21
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 26, 1995.
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_______________
COMMISSION FILE NUMBER 2-33228-40
SOLECTRON CORPORATION
(Exact Name of Registrant as specified in its Charter)
California 94-2447045
(State or other jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
777 Gibraltar Drive, Milpitas, California 95035
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 957-8500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
At May 26, 1995, 41,790,989 shares of Common Stock of the Registrant were
outstanding.
SOLECTRON CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at May 31, 1995 and August 31, 1994......................... 3
Consolidated Statements of Income for the Three Months and
Nine Months ended May 31, 1995 and 1994..................... 4
Consolidated Statements of Cash Flows for the Nine Months
ended May 31, 1995 and 1994 .......................... 5
Notes to Interim Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 7 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................... 11
Item 2. Changes in Securities................................... 11
Item 3. Defaults Upon Senior Securities......................... 11
Item 4. Submission of Matters to a Vote of Security Holders..... 11
Item 5. Other Information....................................... 11
Item 6. Exhibits and Reports on Form 8-K................... 11 - 12
Signatures.............................................. 13
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31, August 31,
1995 1994
------- ---------
(Unaudited)
ASSETS
Current assets :
Cash and cash equivalents $ 89,827 $ 67,906
Short-term investments 66,959 94,070
Accounts receivable, net 237,753 188,794
Inventories 259,039 232,389
Prepaid expenses and other current assets 18,188 18,977
------- -------
Total current assets 671,766 602,136
Net property and equipment 176,799 147,822
Other assets 15,997 16,437
------- -------
Total assets $ 864,562 $ 766,395
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,693 $ -
Current portion oflong-term debt
and capital lease obligations 538 3,149
Accounts payable 255,312 241,930
Accrued employee compensation 31,195 21,598
Accrued expenses 15,589 16,257
Other current liabilities 7,973 9,999
------- -------
Total current liabilities 312,300 292,933
Long-term debt and capital lease obligations 147,683 140,709
Other long-term liabilities 2,186 1,964
------- -------
Total liabilities 462,169 435,606
Shareholders' equity:
Common stock 212,627 206,257
Retained earnings 183,351 126,795
Cumulative translation adjustment 6,397 (2,263)
Unrealized gain on investments 18 -
------- -------
Total shareholders' equity 402,393 330,789
------- -------
Total liabilities and
shareholders' equity $ 864,562 $ 766,395
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------- ------------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $ 516,892 $ 365,083 $ 1,494,836 $ 1,014,131
Cost of sales 464,513 326,498 1,350,645 907,899
------- ------- --------- ---------
Gross Profit 52,379 38,585 144,191 106,232
Operating expenses:
Selling, general
and administrative 19,245 13,878 51,582 39,940
Research and development 1,217 1,010 3,552 3,160
------- ------- ------- -------
Operating income 31,917 23,697 89,057 63,132
Interest income 1,524 1,500 4,739 4,677
Interest expense (2,641) (2,683) (8,106) (8,108)
------- ------- ------- -------
Income before income taxes 30,800 22,514 85,690 59,701
Income taxes 10,472 7,824 29,134 20,746
------- ------- ------- -------
Net income $ 20,328 $ 14,690 $ 56,556 $ 38,955
======= ======= ======= =======
Net income per share:
Primary $ 0.48 $ 0.35 $ 1.34 $ 0.92
------- ------- ------- -------
Fully diluted $ 0.42 $ 0.31 $ 1.18 $ 0.84
------- ------- ------- -------
Weighted average number of shares:
Primary 42,489 42,380 42,305 42,228
Fully diluted 52,180 51,932 52,081 51,787
See accompaying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
( In thousands, unaudited)
Nine Months
Ended May 31,
---------------------------
1995 1994
Cash flows from operating activities:
Net income $ 56,556 $ 38,955
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 43,510 33,664
Interest accretion on zero-
coupon subordinated notes 7,171 6,736
Additions to allowance for
doubtful accounts 561 894
Other 19 (262)
Changes in operating assets
and liabilities:
Accounts receivable (45,107) (28,307)
Inventories (22,370) (30,118)
Prepaid expenses and
other current assets 1,633 (2,011)
Accounts payable 6,070 34,746
Accrued expenses and
other current liabilities 5,023 3,884
------- -------
Net cash provided by
operating activities 53,066 58,181
------- -------
Cash flows from investing activities:
Purchases of short-term investments (43,145) (345,064)
Sales and maturities of short-
term investments 70,537 335,039
Purchase of facilities,
equipment and other assets - (14,383)
Capital expenditures (67,411) (43,829)
------- -------
Net cash used in
investing activities (40,019) (68,237)
------- -------
Cash flows from financing activities:
Proceeds from short-term debt 1,693 -
Repayments of long-term debt
