MMI July 1998

Financial Players Start To Grease Wheels of Consolidation

Bain Joins Other Players Taking a Stake in EMS Companies

Financial players in the EMS industry do not receive much attention. And rightly so. They generally remain behind the scenes, while company management is out front running the business. But financial players are becoming a factor in the shaping of the EMS industry. Here are some reasons why:

·#Capital from financial players has been responsible in recent years for the formation of at least five EMS providers in the MMI Top 50.
·
#Financial players provide a ready source of funds for acquisitions, especially on the private side of the EMS industry.

#As industry consolidation picks up steam, so too will the need for capital. The EMS industry presents a potential opportunity for financial firms that like to act as consolidators.

#The number of financial players investing in the EMS industry has increased over the last two years or so.

The latest financial entrant is the team of Bain Capital, based in Boston, MA, and Celerity Partners of Los Angeles, CA. Acting as equal partners, the two firms together have taken an ownership stake of about 80% in Hi-Tech Manufacturing, an EMS provider in Thornton, CO.

"HTM is an excellent platform for implementing our EMS consolidation strategy," states David Dominik, a Bain Capital managing director. "The depth and capability of its management team coupled with the compa-ny's strong supply chain management skills, should enable it to become a premier, global provider of manufacturing and logistics services."

And Bain has the deep pockets to finance that goal. The private equity investment firm manages over $2.5 billion in capital.

The Roll-Up Strategy

"We believe that with Hi-Tech Manufacturing we have a great superstructure around us to which we can add growth through acquisition and add complementary businesses," Steve Adamson, a partner at Celerity Partners, tells MMI. "We're looking to expand geographically because our customers want us to be global. And we're looking to expand the services that we provide our customers." He says HTM will focus on small- to medium-sized lots, where service and flexibility favor HTM.

Adamson continues, "We're looking to invest heavily in organic growth, greenfield expansion, but acquisitions provide a way to accelerate our growth without diluting our management bench strength. We're looking for companies that have strong management teams in place that want to participate with us in a consolidation."

The EMS industry offers an environment that is attractive to financial buyers like Bain. "There's a lot of consolidation and a lot of OEMs who are out to divest manufacturing assets as well. This is a perfect opportunity for cash-rich financial players to pursue what in the business is called a roll-up strategy, where you make one large purchase and use that as your foundation upon which to make other acquisitions," observes Bruce Swords, who is based in Boston, MA, as VP and director of the Electronics Industry Group at ABN AMRO North America. Swords knows the investment game well. His company, ABN AMRO, is a large international bank that has provided financial services to a number of EMS companies. He adds, "I fully expect these financial players to continue to be acquisitive through the platforms they've acquired."

Bain and Celerity originally joined forces to buy a PCB fabricator, Dynamic Circuits, two years ago. At the time, Celerity was a new private equity firm whose appetite for investment had outstripped its means. So Celerity brought in Bain to provide funding for the deal. Since then, two have participated in three more acquisitions in the PCB industry and are also involved in a telecom services firm.

Rather than waiting for opportunities, Celerity likes to identify a company it would like to own. "We had been talking to HTM for the better part of a year before the transaction closed. It took a long time for them to warm to the concept," reports Celerity's Adamson.

At today's run rates, HTM is described as about a $70-million company and is said to be profitable. Founded in 1991, the EMS provider operates out of a Colorado facility with about 90,000 ft2 of capacity.

Growing on the Private Side of the EMS Industry

While HTM has just started down the road with a financial partner, other providers are farther along. In the January 1996 merger that created box builder Electronic Manufacturing Systems, key equity providers were William Blair & Co. and First Union Capital Partners. With a controlling interest in EMS, Blair and First Union continue to serve as financial partners and were involved in the two acquisitions EMS made last year.

Indeed, financial partners play an essential role in EMS' growth strategy. "We have at our size about $250 million. We need to get to a half billion quickly and to a billion dollars in the next three or four years," explains Mark Stevenson, EMS chairman, president and CEO. "Part of it we can do through organic growth, but part of it we must do through acquisitions. Therefore, these private investment banking relationships are very key to us in order for us to execute our strategy properly." Unlike public companies, private CMs like EMS cannot use their stock as currency to make acquisitions.

Financial partners can also provide other advantages. "Some of the potential larger box build deals that we are flirting with right now require us to do things like open a facility...," says Stevenson. Without a partner to make that happen, "you simply can't respond to the potential larger opportunities," he adds. Keeping up with information systems, which can cost millions of dollars a year, creates yet another need for capital.

"If you don't have a partner like Blair or First Union who is there, who has enough money to do this, and who is committed to this marketplace, then in a fast consolidating industry I think you're just a target. You're not in the game," asserts Stevenson.

One of the first financial players in the EMS industry was the investment banking division of Donaldson, Lufkin & Jenrette. A DLJ managed investment pool has financed five of six acquisitions by Manufacturers' Services Ltd. -- that is, all but the company's first deal.

"Certainly, acquisitions have been a key engine of growth for MSL, but MSL has also achieved significant organic growth," says Bob Donahue, CFO of Manufacturers' Services. "There were no acquisitions in 1997, and MSL grew revenue 18%. With currency effect stabilized, the growth was 28%. Both have been significant." Still, he admits that without capital from a partner like DLJ, Manufacturers' Services would not have become a top-10 EMS provider as fast as it did.

"The capital needs in this industry are significant, and a premier financial partner is a key to having the flexibility to do deals as the opportunities avail themselves," says Donahue. "Also, a quickly ramping large OEM can require large funds to finance inventory, accounts receivable, SMT lines, etc. A strong and progressive financial partner like DLJ is invaluable."

