Outsourcing Is No Barrier to Tapping U.S. Small-Business Fund

(Bloomberg) -- With annual sales of $291 million, the electronic-parts maker is not an obvious candidate for a U.S. government program meant to prop up small businesses during the pandemic.

Yet SigmaTron International Inc., a publicly traded company with a workforce mostly based outside the U.S., has joined the list of firms that have managed to secure a multimillion-dollar loan from the Small Business Administration’s Paycheck Protection Program.

The program, whose explicit purpose is to safeguard American jobs at companies with a maximum of 500 workers, gave a $6.3 million loan to SigmaTron, which woos customers by touting its factories inside and outside the U.S. The company has about 500 U.S. employees, who by the lending rules would benefit from the money; SigmaTron’s other 2,600 workers are located in Mexico, Taiwan, China and Vietnam. The loan, which would be forgiven if certain guidelines are followed, was arranged by U.S. Bancorp.

SigmaTron Chief Executive Officer Gary Fairhead and Chief Financial Officer Linda Frauendorfer didn’t respond to requests for comment.

“We believe that the PPP loan will be essential to support our U.S. employees and factories as they work through the current pandemic and the volatile economy it has created,” Fairhead said in a statement last week. “We appreciate the government’s foresight in creating this program.”

The PPP is currently making $320 billion available to small businesses for relief from the economic devastation of the coronavirus. An initial installment of $349 billion was drained in less than two weeks. The first-come-first-served program has come under fire for making loans to large companies, including the Los Angeles Lakers and the parent of Ruth’s Chris Steakhouses, while many mom-and-pop shops were shut out.

Amid public outrage, both the Lakers, which Forbes values at more than $4 billion, and Ruth’s Chris, which operates 83 restaurants, returned the money. In all, more than $2 billion has been declined or returned to the pool of funds, SBA Administrator Jovita Carranza said Monday.

Trump Administration officials have asked publicly traded firms with access to other capital to return PPP money by May 7. Treasury Secretary Steven Mnuchin said this week that all loans of more than $2 million would be audited.

Labor Resources

“If the economy is ever going to recover, the administration needs to start prioritizing small operators that drive our economy, not companies that ship U.S. jobs overseas,” said Derek Martin of Accountable.US, a government-watchdog group that often criticizes the Trump administration.

On its website, SigmaTron says it provides engineering, design and manufacture of electronic parts for everything from aerospace products to home appliances made by Whirlpool Inc. The company says its ability to outsource regionally allows it to provide lower prices, and having large operations in Mexico, which is home to the majority of its workforce, gives it “access to cost-effective labor resources.”

SigmaTron, based in Elk Grove Village, Illinois, stretches the definition of what constitutes a small business. It reported sales of $216.3 million, for a profit of $805,169, in the nine-month period that ended in January, securities filings show. Its second-biggest shareholder is Renaissance Technologies, one of the world’s most profitable hedge funds, with some $75 billion under management. SigmaTron shares have gained 7.7% in the past year through Thursday.

Essential Businesses

The coronavirus pandemic has slowed some of SigmaTron’s operations, but various facilities have remained open because local authorities deemed them essential, the company said in an April 23 statement. Two of its three sites in Mexico are shut down, but its facility in China, after closing for a week in February, is functioning again. There were no interruptions to its operations in Vietnam or Taiwan, the company said. At job sites in California and Illinois, about 80% of its workers are on the job.

“Many of our customers continue to have strong demand in spite of the condition of the global economy,” Fairhead said in the statement.

Like all PPP loans, the money SigmaTron received from the SBA through U.S. Bancorp becomes a grant if 75% of the loan goes to what’s called payroll-related expenses, which include interest on outstanding debt. SigmaTron said it intends to use funds to maintain payroll or make interest payments on other loans from U.S. Bancorp. It owed the bank $31.8 million as of Jan. 31.

Along with other big banks, U.S. Bancorp is being sued by PPP applicants who say the lenders favored big companies when arranging government small-business loans. U.S. Bancorp, the fifth-biggest U.S. commercial bank by assets, said the characterization was inaccurate. It declined to comment on the SigmaTron loan.

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