Vol. 15, No. 7: July 2005

RoHS: EMS Risk or Reward?

The RoHS directive, which bans lead and five other hazardous materials from nonexempt products sold within the European Union as of July 1, 2006, will benefit the environment of EU countries. But when the RoHS deadline has passed, will EMS providers come out ahead? Clearly, the directive creates a demand for compliance services, which EMS providers can offer to both existing and new customers. Providers have the opportunity to expand relationships with existing customers and attract new customers in need of these services. What’s more, the demand for compliance services is expected to surge as the July 2006 deadline approaches. That means more and more green business for providers, especially those who were ahead of the curve in RoHS preparation.

But just as RoHS creates new opportunities for providers, it also presents them with potential risks. The obvious one is lost EMS revenue. If some OEM product pipelines are shut down because of noncompliance, then the both the affected OEMs and their EMS providers lose revenue. Avoiding lost revenue is perhaps the strongest tie that binds OEMs and their providers in RoHS compliance efforts. EMS revenue might also disappear for another reason, not yet openly discussed. An OEM that has run out of time to make all of its product lines compliant might decide to cancel some percentage of its product portfolio to ensure that the rest are converted in time.

There are other possible outcomes that would also create problems for EMS providers. If non-compliant components are not used up by the July 2006 deadline, then EMS providers and their customers end up with excess inventory. Unless that material can be consumed in products that don’t fall under RoHS, the EMS industry in this scenario would face a build-up of excess and obsolete inventory. Although such inventory is usually the OEM’s responsibility, it still creates a problem for providers who must get customers to buy back material. Some people in the industry are now saying that an inventory overhang from RoHS is inevitable.

A steep rise in the demand for green services creates another possible dilemma for providers. How do they satisfy this demand without ending up with idle resources after the demand goes away?

Flextronics and Sanmina-SCI agree that a large portion of the demand for compliance services has yet to materialize. “I’m anticipating that we’re really at the tip of the iceberg,” said Mike Shannon, senior VP of RoHS/WEEE compliance for Sanmina-SCI. “I think the real avalanche of requests and information are going to be coming in the next quarter and the quarter subsequent to that.”

The need to convert products for RoHS compliance is creating design opportunities. “I think there’s a lot more than is currently being tapped,” said Patrick Hehir, Flextronics VP of global initiatives.

Although Flextronics is doing some significant design work for RoHS, the company believes that it should be doing more design work at this point in the timeline for RoHS compliance. Flextronics is noticing OEMs that “are still not at a stage of really understanding it to the degree that they should be turning on the spigot big time,” said Hehir.

Celestica, which introduced a suite of green services last year, is generating a good deal of engineering services business around product conversion for RoHS. “We’re focusing a lot on the engineering right now, particularly for the kind of non-consumer product customers,” said Marjorie Craw-Ivanko, director of global engineering services, green services and laboratory services at Celestica. She described the interest in Celestica’s engineering services for RoHS as “exponential.”

Sanmina-SCI’s Shannon reported that the company’s “backlog on the engineering side is growing sizably. We’re very pleased with the opportunities we’re seeing.”

Top-tier providers aren’t the only ones gaining business as a result of RoHS. Mentor, OH-based Libra Industries, a provider in the sub-$100 million category, is seeing its design side growing at an estimated 200 to 300% year on year. “A lot of that is coming in as a result of” RoHS compliance work, said Gerald Waldron, Libra’s director of sales and marketing.

Libra, which recently introduced a package of lead-free transition services, is winning new customers based on its ability to manufacture for RoHS compliance. “I can now trace three new client wins where we can build RoHS-compliant product today for them whereas the incumbent CM could not,” said Waldron.

More than one company has chosen Celestica as its green partner because the customer’s existing provider did not offer the proper level of support, according to Celestica’s Craw-Ivanko.