Adding to the List

Another major investor in an EMS company is Canada-based Onex Corp., which led the investor group that purchased Celestica from IBM in 1996. Celestica has just completed what is described as the largest IPO in the annals of EMS (see News p. 9). Then there's Cornerstone Equity Investors, which advised a Prudential fund when it invested in the spin-off of IMS from Maxtor. Later, a Cornerstone fund bought substantial ownership in MCMS from Micron Electronics. Cornerstone holds seats on the boards of both IMS and MCMS (Jan.'98, p. 5-6).

The list goes on. Fant Industries and its sole shareholder, Anthony Fant of Birmingham, AL, have filed a tender offer to increase ownership of HEI, Inc. to 29.5% and have issued a proxy statement to gain control of HEI's board. Publicly-held HEI of Victoria, MN, is a custom builder of microelectronic devices.

Fant Industries becomes yet another financial player because it is selling off its interests in the broadcast industry. "Fant Industries has substantial capital to redeploy into other industries. Contract manufacturing, I'd say, is the most prominent focus at the moment," notes Ed Finch, a principal of FHL Capital in Birmingham. FHL, an investment banking firm, specializes in mergers and acquisitions of mid-market companies, and Finch has been asked to serve on the new board of HEI if Fant wins the proxy fight.

"We intend to grow the company [HEI] by acquisition, internal growth, joint venture or whatever makes sense," says Finch.

On the electromechanical side of EMS, McCown De Leeuw last year took a majority interest in RSP, a box builder in Fremont, CA. McCown De Leeuw likes to target a consolidating industry and build a company through acquisitions.

Any Downside?

Does capital from the financial players bring with it any risks? "On a general scale, the financial consolidator could get tired of this industry and sell you off," responds Stevenson of EMS. He adds, "If they're not seeing the returns, if they feel that the market is slow, or it's going horizontal and it's not growing as fast, you can all of a sudden be sold to somebody else."

Investors could also "get very tired very quickly of the ups and downs of the business, of the volatility, and that could lead to all kinds of unpleasant things if they don't understand the industry and the effects of customer concentration," he adds.

So far, that has not happened in the EMS industry. Still, the financial players must make distributions to their investors at some point. Usually, a player satisfies this obligation when a company in which it invests goes public. Certainly, that is the desirable scenario for a company like EMS, which intends to do a public offering in the next two years.

But for EMS' Stevenson, the number one reason for an IPO is to be able to use publicly-traded stock as currency for making acquisitions. Otherwise, EMS has no choice but to finance each deal it makes with some combination of debt and equity.

More To Be Seen

This article has listed seven financial players or groups involved with the EMS industry. There are more. Remember these players often keep a low profile. They're not looking for name recognition the way their operating companies do. If time had permitted, MMI probably would have confirmed the presence of at least two more players to add to the list.

Not only that, financial observers like Bruce Swords of ABN AMRO believe that the EMS industry will attract still more players. The EMS industry exhibits growth, market fragmentation, and capital need -- characteristics that financial players love to see.

Their impact on the industry, like it or not, should grow as they back more deals and sponsor more IPOs. And their capital will help keep the wheels of consolidation turning.

"Capital is not the limitation today," says Finch of FHL. "Good opportunities are really the limiting factor."

Market Measures

Introducing the MMI Index

In Cooperation With SG Cowen Securities

This month, the MMI index of 21 publicly-traded companies in the EMS industry makes its debut. The idea here is to show how equities in the public sector of the EMS industry are collectively faring both over time and with respect to other stock indices (see chart).

The MMI index is market cap weighted and consists of U.S.-traded companies that derive all or a large part of their sales from EMS. They are ACT Manufacturing, Altron, Benchmark Electronics, CMC Industries, The DII Group, DDL Electronics, EA Industries, EFTC, Elamex, Flextronics International, IEC Electronics, International Manufacturing Services (IMS), Jabil Circuit, Nam Tai Electronics, Plexus, Sanmina, SCI Systems, SigmaTron International, Smartflex Systems, Solectron and XeTel.

Values for the MMI index as well as the NASDAQ and S&P 500 indices used for comparison are provided courtesy of SG Cowen Securities Corp. (Boston, MA). All three indices were assigned a value of 100 on Jan. 2, 1998. Data for the index chart is compiled and entered on a weekly basis.

A quick glance at the chart shows that the MMI index has underperformed both the S&P 500 and the technology-laden NASDAQ since March. The MMI index has also been prone to wider swings this year than have the two benchmarks. But the good news is the MMI index has been increasing since June. After a weekly low of 88.79 on June 19, the index hit 99.30 on July 2 continued up to 104.20 on July 10.

Note: This on-line back issue does not contain the MMI index chart because the chart was not created electronically.

Sales Cycle Updated

MMI last showed sales cycle data from BancAmerica Robertson Stephens (San Franciso, CA) in September 1997. In this update, the num-ber of public companies ana-lyzed has increased from 10 to 24. The sales cycle provides a measure of how efficiently working capital is being used.

"We continue to be impressed with the EMS sector's attention to the working capital cycle, and we're pleased to see that the sales cycle basically held flat despite lower end de-mand by many electronic equipment OEMs that was somewhat unexpected in the marketplace. And yet the sales cycle maintained in the 38-day range," comments J. Keith Dunne, senior analyst and man-aging director at BancAmerica Robertson Stephens.

"We expect companies to continue to lower that a bit over the coming quarters as the OEMs take more parts out of the inventory cycle and continue or begin operating on even leaner lead times. That is an attribute that most EMS companies excel at and should contribute to further outsourcing, given the competitive advantage that the EMS companies can offer OEMs in time to market.

