There were six completed transactions in Q1 2009. As displayed in Chart A, the six transactions show a steep decline in the mergers and acquisition trend compared to Q1 2008. Overall, the economic conditions have heavily affected M&A activity within the electronics manufacturing services (EMS) sector.
As shown in Chart B, EMS consolidations represented two transactions, or 33% of total activity in Q1 2009, down from six transactions in Q4 2008.
There were two vertical / horizontal convergences in Q1 2009 up from one in Q4 2008. Accordingly, as a percentage of total transactions, vertical / horizontal convergences represented 33% in Q1 2009 compared to 13% in Q4 2008.
The number of EMS divestitures remained stable with one transaction in both Q1 2009 and Q4 2008. There was also one private equity investment in Q1 2009, or 17% of total transactions, one more than the previous quarter.
There were no OEM divestitures in Q1 2009.
As illustrated in Chart C (below) four transactions occurred within Europe in Q1 2009, representing 67% of total transactions. This represents an increase from the three transactions in the previous quarter. There was one cross-border deal; up from none in Q4 2008. The transaction was between high and low cost geographies. There was also one transaction within U.S./Canada, or 17% of transactions, representing a decrease from the 5 transactions that occurred in Q4 2008 within that geography. There were no transactions within Asia for this quarter. (Note: “High/High” indicates cross-border transactions between Japan, Taiwan, Western Europe and U.S./ Canada; “High/Low” indicates cross-border transactions between high-cost regions and low-cost regions)
As shown in Chart D, transactions by size for the quarter were led by the Micro Tier, totaling three, or 50%, of all transactions. There was one transaction each (approximately 17% of total transactions) in the Small, Mid, and Large Tier.
For purposes of this report, the following guidelines are used for determining company size based on sales:
- Greater than $3 billion – Large (Tier I)
- $300 million to $3 billion – Mid (Tier II)
- $150 million to $300 million – Small (Tier III)
- Less than $150 million – Micro (Tier IV)
Due to the economic market conditions, larger transactions were more difficult to complete in the past two quarters.
Terms and turns
In looking at EMS industry terms, the cash cycle is calculated by adding days sales outstanding (DSO) and days inventory outstanding (DIO) and subtracting from this sum days payable outstanding (DPO). The financial statistic is used to measure how quickly a company can turn sales into cash.
There are two basic disciplines in managing cash cycle: 1) contractual terms with vendors and customers, and 2) inventory turns. Due to the fact that the EMS industry is very material intensive, inventory management is the most important factor in achieving cash cycle improvements.
In the Large Tier, 4 of the 5 companies’ cash cycles improved (fewer days) while one company’s cycle lengthened.
- Celestica improved 3% to 34.1 days from 35.2 in Q1-2008 due to higher DPO and lower DIO
- Sanmina-SCI’s cash cycle improved from 48.2 days to 39.2 because of lower DSO and DIO
- Jabil saw its cash cycle go from 24.7 days to 19.9, 20% lower, due to lower DSO and DIO
- Flextronics’ cash cycle shortened this year from 24.1 days to 17.8, a 26% decrease, because of higher DPO and lower DIO
- Elcoteq’s cash cycle increased from 6.4 days to 8.9, a 39% rise, because of lower inventory turns and higher DSO and DIO.
In the Mid Tier, CTS and Sypris shortened their cash cycles while Benchmark, Plexus and Nam Tai lengthened theirs. CTS and Sypris both decreased their DSO and DIO leading to shorter cash cycles, while Plexus and Nam Tai both had higher DSO leading to longer cash cycles.
Benchmark increased its DIO and had lower DPO.
The Small Tier showed improvement in cash cycles for all companies except SigmaTron. SMTC, LaBarge and Raven decreased their cash cycles by 22%, 11% and 8%, respectively due to lower DIO and DSO. The cash cycles of Key Tronic and Sparton were shorter because of increased inventory turns.
As shown in Chart E, the Small Tier had the highest average and the four companies with the longest cycles overall.
The Micro Tier had mixed results with two companies with longer cash cycles and two with shorter cash cycles. The greatest improvement came from Winland who lowered its cycle 12% due to lowerDIO.
Nortech lowered its cash cycle 10% because of increased inventory turns and lower DSO. IEC increased its cash cycle despite lower DIO. Simclar’s cash cycle increased due to lower inventory turns. Inventory turnover is the most important cash cycle factor, making up the majority of the cycle.
For example, the three companies with the longest cash cycle, SigmaTron, LaBarge, and Sparton with cash cycles of 126.9,109.7 and 100.6, also have the lowest inventory turns with 3.2, 3.7 and 3.9, respectively.
Conversely the two companies with the shortest cash cycle, Elcoteq and Nam Tai, with cycles of 8.9 and 9.8, have the highest inventory turns of 10.5 and 18.5, respectively.
Inventory turns are also impacted by business type. Low volume, high mix products, for which inventory management is more difficult, generally have lower turns.
The cash cycle continues to be a focus for EMS providers due to its significant impact on ROIC and the importance of cash flow for growth. More detail follows.
Source: Lincoln International Electronics Group, VentureOutsource.com May 2009
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