While RoHS is bringing providers new business in compliance services, it is also creating risk that starts with the OEM and spreads to its EMS supply base. If an OEM does not leave enough time for RoHS compliance, the company jeopardizes product revenue and associated EMS revenue. If OEMs don’t switch over to RoHS-compliant products soon enough, they risk creating an inventory overhang of non-compliant parts. The scope of this problem, expressed as a percent of cost of goods sold, could be large. “Anything from 1 to 3%, people are talking about,” said Hehir of Flextronics.

OEMs that wait to get started also place additional burdens on their providers as time grows short. Whether or not providers have the resources to handle all the demand that has yet to materialize remains to be seen.

As usual, OEMs are in the driver’s seat. How they approach RoHS will determine if RoHS compliance ends up as a positive or negative for their providers.


Consolidation Deals Up in First Half

The first half of 2005 saw no let up in deals that reduce the number of EMS players. Indeed, the pace of consolidation appears to be quickening. A tally of consolidation deals closed in the first half of the year shows a 38% increase in the number of such deals compared with the same period in 2004. MMI found that the number of consolidation deals closed in the first six months of 2005 rose to 11 from eight in the first half of 2004 (chart). This 38% growth in consolidation deals follows last year’s 24% increase in such transactions (Feb., p. 1).

Factors driving industry consolidation on the buy side have not changed. The main reasons for acquiring a competitor are to grow revenue, expand geographic coverage, diversify customer business, and add capabilities. Often deals are made for some combination of these reasons.

Motivations to sell usually take one of two forms. A smaller provider sells to a larger one because the combined organization can offer size, footprint and purchasing leverage that the smaller company could not attain on its own. Or the seller wants out of the EMS business. In the first half of 2005, there were six cases where a company sold off a unit that included an external EMS business in order to focus on the company’s core business. In five of these cases, the seller was an OEM.

While basic motivations for buyers and sellers remain unchanged, something is bringing them to the table in larger numbers. MMI believes that the 2005 increase in consolidation deals reflects the migration of outsourcing work from high- to low-cost regions. As EMS business flows out of North America and Western Europe, there is greater urgency among potential buyers and sellers in those markets to do deals. In markets where growth opportunities are declining overall, EMS business owners must either commit to the business or get ready to sell. On the other hand, in low-cost regions where most of the growth is occurring, owners must either spend capital or exit the business. And if sellers wait too long, they face the risk of taking less for their business. Opportunistic buyers are taking advantage of the situation. If the first half is any indication, buyers have more from which to choose, thereby increasing their chances of finding the right fit.

Of the 11 transactions counted in the first half, seven involved assets located in the US or Western Europe. The remaining four deals each combined high-cost facilities with a low-cost location.

For the most part, this consolidation activity took place below the industry’s top tier. Only one provider in the first tier made a consolidation deal in the first half.


REMEC Sells EMS Business

REMEC (Del Mar, CA), a manufacturer of high-frequency subsystems for wireless networks, has sold its EMS business unit to a group that includes the former owner of the business. Keith Butler, who sold the business to REMEC in 1997, joined with an investor, Brian Kahn, to buy the business back. The newly independent EMS business, which is based in Escondido, CA, has been renamed Veritek Manufacturing Services.

The buyers paid $19 million in cash for the business, subject to adjustments including an adjustment based on working capital. This deal also calls for additional payments through December 2006 equal to 10% of the amount by which the average quarterly gross sales placed by certain parties exceed $7.5 million, with payments totaling no more than $4 million.

Although the EMS business operates primarily in Escondido, CA, the purchase also includes assets in Poway, CA, and Costa Rica. REMEC is subleasing some of its facilities to Veritek on a short-term basis. Veritek will not end up with a presence in Costa Rica. Under a service agreement, REMEC is temporarily manufacturing in Costa Rica for Veritek, which is in the process of transitioning that work to another facility in Tijuana, Mexico. Also as part of this deal, REMEC will license certain IP to Veritek.

For the quarter ended April 29, the EMS unit achieved operating profit of $1.2 million on sales of $14.1 million, according to a Form 8K filed by REMEC. For the fiscal year ended Jan. 31, 2005, the unit earned operating profit of $4.2 million on revenue of $53.8 million. The business employed about 160 people.