and capital lease obligations (2,805) (5,100)
Net proceeds from sale of common stock 6,370 4,860
------- -------
Net cash provided by
financing activities 5,258 (240)
------- -------
Effect of exchange rate changes on
cash and cash equivalents 3,616 (158)
------- -------
Net decrease in cash and cash equivalents 21,921 (10,454)
Cash and cash equivalents at
beginning of period 67,906 35,232
------- -------
Cash and cash equivalents at end of period $ 89,827 $ 24,778
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period:
Interest $ 422 $ 1,016
Income taxes $ 30,260 $ 17,810
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying consolidated balance sheets as of May 31, 1995
(unaudited) and August 31, 1994, the unaudited consolidated statements of
income for the three-month and nine-month periods ended May 31, 1995 and
1994, and the unaudited consolidated statements of cash flows for the nine
months ended May 31, 1995 and 1994 have been prepared on substantially the
same basis as the annual consolidated financial statements. Management
believes the financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position, operating results and cash flows for the periods
presented. The results of operations for the three-month and nine-month
periods ended May 31, 1995 are not necessarily indicative of results to be
expected for the entire year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto for the year ended August 31, 1994 included in the
Company's Annual Report to Shareholders.
For clarity of presentation, the Company has indicated its third
quarter as ending on May 31 and its fiscal year as ending on August 31,
whereas in fact, the Company's fiscal periods end on the last Friday of the
respective month.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
May 31, August 31,
1995 1994
------- -------
Raw materials 185,002 164,817
Work-in-process 74,037 67,572
------- -------
259,039 232,389
======= =======
NOTE 3 - Net Income per Share
Primary net income per share is computed using the weighted average
number of common and dilutive common stock equivalent shares outstanding.
Fully diluted net income per share includes the dilutive effect from the
assumed conversion of the Company's outstanding convertible zero-coupon
subordinated notes.
SOLECTRON CORPORATION AND SUBSIDIARIES
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Solectron's net sales are derived from sales to electronics system
original equipment manufacturers. The majority of the Company's customers
compete in the telecommunications, computer peripherals, workstation and
personal computer segments of the electronics industry. The Company uses
advanced manufacturing technologies in assembly and manufacturing
management of complex printed circuit boards and electronics systems.
Operating results are affected by a number of factors, including the
degree of turnkey manufacturing, the material content and volume of
products built, manufacturing efficiencies, utilization of capacity, start-
up costs associated with new customer projects and price competition. Over
the past several years, the Company's strategy has been to increase the
percentage of sales it derives from turnkey manufacturing, which currently
represents a substantial portion of the Company's sales. Turnkey projects,
in which the Company procures some or all of the components necessary for
production, typically generate higher net sales and higher gross profits
with lower gross margin percentages than consignment projects due to the
inclusion in the Company's operating results of sales and costs associated
with the purchase and sale of components. The increase in gross profit and
the decrease in gross margin over the past several years has been due
primarily to this shift toward turnkey manufacturing. More recently, the
Company has assembled products with varying degrees of material content,
which has caused the Company's gross margin to fluctuate. In addition, the
degree of startup costs and inefficiencies associated with new customer
projects has affected the Company's gross margin.
The Company has manufacturing operations in six locations, three of
which are overseas. Additionally, on May 29, 1995, the Company announced
that it signed a memorandum of understanding with Hewlett-Packard GmbH
(HP), a subsidiary of Hewlett-Packard Company, to acquire HP's printed
circuit assembly operation in Boeblingen, Germany. This transaction is
expected to close in November, 1995. Completion of the transaction is
subject to the negotiation and signing of definitive agreements, including
an assembly purchase agreement with certain purchase commitments. There
can be no assurance the transaction will close in a timely manner or at
all. As the Company manages its existing operations and expands
geographically, it may experience certain inefficiencies from the
management of geographically dispersed operations. In addition, the
Company's results of operations will be adversely affected if these new
facilities do not achieve revenue growth sufficient to offset increased
expenditures associated with geographic expansion.
