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 24, 1996.
__ 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 1-11098
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 June 30, 1996, 52,440,421 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, 1996 and August 31, 1995....................... 3
Consolidated Statements of Income
for the Three Months and Nine Months ended May 31,
1996 and 1995............................................. 4
Consolidated Statements of Cash Flows
for the Nine Months ended May 31, 1996 and 1995 ......... 5
Notes to Interim Consolidated Financial Statements....... 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 8 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 15
Item 2. Changes in Securities.................................... 15
Item 3. Defaults Upon Senior Securities.......................... 15
Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 5. Other Information........................................ 15
Item 6. Exhibits and Reports on Form 8-K......................... 15
Signatures............................................... 16
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
May 31, August 31,
1996 1995
(unaudited)
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 359,412 $ 148,602
Accounts recievable, net 338,291 254,898
Inventories 384,053 298,809
Prepaid expenses and other current assets 29,347 24,049
Total current assets 1,111,103 726,358
Net property and equipment 252,887 203,609
Other assets 56,109 10,888
Total assets $ 1,420,099 $ 940,855
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 4,949 $ 4,366
Current portion of long-term debt and
capital lease obligations 7,129 4,796
Accounts payable 301,893 310,680
Accrued employee compensation 35,597 28,705
Accrued expenses 9,055 15,264
Other current liabilites 11,156 6,944
Total current liabilities 369,779 370,755
Long-term debt and capital lease obligations 381,214 30,043
Other long-term liabilites 7,564 1,916
Total liabilties 758,557 402,714
Shareholders' equity:
Common stock 373,442 329,265
Retained earning 289,038 206,321
Cumulative translation adjustment (938) 2,555
Total shareholders' equity 661,542 538,141
Total liabilties and shareholders' equity $ 1,420,099 $ 940,855
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, May 31, May 31,
1996 1995 1996 1995
Net sales $ 680,554 $ 516,892 $ 2,028,354 $ 1,494,836
Cost of sales 608,761 464,513 1,824,854 1,350,645
Gross profit 71,793 52,379 203,500 144,191
Operations expenses:
Selling, general &
administrative 25,614 19,245 71,035 51,582
Research & development 1,478 1,217 5,017 3,552
Operating Income 44,701 31,917 127,448 89,057
Interest income 4,456 1,524 7,027 4,739
Interest expense (7,158) (2,641) (9,148) (8,106)
Income before income taxes 41,999 30,800 125,327 85,690
Income taxes 14,279 10,472 42,610 29,134
Net income $ 27,720 $ 20,328 $ 82,717 $ 56,556
Net income per share:
Primary $ 0.53 $ 0.48 $ 1.60 $ 1.34
Fully diluted $ 0.53 $ 0.42 $ 1.57 $ 1.18
Shares used in computation:
Primary 52,456 42,489 51,675 42,305
Fully diluted 57,018 52,180 54,621 52,081
See accompanying notes to interim consolidated financial statements
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Nine Months Ended
May 31,
1996 1995
Cash flows from operating activities:
Net income $ 82,717 $ 56,556
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 61,200 43,510
Interest accretion on zero-
coupon subordinated notes 1,420 7,171
Additions to allowance for
doubtful accounts 534 561
Other 1,260 19
Changes in operating assets
and liabilities:
Accounts receivable (31,286) (45,107)
Inventories (42,724) (22,370)
Prepaid expenses and other
current assets (5,582) 1,633
Accounts payable (33,914) 6,070
Accrued expenses and other
current liabilities 8,306 5,023
Net cash provided by
operating activities 41,931 53,066
Cash flows from investing activities:
Purchases of short-term
investments (652,763) (43,145)
Sales and maturities of short-term
investments 570,578 70,537
Acquisition of new operations (132,169) -
Capital expenditures (92,428) (67,411)
Other 4,408 -
Net cash used in investing
activities (302,374) (40,019)
Cash flows from financing activities:
Proceeds from short-term debt - 1,693
Proceeds from long-term debt 380,000 -
Debt aquisition costs (7,675) -
Repayments of long-term debt and
capital lease obligations (1,047) (2,805)
Net proceeds from sale of common stock 14,134 6,370
Other 4,641 -
Net cash provided by financing
activities 390,053 5,258
Effect of exchange rate changes on
cash and cash equivalents 620 3,616
Net increase in cash and cash
equivalents 130,230 21,921
Cash and cash equivalents at
beginning of period 89,959 67,906
Cash and cash equivalents at end of period $ 220,189 $ 89,827
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period:
Income taxes $ 41,697 $ 30,260
Non-cash investing and financing
activities:
Issuance of common stock upon
conversion of long-term debt $ 30,570 $ 3,641
Tax benefit associated with
exercise of stock options $ 2,201 $ 4,040
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, 1996 (unaudited) and August 31, 1995, the unaudited
consolidated statements of income for the three-month and
nine-month periods ended May 31, 1996 and 1995, and the
unaudited consolidated statements of cash flows for the nine
months ended May 31, 1996 and 1995 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, 1996 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 third quarter as ending on May 31, and its fiscal year
as ending on August 31, whereas in fact, the Company's third
quarter of 1995 ended on May 26, 1995, its third quarter of
1996 ended on May 24, 1996 and its 1995 fiscal year ended on
August 25, 1995.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
May 31, August 31,
1996 1995
Raw materials $264,534 $206,221
Work-in-process 119,519 92,588
$384,053 $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
subordinated notes.