Segments served by Veritek consist of medical, RF/microwave, telecom, gaming, computer, security systems, banking and industrial controls. The provider offers turnkey manufacturing through finished product delivery to customers.

“We were kind of a satellite step child of REMEC,” said Butler, president and COO of Veritek. He also ran REMEC’s EMS business as VP of REMEC Global Manufacturing Services.

The EMS unit had ceased manufacturing for REMEC, other than low-volume runs for initial production, some five or six years ago. Contract manufacturing continued as it had in the years before REMEC owned the operation. It was started by Butler and his father in 1978 and did business under the trade name Veritek.

As part of REMEC, the EMS operation was not highly visible. Butler reported that the unit was not listed among the top 100 providers even though its sales were high enough to qualify. “We’re kind of coming out of stealth mode,” he said.

“It’s nice to be out from that umbrella to expand our scope and presence,” said Butler.

REMEC has been selling off assets, and its board has approved a plan to dissolve the company.

Deals done…PartnerTech (Malmö, Sweden) paid about SEK 67 million ($8.6 million) in cash and stock for Finnish provider KSH-Productor Oy (June, p. 5-6). With about 170 employees, the acquired operations posted more than SEK 200 million ($25.6 million at current exchange rates) in 2004 revenue….Publicly held SigmaTron (Elk Grove Village, IL) has completed its acquisition of Able Electronics, a privately owned provider based in Hayward, CA (April, p. 5-6). SigmaTron said the deal gives it the opportunity to consolidate its California operations into a single facility. The company also has a pre-existing operation in Fremont, CA…Effective May 31, RAD Technologies, LLC (Simi Valley, CA), which now does business as RAD Electronics, Inc., acquired Arrow Electronics’ Cable Assembly Division. RAD Electronics has two operating divisions: RAD Technologies, a contract manufacturer specializing in complex PCBA, custom cable assemblies and over molded embedded electronics, and RAD Mil-Aero, a distributor to military and aerospace customers. Also, RAD Electronics recently purchased assets of Astrex (Plainview, NY), a component distributor….EMS provider Outsource Electronics (Havant, Hampshire, UK) has acquired certain assets of Mindsail, a nearby design house specializing in embedded systems, according to ElectronicsWeekly.com.

Deal not done…Sparton (Jackson, MI) has decided not to pursue the acquisition of medical device manufacturer HDJ Company and its wholly owned subsidiary Specialized Medical Devices (May, p. 5).

Alliances…Key Electronics (New Albany, IN), an EMS company, and SHOT (Greenville, IN), an engineering and product development firm, have formed an alliance to provide their respective customers with complete turnkey product design and manufacturing services. The Key sales staff will market SHOT engineering services along with Key’s own manufacturing capabilities, while SHOT will begin offering Key’s manufacturing services in addition to SHOT’s engineering capabilities. Key employs nearly 150 people at its New Albany, IN, and Owingsville, KY, facilities. SHOT has a technical staff of 27 full-time engineers, scientists and technicians. Offering a multidisciplinary approach to design, the firm serves government agencies, universities, and commercial customers….EMS provider Libra Industries (Mentor, OH) has entered into an alliance with Engent (Norcross, GA). The new partnership allows Libra to offer Engent’s advanced microelectronics assembly and process development capabilities. Engent possesses next-generation assembly technology in areas such as flip chip, wire bonding, system in a package, and micro electromechanical (MEMS) packaging. In addition, Engent’s reliability testing and failure analysis services will be available to Libra customers as needed.

Raymarine Outsources UK Manufacturing

Raymarine (Portsmouth, UK), which sells its marine electronics to the leisure boating market, has decided to outsource all of its UK manufacturing operations and will close its Anchorage Park facility in Portsmouth as a result. The company has selected a preferred outsourcing partner, which it will eventually identify, and will spend the next few weeks negotiating contract terms. Transfer of operations to the selected provider will begin in August and finish in early 2007. About 250 employees will be affected potentially.

