Last week, Solectron
Revenues were up 1.1% from fiscal 2005 and up 21% from fourth-quarter 2005. This is a decent change, since sales have been sliding since 2001. Gross margins fell slightly from 5.5% in 2005 to 5.2% in 2006. Operating margins improved year over year from 0.66% in 2005 to 0.95% in 2006. However, there will be margin pressure moving forward because management also announced more restructuring, with plans to reduce the workforce and manufacturing capacity by 1,400 people and 700,000 square feet, respectively.
At first glance, it seems that the restructuring is paying off. Over the past three years, management has reduced the head count from 73,000 to roughly 50,000 employees. Even with revenues falling, revenue per employee -- a rough gauge of productivity -- has improved from its low of $168,000 per person in 2002 to $197,000 per person in 2005. In Solectron's more profitable days of 1998 and 1999, the average revenue per employee was roughly $210,000 to $220,000 per person. Compare that to Jabil Circuit
On the capacity side, square footage has dropped from a high in 2002 of 15.5 million square feet to less than 11 million square feet, including the just-announced 700,000-square-foot reduction. Furthermore, the company's capacity is decreasing to that of the 1999 to 2000 time period, when revenues were about the same or slightly less than current levels. With forecasts of tepid sales growth, any reduction in fixed costs will help lower the cost of doing business.
But I have a problem with the turnaround story. Gross profit margins are not improving. Management's reduction efforts haven't wrung out more cost efficiencies above the line, otherwise known as cost of goods sold (COGS). Further, if it is pursuing higher-margin business, these efforts are not making a positive contribution. Unfortunately, management faces an uphill battle when large customers like Cisco
Until Solectron can return gross margins to the previous 9% to 10% levels of the late 1990s, it will surely remain a turnaround story -- turning around and around and around.
Select some related Foolishness:
- Foolish Forecast: Time to Select Solectron?
- Solectron: Slow Progress Is Still Progress
- Solectron Plays for Time