CHICAGO – There were seven completed transactions in the second quarter in the EMS industry, says Lincoln International in its latest report.

That marks a decrease in M&A activity compared to the 12 transactions in the previous quarter, says the firm. However, year-to-date transaction activity for 2014 remains higher than 2013, with 19 completed thus far, compared to 13 for the first two quarters of last year.

Vertical/horizontal convergences represented four transactions, or 57% of total activity in the second quarter. Two transactions were classified as private equity investments, down from three sequentially. One involved an EMS consolidation, down from six sequentially, says Lincoln.

Transaction activity showed an uptick in outside investment in EMS companies, both from companies expanding into EMS through vertical/horizontal integration and from private equity firms.

Three transactions took place in the US and Canada during the quarter, down from seven sequentially; one in Europe and one in Asia transaction, both up from none in the first quarter. Two cross-border transactions took place, one between Germany and the US and one between Switzerland and India.

All seven transactions in the quarter were classified as involving small tier companies.

Large tier EMS companies’ gross margin and operating income margin increased to 6.9% and 2.7%, respectively in the last 12 months, up from 6.7% and 2.6% in the same period of 2013. EBITDA margin increased to 4.5%, from 4.4% in the same period last year. Mid tier companies’ gross margin and operating income margin were flat at 10.9% and 3.7%, respectively. EBITDA margin increased to 5.9%, compared to 5.8% in 2013. Small tier EMS firms saw a decrease in all three metrics, says Lincoln: 10.1%, 1%, and 3.2%, respectively, down from 10.7%, 1.3%, and 3.5% for the same period last year.

In the second quarter, in the large tier category, Celestica showed the most improvement, with an operating margin of 2.6%, compared to 2.3% last year.

Benchmark led the mid tier operating margin with 3.8%, compared to 3.4%. In the small tier category, IEC Electronics came in first, with an operating margin of 2.9%, up from 1.4%.

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