“The outsourcing of our UK manufacturing operations is essential for Raymarine to remain competitive in today’s markets. A number of our competitors already have manufacturing operations in lower cost environments,” stated Malcolm Miller, CEO of Raymarine.

Cost savings from this outsourcing will start at £5 million in 2007 and reach £11 million in 2010.

On May 3, the company announced that, due to increased demand for its products and planned new product launches, it was in discussion with potential outsourcing partners. Raymarine received written proposals along with formal presentations from a number of providers. A number of factors were analyzed including the potential for cost savings, the means to achieve an efficient and streamlined transfer of manufacturing, the likely timetable for the transfer of operations, and the need to maintain product quality and reliability.

Raymarine has been using EMS companies in Mexico and Taiwan. A spokesperson told MMI that the company would probably continue to use them for a short time and transfer production to the new provider.

The company, which is listed on the London Stock Exchange, reported 2004 revenue of £106.3 million.

Lucent Consolidates Wireline Business with Solectron

Signs MOU with Celestica

Lucent Technologies and Solectron (Milpitas, CA) have entered into an agreement that essentially consolidates the manufacturing of Lucent’s portfolio of wireline products with Solectron. This agreement, which expands the relationship between the two companies, calls for Solectron to become a worldwide manufacturer primarily of Lucent’s outsourced wireline products. The two companies had earlier said they had signed a nonbinding term sheet.

In addition, MMI has learned that Lucent has signed a memorandum of understanding with Celestica (Toronto, Canada). Although final details need to be worked out, Lucent expects that Celestica will be focusing on Lucent’s wireless business, which is the fastest growing part of the OEM’s portfolio.

Lucent spokesperson Mary Ward told MMI that the company had been using five major EMS suppliers.

The agreement with Solectron “has compelling strategic value for Lucent as it drives operational efficiencies by consolidating these product lines with a supplier who can work with us in a truly integrated manner,” stated Jose Mejia, president of Supply Chain Networks at Lucent.

As part of this agreement, the two companies will collaborate across the supply chain, with Lucent leveraging Solectron’s design engineering capabilities and post-sales repair and service offering.

Solectron announces other wins

Based on another business win, Solectron is purchasing McDATA’s Lumberton, NJ, manufacturing operations and assets, which McDATA obtained as part of the company’s recent acquisition of CNT. The transaction was slated to close the week of June 26.

As a result, Solectron is assuming production of all former CNT-branded products. This deal expands the relationship between the two companies. McDATA currently outsources manufacturing of its Sphereon fabric switches and Eclipse SAN routers to Solectron.

Solectron will take over the lease of the Lumberton facility and sublease to McDATA certain non-manufacturing floor space. About 123 McDATA employees will transfer to Solectron. The provider will pay about $1.5 million for assets such as equipment. But McDATA will partially compensate Solectron for restructuring costs to be incurred by paying the provider $3 million in installments over 330 days.

Ingalls & Snyder analyst Alexander Blanton estimated that this deal would produce additional revenue of roughly $75 million a year for Solectron.

Also, Wyse Technology (San Jose, CA) has awarded Solectron a contract to manage the supply chain, including logistics and after-sales support, for the Wyse line of thin client and terminal products. Wyse told Ingalls & Snyder analyst Alexander Blanton that it expects this award will initially bring Solectron roughly $100 million a year in revenue. Among other new business won by Solectron is an additional contract from Thomson, one of Solectron’s set-top box customers.

