Solectron to make fourth convertible offering for $1 billion, reports net loss, gets cut to junk

By Ronda Fears

Nashville, Tenn., Dec. 18 - Solectron Corp. is back in the convertible market this week pitching $1 billion of three-year mandatory convertibles talked to yield 6.75% to 7.25% with an 18% to 20% initial conversion premium.

The registered deal, via book-running lead manager Goldman Sachs & Co., is set to price after the close Thursday.

This will be Solectron's fourth trip to tap the convertible market, after selling some $8.5 billion (face amount) of zero-coupon convertibles over the past three years.

Also Tuesday, the Milpitas, Calif.-based electronics manufacturing services firm reported earning that were in line with expectations but showed the effects of the declining semiconductor business, and was downgraded to junk territory by Standard & Poor's and Moody's Investors Service.

Solectron also said it plans a $500 million unsecured fixed-rate debt offering in early 2002. In addition, the company said Tuesday that it has secured a new $500 million revolving credit facility.

On Jan. 28, the company faces a put on its zero-coupon senior convertible notes due in 2019, with an accreted value of $530 million, which the company said it would pay in cash. Market sources said $89 million of the zero-coupon converts due 2019 have been put back to the company already.

Moody's cut Solectron to Ba1 and S&P cut Solectron to BB+, both citing deteriorating operating performance and weaker credit measures, compounded by high debt levels. Moody's said it expects that operating performance will remain weak over the intermediate term while Solectron's cash flow leverage remains elevated, although the rating agency acknowledged that the new convertible will boost the company's cash balances and help the company meet the put in January. Credit measures are likely to benefit modestly from the financing activity, S&P said, but noted that pro forma with the new issue, the financial profile remains leveraged with debt to EBITDA for the 12 months ended Nov. 30 of more than 4 times.

Solectron reported fiscal first-quarter sales of $3.2 billion and cash earnings per share of 5c, which were within the company's guidance, versus revenues of $5.7 billion and cash EPS of 31c a year before. The company posted a net loss of $52.5 million, or 8c per diluted share, versus net income of $190.6 million, or 29c per diluted share, a year earlier. Solectron recorded after-tax restructuring charges of $72.9 million, or 8c per share.

For fiscal second-quarter, the company it expects revenues of $2.7 billion to $3.2 billion and cash EPS of 1c to 4c.

"We made good progress on a number of fronts during the quarter," said Koichi Nishimura, Solectron chief executive officer, in the company's earnings announcement.

"We continued taking tough actions to align our cost structure with current revenue levels. These actions, which include reducing employment levels and production capacity, are painful but necessary to keep the company healthy. We remain cautious about the near-term direction of the economy and its impact on the end markets we serve. While we expect second-quarter sales to be influenced by this environment and typical seasonal softness, we are optimistic about the prospect of stronger sales in the second half of the year, driven by new business wins."

Analysts were mostly hesitant to comment on the Solectron situation, but Merrill Lynch & Co. convertible analysts Anne Cox and Shawn Foley issued a report Tuesday saying that the company's results and announced offerings reinforce their view that the credit profile is improving. The Merrill convertible analysts recommend two of the three Solectron convertibles, the May 2020 issue and the November 2020 issue with a preference for the May 2020 issue.

The Solectron zero-coupon convertible due January 2019, which was issued at 45.29 in January 1999, was flat Tuesday at 50.625 bid, 50.875 offered. The zero-coupon convertible due May 2020, which was issued at 57.91 in May 2000, was flat at 53.5 bid, 53.875 offered. The zero-coupon convertible due November 2020, which was issued at 52.48 in November 2000, was up 0.25 point on the day to 43.5 bid, 44 offered. Solectron shares closed down $2.71 to $12.10.

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