NOTE 4 - Commitments
The Company leases various facilities under operating
lease agreements. These leases expire at various dates
through the year 2000. Substantially all leases require the
Company to pay property taxes, insurance, and normal
maintenance costs. All of the Company's leases have fixed
minimum lease payments except the lease for certain
facilities in California. Payments under this lease are
periodically adjusted based on LIBOR rates. This lease
provides the Company with the option at the end of the lease
of either acquiring the property at its original cost or
arranging for the property to be acquired. The Company is
contingently liable under a first loss clause for a decline
in the market value of the property up to $44.2 million in
the event that the Company does not purchase the property at
the end of the five-year lease term. The Company must also
maintain compliance with financial covenants similar to its
credit facilities. Future minimum lease payments related to
lease obligations are $9.4 million, $8.0 million, $7.0
million, $5.5 million and $1.6 million in each of the years
in the five year period ending August 31, 2000.
Note 5 - Acquisitions
On March 18, 1996, Solectron exchanged approximately
$14 million in shares of common stock and options for all of
the outstanding stock and options of Fine Pitch Technology,
Inc. (Fine Pitch) a provider of prototype services. This
transaction was accounted for under the pooling of interests
method. The results of operations of Fine Pitch are not
considered material to Company's consolidated results of
operations and accordingly pro-forma information has not
been disclosed.
On March 31, 1996, the Company completed its purchase
of Texas Instruments Incorporated's custom manufacturing
services (CMS) business (the TI transaction). This
business, headquartered in Austin, Texas, was acquired for
approximately $132 million. Under the terms of the
agreement, Solectron purchased the CMS business in Austin,
Texas and certain assets of the CMS business in Kuala
Lumpur, Malaysia (collectively the CMS operations). The
Company plans to transition the CMS business in Kuala Lumpur
to Solectron's Penang, Malaysia operations over the course
of the next 10 months. This transaction was accounted for
under the purchase method of accounting. The acquisition
resulted in goodwill of approximately $38 million which will
be amortized on a straight line basis over 10 years.
The CMS operations' fiscal year ends July 31, 1996. The Company's
consolidated financial position as of May 31, 1996 includes
the financial position of the CMS operations as of April 30, 1996,
and the Company's consolidated results of operations and cash
flows for the three-month and nine-month periods ended May 31,
1996 include the results of operations and cash flows of the
CMS operations for the month ended April 30, 1996.
The following pro forma combined financial information
gives affect to the acquisition of the CMS operations on a
purchase accounting basis for the three month and nine month
periods ended May 31, 1996 and 1995 as if the CMS operations
had been acquired at the beginning of the periods presented.
The preparation of this financial information requires the
use of management's estimates. This pro forma financial
information includes certain adjustments for goodwill
amortization, increased depreciation expense, a decrease in
interest income (related to the assumed liquidation of
certain current investments for the purchase of the CMS
operations), and the related income tax effects.
This pro forma combined financial information is not
purported to be indicative of the results that would have
actually been obtained if the combination had been in effect
during the periods indicated, or that may be obtained in the
future. In addition, it does not reflect the effects of any
synergy that might be achieved from the newly combined
operations.
Pro forma financial information for the periods ended May 31, 1996:
Three Months Nine Months
Ended May 31, Ended May 31,
1996 1996
Net Revenues $767,027 $2,364,125
Net Income $28,958 $83,570
Primary Earnings
Per Share $0.55 $1.62
Fully Diluted
Earnings Per Share $0.55 $1.59
Pro forma financial information for the periods ended May 31, 1995:
Three Months Nine Months
Ended May 31, Ended May 31,
1995 1995
Net Revenues $618,965 $1,780,521
Net Income $20,616 $53,444
Primary Earnings
Per Share $0.49 $1.26
Fully Diluted
Earnings Per Share $0.43 $1.12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of
Financial Condition and Results of Operations contains
forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including those
factors set forth under "Trends and Uncertainties" below.
