Few Sparks In Solectron's Tech Demand Environment

The technology demand environment is challenging and pricing pressures for printed circuit board fabrication continue to affect Solectron, a Milpitas, Calif., provider of electronics manufacturing services. Nick Nilarp, analyst at Fitch Ratings, explained that Solectron, like other companies in its sector, is suffering because of weakened demand levels. This is reflected in Fitch's BB+ rating of Solectron's $450 million in credit facilities. A negative outlook for Solectron further indicates that the ratings could suffer if adverse market conditions persist, outsourcing contracts do not improve, cash acquisitions occur, or if the company does not execute its restructuring plans successfully.

Nilarp explained that Solectron has been implementing a restructuring plan since last year, which includes such actions as reducing staff and moving manufacturing facilities to lower cost regions. Event risk of restructuring programs further constrains the ratings.

Quarterly EBITDA levels, minus restructuring charges, continue to fluctuate also, but have improved sequentially in the first quarter to an estimated $93.7 million. Total debt-to-EBITDA leverage as of last November had reached an excess of nine times, with interest coverage less than two times. "It's remained a tier one company [and] liquidity remains sufficient," Nilarp stated to Solectron's credit. As of last November, Solectron's available cash totaled $1.9 billion and its bank facility was not tapped. Solectron's quarterly revenues and operating performance have also recently shown signs of stabilization. The new credit consists of a 364-day, $200 million revolver that is tacked on to an amended $250 million facility that expires in 2005. Solectron's senior unsecured debt is rated BB. Calls to officials at Solectron were not returned.