Around the world, the Company is subject to a variety of environmental
regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its manufacturing process. Any failure by
the Company to comply with present and future regulations could subject it
to future liabilities or the suspension of production. In addition, such
regulations could restrict the Company's ability to expand its facilities
or could require the Company to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations.
The Company competes within the electronics manufacturing services
(EMS) segment of the electronics industry. The EMS segment is currently
growing at a faster rate than the overall electronics industry, but the EMS
segment is also comprised of a large number of companies, several of which
have achieved substantial market share. In addition to competing with
other EMS companies, the Company also faces competition from current and
prospective customers which evaluate Solectron's capabilities against the
merits of manufacturing products internally. Certain of the Company's
competitors have substantially greater geographic breadth. They also may
have greater manufacturing, financial, research and development and
marketing resources than the Company. The Company believes that the
primary basis of competition in its targeted markets is manufacturing
technology, quality, responsiveness, the provision of value-added services
and price. To remain competitive, the Company must continue to provide
technologically advanced manufacturing services, maintain quality levels,
offer flexible delivery schedules, deliver finished products on a reliable
basis and compete favorably on the basis of price. The Company currently
may be at a competitive disadvantage as to price when compared to
manufacturers with lower cost structures, particularly with respect to
manufacturers with established facilities where labor costs are lower.
Results of Operations
The following table sets forth, for the three months and nine months
ended May 31, 1995 and 1994, certain items as a percentage of net sales.
The table and the discussion below should be read in conjunction with the
consolidated financial statements and notes thereto that appear elsewhere
in this report.
Three months ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1995 1994 1995 1994
----- ----- ----- -----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 89.9 89.4 90.4 89.5
----- ----- ----- -----
Gross profit 10.1 10.6 9.6 10.5
Operating expenses:
Selling, general and administrative 3.7 3.8 3.5 3.9
Research and development .2 .3 .1 .4
----- ----- ----- -----
Operating income 6.2 6.5 6.0 6.2
Interest expense, net .2 .3 .3 .3
----- ----- ----- -----
Income before income taxes 6.0 6.2 5.7 5.9
Income taxes 2.1 2.2 1.9 2.1
----- ----- ----- -----
Net income 3.9 % 4.0 % 3.8 % 3.8 %
===== ===== ===== =====
Net sales for the three months and nine months ended May 31, 1995 were
$517 million and $1.495 billion, respectively, representing increases of
42% and 47% over the comparable periods last fiscal year. These increases
in net sales are due primarily to increased orders from existing customers,
the addition of new customers and growth in the Company's turnkey business.
The overall increase in net sales reflects the continuing trend toward
outsourcing within the electronics industry.
The Company's two largest customers during the first nine months of
fiscal 1995 were International Business Machines Corporation (IBM) and
Apple Computer, Inc. (Apple). Net sales to IBM during this period
accounted for 22% of consolidated net sales, compared to 30% in the first
nine months of fiscal 1994. Sales to Apple were less than 10% of
consolidated net sales in the first nine months of fiscal 1995, compared to
11% for the comparable period of fiscal 1994. While net sales to both
customers increased in absolute amounts during fiscal 1995 compared to
fiscal 1994, the Company has focused its efforts on obtaining business from
other customers, thereby reducing its dependency on these accounts. Net
sales to the Company's top ten customers during the first nine months of
fiscal 1995 accounted for 71% of consolidated net sales, compared to 75%
for the comparable period of fiscal 1994.
The Company is dependent upon continued revenues from IBM, Apple and
the rest of its top ten customers. Any material delay, cancellation or
reduction of orders from these or other customers could have a materially
adverse effect on the Company's results of operations. The Company has a
manufacturing services agreement with IBM at its Bordeaux, France facility
that expires on December 31, 1995. While the Company expects to continue
business with IBM after the agreement expires, there can be no guarantee
that such business will be available at satisfactory terms to the Company.
