grew more than 10% in aggregate from 2004 to 2006. The trade groups reaping the most benefit? IPC, up 25%, SMTA, up 18%, and the AeA, up 16% (Table 1). The median growth was 12%.


Firms that failed to fare well include Jedec (down 1.5%) and the ECA (down 25%). However, each faced extenuating circumstances. Both are former units of the now-defunct EIA, which was “realigned” last summer and saw its assets split among its members. It is unclear how much of the former groups’ revenues were tied to their EIA parent; both declined to respond to interview requests.

Most trade groups derive a large portion of their revenues from member dues. However, there are variations to that model. IPC, which relies heavily on revenues from trade shows and sales of standards, drew about 14% of its sales from dues. SEMI members ponied up less than 10% of the organization’s $45 million in sales in 2005 (the latest year for which its figures are available). SMTA, which until 2007 did not have its own trade show, relied on dues for 47% of its overall income, while Jedec members were good for 70%. At the extreme, iNEMI’s members footed 92% of the bill (Table 2).


Trade shows and conferences are clearly a boon to association coffers. Per its 2006 IRS filings, IPC netted $1.35 million on $4.6 million in industry program revenue. SEMI, which produces the prodigious SemiCon West show that occupies much of downtown San Francisco each July, earned some $28.7 million in 2005. Even stripped-down technical conferences are reliable profit centers: Jedec earned $185,000 on $396,000 taken in from such meetings in 2006; ECA declared $995,752 in revenues against $626,419 in expenses from conferences in 2005. SEMI and AeA reported $2.5 million and $2.7 million in revenues from conferences in 2005 and 2006, respectively. For SMTA and IMAPS, nearly half their respective 2006 revenue came from conferences.

For trade groups, unrelated business income – revenue from activities “not substantially related” to their business purpose – is problematic, with critics contending tax-exempt organizations use tax breaks to unfairly compete with for-profit entities. The debate rages in Washington, where the U.S. House Ways and Means Committee has held more than 10 hearings on the issue since 1987. Conventions and trade shows are among the exemptions from unrelated business income taxes. None of the electronics trade groups in this review specified significant amounts of unrelated business income during the past three years.

Other sources of income vary and are generally insignificant. A few groups – SIA, SEMI and IPC among them – generate notable fees from sales of standards, worker and management training programs, and market research activities.

Membership

By and large, trade organizations follow a similar model of encouraging membership (Table 2) through low dues. Often, as in the case of AeA, SEMI, IPC, iNEMI and others, dues are based on a progressive scale relative to the member company’s annual revenues. Some associations’ memberships are facility-based; others are company-wide. The range can be dramatic, however. For AeA, for instance, the cost of a regular corporate membership can cost as little as $1,000 and as much as $104,000 per year.

A typical approach would echo that of SEMI’s, where corporate membership dues are low and raised infrequently. “We try not to exclude new companies and many smaller companies who might view the dues as being cost prohibitive, as we have a ‘startup’ category and have dues that are graduated based on company revenues,” explains SEMI CFO Alfred Drumm.

Individual memberships largely drive SMTA and IEEE. The remainder of the tax-exempt organizations studied, except ACI, are primarily made up of corporate members.

‘Attention to Budgets’

As part of our study, we looked at each organization’s expenses. Almost across the board, revenues are rising faster than expenses, suggesting the trade groups are keeping an eye on budgets. Outliers include IMAPS, Jedec and SIA (Table 3).


This attention to the bottom line has resulted in some eye-opening jumps in assets among the surveyed tax-exempt organizations. Although ECA, which owed some $591,000 to EIA at year-end 2006, took a step back, most saw impressive gains, with IPC and SMTA leading the pack (Table 4). The median growth was 18% over the two-year span from 2004 to 2006.


Not surprisingly for service organizations, employee compensation is a leading expense (Table 5). As a percent of revenues, the range by organization was 28 to 57%, with the median 34%. Executive pay ranged mightily. The best-paid CEO, including salary, benefits and other compensation, took home nearly $1 million in 2006, while the low person on the scale pocketed about $215,000. One group is run by a management firm and does not break out executive compensation. Executive salaries are typically determined by subcommittees within the various groups’ boards of directors, aided by benchmarking data. Only SEMI pays its board, allocating $1,500 each in stipends to its 34 directors.


