Sales in the quarter ended March 2 were $5.4 billion, up 85.5 percent from the same period last year. Diluted cash earnings per share* were 30 cents, a penny higher than analysts’ consensus estimate of 29 cents published by First Call. The company earned diluted cash EPS of 19 cents in the year-ago period.
In the quarter, Solectron earned net income under U.S. Generally Accepted Accounting Principles (GAAP) of $121.9 million, up 26 percent from the same period last year. Diluted GAAP EPS** was 18 cents in the quarter, compared with 16 cents in the year-earlier period. Before one-time charges, diluted GAAP EPS was 24 cents in the quarter, in line with the company’s guidance and compared with 18 cents in the same period last year.
The company also said today it expects to take a pre-tax restructuring charge of $300 million to $400 million in the third quarter. The reserve will cover qualifying costs associated with actions to realign the company’s capacity and capabilities.
The strength of our organization and the diversity of the markets we serve combined to generate second-quarter results consistent with our guidance. Even so, changing economic conditions overall led to a significant reduction in demand from our customers as we moved through the quarter, said Koichi Nishimura, Solectron chairman, president and chief executive officer. We are acting aggressively to meet the challenges posed by the current business environment. Unfortunately, with significantly lower customer demand we are unable to support our recent levels of employment, and we have been reducing our work force at many sites. In addition, we will implement a plan to balance our capacity and capabilities as we prepare the organization for a re-acceleration of growth.
Quarter Summary
Gross margin in the quarter increased to 9 percent from 8.5 percent in the fiscal first quarter. The improvement reflected the impact of cost-control measures and continued improvement in the availability of component supplies in the electronics industry.
Reported inventories of $4.9 billion included $440 million in inventory added through acquisitions in the second quarter. On a comparable basis, inventories at the end of the second quarter declined to about $4.4 billion from $4.6 billion at the end of the first quarter. The company said inventory trends are improving, but progress has been slowed by reduced customer demand.
During the quarter, Solectron completed three transactions: The acquisition of NatSteel Electronics, a Singapore-based EMS company; the former Sony Corporation facilities in Nakaniida, Japan, and Kaohsiung, Taiwan, as part of an overall cooperative agreement with Sony announced last fall; and the former IBM product repair facility in Amsterdam, Netherlands, establishing a significant European hub operation for Solectron’s growing Global Services business.
The company continued to benefit from serving a cross-section of electronics market segments: Networking, 32 percent; non-mobile telecommunications, 20 percent; mobile telecommunications, 13 percent; notebooks/personal computers, 13 percent; computer peripherals, 6 percent; workstations/servers, 5 percent; semiconductor, test and other instruments, 3 percent; and mainframes, medical equipment, avionics and other, 8 percent.
Restructuring Activities
In the second quarter, Solectron recorded a restructuring charge of $25.2 million to consolidate recently acquired NatSteel Electronics sites in Guadalajara, Mexico, and Budapest, Hungary, into existing Solectron sites.
In addition, the company expects to record a charge of $300 million to $400 million in the third quarter to, over the next 12 months, restructure additional facilities, relocate certain capabilities and change the strategic focus of a number of sites, based on anticipated future customer requirements. The expected restructuring charge will cover employee severance, facilities, equipment and applicable facility and equipment lease termination costs, and the write-off of goodwill, if any, associated with affected facilities.
In connection with the anticipated restructuring, the company expects to reduce its work force by about 8,200. Many of those reductions have taken place in the last two weeks. The company said it will, as always, continue to adjust staffing to meet changes in customer demand. At the end of the second quarter, Solectron had about 79,000 employees worldwide.
While these actions are needed to prepare us to take full advantage of a re-acceleration in demand, we do this with a heavy heart and only after careful analysis, since it will have an impact on our people, Nishimura said. These steps are necessary to help ensure our long-term competitiveness and position as the EMS leader. Even so, the effect of these actions on people is the hardest part of this, and in meeting this business challenge we will do our best to treat people with dignity, integrity and respect.
Forward-Looking Guidance
The company targets third-quarter sales of $4.1 billion to $4.5 billion, diluted cash EPS of 12 cents to 16 cents, and GAAP EPS of 2 cents to 6 cents. All targets for the quarter, which ends June 1, are before non-recurring charges.
The company said that, given the currently uncertain picture of customer demand, it will not provide detailed guidance for the fourth quarter and full year.
Six-Month Summary
For the first six months of fiscal 2001, Solectron reported sales of $11.1 billion, compared with $5.8 billion in the year-earlier period. U.S. GAAP net income increased to $312.5 million from $206.5 million a year ago. Diluted cash EPS was 60 cents, up from 38 cents a year ago.