More new programs…Economic Daily News, a Chinese-language newspaper, is reporting that Hon Hai Precision Industry, also known as Foxconn, recently landed desktop PC orders from HP. Hon Hai declined to comment….Visual Networks (Rockville, MD), a provider of network and application performance management, has selected Plexus (Neenah, WI) as its new primary contract manufacturer. In that role, Plexus will serve as Visual Network’s turnkey supplier, responsible for manufacturing the company’s hardware appliances from prototype development through high-volume production….Nam Tai Electronics (Tortola, British Virgin Islands), which manufactures in China, has won a new order from Sony Computer Entertainment Europe to build a second-generation USB camera for a new model of Sony’s PlayStation 2 game console. Nam Tai also supplied the original camera. In addition, Nam Tai has received new business from GN Netcom A/B for the development and manufacturing of peripherals for new game devices. GNN is part of GN Store Nord A/S, a technology group publicly traded in Denmark….Leitch Technology, a supplier of video systems for the professional TV industry, has agreed to outsource the majority of its board manufacturing activities in Toronto, Canada, to SMTC (Mark-ham, Ontario, Canada). It is estimated that the agreement will achieve an annualized run rate of $20 million for SMTC, which will initially provide manufacturing services at its NPI center in Markham, Canada, and its facility in Chihuahua, Mexico….Under a long-term contract, CTS Electronics Manufacturing Solutions (Moorpark, CA), a unit of publicly held CTS Corporation, will provide PCB assemblies to DRS Technologies for systems supplied to the US Marine Corps’ combat vehicle enhancement program….Bofors Defence (Karlskoga, Sweden) has chosen PartnerTech (Malmö, Sweden) as a principal supplier for a newly developed artillery grenade. As part of this arrangement, PartnerTech has received a pilot production order worth some SEK 30 million ($3.9 million) over one year. Serial production is slated for 2008….Enermet, a supplier of energy metering and load management, and Enics (Turgi Switzerland), an EMS provider focused on industrial electronics, have entered into an agreement making Enics a strategic and preferred partner of Enermet. As part of the agreement, Enics will acquire Enermet’s production and repair business activities in Jyskä, Finland. Enermet has been an Enics customers since 2000….Servatron (Spokane, WA) will produce a 1-kw fuel cell for ReliOn (Spokane, WA). The agreement between the two companies calls for Servatron to provide a complete box build of the fuel cell assembly….Raytheon’s Space and Airborne Systems (El Segundo, CA) has awarded LaBarge (St. Louis, MO) a $7.4-million contract to continue to produce backplane assemblies for the F/A-22 Raptor, a stealth fighter plane developed for the US Air Force….CirTran’s facility in Salt Lake City, UT, has started refurbishing Pachislo slot machines from Japan. These machines are sold on TV in the US.

Flextronics To Put Industrial Park in Malaysia

Flextronics (Singapore) has selected a location in South Malaysia for the site of a new industrial park. The company has signed an agreement with the Port of Tanjung Pelepas for construction of a complex reported as 1.2 million ft2 by the Malaysian Industrial Development Authority (MIDA) and 1.3 million ft2 by the Malaysian National News Agency. The vertically integrated industrial park will be located in the Pelepas Free Zone, adjacent to the port. According to the Malaysian news service, the port will build the facility and lease it to Flextronics.

Various Asian news sources report that Flextronics plans to invest 1 billion ringgits ($263 million) or up to that amount over the next ten years.

Reportedly, the company will consolidate some of its Malaysia operations into the new industrial park.

According to MIDA, the industrial park is slated to be operational by April 2006. The Malaysian National News Agency reported that Flextronics’ Peter Tan said the park will employ between 12,000 and 13,000 people. Tan is president and managing director of the company’s Asia operations.

In an interview with Reuters, he said Flextronics was looking for an alternative to China, where costs can only increase.

Looks to grow sales to Taiwanese ODMs

In other news, Flextronics is working to drum up business from Taiwanese ODMs. A recent trip to Taiwan by Flextronics CEO Michael Marks underscored this effort.

According to Asian news reports coinciding with the trip, Marks said the company expects that revenue from Taiwanese customers will reach $400 million in fiscal 2006, up from $100 million in fiscal 2005. These figures are considerably higher than numbers presented at Flextronics’ analyst and investor meeting held in May. During the meeting, Flextronics said its business from Taiwan would increase to an estimated $153 million in fiscal 2006 from $23.7 million in fiscal 2005.

The company intends to provide key services not available within Taiwanese ODMs. These services consists of components, mechanicals and some assembly services in Asia; forward and reverse logistics worldwide; and manufacturing services in Eastern Europe, Mexico and Brazil. As of the May meeting, Flextronics had added five new Taiwanese customers in the previous 12 months.