News

Poll Points To More Outsourcing

Telecom Companies Score Highest in Outsourcing Potential

In a recent poll by Bear, Stearns & Co. (New York, NY), 74% of OEM respondents said they intend to increase use of EMS providers over the next 12 months. What's more, an even greater portion of telecom hardware companies -- 86.7% -- plan to do more business with EMS providers over the next year.

Bear Stearns surveyed nearly 100 OEMs in computers, networking, telecom, consumer electronics, medical electronics and defense/avionics. Of those, 53 companies answered including Hewlett-Packard, Dell, Sun, Cisco, 3Com, Bay Networks, Lucent, Ericsson, Nortel, Nokia, Sony and Xerox. While 74% of respondents expect to increase EMS usage over the next 12 months, 53% indicated that the increase would be modest, versus 21% that said it would be substantial.

The tendency to outsource more was greatest at both the low and high end of the sales spectrum. Survey results showed 87.5% of emerging companies with sales up to $1 billion and 90% of market leaders with sales of $10-$50 billion expect to use EMS providers more in the next 12 months. Bear Stearns says these results confirm its theory that market share leaders and emerging growth companies are the most aggressive outsourcers. The firm also believes that this outsourcing trend will inevitably put pressure on middle-tier companies to follow suit.

According to Bear Stearns, the EMS poll gives it the ability to cross-reference top OEM customers of a specific EMS provider with OEM responses to the poll. In this respect, Solectron (Milpitas, CA) scored highest in the poll.

Compaq To Outsource Houston Work

In a worldwide move to consolidate manufacturing, Compaq has said it will close all PCB assembly and some consumer product manufacturing operations at its Houston headquarters site. As a result, the company will outsource PCB assembly for commercial and consumer desktop PCs.

But Compaq is not exiting the PCB assembly arena. "People said we were getting out of that. That wasn't accurate," says Alan Hodel, Compaq spokesperson. He points out that Compaq will continue to do board assembly for servers and higher end systems. Indeed, Jim Savage, an analyst at B.T. Alex Brown (New York, NY) reports that Compaq will move Houston PCBA for servers to its Singapore facility.

Estimates vary widely as to how much revenue this PCBA work will generate for EMS providers. Some news sources have published analyst estimates of $1 billion to $3 billion. But Savage believes the number is less than $1 billion. "I think it's more like $600 to $700 million," he says. Also, the value would depend on whether any materials are consigned.

Sources including Savage mention SCI Systems and Solectron as two providers that could be considered for the Compaq work. In addition, NatSteel Electronics Ltd., another Compaq supplier, has told MMI that it wants a good share of this work. AVEX Electronics, which also supports Compaq, wants to get in on this as well. "We do expect to participate with them in the activity that's now going on," says Larry Hanlon, AVEX director of worldwide marketing.

Taiwan may also be waiting in the wings as a potential source. "I think a big piece of it is also going to Taiwan," says Savage.

Compaq plans to implement its outsourcing plan over the next few months. "Final decisions over which manufacturers to use have not been made," says Compaq's Hodel. Neither does Compaq know yet whether it will select one provider or more than one, he adds.

In Houston, about 1000 employees in a range of manufacturing positions will be affected by Compaq's consolidation program.

Another company with outsourcing plans...Nexar Technologies (Southborough, MA), a PC maker, has announced plans to sublease its Hayward, CA, manufacturing facility and operations and to move its production to a contract manufacturer.

Some new programs...The Digital Video Systems group of Philips Business Electronics B.V. has selected SCI Systems (Huntsville, AL) to manufacture a family of digital satellite receiver products. Annual volumes are expected to exceed one million by the year 2000. Production for Philips is underway at one of SCI's Mexico facilities to supply South America. Over the near term, it is planned to extend production to SCI's facilities in Brazil and potentially also to Eastern Europe and Asia as demand grows. Meanwhile, SCI has shipped 2.5 million satellite TV set-top boxes to EchoStar Communications. ...Dovatron International (Boulder, CO), the EMS arm of The DII Group, has won a contract from Ascom Business Systems Ltd. to build RF modules for a new generation of digital enhanced cordless phones. By October, production is expected to reach 135,000 to 160,000 units a month at Dovatron Malaysia. Ascom, a public Swiss company, is projected to be a top-10 customer for Dovatron in 1999. Another customer, Baxter Healthcare Pte., recently gave Dovatron the Best Supplier Award 1997....Last month's issue (p. 8) reported that Michael Carr Enterprises (MCE) of Salem, OR, received a large-volume contract from a Northwest manufacturer of fax modems. Since then, MMI has learned that this customer is Diamond Multimedia, for which MCE is providing box build, pack out, and drop shipment to retail distribution. "We are especially proud that we were selected over an international list of competition," states Michael Carr, company founder and president....Group Technologies (Tampa, FL), now a subsidiary of Sypris Solutions, has been awarded a $1.2-million contract by the FBI to produce retrofit encryption equipment for mobile communications devices. "This contract award is a result of more than five years of technical development effort on the part of GroupTech and the FBI," states Thomas Lovelock, GroupTech president and CEO. The CM has also received a $7.3-million contract to manufacture secure communications equipment for the Department of Defense....R. M. Schultz & Associates, a CM in McHenry, IL, will manufacture a new hand-held computer for its parent company, Dauphin Technology. The product is expected to start shipping this month.

More work for medical CMs...New customers of SeaMED (Redmond, WA), a medical CM, include Novoste Corp., which is involved in intracoronary radiation therapy, and Terumo Corp., a medical device manufacturer in Japan. During the March quarter, SeaMED also saw more business from Johnson & Johnson and Arrow International. The CM is adding 80,000 ft2 of manufacturing space, which will give it a total of 188,000 ft2 available....Another medical CM, ZEVEX (Salt Lake City, UT), has landed two development and manufacturing customers -- one in ocular surgery and the other in cardiac technology....Paravant Computer Systems (Melbourne, FL), yet another medical contract manufacturer, has received a $4.1-million purchase order from Medtronic to cover Paravant's first year of production of Programmer Computer Subassemblies. These devices will be used to program Medtronic's implantable infusion pumps and neurological stimulators. Paravant has also received a $429,000 PO to produce implantable device programming platforms for a second customer.

