Short Circuited
By JEROME R. STOCKFISCH / Tampa Tribune
Published: Jan 21, 2002
(photo) Vernadean Harrison, above, makes sure a circuit board made by Jabil Circuit meets the company's quality standards. The St. Petersburg-based manufacturer is navigating its way through its first economic slump.
ST. PETERSBURG - He's basked in the applause of shareholders after announcing a split of his company's high- flying stock. He's addressed the Bay area's business elite while clutching The Tampa Tribune Bay Commerce 2000 trophy awarded to the region's best- performing company.
He's helped boost the company to listings on the New York Stock Exchange, the S&P 500 and the Fortune 500.
But nowadays, Tim Main is tackling much less pleasant tasks at Jabil Circuit.
Instead of maintaining the phenomenal growth and profitability of the St. Petersburg circuit board manufacturer, the president and chief executive is steering Jabil through its first sustained slump.
Jabil's stock, which traded at more than $65 a share in October 2000, is now trading at about one-third that price. The company was about 2,000 employees lighter on Aug. 31 than it was the prior fiscal year, and several hundred of those layoffs took place in St. Petersburg.
Jabil forecasts lower revenue for fiscal 2002 than it recorded in fiscal 2001, the first time since going public in 1993 that the company hasn't recorded sequential annual growth.
There might not seem to be room for optimism amid those numbers. But Main insists that Jabil, caught in the toppling dominoes of the worldwide technology slump, will reverse course.
``Relative to our sector, we are holding up as well or better than anyone else,'' he said. ``It's a difficult environment for us, particularly with head-count reductions, but we will prevail. We'll be able to rebuild the business. We still have a great company.''
When it comes to industry observers and analysts, Main is preaching to the choir.
``You have to take it in the context of the industry,'' said Pamela Gordon, president of Technology Forecasters. The Alameda, Calif., research firm reported an annual revenue decline of 2.3 percent in 2001 for the sector that includes Jabil Circuit.
``That's a historic departure,'' the first decline in at least two decades, Gordon said. Jabil's performance ``doesn't shock me. It's the state of the electronics industry right now.''
Goldman Sachs analyst Michael Zimm has a ``market outperform'' rating on Jabil stock. ``Relative to the other top-tier players, Jabil's operations are much tighter,'' he said.
``They've had much fewer layoffs than the other major companies, fewer plant consolidations, things of that nature,'' he added. ``It's just a matter of the economy coming back. They'll outperform in that sort of scenario.''
The EMS Boom
Jabil produces circuit boards and handles related services for some of the world's most prominent technology companies. It was founded in 1966 by James Golden and Bill Morean, whose first names led to the ``Jabil'' moniker. The company was well-positioned for an explosion in contract manufacturing in the 1990s.
Historically, original equipment manufacturers, or OEMs, adhered to a vertically integrated production model. They handled manufacturing of their circuitry in-house, occasionally offering overflow production to smaller companies such as Jabil.
Circuit-board manufacturing is a complicated, highly computerized process of stamping and soldering chips and other electronic components onto raw boards.
It didn't take long for OEMs to realize that contract manufacturers - now known as electronics manufacturing services, or EMS, providers - could do it faster, better and cheaper. They could respond much faster to the short high-tech product cycle.
In 2001, roughly 14 percent of the world's electronics manufacturing was outsourced to EMS providers. That's a $104 billion market, expected to grow to $288 billion by 2005 as the EMS share increases to nearly 30 percent, according to Technology Forecasters.
Jabil's customers include Cisco Systems, Dell, Hewlett- Packard and Lucent Technologies. The company's product mix covers telecommunications, networking, peripherals, computing and storage, automotive, consumer goods, instrumentation and medical markets.
Jabil went public in 1993, when it recorded annual revenue of $335,000. By the end of the decade, it was increasing its top line by a billion dollars a year, to last year's $4.3 billion n annual revenue.
The stock soared, making a paper billionaire out of chairman William Morean, son of one of the founders, who holds about 34 million shares. Jabil emerged as one of the stars of the Tampa Bay economy and the worldwide EMS sector.