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. A discussion of some of the
potential fluctuations in operating results is discussed
under "Trends and Uncertainties" below.
As of June 30, 1996 the Company had manufacturing
operations in eleven locations, five of which are overseas.
On March 18, 1996, the Company acquired Fine Pitch
Technology, Inc., a provider of prototype services. On
March 31, 1996 Solectron completed its purchase of Texas
Instruments Incorporated's custom manufacturing services
(CMS) business (the TI Transaction). Under the terms of the
agreement, Solectron purchased TI's CMS business in Austin,
Texas and certain assets at the Kuala Lumpur, Malaysia
location. The Company intends to transition the business in
Kuala Lumpur to Solectron's Penang, Malaysia operations over
the next twelve months. This acquisition has been accounted
for under the purchase method of accounting.
Results of Operations
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. See "Trends
and Uncertainties -Potential Fluctuations in Operating
Results and Competition" below for further discussion of
potential fluctuations in operating results.
The following table sets forth, for the three months
and nine months ended May 31, 1996 and 1995, 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,
1996 1995 1996 1995
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 89.5 89.9 90.0 90.4
Gross profit 10.5 10.1 10.0 9.6
Operating expenses:
Selling, general
& administrative 3.8 3.7 3.5 3.5
Research and
development 0.2 0.2 0.2 0.1
Operating income 6.5 6.2 6.3 6.0
Interest expense
(income), net 0.3 0.2 0.1 0.3
Income before
income taxes 6.2 6.0 6.2 5.7
Income taxes 2.1 2.1 2.1 1.9
Net income 4.1% 3.9% 4.1% 3.8%
Net sales for the three months and nine months ended
May 31, 1996 increased 31.7% and 35.7%, respectively, over
the comparable periods in the prior fiscal year. The
increases in net sales are primarily due to the net effect
of sales volume changes from existing customers and to a
lesser extent, the addition of new sites to the Company.
Sales increases have been particularly strong in the
networking and telecommunications segment, however, the
addition of new customers within numerous market segments is
also a significant factor for the revenue increases. In the
second quarter of fiscal 1996 the Company's sales volume in
the personal computer and peripheral segments began to
decline and subsequently level off in the third quarter.
While this decline in sales revenue was offset by increases
in sales revenue to customers in other market segments,
there can be no assurance that sales to customers within any
particular market segment will not experience decreases
which could have an adverse effect on the Company's sales.
For this reason, the Company is committed to seeking
diversification of its customer base among many market
segments and product lines within market segments.
The Company's largest customer during the first nine
months of fiscal 1996 was Hewlett-Packard Corporation (HP).
Net sales to HP during both the three months and nine months
periods ended May 31, 1996 accounted for 10.5% of
consolidated net sales, compared to less than 10% for both
the third quarter and the nine months ended May 31, 1995.
For the nine months ended May 31, 1995, International
Business Machines (IBM) represented the Company's largest
customer with sales accounting for 22% of consolidated net
sales. For the nine months ended May 31, 1996, sales to
IBM were less than 10% of consolidated net sales. The
decrease in sales to IBM as a percentage of consolidated net
sales is in part due to a decrease and subsequent leveling
off of sales to IBM in absolute dollar amounts at the
Company's Bordeaux, France site. This decrease was in
conjunction with the termination of the Company's
manufacturing services agreement with IBM in December 1995.
Net sales to the Company's top ten customers during the
first nine months of fiscal 1996 accounted for 67% of
consolidated net sales, compared to 71% in the first nine
months of fiscal 1995.
Net sales at the Company's foreign locations
contributed 32% of consolidated net sales in the first nine
months of fiscal 1996, compared to 40% in the first nine
months of fiscal 1995. This is primarily due to the
Company's domestic sites growing at an overall faster rate
than its foreign sites. However, these rates can fluctuate
significantly over time. Net sales at the Company's foreign
locations for the third quarter of fiscal 1996 were 30%.
See "Trends and Uncertainties" below for a further
discussion of potential fluctuations in operating results.
The Company's operations in Milpitas, California
contributed a substantial portion of the Company's net sales
and operating income during the first nine months of fiscal
1996 and fiscal 1995. The results of the Company's Milpitas
operations are 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 adverse effect on the Company's results of
operations.