Dovatron Chooses Czech Republic

Putting Larger Plant in Florida

MMI has learned that Dovatron International has bought a 100,000-ft2 building in the Czech Republic and already has some operations underway there. Dovatron is the first global EMS player to pick the Czech Republic for a Central European site.

Located two hours by car from Vienna, the Czech site is opening its doors with design and R&D capabilities and a few German customers in light manufacturing. R&D services include test development, DFM and DFT, "what you usually don't find resident over there," points out Dave Thielen, Dovatron's worldwide VP of sales. Although Dovatron is using a local team for immediate front-end capabilities, the company describes the Czech facility as basically a greenfield site.

The building is undergoing a complete upgrade and is expected to be on line as a Dovatron facility by September. Dovatron expects to start ramping production in Q1 1999.

"If you look at a map, the Czech Republic is dead center in this wonderful common Europe," says Thielen. "We think we picked just the right spot for the low-cost manufacturing, yet it's an effective location for point-of-use shipment to our customers." Dovatron also looked in Hungary and Poland.

The Czech facility "is going to provide the Mexico solution for Europe," notes Thielen. He says the facility will allow Dovatron's European operation to go after business that it could not play in before.

Meanwhile, Dovatron Florida will relocate to a 130,000-ft2 facility in Palm Harbor. The new facility will be more than twice the size of the operation's existing 58,000-ft2 plant in Clearwater, FL. The Florida operation expects continued growth in its high-mix, medium-volume PCB assembly and box build business. The operation recently added a new high-speed SMT line to provide high-volume manufacturing. Besides serving customers within the Southeastern U.S., the new plant will also perform initial manufacturing and prototype services for local projects that will ultimately go to one or more offshore facilities.

Dovatron acquired the existing Clearwater plant from Square D in 1995, and the plant still does work for Square D. But Thielen points out, "We've brought in a lot of new customers into that facility in the last year."

More new plants...Jabil Circuit (St. Petersburg, FL) will locate a 180,000-ft2 greenfield site in San Jose, CA. The company expects to begin production there in Q2 of its fiscal 1999....Venture Manufacturing (Singapore) has moved into a 50,000-ft2 facility in Newark, CA, and the first of five planned SMT lines (Fuji) is in operation. Capabilities include paste-through-hole, BGA and mixed technology processing. Venture has expansion plans for other states in the U.S. as well as Europe....Electronic Systems (Sioux Falls, SD) will open a new 30,000-ft2 facility in Pierre, SD. The Pierre Economic Development Corp. is constructing the new building and will lease it to the CM. The facility is expected to be ready for operation by Nov. 1. Electronic Systems cited the quality of South Dakota's work force as the reason for expanding there. Also, available workers from a previous plant closing in Pierre became a major factor in selecting that location. The CM expects that its existing Sioux Falls facility will continue to grow as well.

AVEX Buys Philips Plant in Ireland

Philips Electronics Ireland Ltd. has finalized the sale of Philips' security camera manufacturing plant in Cork, Ireland, to AVEX Electronics (Huntsville, AL). This deal includes an agreement by which AVEX will continue to supply Philips with products currently manufacturing in the Cork plant. AVEX projects that the deal will be worth $20 to $30 million a year in EMS revenue.

The 28,000-ft2 plant, which employs 110 people, is part of the Video Camera Modules business within the Philips Consumer Electronics Div. AVEX confirms that it will seek other EMS customers for the plant.

This acquisition obviously gives AVEX an Irish site in addition to its other European locations in Scotland and Sweden. But there also was a corporate angle to this deal since AVEX's parent, J.M. Huber, already had interests in Ireland. "For us as an organization, there was some corporate interest in Ireland as well," notes Larry Hanlon, AVEX director of worldwide marketing.

"During the last couple of years, we have been moving more and more toward outsourcing of our manufacturing, but not everything," says Marijke van Hooren, spokesperson for Philips Consumer Electronics. She explains it depends on the type of product and the stage that the product is in.

In other news, AVEX was recently named to the Pitney Bowes Alliance of Champions Honor Roll.

NatSteel To Acquire Apple Assets in Ireland

Under a newly signed letter of intent, NatSteel Electronics Ltd. (Singapore) will buy certain board assembly and test equipment as well as spare parts from Apple's manufacturing site in Cork, Ireland. NEL will pay about S$20 million (Singapore dollars) in cash. The transaction is due to be completed before the end of Q3.

This will mark the second time that NEL has bought equipment from Apple. Last year, NEL acquired motherboard lines from Apple in Singapore and became a key supplier to Apple.

Included in the equipment to be purchased are SMT lines that, depending on the configuration, would form four "super" lines or up to 12 "simple" lines. With this acquisition, NEL will have the equivalent of 85 simple SMT lines worldwide.

"The equipment is part of the ongoing requirement to increase NEL's production capacity to meet growing demand and will be distributed to a few plants in Asia, Europe and North America," says Y.M. Chay, NEL's CFO. The company will not have an operation in Cork.

According to Chay, there is no direct link between this asset purchase and what NEL supplies to Apple.