A Chinese-language daily is reported to have written that Flextronics and Taiwan’s Kinpo-Compal Group will set up a joint venture. MMI was unable to confirm this report with Flextronics.

More expansion…Jabil Circuit (St. Petersburg, FL) plans to increase the footprint of its EMS operation in Memphis, TN, by more than 50%. The company’s website lists the Memphis EMS operation at 630,000 ft2. Jabil will hire 500 people for the operation from late June to the end of the year. The expansion will support recently awarded manufacturing, assembly and material handling of electronic cash registers and self-serve kiosks. Under this new contract, the Memphis operation will consolidate more than 5000 parts coming from 200-plus global suppliers via truck, air and rail. The Memphis Business Journal reported that Jabil will lease 366,000 ft2 in the city….Hon Hai is investing $19.8 million indirectly in a Tianjin, China, operation for the manufacture of components and mobile communication systems, according to a statement filed with the Taiwan Stock Exchange. The investment is being made through Hon Hai’s handset spinoff, Foxconn International Holdings….Elcoteq Network (Espoo, Finland) has opened Elcoteq Engineering Service Center in Richardson, TX. The center occupies 28,117 ft2 and employs 100 people. Services include project management, prototyping, industrialization, low-volume manufacturing, test services, and material management….Electronics Evolution Technologies, an EMS provider in Reno, NV, will establish a facility in Mexico through a shelter services agreement with The Offshore Group (Tucson, AZ). EET will occupy 17,000 ft2 at the Group’s interior location at Empalme, Sonora.

Permanent home…EMS provider VEMAS, which operates out of a 28,000-ft2 leased facility in Middlebury, VT, has purchased a 31,000-ft2 building in Poultney, VT. The purchase “gives our company a permanent home and underscores our seriousness about being a long-term player in this industry,” said Jon Leber, president of VEMAS. The company will relocate to Poultney some time before the current lease expires in February 2008. VEMAS will not occupy all of the space in the new location as some space will be leased out.

Unnamed Provider Borrowing from Jabil

Jabil Circuit has agreed to lend up to $25 million to an unidentified EMS provider and has the option to acquire all of the outstanding stock of this provider. As reported in Jabil’s most recent Form 10Q, the two companies signed a loan agreement and an agreement and plan of amalgamation.

Under the plan of amalgamation, Jabil can opt to combine this unnamed provider with a newly-formed subsidiary of Jabil at any time prior to November 1, subject to potential limited extensions. The two companies have agreed on an initial and contingent purchase consideration should Jabil exercise the purchase option.

Jabil disbursed $15.0 million to the borrower when the agreements were executed during the May quarter. The remaining $10.0 million principal under the loan agreement was put in escrow to be paid out only upon satisfaction of certain requirements.