The Company believes that its ability to continue to
achieve growth will depend upon growth in sales to existing
customers for their current and future product generations,
successful marketing to new customers and future geographic
expansion. 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. See "Trends and Uncertainties" below
for a discussion of certain factors affecting the management
of growth, geographic expansion and potential fluctuations
in sales and results of operations.
Gross margins for the three months and nine months
ended May 31, 1996 have improved over those of 1995 in part
due to improved cost controls and changes in product mix.
The Company's sites in Charlotte, North Carolina, Bordeaux,
France and Penang, Malaysia have experienced the most
notable increases in gross margins compared to the first
nine months of 1995. However, we continue to experience
margins at our site in Dunfermline, Scotland site which are
substantially below those of the Company as a whole. This
is largely due to inefficiencies resulting from changes in
product complexity and decreases in sales within the
personal computer and peripheral segments.
Over time, gross margins at the individual sites and
for the Company as whole may continue to fluctuate.
Increases in turnkey business, additional 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 is still subject to lead time
and other constraints which may limit the Company's revenue
growth. Because of these factors and others discussed under
"Trends and Uncertainties" below, there can be no assurance
that the Company's gross margin will not fluctuate or
decrease in future periods.
Selling, general and administrative (SG&A) expenses as
a percentage of net sales have remained relatively
consistent for the three month and nine month periods ended
May 31, 1996 compared to the comparable periods of fiscal
1995. In absolute dollar amounts, SG&A expenses increased
during the third quarter and first nine months of fiscal
1996 relative to the comparable periods of fiscal 1995. The
increases during these periods are due primarily to growth
in infrastructure such as personnel and related departmental
expenses at all manufacturing locations to support the
increased size and complexity of the Company's business and
the addition of new sites in Germany, Malaysia (Johor),
California (Fine Pitch), and most recently Texas. The
Company anticipates SG&A expenses will continue to increase
in the future in terms of absolute dollars as the Company
continues to build the infrastructure necessary to support
its current and prospective business.
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. R&D expenses did
not change significantly in the third quarter or first nine
months of fiscal 1996 compared to the same periods in 1995.
Research and development expenses are not expected to change
significantly in the near future.
As a result of issuing the new convertible subordinated
notes in February, 1996 and the senior notes in March, 1996,
(please refer to the "Liquidity and Capital Resources"
section below for a detailed description of these "new
issues"), interest expense for the three months and nine
months ended May 31, 1996 has increased over the same
periods in 1995. The increase in interest expense was
offset in part by a reduction in interest expense due to the
conversion of the remaining LYONs notes during the quarter.
Interest expense on the new issues is expected to be
approximately $25 million annually and will be partially
offset by interest earned on undeployed cash.
Liquidity and Capital Resources
Working capital was $741 million as of May 31, 1996.
This reflects the net proceeds from the completion of the
Company's private placement of $230 million aggregate
principle amount of its 6% convertible subordinated notes
due 2006 completed at the end of the second quarter of
fiscal 1996 and the $150 million aggregate principle amount
of its 7-3/8 senior notes due 2006 completed early in the
third quarter of fiscal 1996, (collectively the "notes").
Approximately $132 million of the proceeds from the notes
was used to complete the TI transaction in March 1996, the
remainder will be used to finance the working capital of the
Company. Interest expense on the notes is expected to be
approximately $25 million annually and will be offset in
part by interest earned on undeployed cash. The Company
believes the proceeds from these offerings, cash generated
from operations together with the Company's available credit
will provide adequate working capital for the foreseeable
future.
On May 6, 1996 the Company called for redemption of all
of the Company's remaining Liquid Yield Option Notes, (the
"LYONs notes") which triggered the complete conversion of
those notes to common stock.
Inventory levels fluctuate directly with the volume of
the Company's manufacturing. Changes or significant
fluctuations in product market demands can cause
fluctuations in inventory levels which may result in changes
in levels of inventory turns and liquidity. Historically,
the Company has been able manage it's inventory levels with
regard to these fluctuations. However, should permanent
material decreases or material fluctuations occur in product
demand, the Company could experience an increase in
inventory levels resulting in slower turns and reduced
liquidity.
During the first three quarters of fiscal 1996, the
Company invested approximately $92 million in capital
expenditures. Approximately, $17 million of this investment
went to replace equipment which was retired or sold. The
net book value of the retired and sold equipment was not
significant. The remaining investment was mainly in new
equipment, primarily surface mount assembly and test
equipment, to meet current and expected production levels.
For the remainder of fiscal 1996 total capital expenditures
at existing facilities including the CMS site in Austin,
Texas are expected to be in the range of $20 to $35 million.