More capacity...In Middlebury, VT, VEMAS Corp., a contract manufacturer of board assemblies, has nearly tripled its manufacturing space from 10,000 ft2 to 28,000 ft2. The CM says this expansion was needed to support a business increase of 66% over the past 12 months, bringing total volume to over $7 million. Incorporated in 1991, VEMAS runs four SMT lines plus other equipment including a Takaya fixtureless in-circuit tester and GenRad functional test systems....Advanced Electronics, Inc. (Boston, MA) has installed a new Fuji surface mount line at its South Boston facility, which will offer high-volume BGA capability incorporating x-ray inspection. The new line gives AEI a total of five SMT lines at the facility.

Merger To Create Finished-Product CM

Pen Interconnect (Salt Lake City, UT) and TMCI Electronics (San Jose, CA) have signed a letter of intent to merge Pen into TMCI, with TMCI as the surviving entity. TMCI produces custom fabricated electronic cabinets and products, metal stamping, and cable harness assemblies as well as providing component distribution. Pen manufactures products such as board assemblies, power supplies and custom molded cables, which can fit into the above cabinets. According to a joint statement from the two companies, the merger will allow them to offer complete outsourcing of finished products to their OEM customers. TMCI, which has a strategy of vertical integration through acquisition, has previously stated its intention to become a full-service CM (May, p. 6).

Under the proposed merger, it is expected that 625 shares of TMCI stock will be exchanged for each share of Pen stock. Both are public companies. The deal is subject to conditions such as shareholder and lender approvals.

Together, the two companies serve such customers as HP, Tandem Computers, L-3 Communications, ALARIS Medical, IBM, Compaq, Unisys, KLA-Tencor and Lam Research.

Meanwhile, Pen said that it has relocated the contract manufacturing operations of its InCirT Technology Div. from Tustin to Irvine, CA, doubling the division's manufacturing space. The division said increasing backlogs of +$4 million, along with investments in new technologies, made the move necessary. InCirT focuses on the medium-sized market for board assembly as well as offering BTO capabilities.

DDL Acquires Jolt

DDL Electronics (Newbury Park, CA) has acquired Jolt Technology, a private CM in Fort Lauderdale, FL, following approval by DDL's stockholders at their annual meeting. In a pooling-of-interests transaction, DDL issued nine million shares of its common stock for Jolt. Based on DDL's share price of 13/16 when the deal closed on June 30, the acquisition price was $7.3 million. The deal was announced last year (July '97, p. 5).

In 1997, Jolt recorded net income of $810,000 on sales of $2.7 million. Q1 1998 net income and sales were $302,000 and $746,000 respectively. Jolt's services focus on the manufacture of complex PCB assemblies, and the CM has turnkey capability. Its largest customer has been J-Tech, which sells a pager to the restaurant industry. Others include Coulter Scientific in the medical industry and IBM.

Including Jolt on a pooling basis results in DDL showing net income of $.03 per share for the nine months ended March 31, compared with a loss of $.01 per share prior to the acquisition. Rick Vitelle, DDL's CFO, says he expects the deal "to continue to be accretive in the future to our earnings per share."

"DDL has continued to experience strong bookings and bidding activity, with a current backlog in excess of $30 million," states Gregory Horton, president and CEO of DDL. "With the Jolt acquisition completed, DDL can now focus on making additional acquisitions of medium to small EMS providers that are accretive to earnings per share. DDL is well positioned to take advantage of strong market demand in the high-complexity, high-mix segment of the EMS industry."

Last year, DDL agreed to acquire Jolt as a condition of obtaining a $2-million loan from Thomas Wheeler, Jolt's principal shareholder.

Also, DDL is planning a name change in the near future to create a new identity. "It could happen as early as fall," says Vitelle.

Some other deals done...SCI Systems has completed its previously announced acquisition of manufacturing operations in Motala, Sweden, and Oulu, Finland, from Nokia (May, p. 3). ...Manufacturers' Services Ltd. (Concord, MA) has closed its purchase of IBM's fulfillment and integration operation in Charlotte, NC. The deal was reported earlier (May, p. 3)....Nam Tai Electronics (Vancouver, Canada), which provides contract manufacturing in China, has paid $16 million for about 20% of the stock of Group Sense (International) Ltd., which is publicly listed in Hong Kong. Group Sense is involved in the design, manufacture and sale of products such as electronic Chinese dictionaries, multilingual translators, LCD hand-held games, electronic organizers, computer products and educational toys. The company also manufactures telecom products. Besides manufacturing products under its own name, Group Sense is also engaged in design and production of high-end products for several major brands. According to Nam Tai, the customer sets, market focus and product lines of the two companies are complementary. It is envisioned that this investment will lead to a strategic alliance between the two companies. Group Sense's strength in software development is attractive to Nam Tai. In addition, Nam Tai felt the need to go into original design manufacturing, where Group Sense already operates.

Sales deal...Photomatrix (Carlsbad, CA), newly merged with CM I-PAC Manufacturing, intends to acquire the assets and business of MGM Techrep, a rep firm that has brought in about 60% of I-PAC's new sales from 1994. Primarily owned by the officers and former owners of I-PAC, MGM will be acquired to provide an integrated solution to sell the products and services of Photomatrix's Manufacturing Group, of which I-PAC is a hub. Photomatrix says its Manufacturing Group will grow through expansion of its I-PAC Express locations (see June, p. 2-3), vertical integration, and a Mexico capability.

Non-EMS deals of interest... Multilayer Technology, the board fabrication unit of The DII Group, has signed a memorandum of understanding to purchase HP's Printed Circuit Organization in Boeblingen, Germany....Elamex (Cd. Juarez, Mexico) has formed a joint venture with GE Mexico for the production of plastic molding and stamped metal components. The venture has a $10-million commitment for GE business.

