It's Pretty Bad at Solectron
(posted article here so comparison could be drawn between
the two EMS companies - going in opposite directions for
now. Though dated Dec 19, it still sums up the current
situation there pretty well. Peter)
Time catches up to Solectron
Sales warning leaves followers cold
Steve Maich / Financial Post, with files from news services
Dec 19, 2001
Living on borrowed money and borrowed time seems to have finally caught up with giant U.S. electronics manufacturer Solectron Corp.
Investors carved 18.3% off Solectron's market value yesterday after the Milpitas, Calif.-based company warned that sales next quarter will be lower than analysts' projections, and will result in an unexpected loss because of restructuring costs and one-time charges.
Moody's Investors Service and Standard & Poor's immediately cut Solectron's credit rating to junk status, and that was enough to convince hoards of investors to pound the sell button. Solectron's stock (SLR/NYSE) suffered its biggest one-day percentage drop in years, as 33.5-million shares changed hands, the stock's biggest trading day ever.
Just two weeks after closing its $3.6-billion acquisition of Montreal's C-MAC Industries Inc., Solectron's woes suddenly seem to go much deeper than just weak demand for high-tech equipment. After chasing growth at almost any cost in the late 1990s, Solectron's management is now urgently trying to cut costs.
Facing a daunting pile of debt, major cash obligations and razor-thin profit margins in a deteriorating market, many investors have decided Solectron is simply too hot to hold.
"We're reviewing it to see if we want to hold onto it much longer," said Deanne Steele, who co-manages the US$550-million Bank of New York Hamilton Large Cap Growth fund, which owns 170,000 Solectron shares.
"It's not good news with the downgrade. They have a lot of funding needs."
The grim turn of events is just the latest in a string of disappointments for the contract manufacturer, which makes products ranging from cellphones to auto parts for customers including Cisco Systems Inc., Nokia Oyj and Delphi Automotive Systems Corp.
The stock has now dropped 64% this year, and until the company can clarify how and when it will be profitable again, many investors hold little hope of it rising soon.
Like so many others, Solectron is now struggling with the hangover from the wave of technology investment through the late 1990s.
The company attracted big-name customers when telecom carriers were throwing money at the likes of Cisco, Lucent Technologies Inc. and Nortel Networks Corp. to build their networks. It furiously bought small competitors in a bid to expand its market share, closing 27 acquisitions since in four years.
Along the way, the company's debt has ballooned to US$4.9-billion, "notably higher than its peers" says Moody's. The heavy debt load combined with weak sales has forced the company on to a cost-cutting binge that has seen it fire 25,000 employees and shut down 490 production lines and four million square-feet of production space in the past year.
Still, sales continue to slide. In the most recent quarter sales were down 45% from a year earlier, resulting in Solectron's third-straight money-losing quarter.
"It does appear that they have been losing market share to some of the other names, like Flextronics International Ltd. and Celestica Inc.," said Louis Miscioscia, an analyst at Lehman Brothers.
Solectron does, however, hold two aces up its sleeve. First, the company has US$2.9-billion in cash at the end of November. Second, the company's acquisition of C-MAC gives it the opportunity to improve the appearance of its results on two fronts.
The acquisition, in theory at least, opens the opportunity for Solectron to account for many writedowns and integration charges as one-time items, thus excluding them from the "cash earnings" numbers that analysts are focused on. Solectron also had a tiny 0.8% operating profit margin in the latest quarter, a problem also faced by rivals such as Celestica. But C-MAC's margins have generally been much better, and when those results are blended with Solectron's in future quarters it should give the appearance of improved profitability.
But C-MAC is far from problem-free itself. The company remains reliant on a handful of customers, most notably Nortel, which is suffering badly itself. In October, C-MAC warned it will have a 28% drop in sales this quarter, and suffer a US25¢ per share loss, rather than the US15¢ profit it was expecting, all apparently because Nortel delayed a key project.
And come January, Solectron's cash war chest might be noticeably lighter as creditors can redeem up to US$530-million in cashable bonds. The company hopes to satisfy that obligation, and pay down additional debt by raising about US$2-billion through the sale of bonds convertible into stock and credit lines from Goldman Sachs Group Inc., Koichi Nishimura, Solectron's chief executive, told analysts yesterday.
And if the immediate cash issue is solved, Mr. Nishimura must still hope for a sharp turnaround in his business before US$2.3-billion in debt comes due in 2003. |
