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Electronics Production | August 19, 2008

EMS consolidations decreased in Q2/08

There were 13 completed transactions in the second quarter of 2008, compared to 13 in the last quarter and 14 in the second quarter of 2007.
Q2 2008 Deal Volume Comparison
• Wistron is acquiring the digital display business of Lite-On Technology (Pending)
• Flextronics International completed the acquisition of FRIWO Mobile Power Gmbh from CEAG (May-08)
• IEC Electronics acquired Val-UTech Corp., a manufacturer of wire harness assemblies (May-08)
• Flextronics International completed the divestiture of the multi vendor division of ServiceSource Europe to management. (April-08)

As shown in Chart A above, there were 13 completed transactions in the second quarter of 2008, compared to 13 in the last quarter and 14 in the second quarter of 2007. As illustrated in Chart B above, EMS consolidations decreased from five transactions in the last quarter, or 39% of transactions, to three transactions in this quarter, or 23% of transactions. OEM divestitures remained stable with one transaction in both the first and second quarter of 2008, says the market researcher Lincoln International.

EMS divestitures increased from zero transaction in the first quarter of 2008 to two transactions in the second quarter of 2008, representing 15% of transactions. In both Q1 and Q2 2008 there was one transaction that was included in the private equity investment category. Private equity investments represented 8% of total transactions in both quarters.

As displayed below in Chart C, 16% of the deals in Q2 2008 were cross border. Within this category, there was one transaction between a high-cost region and a low-cost region, and one transaction between high cost regions. In comparison, one of the transactions in Q1 2008 was between a highcost region and a low-cost region and none were from high-cost regions. For Q2 2008, four transactions occurred within the U.S./Canada region, the same number as in Q1 2008. Six of the closed transactions in the second quarter of 2008 occurred within Western Europe, and only one occurred within Asia.

As shown in Chart D, transactions for the quarter were led by the Micro Tier, totaling nine. Large Tier and Mid Tier EMS companies closed one transaction each while there was two Small Tier transactions in the second quarter of 2008.



Margin Squeeze and Expansion: An exploration of Margin Performance in the EMS Industry
With corporate restructurings a thing of the past for many EMS companies, margins have flattened across all four groups. In order to increase margins, EMS companies are looking to make moves both internally (operational improvements) and externally (acquisitions).

The three graphs below provide a summary overview of gross margin, operating income margin and EBITDA margin performance from 1998 through today. Each graph shows the margin performance by size group. In terms of margin performance, every group showed improved performance from FY 2007 to Q2 2008 LTM in gross margin, operating margin, and EBITDA margin. This compared to all groups decreasing gross margins, operating margins and EBITDA margins from FY 2006 to FY 2007.

On a relative basis, the Large Group had the lowest LTM margins of all the groups due to its high volume/low mix business model. The Small Group, which had the highest LTM margins of the four tiers in both the gross margin and operating margin categories, has experienced slightly increasing margins. Typically the most volatile, the Micro Group’s gross margin was only slightly lower than the Small Group, however its operating margins and EBITDA margins were significantly lower than the Small Group margins.

On a percent change comparing the Q2 2008 results with the same period a year ago, Celestica Inc. showed the most improvement in operating margin from 1.3% to 2.3% in the Large Group; Nam Tai Electronics Inc. led the Mid Group improving operating margins from 5.0% to 5.6%; SigmaTron International led the Small Group improving operating margins from 2.9% to 4.3%; and in the Micro Group, Nortech Systems Inc. improved operating margins from 2.7% to 3.5%.





Source: Lincoln International Newsletter

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