Fighting Asian flu...ASD Group (Poughkeepsie, NY), a contract manufacturing and engineering services firm, had reported that sales had been hurt by a reduction in orders by several customers, principally in the Asian market. As a result, ASD was no longer in compliance with certain debt covenants and was seeking additional financing. Financing has come through from an investment group led by Cameron Worldwide. The group has agreed to purchase a total of $1.9 million worth of common and convertible preferred stock. ASD has also reached agreement with its three primary lenders to restructure its debt. The company, which went public a year ago, provides design services, board and system assembly as well as other services such as cable and harness assembly, precision machining and welding, and sheet metal fabrication. Customers include Motorola, IBM, General Electric, Applied Materials and Unisys.

No more outsourcing...While reporting Q1 1998 results in May, Millennium Electronics (Laguna Beach, CA) said it was troubled by shrinkage of company inventory at one of its contract assemblers. Amounting to $263,000, this shrinkage was well beyond reasonable estimates, Millennium said. The company also reported experiencing an inordinately high level of returns of sub-$1000 computers assembled by the same contract manufacturer. As of May, Millennium is no longer using CMs and has brought assembly and testing in house at its Irvine, CA, facility. Millennium said it had been planning to build a core competency in assembly before this. The company believes that direct control of inventory and manufacturing will address future issues of inventory, shrinkage and quality control. Millennium is a provider of NetRam personal and professional computers and DRAM upgrade components and recently introduced a $499 computer.

Celestica Floats $360.5M IPO

Earlier this month, Celestica (Toronto, Canada) completed a $360.5-million IPO that it says is the largest of any offered in the history of EMS industry and Canadian high tech. A total of 20.6 million subordinate voting shares were offered at a price of $17.50. Celestica shares are now listed on the New York, Toronto and Montreal exchanges under the symbol CLS.

The net proceeds were used to prepay debt, strengthening Celestica's balance sheet.

Although Celestica's revenue was flat at $2.0 billion in 1996 and 1997, this lack of growth by no means tells the whole story. What emerges from Celestica's prospectus is a company that has rapidly grown its non-IBM business in EMS, both organically and through acquisition. For 1997, Celestica's EMS revenue from non-IBM business jumped by 330% to $1.360 billion from $316.1 million in 1996. Organic growth in 1997 increased non-IBM EMS revenue by $311.1 million, or 98%, while acquisitions added $723.5 million.

EMS revenue from IBM, on the other hand, declined by 51% from $332.2 million in 1996 to $163.3 million in 1997. In addition, when Celestica spun off from IBM, IBM retained production of a proprietary data storage system that was worth $248.5 million in 1996 revenue. Still, EMS revenue overall grew by a healthy 70% in 1997.

Masking the growth of Celestica's EMS revenue was a 57% decline in memory/power revenue. This revenue went from $1.120 billion in 1996 to $483.6 billion in 1997 primarily because of declining memory prices.

Celestica reported that its 1997 revenue declined by more than $600 million due to deflation in memory prices. The company also lost $115 million in revenue when IBM converted a memory program from turnkey to consignment.

For Q1 1998, total revenue increased by 53% to $738.7 million from $483.6 million in Q1 1997. Non-IBM EMS revenue climbed by 104% to $625.8 million from $307.0 million in Q1 1997, primarily as a result of $280.2 million in revenue from 1997 acquisitions completed after March 1997. Q1 1998 EMS revenue from IBM came to $31.8 million, a decrease of 23% over a year earlier, while memory/power sales amounted to $81.1 million, down 40% from the prior Q1. Celestica reported a Q1 net loss of $31.8 million, which included a $35.0-million write-down of intellectual property. The company also recorded a net loss of $6.9 million for 1997.

IBM, Sun and Cisco together accounted for 51% of Celestica's 1997 revenue, with IBM at 27%. These customers plus Dell, EMC Corp., ICL, Sequent and HP represented 87% of 1997 revenue. Celestica counted more than 40 customers last year. In Q1 1998, HP, Cisco and IBM were the three largest customers, accounting for 61% of Celestica's sales. For the quarter, revenue from former HP facilities in Fort Collins, CO, and Exeter, NH, generated 38% of total revenue.

Onex, which led the original buyout of Celestica from IBM, now holds some 37% of all equity shares, but has about 93% voting power. The difference results from Onex owning all of Celestica's multiple voting shares, which are worth 25 votes versus one vote for a subordinate share. Onex owns 19.5 million multiple voting shares and 4.3 million subordinate shares. Excluding any over-allotments, the IPO brought Celestica's total of outstanding subordinate shares to 44.3 million. Underwriters have an option to acquire up to 3.1 million additional shares to cover over-allotments.

Also, Celestica set up a $250-million revolving credit facility through The Bank of Nova Scotia.

Finally, Celestica has completed its previously announced acquisition of Silicon Graphics' board assembly operation in Chippewa Falls, WI. According to the prospectus, the price for this asset purchase was about $8.0 million, not counting inventory associated with Celestica's supply agreement with Silicon Graphics. Under this five-year agreement, the Chippewa Falls operation will continue to produce PCB assemblies for three Cray models and future high-performance server products. Celestica says this acquisition is a part of its strategic alliance with Silicon Graphics. Celestica has made 10 acquisitions since January 1997.

Primetech To Go Public

Primetech Electronics (Dollard-des-Ormeaux, Quebec, Canada) has filed for both an initial public offering and a secondary offering with provincial authorities in Canada. The company becomes the second EMS provider based in Canada, after Celestica, to announce an IPO filing in recent months.

Primetech expects that the combined offerings will amount to about $40 million Canadian, from which the company will gross about $30 million Cdn. The company will use the proceeds for debt repayment of about $3.0 million Cdn, for capital expenditures of about $3.0 million Cdn, for expansion of operations, including acquisitions, and for working capital and general purposes.