Some financial results…For the quarter ended May 31, Solectron reported that sales decreased both quarter over quarter and year over year. Revenue in the quarter amounted to $2.60 billion, compared with $2.76 billion in the prior quarter and $3.03 billion in the year-earlier quarter. The company attributed the sequentially lower sales to weaker demand in the networking and consumer markets. Net loss from continuing operations in the May quarter was $66.7 million versus a loss of $65.4 million a year earlier. Excluding $102.9 million of charges, non-GAAP net income from continuing operations came to $36.2 million, or 4 cents per share. These charges consisted of $41 million for restructuring, $45 million from the redemption of senior notes, and $17 million principally related to Brazilian tax audits. For the August quarter, Solectron’s guidance calls for sales of $2.4 to $2.6 billion and non-GAAP EPS from 3 to 5 cents for continuing operations. This guidance means that Solectron expects August quarter sales will be down year over year….Celestica (Toronto, Canada) saw its Q2 sales rise 5% sequentially to $2.25 billion. They still lagged Q2 2004 revenue by 3%. The provider posted net earnings of $12.6 million, or 6 cents per share, for Q2 2005, compared with a net loss of $7.9 million for the year-earlier quarter. Adjusted net earnings for Q2 2005 amounted to $39.8 million versus $22.8 million a year earlier. The company said Q3 demand is rolling up weaker than the seasonality it would typically see. For Q3, Celestica is expecting revenue in the range of $1.9 to $2.2 billion and adjusted EPS from 9 to 19 cents….For the quarter ended May 31, Jabil Circuit posted sales of $1.94 billion, up 19% from a year earlier. Net income for the quarter increased 48% year over year to $59.4 million, while GAAP EPS climbed 53% to 29 cents. Core EPS went up 27% to 33 cents. Core operating income increased to 4.4% of revenue. For the August quarter, Jabil foresees revenue in a range of $2.0 to $2.1 billion and core EPS from 35 to 37 cents. This guidance translates into minimum year-over-year growth of 23% for the August quarter. For the November quarter, Jabil expects sequential sales growth of 8 to 17%, indicating revenue of $2.2 to $2.4 billion and core EPS of 40 to 44 cents….Benchmark Electronics (Angleton, TX) recorded Q2 sales of $560.8 million, representing an increase of 14% year over year. Net income was $18.7 million, compared with $17.6 million in the year-earlier quarter. The company had no debt outstanding as of June 30. Q2 operating margin of 4.1% was affected by a combination of product pricing and mix as well as realignment costs of about $0.6 million. Benchmark expects Q3 revenue between $555 and $580 million and EPS from 44 to 48 cents. This guidance calls for minimum Q3 growth of 10% from a year earlier….For the fiscal year ended April 30, SigmaTron International (Elk Grove Village, IL) grew revenue 6% to $106.1 million. Net income decreased to $4.7 million from $5.4 million in fiscal 2004, while fiscal 2005 EPS stood at $1.23 compared with $1.53 in the prior year. The company expects July quarter earnings to be down from a year earlier, based on a decrease in sales, increased overhead and continuing pricing pressures….PartnerTech (Malmö, Sweden) reported that Q2 revenue rose by 26% year over year to SEK 530.1 million ($67.8 million). Q2 sales include SEK 19.9 million from the acquisition of KSH-Productor on June 3. Revenue was up 21% for comparable units. Net profit was SEK 12.6 million, compared with SEK 9.3 million a year earlier.

Notice of delisting…Last month, the New York Stock Exchange notified Three-Five Systems, or TFS (Tempe, AZ), that the company’s stock would be delisted. This ruling followed prior warnings from the NYSE that the company had fallen out of compliance with respect to requirements for market capitalization, stockholders’ equity, and minimum average closing price. In response to the NYSE decision, TFS said it was examining other trading alternatives for its stock, including the OTC Bulletin Board. Earlier, TFS announced that it was exploring a range of possible options to maximize shareholder value (April, p. 6).

Warning from Nasdaq…In June, SMTC received notice from The Nasdaq Stock Market that its common stock has failed to maintain a minimum bid price of $1.00 per share over 30 consecutive trading days, as required by Nasdaq rules. The company has until Nov. 28 to regain compliance or be subject to delisting. To regain compliance, SMTC’s stock must achieve a minimum closing bid price of $1.00 for at least ten consecutive trading days. The company has the right to appeal a notice of delisting. SMTC expects more significant growth in Q2 2005 compared with the marginal revenue increase from Q4 2004 to Q1 2005. SMTC continues to believe that Q4 2004 will be its low point in revenue. The company also expects to improve its bottom line results in Q2.

Lawsuit…A class action lawsuit has been filed against PEMSTAR (Rochester, MN) on behalf of shareholders who acquired PEMSTAR securities between Jan. 29, 2003 and Jan. 24, 2005. The complaint alleges that the company and certain of its executive officers issued false and misleading financial statements regarding the company’s financial condition and outlook. Earlier this year, PEMSTAR announced the settlement of a securities class action lawsuit and derivative lawsuits filed against the company in 2002 (March, p. 7).