Net sales at the Company's foreign sites grew at faster rates over the
last year than net sales at the Company's domestic sites. Foreign
locations contributed 40% of consolidated net sales in the first nine
months of fiscal 1995, compared to 32% for the comparable period of fiscal
1994. As a result of the Company's foreign sales and facilities, the
Company's operations are subject to risks of doing business abroad,
including fluctuations in the value of currency, changes to import and
export regulations, possible restrictions on the transfer of funds, and in
certain parts of the world, political instability. While to date these
dynamics have not had a materially adverse impact on the Company's results
of operations, there can be no assurance that there will not be such an
impact in the future.
The Company's operations in Milpitas, California contributed a
substantial portion of the Company's net sales and operating income during
the first three quarters of fiscal 1995 and 1994. The performance of this
operation is expected to continue as a significant factor in the overall
financial results of the Company. Any material change to the customer
base, product mix, efficiency or other attributes of this site could have a
material effect on the Company's consolidated results of operations.
Over the past few years the Company's revenues have grown
substantially and have exceeded the Company's own targeted growth rate.
The Company believes that its ability to continue to achieve rapid growth
will depend upon growth in sales to existing customers for their current
and future product generations and successful marketing to new customers.
While the Company expects a modest revenue contribution from its planned
facility in Germany, management believes such expansion is not necessary to
meet its targeted growth rates. With the exception of a manufacturing
services agreement with IBM at the Bordeaux, France site which expires on
December 31, 1995, the Company has no firm long-term volume commitments
from its customers and over the last few years has experienced reduced lead-
time in customer orders. Customer contracts can be canceled and volume
levels can be changed or delayed. The timely replacement of delayed,
canceled or reduced orders with new business cannot be assured. In
addition, there can be no assurance that any of the Company's current
customers will continue to utilize the Company's services. Because of
these factors, there can be no assurance that the Company's historical
revenue growth rate will continue.
The Company currently serves the electronics industry, which is
subject to rapid technological change, product obsolescence and price
competition. These and other factors affecting the electronics industry,
or any of the Company's major customers in particular, could have a
materially adverse effect on the Company's results of operations.
Gross margin for the third quarter of fiscal 1995 was 10.1%, compared
to 10.6% for the third quarter of fiscal 1994. Gross margin for the first
nine months of fiscal 1995 was 9.6%, compared to 10.5% for the comparable
period last fiscal year. The decline in gross margin for both periods is
the result of under-utilization of the Company's Bordeaux, France facility
and manufacturing inefficiencies at the Dunfermline, Scotland location,
partially offset by improved product mix. In addition, the year-to-date
results were adversely affected by manufacturing inefficiencies at the
Charlotte, North Carolina location. The manufacturing inefficiencies are
the result of new customer projects and the continuing ramp-up in
complexity of business in Charlotte and Dunfermline. The Company has made
progress at these sites and has improved the management and logistical
infrastructure. The Bordeaux facility is expected to be under-utilized for
at least the remainder of calendar 1995. Increases in turnkey business,
costs associated with new projects, and price erosion within the
electronics industry could adversely affect the Company's gross margin.
Additionally, changes in product mix could cause the Company's gross margin
to fluctuate. While the availability of raw materials appears adequate to
meet the Company's current revenue projections through the remainder of
fiscal 1995, component availability to support revenue increases beyond the
Company's current plans is limited. Furthermore, availability of customer-
consigned parts and unforeseen shortages of components on the world market
are beyond the Company's control and could adversely affect revenue levels
and operating efficiencies.
Selling, general and administrative (SG&A) expenses increased in
absolute amounts during the third quarter and first nine months of fiscal
1995, relative to the comparable periods of fiscal 1994. The increases
during these periods are due primarily to growth in personnel and related
departmental expenses at all manufacturing locations to support the
increased size and complexity of the Company's business. SG&A expenses as
a percentage of net sales have decreased during the three-month and nine-
month periods ended May 31, 1995, in relation to the comparable periods of
fiscal 1994, from increased leverage of fixed operating costs on a higher
revenue base and continued management of overhead expenses. The Company
anticipates SG&A expenses will increase in absolute amounts in the future
as the Company builds the infrastructure necessary to support its current
and prospective business.
