Despite crash diet, EMS providers urged to shed more weight
Claire Serant / EBN / (01/27/2003 11:46 AM EST)
Weighed down with excess manufacturing capacity and weak end-market demand, major EMS providers will have to implement another round of severe belt tightening this year to improve profitability, according to industry analysts. Although efforts to reduce operations produced $1.4 billion in restructuring costs last year and $2.5 billion in 2001, the EMS industry still has more work to do, analysts said.
"EMS margins will remain depressed until there is a massive restructuring or further consolidation in the industry," said Chris Whitmore of Deutsche Bank Securities Inc., San Francisco. "The EMS industry needs to undergo roughly $2.5 billion in restructuring costs to return to satisfactory utilization rates."
Capacity utilization rates in the electronics industry fell to about 68% in 2002 and are expected to drop to 65% in 2003. To reach an optimal 75%, EMS providers need to tack on restructuring charges of more than $1.2 billion to the $700 million expected for the year, analysts said.
According to Whitmore, those costs should be evenly divided between employee severance, lease and equipment exit costs, and asset write-offs.
"We'll see more plant closures within the next six months," said Randall Sherman of New Venture Research Corp., Nevada City, Calif. "Companies like Celestica and Jabil are not overbuilt, but Sanmina-SCI and Solectron are bleeding from excess capacity."
Analysts cited one key reason why Sanmina-SCI Corp. and Solectron Corp. are suffering more than their competitors: a higher percentage of their operations are located in high-cost regions such as Europe and North America. Executives at both companies were not available to comment on whether they intend to boost restructuring charges in subsequent quarters.
Last week, Sanmina-SCI executives at company headquarters in San Jose told analysts the EMS provider plans to close three printed-circuit-board plants in North America by June.
"Our PCB fabrication business continues to navigate through a period of excess capacity," said Randy Furr, Sanmina-SCI's president and chief operating officer. "We are in the process of closing two additional PCB fabs in Watsonville, Calif., and Ward Hill, Mass., and we also decided to permanently close our Derry, N.H., facility."
During Sanmina-SCI's earnings call last week, chief financial officer Rick Ackel reiterated the company's plan to spread out $250 million in restructuring costs during the remainder of fiscal 2003, ending in September, to gain $50 million in quarterly savings. For the first quarter of 2003, ended Dec. 28, the contractor reported $36.5 million in restructuring, merger, and integration charges.
Merger costs
Most of Sanmina-SCI's restructuring woes stem from its December 2001 merger with SCI Systems Inc., Huntsville, Ala.
"Sanmina-SCI has more work to do than other EMS providers because they were burdened with not only consolidating manufacturing through a merger, but they faced doing it in the midst of a severe economic downturn," said Shawn Severson, an analyst at Raymond James & Associates Inc., St. Petersburg, Fla.
But Ackel is convinced that the restructuring efforts will pay off.
"You won't see a real major impact probably until the middle to the end of the third quarter and then the fourth quarter. That's when the savings really start to ramp because of the time it takes to shut down and move operations and coordinate with customers," he said.
During Solectron's first fiscal quarter of 2003, ended Nov. 29, the Milpitas, Calif., company took restructuring charges of $102 million.
"What we see remaining in the fiscal year is between $50 million and $75 million in restructuring charges," said Kiran Patel, Solectron's executive vice president and chief financial officer, during a conference call with analysts last month.
Since the economic downturn took hold two years ago, Solectron has shuttered 19 plants, of which 13 were located in the Americas and five in Europe, said Thomas Hopkins, an analyst at Bear, Stearns & Co. Inc., New York, in a report.
"Although Solectron formally announced 19 closures, we believe substantial floor space has been reduced from additional facilities," Hopkins said. "Solectron's goal is to have 60% of its capacity in low-cost regions by the end of fiscal 2003."
Plexus draws a charge
Last week, Plexus Corp., Neenah, Wis., posted restructuring charges of $31.8 million in its first fiscal quarter of 2003, ended Dec. 31. Plexus closed its San Diego plant last month and plans to reduce the number of employees at its Seattle plant and in the United Kingdom, along with several smaller sites, said chief financial officer Gordon Bitter.
"Our restructuring actions have better aligned our global footprint and cost structure with the realities of the competitive high-end markets that we serve," Dean Foate, Plexus' president and chief executive, told analysts. "We expect these actions to improve our capacity utilization and bottom line as they are completed during the current fiscal year."
Flextronics International Pte. Ltd., Singapore, has shut 12 plants since the downturn: seven in the Americas, four in Europe, and one in Singapore, Hopkins said.
Flextronics reported an aftertax charge of $67.1 million targeted at the company's resized PCB fab footprint, which included the closure of plants in Irvine, Calif., and Kumla, Sweden, during its third quarter of fiscal 2003, ended Dec. 31.
"We've gone through all of these restructurings and it's not fun, but we're feeling good about our business," Michael Marks, Flextronics' chief executive, told analysts last week during a conference call.
In a recent report, Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc., New York, said: "We believe Flextronics' restructuring efforts will be fully implemented in the March quarter of calendar 2003, with the benefits beginning to have a more meaningful impact on profitability in the PCB business during the June quarter of calendar 2003." |