The EMS provider reported net income of $4.6 million Cdn on sales of $68.9 million Cdn for the fiscal year ended Sept. 30, 1997. Primetech has achieved compound annual growth rates of 73% and 152% for sales and net income respectively over the last three years. Sales from the U.S. accounted for about 83% of sales in fiscal 1997. For the six months ending in March, sales increased by 37% over a year earlier to $43.4 million Cdn, while net income climbed by 98% to $4.3 million Cdn.

According to the IPO prospectus, customers include Newbridge Networks, Apple and Sun Microsystems. Direct and indirect sales to these OEMs have increased by a compound average growth rate of 107% over the last three years. Also, 14 of Primetech's customers associated with these three OEMs accounted for about 97% of the company's fiscal 1997 sales. Fiscal 1997 customers totaled about 50.

Started in 1976 to supply and distribute imported electronics, Primetech in 1984 began to offer design and manufacturing services to key customers.

The company believes the foundation for its success is largely based on attracting, motivating and retaining quality employees. For its fiscal 1997, Primetech reported turnover of 7%.

One element in the provider's strategy is to acquire additional manufacturing facilities and expand its customer base. Acquisition candidates would be in the range of about $40 to $100 million Cdn and benefit from implementing Primetech's business process management system.

With 388 employees as of May 1, Primetech operates a 55,000-ft2 manufacturing facility and a 11,500-ft2 logistics center in suburbs of Montreal. The provider runs a total of 10 production lines.

Lead manager for the offering is CIBC Wood Gundy Securities.

IEC Adopts Poison Pill

In what is commonly known as a poison pill defense against hostile takeovers, IEC Electronics (Newark, NY) has declared a dividend of one preferred share purchase right for each outstanding share of IEC's common stock as of June 15. The rights will generally be exercisable only if a person or group acquires ownership of 15% or more of IEC common stock or makes an offer with the same result. In that event, rights holders will be entitled to buy shares of IEC preferred stock, or common stock of the acquiring company, which have a market value of twice the rights' exercise price. Each right entitles the holder to purchase 1/1000 of a share of IEC's new series A preferred stock.

The idea is to effectively dilute the ownership interest of the acquiring party. IEC says this plan does not prevent a fairly valued bid. "It just prevents a takeover at a bargain basement level," notes Diana Kurty, IEC's CFO. She explains that this plan is intended to give IEC's board some time to determine whether it has a good offer in hand.

Meanwhile, IEC recently obtained a $65-million senior credit facility from a group of three banks. The company says this move approximately doubles its borrowing capacity at more favorable rates.

In other news, IEC has opened an 8,000-ft2 Technology Center at its Newark, NY, facility. The center combines a prototype lab, a design engineering group and an advanced materials lab. IEC recently acquired GenRad's GR Pilot flying probe tester for the center.

Earlier this year, IEC received a safety award from Kemper Insurance Companies. IEC Newark NY Operations was recognized for over 500,000 hours without a time-loss accident.

Other financial news of the EMS industry...Last month, an offering of three million shares of EFTC common stock went at a price of $14 per share. The Denver-based provider sold 1.6 million shares amounting to $22.4 million in gross proceeds, while certain shareholders sold 1.4 million shares. The company intends to use the net proceeds to retire debt. Meanwhile, EFTC has created a Component Obsolescence Program to alert customers to obsolete components in their bills of materials. ...Flextronics International (San Jose, CA) has filed a "shelf" registration statement regarding the possible resale of up to 934,208 shares issued in connection with the acquisitions of Altatron and Conexao this year. This filing also includes 3,288,459 previously registered shares issued as a result of three 1997 acquisitions....In case you missed it, Sanmina (San Jose, CA) has declared a two-for-one stock split, bringing the number of shares outstanding to about 50 million....Nam Tai Electronics has announced a Q2 dividend of $0.07 per share....Hadco (Salem, NH) reports that fiscal Q2 sales (ended May 2) from its backplane operations grew by 29% over fiscal Q1 and 104% from a year earlier....For the March quarter, Elcoteq Network Corp. (Lohja, Finland) recorded sales of FIM 452.7 million, up 51% from Q1 1997. Net income was FIM 5.0 million versus FIM 6.8 million for the year-earlier period. The company's target is 50% growth....Last month, The DII Group said it expected Q2 and Q3 results to be below analysts' expectations. The company cited soft industry conditions and delayed orders from several major PCB customers as responsible for the decline. But DII still anticipates strength in Q4 and 1999....Jabil Circuit reports that near-term production schedules have remained soft as a result of significantly lower production levels for one communications product line. For the balance of fiscal 1998 ending with the August quarter, the company anticipates that revenue will remain flat, with significant growth in the fall quarter. Jabil has announced two new customers, a datacom company projected to start production in Q1 fiscal 1999 and another customer whose notebook PC product Jabil will help design....Nam Tai Electronics reports its sales are now under severe pressure from the currency troubles created by the Asian financial crisis. The CM has adjusted its forecast for the remaining quarters of 1998 and now anticipates a drop in sales of about 15% to 25% for the year.

Fiscal year results...For the fiscal year ended May 2, International Manufacturing Services (San Jose, CA) reported revenue of $312.5 million, up 84% from a year earlier. Net income for fiscal 1998 amounted to $11.1 million, or $.60 per share, compared with a net loss of $599,000 for fiscal 1997....Sigmatron International (Elk Grove Village, IL) posted sales of $85.7 million for the fiscal year ended April 30, representing a 2% decrease from fiscal 1997. Net income for fiscal 1998 came to $525,892 versus $3.3 million in fiscal 1997. Diluted EPS for fiscal 1998 were $.18, compared with $1.11 in the prior year.