The Tech Bubble Bursts
The U-turn came with the technology collapse and the 2001 recession. ``It was a surprise that it happened, and it's a very large surprise that it's been as deep as it has been and has gone on as long as it has,'' Main said.
As demand for technology products such as computers, networking equipment and even cellular phones sagged, those manufacturers suffered. Cisco lost $1 billion in 2001 and slashed 8,500 jobs. Lucent lost $16 billion, cut 35,000 jobs, and has seen its stock plunge 90 percent in two years.
In turn, Jabil and the other companies that supply those OEMs stumbled. Solectron announced it would cut 8,000 jobs. Flextronics, Sanmina-SCI and Celestica have all posted losses in their most recent quarters. Two EMS providers, ACT Manufacturing and MCMS Inc., are bankrupt.
Further down the supply chain, components manufacturers that supply the circuit- board makers also are reeling. Texas Instruments has posted two consecutive quarterly losses and laid off 2,500 last year. Samsung Electronics' profit fell 52 percent for fiscal 2001.
It's unfamiliar turf for the industries that led the economic boom of the 1990s - and for their employees.
``I think there's a lot of very legitimate concern about how long and how deep the recession will go on,'' Main said. ``We talk very openly and honestly about the state of the business, and try to give people as soft a landing as we can, while we maintain the ability of the company to compete,'' he continued. ``That's the shame of having to go through this: None of the employees created this problem.''
A New Perspective
Main, a former banker, was hired as a Jabil manager in 1989 and rose steadily through the ranks. In a Tribune interview when he assumed the top spot in 1999, he said of his job, ``Part of it is just not to let the wheels come off.''
His role has, obviously, changed. ``It is a different set of challenges for management today than it was a year ago, there's no doubt about that,'' Main said recently.
Those challenges include balancing cutbacks in people and facilities with Jabil's workload. Keeping up morale. Maintaining strong customer relations. Reassuring the investment community of Jabil's operational strength.
On the latter two, success is apparent. An electronics industry trend has been for the major manufacturers to pare their circuit board partners from dozens to a handful.
``We've been very successful in being one of those two or three global suppliers,'' Main said. ``That doesn't show up immediately because business is just so bad for the customers right now. But it will [show up] as business levels recover.''
Analysts credit Jabil's measured, cautious expansion strategy during an industry acquisition orgy for its relative strength in the downturn.
A $20 billion company - the stated target of industry leader Solectron - may derive tremendous leverage in parts procurement and other economies of scale. But after some 60 acquisitions in recent years, Milpitas, Calif.-based Solectron is facing an estimated $884 million in charges against earnings to downsize. Jabil took $55 million in restructuring charges in 2001.
Jabil strategists haven't exactly been sitting on their hands. The company bought Hewlett-Packard's laserjet business in 1998, GET Manufacturing of China in 1999, and communications operations of Marconi PLC in 2001. Jabil said last week it is shopping for sites in Japan.
The Bottom Line For Optimism
``When I look around for opportunities for investment in the tech sector, it's hard to come up with too many companies that have been able to hold the line on profitability as well as Jabil has,'' Goldman Sachs' Zimm said.
Jabil's balance sheet is strong, with almost $500 million in cash and plenty of credit available.
Historically, recessions nudge the big electronics companies to an outsourcing strategy to shed major capital cost: ownership of factories.
Both IBM and NEC have announced huge outsourcing deals in the past few weeks. Although they went to Jabil competitors, observers take them as confirmation of that industry trend.
Meanwhile, Technology Forecasters' Gordon points out that the semiconductor industry, considered a barometer of electronics as a whole, reported improvements in November and December. ``Normally, that would portend relief for the rest of the electronics industry soon,'' she said.
Main expects a flat second quarter, which ends Feb. 28, and increasing revenue in the third and fourth quarters.
``My personal conviction is that ... as we get into the back half of calendar 2002, business will look a hell of a lot better than it does today,'' he said. ``The model still works.''
Reporter Jerome R. Stockfisch can be reached at (813) 259-7850. |