Not all associations account for expenses the same way. Take bank fees and related charges. SMTA and iNEMI declared none for fiscal 2006. SIA and ECA claimed slightly more than $10,000 each. IPC, on the other hand, reported $175,000 in banking expenses for 2006, after declaring $193,000 in 2005, the result of hefty credit card fees. The “winner” was SEMI at $774,662; the firm operates entities in Singapore and Japan, which likely contribute to the sum. “We had one company pay its $80,000 dues on a credit card,” says AeA’s Palafoutas, explaining the $133,000 the organization chalked up in bank fees.

Likewise for consultants. Contracting to a trade group is a lucrative undertaking. The semiconductor trade groups spend heavily, thanks in large part to their frequent forays to lobby Washington legislators. SIA expensed nearly $2.1 million in 2005, while SEMI lined consultants’ pockets to the tune of $14.8 million in 2005. ECA and AeA both spent more than $400,000; Jedec laid out nearly $300,000, and IPC wrote checks for some $618,000. Only SMTA declared no professional fees in 2006.

Just what those professional fees went to ranged from software to outside staffing and everything in between. Many of the smaller firms outsource IT support, legal and accounting services, and even some marketing. Among the bigger entities, IPC, for instance, licensed and implemented an enterprise-level management information system, with other sums going toward its 50th anniversary festivities and its European representative, according to Kim Sterling, vice president of marketing and communications. SEMI’s expenses ranged from program-related line items such as magazine publishing and exhibitions to more mundane services such as accounting, human resources, management consulting and IT.

When it comes to lobbying, electronics trade groups fall into two categories: those that do, and those that do not. More than half of those firms we looked at declared no lobbying expenses in 2006. The most active, AeA, spent $2.2 million, much of it on nine contract lobbyists around the country. Next was the SIA, at slightly less than $1 million, followed by SEMI at $402,000 and IPC at $316,000. (The $40,000 EIA declared in 2005 is somewhat misleading, as its head at the time was Dave McCurdy, a former U.S. Congressman.)

Under certain circumstances, not-for-profit organizations can lose their tax-exempt status if the IRS determines they are engaged in “excessive” attempts to influence legislation or promote an individual’s candidacy for public office. Every firm that responded to Circuits Assembly’s inquiries indicated they did not engage in activities designed to elect individuals to office. For example, AeA’s contributions were “all for influencing legislation,” said AeA’s Palafoutas. “We’re not allowed to give a dime to candidates. It’s illegal. It’s called jail.”

Or as SIA director of communications John Greenagel succinctly put it, “SIA does not endorse candidates or contribute to political campaigns.” Likewise, Kim Sterling says IPC’s lobbying expenditures are “used to monitor and influence legislation and regulations and communicate to the industry. We do not support specific candidates.”

SEMI’s Drumm says, “Our office works on advocacy issues important to our members, which include export controls legislation, H-1B visa quotes, R&D investment tax credit extensions, funding of science and technology programs, R&D, environmental/health/safety legislation, IP protection and stock option provisions. These lobbying expenses are not involved with electing any candidate for public office.”

Given the cyclical nature of the electronics industry, it behooves companies of all shapes and sizes to maintain ample reserves, either for unanticipated expenses or – in extreme cases – closing up shop (the “wrapping up account”). As SMTA president David Raby explains, “The general rule of thumb for a small, non-profit association such as ours is to maintain reserves to cover six months of operating expenses after considering significant seasonal revenues and costs such as SMTAI Orlando.” Although appreciably larger, AEA’s board has set the same target: six months. iNEMI president Jim McElroy was less candid, but noted the contingency fund built over the years from small annual surpluses is believed “sufficient to meet our needs.” Without a trade show or real estate mortgages, of course, iNEMI has less forward risk than some other tax-exempt firms.

The picture of the industry’s tax-exempt organizations is one of health. While the largest of the firms are generally growing the fastest, even the smaller ones are showing plenty of life. Strides could still be made, however, in raising their operational transparency to the levels of their financial performance.

Mike Buetow is editor-in-chief of Circuits Assembly; mbuetow@upmediagroup.com.

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