18
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
November 24, 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 November 24, 1995, 49,860,771 shares of Common Stock of the
Registrant were outstanding.
SOLECTRON CORPORATION pg 2
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at November 30, 1995 and August 31, 1995.................... 3
Consolidated Statements of Income
for the three Months ended November 30, 1995 and 1994....... 4
Consolidated Statements of Cash Flows
for the three months ended November 30, 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............... 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceeding............................................ 12
Item 2. Changes in Securities....................................... 12
Item 3. Defaults Upon Senior Securities............................. 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Item 5. Other Information........................................... 12
Signitures.................................................. 13
Item 6. Exhibits and Reports on Form 8-K............................ 12-15
SOLECTRON CORPORATION AND SUBSIDIARIES pg 3
CONSOLIDATED BALANCE SHEETS
(In thousands)
November 30, August 31,
ASSETS 1995 1995
(Unaudited)
Current assets:
Cash and cash equivalents $ 89,526 $ 89,959
Short-term investments 17,184 58,643
Accounts receivable, net 312,751 254,898
Inventories 347,362 298,809
Prepaid expenses and other current assets 24,057 24,049
Total current assets 790,880 726,358
Net property and equipment 229,223 203,609
Other assets 10,415 10,888
Total assets $ 1,030,518 $ 940,855
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 4,347 $ 4,796
Accounts payable 341,044 310,680
Accrued employee compensation 40,248 28,705
Accrued expenses 22,280 15,264
Other current liabilities 11,507 11,310
Total current liabilities 419,426 370,755
Long-term debt and capital lease obligations 30,147 30,043
Other long-term liabilities 9,847 1,916
Total liabilities 459,420 402,714
Shareholders' equity:
Common stock 332,809 329,265
Retained earnings 233,668 206,321
Cumulative translation adjustment 4,621 2,555
Total shareholders' equity 571,098 538,141
Total liabilities and shareholders' equity $ 1,030,518 $ 940,855
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES pg 4
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except income per share data)
(Unaudited)
Three Months Ended
November 30,
1995 1994
Net sales $ 690,624 $ 506,678
Cost of sales 624,278 461,235
Gross profit 66,346 45,443
Operating expenses:
Selling, general & administrative 24,041 15,531
Research & development 1,502 1,191
Operating income 40,803 28,721
Interest income 1,446 1,542
Interest expense (814) (2,697)
Income before income taxes 41,435 27,566
Income taxes 14,088 9,372
Net income $ 27,347 $ 18,194
Net income per share:
Primary $ 0.54 $ 0.43
Fully diluted $ 0.52 $ 0.38
Shares used in computation:
Primary 51,033 42,275
Fully diluted 53,034 51,825
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES pg 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months
Ended November 30,
1995 1994
Cash flows from operating activities:
Net income $ 27,347 $ 18,194
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization 18,819 13,736
Interest accretion on zero-coupon
subordinated notes 532 2,341
Additions to (reductions of)
allowance for doubtful accounts 520 (103)
Other 609 (105)
Changes in operating assets and liabilities:
Accounts receivable (57,465) (22,598)
Inventories (47,416) (20,918)
Prepaid expenses and other current assets 254 (1,476)
Accounts payable 28,741 27,877
Accrued expenses and other current
liabilities 28,994 7,068
Net cash provided by operating
activities 935 24,016
Cash flows from investing activities:
Purchases of short-term investments 183,397 (23,742)
Maturities of short-term investments (141,637) 38,573
Capital expenditures (44,374) (17,170)
Other 132 (129)
Net cash used in investing activities (2,482) (2,468)
Cash flows from financing activities:
Proceeds from short-term debt (3,004) 2,966
Repayments of long-term debt and
capital lease obligations (505) (1,099)
Net proceeds from sale of common stock 3,494 1,637
Other 465 -
Net cash provided by financing activities 450 3,504
Effect of exchange rate changes on cash and
cash equivalents 664 197
Net increase (decrease) in cash and cash
equivalents $ (433) $ 25,249
Cash and cash equivalents at beginning of
period 89,959 67,906
Cash and cash equivalents at end of period $ 89,526 $ 93,155
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period:
Interest $ 38 $ 168
Income taxes $ 5,144 $ 1,494
Non-cash investing and financing activities:
Issuance of common stock upon conversion
of long-term debt $ 399 $ 23
Tax benifit associated with excercise
of stock options $ 264 $ 371
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES pg 6
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying consolidated balance sheets as of November
30, 1995 (unaudited) and August 31, 1995, the unaudited
consolidated statements of income for the three-month periods
ended November 30, 1995 and 1994, and the unaudited consolidated
statements of cash flows for the three months ended November 30,
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 period ended November 30, 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, 1995 included in the
Company's Annual Report to Shareholders.
