Solectron rebounds, but analyst warns of trouble.

SAN JOSE -- Solectron Corp. (solectron.com) reported a second-quarter profit of $30.4 million, reversing a loss of $2.2 million last year. Revenue fell 10.8% to $2.46 billion from $2.76 billion a year ago.

For the quarter, the gross profit was $29.7 million, excluding charges and one-time items. Income from continuing operations was $17.1 million, up from a $3.1 million loss a year earlier. The company said $13.3 million of its net income came from discontinued operations.

Cisco (cisco.com) and Nortel (nortel.com) were Solectron's top two customers during the quarter, accounting for $452 million (18%) and $292 million (12%), respectively, of sales. Solectron is expected to lose much of the Nortel business as the telecom gear maker transfers its manufacturing to Flextronics (flextronics.com). Sales to Cisco grew 10% sequentially.

Inventory turns fell half a turn to 7, while inventory levels grew 9% sequentially due to cost-of-goods sold increases. Solectron cited poor inventory management in program ramps for the increase. However, Cisco plans to roll out its Lean initiative during the November quarter, which could mean higher inventories at Solectron.

However, the EMS company may be headed for a rough patch. In a research report, Deutsche Bank (db.com) analyst Carter Shoop said he expects Solectron to restructure its higher-cost manufacturing areas starting in the second half of the year.

Separately, Solectron's facility in Charlotte, NC, has gained certification to the IPC Restrictions on Hazardous Materials Lead-Free Electronics Assembly Process Capability. The site, which was the beta site for the IPC program, is the first of the tier one EMS firms to receive the certification.

The full rollout of the program was planned for early April.

In a press release, Solectron said it completed the audit program by demonstrating the processes necessary to be capable of producing Pb-free assemblies in complying with the RoHS directive.