Research and development (R&D) activities have been focused primarily
on fine pitch interconnection technologies (which include ball-grid array,
tape-automated bonding, multichip modules, chip-on-flex, and chip-on-
board), high reliability environmental stress test technology, and no-clean
soldering processes. R&D expenses have increased slightly during fiscal
1995 compared to fiscal 1994, but are not expected to change significantly
in the near future.
The effective income tax rate throughout fiscal 1995 was approximately
34%, a slight decrease from the 34.7% effective tax rate for the first nine
months of fiscal 1994. The decrease reflects primarily increased earnings
from the Company's foreign operations which have lower statutory tax rates
than the domestic subsidiaries.
Liquidity and Capital Resources
Working capital was $359 million as of May 31, 1995, an increase of
$50 million from the end of fiscal 1994. This increase reflects primarily
the growth in net sales during fiscal 1995 and the required investment in
working capital to support this growth. The increase in working capital
was financed by cash generated from operations. The Company anticipates
that further increases in working capital will be required to support
anticipated revenue growth.
Net cash used in investing activities was $40 million for the first
nine months of fiscal 1995, consisting of capital expenditures of $67
million for surface mount assembly and test equipment at the Penang,
Milpitas and Dunfermline locations to meet current and expected production
levels, offset by net sales of short-term investments of $27 million. For
the remainder of fiscal 1995, capital expenditures at existing facilities,
including the expansion of the Company's Charlotte and Dunfermline
locations, are expected to be in the range of $30 million to $40 million.
On May 29, 1995 the Company announced that it signed a memorandum of
understanding to buy certain assets of Hewlett-Packard's printed circuit
assembly operation located in Boeblingen, Germany. The purchase price for
these assets is not expected to be significant. The Company currently
anticipates that the purchase and start-up of this operation will be
financed with existing cash and short-term investments.
In addition to the Company's working capital as of May 31, 1995, which
includes cash and cash equivalents of $90 million and short-term
investments of $67 million, the Company also has available a $100 million
unsecured domestic revolving credit facility, subject to financial
covenants and restrictions, and $35 million in available foreign credit
facilities. Subsequent to the close of the third quarter, approximately
55% of the Company's outstanding convertible zero-coupon subordinated debt
was voluntarily converted to common stock. The result of this conversion
is to decrease long-term debt by $78 million, decrease other assets by $2
million (unamortized issue costs), and increase common stock by $76
million. Beginning in September 1997, the Company will be required to
pledge approximately $44 million of cash or marketable securities as
collateral for its obligation under the terms of the Company's operating
lease for certain of its facilities in Milpitas, California. The lease
expires in September 1999.
SOLECTRON CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: Computation of Net Income per Share
(b) Reports on Form 8-K
None
SOLECTRON CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ ------
Weighted average number of shares of
common stock and common stock equivalents:
Primary:
Common stock 41,656 41,093 41,497 40,904
Common stock equivalents - stock options 833 1,287 808 1,324
------ ------ ------ ------
42,489 42,380 42,305 42,228
Fully diluted:
Common shares issuable upon assumed
conversion of convertible zero-coupon
subordinated notes 9,543 9,552 9,543 9,559
Incremental increase in common stock
equivalents using end of period
market price 148 0 233 0
------ ------ ------ ------
52,180 51,932 52,081 51,787
====== ====== ====== ======
Net income - primary $20,328 $14,690 $56,556 $38,955
Interest accretion on convertible
zero-coupon subordinated notes,
net of taxes 1,602 1,479 4,749 4,365
------ ------ ------ ------
Net income - fully diluted $21,930 $16,169 $61,305 $43,320
====== ====== ====== ======
Net income per share - primary $0.48 $0.35 $1.34 $0.92
====== ====== ====== ======
Net income per share - fully diluted $0.42 $0.31 $1.18 $0.84
====== ====== ====== ======
SOLECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLECTRON CORPORATION
(Registrant)
Date: June 16, 1995 By: /s/ Koichi Nishimura
Dr. Koichi Nishimura
President &
Chief Executive Officer
Date: June 16, 1995 By: /s/ Susan S. Wang
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
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