Suppliers selected...EMS provider Bull Electronics has installed a GR Pilot flying probe tester from GenRad (Westford, MA) on a prototype line within Bull's Lowell, MA, facility. Bull says the tester's integrated CAD-to-test software provides an opportunity to further compress time to market....Solectron has selected International CompuTex (Atlanta, GA) to provide ICI's ItemQuest software that will give Solectron's engineers real-time access to component information. Before launching the software worldwide, Solectron will evaluate it at the company's Texas facility....Finland-based Elcoteq has ordered an ERP system from the Baan Company of the Netherlands. To be started up during Q2 1998, the system will cover the entire Elcoteq Group in 1999....Nextek (Madison, AL) has installed a Variable Frequency Microwave cure system, the MicroCure 5100 from Lambda Technologies (Morrisville, NC). The new system provides short cycle-time processing for die attach, underfill, encapsulation and other such uses of polymer material. Nextek and Lambda have also entered into a technology partnership.

Other EMS providers in the news...Plexus (Neenah, WI) recently received the Governor's Exemplary Employer Award for outstanding employment practices in the state of Wisconsin....EPIC Technologies (Norwalk, OH) has achieved certification to QS-9000, which is being pushed by the automotive industry. According to EPIC, QS-9000 goes well beyond ISO standards in that it adds production part approval, continuous improvement and manufacturing capabilities....DA-TECH Corp. (Ivyland, PA) has earned certification to ISO 9002.

New offices...Flextronics has moved into a larger UK office that will coordinate sales and marketing efforts in Sweden, France, the Netherlands, Germany, Austria and Hungary. The new location is outside Maidenhead, UK....The Finished Products Group of Orient Semiconductor Electronics has set up a sales office in Taipei, Taiwan. The group describes itself as the second largest EMS provider in Taiwan.

EMS industry news...BancAmerica Robertson Stephens (San Francisco, CA) will hold the first annual Electronic Manufacturing Products and Services Industry Conference on July 28 in San Francisco. Included in the program are at least 14 EMS pro-viders....The IPC trade association (Northbrook, IL) has collected examples of contract terms and compiled them in a single document, Electronics Manufacturing Services Industry Terms and Conditions. Call (847) 509-9700....With urging from the IPC, two senators have introduced a bill that if passed, will reduce the depreciation period for board fab and electronics assembly equipment from five years to three.

EMS management moves...Ogden Atlantic Design has gone through a reorganization. Three of its EMS facilities were sold; corporate headquarters were moved to Reynosa, Mexico, the location of Atlantic Design's remaining plant; and its senior management team was replaced. Ronald Van Meter has taken over as president, while Robert Hawk now serves as CFO. Andrew Williams is VP and GM, and Martin Siordia is director of new business develop-ment....EFTC's board has elected president and CEO Jack Calderon to serve as its chairman. He replaces Gerry Reid, EFTC's founder, who resigned but will remain on the board. The company has also extended Calderon's contract through the year 2001. When he joined the company in August 1996, the company had annualized sales of about $56 million. Wall St. is now estimating that EFTC's sales will exceed $225 million in 1998. Also, the company has reduced the size of its board from 16 to 10 directors. Seven people voluntarily resigned, while Bob Monaco, founder of newly acquired Personal Electronics, was added. Also, EFTC has hired Val Avery, a former consultant for Oracle-based information systems, as chief information officer. ...Garry Bowhall has been promoted to the newly created position of GM of Phoenix International in Fargo, ND....Thomas Bell, who had been with EPE Corp. (Manchester, NH) for 25 years, has rejoined the company as director of new business development. The contractor has also named Michael Richard, an electronics industry veteran, as purchasing manager. EPE is planning a new facility in nearby Bedford, NH, where the company has agreed to purchase 16 acres....SeaMED has appointed Bengt Svensson as senior VP, Project Office, with responsibility for execution of development projects. His resume includes head of the Pacemaker Division at Siemens.

More personnel changes...Nam Tai Electronics has named Edward K.W. Chan as CFO. Chan has 26 years of experience in Canada working for such companies as KPMG and Price Waterhouse. Ray Moore has also joined Nam Tai's financial management team as financial controller. ....Rodney DeRego has been promoted to VP of Central U.S. operations at Manufacturers' Services Ltd. Before joining the company in 1995, DeRego was VP and CFO at AVEX....The new COO of Qtron (San Diego, CA) is Lynn Brock, who gained experience at SCI, Comptronix, Benchmark Electronics and K*Tec Electronics. ...At Laughlin-Wilt Group (Beaverton, OR) Dale Sands, a former CFO of AVIA Group International, has been appointed as director of materials. Bradley Garrett also joins LWG as director of production, responsible for manufacturing operations at LWG's Beaverton site. Most recently, he was VP of operations for Advanced Input Devices....Appointed to Solectron's board are Philip Gerdine, a director in mergers and acquisitions at Siemens AG, and William Hasler, dean of the Haas School of Business at the University of California, Berkeley. They will bring the total number of directors to ten. Solectron says in order to manage a global organization, the company must have a multinational board of directors and management team....The DII Group has promoted Mark Herbst to senior VP of corporate sales and marketing. He replaces Ronald Snyder, who took over as president of DII's Orbit Semiconductor unit....Tim Boates will succeed Paul Foley, who is retiring, as AVEX's CFO. Boates comes from J.M. Huber Corp., AVEX's parent company, where he was VP and controller. AVEX has also appointed Roger Malmrose as VP of assembly technology and integration. Before AVEX, Malmrose held marketing positions at Flip Chip Technologies and Cirrus Logic....Lyn Gosz has been promoted to VP of marketing at Smartflex Systems (Tustin, CA), a flex circuit CM. She will take over that function from VP Richard Bell, who heads up an expanded sales force.

MMI June 1998

MMI August 1998

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