For clarity of presentation, the Company has indicated its
first quarter as ending on November 30 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 months.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
November 30, August 31,
1995 1995
Raw materials $ 232,884 $206,221
Work-in-process 114,478 92,588
Total $347,362 $298,809
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 pg 7
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 material content and volume of products built, the
degree of turnkey manufacturing, manufacturing efficiencies,
utilization of capacity, start-up costs associated with new
customer projects and price. The Company assembles products with
varying degrees of material content, which may cause the Company's
gross margin to fluctuate. Typically, projects with higher
material content generate higher net sales and higher gross
profits with lower gross margin percentages than projects with
lower material content. The overall decrease in gross margin over
the last several years is due principally to a shift towards
projects with greater material content. More recently, the degree
of startup costs and inefficiencies associated with new customer
projects have also affected the Company's gross margin.
The Company has manufacturing operations in seven locations,
four of which are overseas. In November 1995, the Company
acquired from Hewlett-Packard GmbH (HP), a subsidiary of Hewlett-
Packard Company, HP's printed circuit board assembly operation in
Boeblingen, Germany. This site is not expected to yield
substantial sales and profits growth in the near future, however
the Company believes this facility will position it to assist
major European electronics OEMs as they migrate towards
outsourcing. 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 it's 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. Some competitors also may have greater manufacturing, pg 8
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,
breadth of services offered, quality, responsiveness, on time
delivery, 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.
The electronics industry 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.
Results of Operations
The following table sets forth, for the three months ended
November 30, 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
November 30,
1995 1994
Net sales 100.0 % 100.0%
Cost of sales 90.4 91.0
Gross profit 9.6 9.0
Operating expenses:
Selling, general & administrative 3.5 3.1
Research and development .2 .2
Operating income 5.9 5.7
Interest (income) expense, net (.1) .2
Income before income taxes 6.0 5.5
Income taxes 2.0 1.9
Net income 4.0% 3.6%
Net sales for the three months ended November 30, 1995 were
$691 million, representing an increase of 36.3% over the
comparable period of the last fiscal year. The increase in net
sales is due primarily to increased orders from existing
customers, the addition of some new customers, and changes in
product mix.
The Company's largest customer during the first three months
of fiscal 1996 was International Business Machines Corporation
(IBM). Net sales to IBM during this period accounted for 11.7% of
consolidated net sales, compared to 25.0% in the first three
months of fiscal 1995. No other customer accounted for more than pg 9
10% of net sales during the quarter. Net sales for the Company's
top ten customers accounted for 71% of consolidated net sales,
essentially unchanged from 74% in the same quarter in the previous
year, as growth in other top ten customers approximately offset
the decrease in revenue from IBM. The Company is dependent upon
continued revenues from 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 the previous
levels or satisfactory terms to the Company.
Foreign locations contributed 35% of consolidated net sales
in the first three months of fiscal 1996, compared to 45% for the
comparable period of fiscal 1995. Although growth in net sales at
the Company's foreign operations was out paced by net sales growth
in domestic operations during this period, net sales from foreign
operations have increased in absolute dollars. The Company is
subject to risks of doing business abroad. Such risks include
fluctuations in the value of currency, changes to import and
export regulations, possible restrictions on the transfer of
funds, labor unrest, 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 California contributed a
substantial portion of the Company's net sales and operating
income during the first three months of fiscal 1996 and in the
first three months of fiscal 1995. 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. 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. 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 significant long-term volume commitments from its
customers and over the past 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.
Gross margin for the first quarter of fiscal 1996 was 9.6%,
compared to 9.0% for the first quarter of fiscal 1995. The
increase in gross margin is largely the result of better
utilization of the Company's capacity and increased efficiencies,
particularly at the Charlotte, North Carolina facility where many
projects which were new one year ago are now beyond the start-up
phase. Partially offsetting these improvements were manufacturing
inefficiencies at the Dunfermline, Scotland location due to
inefficiencies resulting from the start-up of new projects and pg 10
increased complexity associated with the move from high volume to
medium and low volume projects. Additionally, margins were
reduced as a result of costs associated with the transfer of some
existing operations to new facilities at the California site in
the first quarter of 1996 as that site added space to accommodate
its continued growth.