Settlement…Sparton (Jackson, MI) is receiving $5.5 million under a settlement with two insurance companies. With the settlement, Sparton recovers a portion of the costs associated with its remediation efforts at a site in Albuquerque, NM. These efforts began in 1983.

Still more restructuring…Foxconn International Holdings, Foxconn’s handset subsidiary, plans to close one of two plants in Finland, according to news sources in Finland and Sweden. Foxconn obtained operations in Finland through the company’s 2003 acquisition of Eimo, a supplier of cell-phone plastics….Solectron intends to shut down its Services Operations site in Turnhout, Belgium. If the closure is confirmed in accordance with Belgian rules, the equivalent of 278 full-time jobs would be lost….PEMSTAR has decided to exit its manufacturing facility in Guadalajara, Mexico, according to a Form 8-K filed by the company. This pull-out, slated to be completed last month, stems from the company’s continued losses from operations at the 119,000-ft2 facility. The provider had been reviewing options for the Mexico operation (May, p. 7).

New services…Sypris Electronics (Tampa, FL), a subsidiary of Sypris Solutions and an EMS supplier to the defense, aerospace and homeland security markets, is now offering a rapid prototype capability….TXP-Texas Prototypes (Richardson, TX) has expanded its optoelectronics testing capabilities.

Last Word

Tier Ones Pursue Low Volume, High Mix

In days of yore, tier-one providers and low-volume, high-mix (LVHM) seldom appeared in the same sentence. The tier-one providers sought high volumes, which meant more efficient use of equipment, higher inventory turnover and generally larger programs. LVHM work entailed smaller runs, more set-ups and less revenue – not the sort of thing that appealed to the industry’s top tier. So LVHM customers typically went elsewhere to smaller providers who could afford to cater to their needs. The demands of LVHM production have not changed, but attitudes within the top tier have. Instead of avoiding LVHM business, at least half of the tier-one providers are now openly embracing it.

Three LVHM initiatives have recently come to light within the top tier. In the most recent example, Solectron will acquire an LVHM operation in Massachusetts from Teradyne, as reported in here last month (p. 5). Solectron is looking to expand its LVHM business, handled by the company’s FinePitch Technology unit. Jabil Circuit offers another case of an LVHM-driven deal. Earlier in the year, Jabil purchased Varian’s electronics manufacturing business, which specializes in high-mix work (Feb., p. 5). In the third example, MMI has learned that Flextronics has set up its Special Business Solutions Group to pursue LVHM business with medium-size customers.

If LVHM did not inspire these providers in the past, what has changed? Two things, MMI believes. First, LVHM work is an integral part of the outsourcing that is emerging from segments such as medical, instrumentation and industrial. These underpenetrated segments offer potentially higher growth, but to exploit them fully providers must be able to meet the LVHM needs of customers in these segments. Secondly, LVHM work yields higher margins than what top-tier providers would otherwise expect. And margin expansion is a top priority for these companies.

Furthermore, the tier-one providers are not approaching this business as they normally would. Instead, they are engaging LVHM customers through a smaller unit or group that is focusing on just this type of business. In essence, these LVHM units aim to duplicate the flexibility and responsiveness that is the hallmark of smaller providers.

This tier-one move into LVHM cannot be good news for smaller providers. In the past, they did not have to worry about tier-one companies invading their LVHM territory. Still, tier-one providers cannot afford to go after every LVHM customer. Some are just too small.

Can the largest providers succeed in LVHM? Clearly, when it comes to technology, buying power and footprint, the big guys have an advantage. Still, LVHM business is not without its challenges. A provider must be able to manage a large number of different assemblies in varying quantities. LVHM work generally requires more inventory, which slows down turn rates. Also, equipment utilization decreases because of more frequent set-ups. Finally, LVHM business will likely require more SG&A support.

Dedicated LVHM units give these tier-one providers the best chance for meeting the challenges of LVHM work. And LVHM is a key to unlocking the full outsourcing potential of several emerging segments.

Copyright 2005 JBT Communications. Unauthorized distribution is prohibited.

MMI June 2005

MMI August 2005

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