Increases in the mix of turnkey projects relative to
consigned projects, 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 1996, component availability to support revenue increases
beyond the Company's current plans may be 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 future revenue levels and operating
efficiencies.
Selling, general and administrative (SG&A) expenses increased
in the first quarter of fiscal 1996 relative to the comparable
period of fiscal 1995. The increase is due primarily to growth in
personnel and related departmental expenses at most locations in
order to support the increased size and complexity of the
Company's business. In addition, the Company continues to make
investments in its information systems capabilities. The Company
anticipates SG&A expenses will increase in absolute amounts and
may increase as a percentage of net sales in the future as the
Company builds the infrastructure necessary to support its current
and prospective business.
Research and development expense was $1.5 million in the
first quarter of fiscal 1996, an increase of $.3 million when
compared to the same quarter of the prior fiscal year. The
Company's research and development activities are focused
primarily on refinement of prototype engineering, the development
of concurrent engineering, fine pitch interconnection technologies
(which include ball-grid array, tape-automated bonding, multichip
modules, and other direct chip attachment technologies),
reliability test technology (mechanical deflection system and
accelerate thermal cycling test), no-clean soldering processes,
fluxless soldering process, and lead free soldering process.
Net interest expense decreased significantly in the current
quarter when compared to the first quarter of fiscal 1995 due to
the conversion of approximately 80% of the Company's zero-coupon
subordinated notes into common stock primarily during the fourth
quarter of fiscal 1995.
Liquidity and Capital Resources
Net working capital was $371 million as of November 30, 1995,
an increase of $16 million from the end of fiscal 1995. This
increase primarily reflects the required investment in working
capital to support the growth in net sales during the first
quarter of fiscal 1996. 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. If the Company's
revenue growth rate generates financing requirements greater than
can be met by cash generated from operations, the Company may be
required to borrow against one of its existing lines of credit or
seek additional funding. pg 11
During the first quarter of fiscal 1996, the Company invested
approximately $44 million in new equipment, primarily in surface
mount assembly and test equipment at the California and Malaysia
operating sites to meet current and expected production levels.
These equipment additions were financed primarily by a reduction
in short-term investments. For the remainder of fiscal 1996,
capital expenditures at existing facilities, including the
expansion of the Company's Charlotte, Malaysia and California
locations, are expected to be in the range of $50 million to $70
million. In November 1995, the Company purchased certain assets
of Hewlett-Packard's printed circuit assembly operation located in
Boeblingen, Germany. The purchase price for these assets was not
material and was financed with existing cash and short-term
investments.
The Company's working capital as of November 30, 1995,
included cash and cash equivalents of $90 million and short-term
investments of $17 million. The Company also has available a $100
million unsecured domestic revolving credit facility, subject to
certain financial covenants and restrictions, and $30 million in
available foreign credit facilities. During the first quarter of
fiscal 1996, approximately $1.3 million of the Company's
outstanding convertible zero-coupon subordinated debt was
voluntarily converted to common stock. 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. This lease
expires in September 1999.
SOLECTRON CORPORATION AND SUBSIDIARIES pg 12
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 pg 13
SIGNITURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused ths report to be signed on its behalf
by the undersigned thereunto duly authorized.
SOLECTRON CORPORATION
(Registrant)
Date: December 22, 1995 By: /s/ Koichi Nishimura
Dr. Koichi Nishimura
President &
Chief Executive Officer
Date: December 22, 1995 By: /s/ Susan S. Wang
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
pg 14
Exhibit 11.1
SOLECTRON CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
Three Months Ended
November 30,
1995 1994
Weighted average number of shares of common
stock and common stock equivalents:
Primary:
Common stock 49,725 41,378
Common stock equivalents - stock options 1,308 897
Total primary shares 51,033 42,275
Fully diluted:
Common shares issuable upon assumed
conversion of convertible zero-coupon
subordinated notes 1,960 9,550
Incremental increase in common stock
equivalents using end of period
market price 41 -
Total fully diluted shares 53,034 51,825
Net income - primary $27,347 $18,194
Interest accretion on convertible
zero-coupon subordinated notes, net
of taxes 350 1,546
Net income - fully diluted $27,697 $19,740
Net income per share - primary $0.54 $0.43
Net income per share - fully diluted $0.52 $0.38
pg 15
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<NAME> SOLECTRON CORP
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