In addition to the Company's working capital as of May
31, 1996, the Company has available a $100 million unsecured
domestic revolving credit facility and $47 million in
available foreign credit facilities. Beginning in September
1997, the Company will be required to pledge approximately
$52 million of cash or marketable securities as collateral
for its obligation under the terms of the Company's
operating lease for its facilities in Milpitas, California.
Trends and Uncertainties
Customer Concentration; Dependence in the Electronics
Industry
In the second quarter of fiscal 1996 the Company's
sales volume in the personal computer and peripheral
segments began to decline and subsequently level off in the
third quarter. While this decline in sales revenue was
offset by increases in sales revenue to customers in other
market segments, there can be no assurance that sales to
customers within any particular market segment will not
experience decreases which could have an adverse effect on
the Company's sales.
A small number of customers are currently responsible
for a significant portion of the Company's net sales. In
the three and nine month periods ended May 31, 1996 and in
the fiscal years 1995, 1994, and 1993 the Company's ten
largest customers accounted for over 66% of consolidated net
sales. 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 material adverse effect on the
Company's results of operations. The Company's largest
customer during the first nine months of fiscal 1996 was
Hewlett-Packard Corporation (HP). Net sales to HP during
this period accounted for 10.5% of consolidated net sales,
compared to less than 10% in the first nine months of fiscal
1995. For the nine months ended May 31, 1995, International
Business Machines (IBM) represented the Company's largest
customer with sales accounting for 22% of consolidated net
sales. For the nine months ended May 31, 1996, sales to
IBM were less than 10% of total consolidated sales. The
Company had a manufacturing services agreement with IBM at
its Bordeaux, France facility which expired on December 31,
1995. There can be no assurances that the Company will
continue to do business with IBM, HP or any other customer.
The percentage of the Company's sales to its major
customers may fluctuate from period to period. Significant
reductions in sales to any of these customers would have a
materially adverse effect on the Company's results of
operations. The Company has no firm long-term volume
purchase commitments from its customers, and over the past
few years has experienced reduced lead-times in customer
orders. In addition, customer contracts can be canceled and
volume levels can be changed or delayed. The timely
replacement of canceled, delayed or reduced contracts with
new business cannot be assured. These risks are increased
because a majority of the Company's sales are to customers
in the electronics industry, which is subject to rapid
technological change and product obsolescence. The factors
affecting the electronics industry in general, or any of the
Company's major customers in particular, could have a
material adverse effect on the Company's results of
operations.
Management of Growth; Geographic Expansion
The Company has experienced substantial growth over the
last five fiscal years, with net sales increasing from
$265.4 million in fiscal 1991 to $2.1 billion in fiscal year
1995. In recent years, the Company has acquired facilities
in six locations, including the Company's most recent
purchase of the custom manufacturing services ("CMS")
business of Texas Instruments Incorporated located in
Austin, Texas. There can be no assurance that the Company's
historical revenue growth will continue or that the Company
will successfully manage the integration of the CMS business
or any other business it may acquire in the future. As the
Company manages its existing operations and expands
geographically, it may experience certain inefficiencies as
it integrates new operations and manages geographically
dispersed operations. In addition, the Company's results of
operations could be adversely affected if its new facilities
do not achieve growth sufficient to offset increased
expenditures associated with geographic expansion. Should
the Company increase its expenditures in anticipation of a
future level of sales which does not materialize, its
profitability would be adversely affected. On occasion,
customers may require rapid increases in production which
can place an excessive burden on the Company's resources.
Custom Manufacturing Services Acquisition from Texas
Instruments Incorporated
The acquisition of the CMS business from Texas
Instruments Incorporated entails a number of risks,
including successfully managing the transition of customers
from TI to Solectron, employees at the Austin site from TI
to Solectron, integrating purchasing operations and
information systems and managing a larger and more
geographically disparate business. In addition, the CMS
business will increase the Company's expenses and working
capital requirements. The Company believes it has adequate
resources and capabilities to successfully manage the
integration of the CMS business into Solectron's business.
In the event the Company is unsuccessful in these efforts,
the Company's results of operations could be materially
adversely affected.
International Operations
As a result of its foreign sales and facilities, the
Company's operations are subject to risks of doing business
abroad, including but not limited to, fluctuations in the
value of currency, export duties, changes to import and
export regulations (including quotas), possible restrictions
on the transfer of funds, employee turnover, labor unrest,
longer payment cycles, greater difficulty in collecting
accounts receivable, the burdens and costs of compliance
with a variety of foreign laws and, in certain parts of the
world, political instability. While to date these factors
have not had an 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. In addition, the Company
currently benefits from a tax holiday in its Penang,
Malaysia site which expires in January, 1997. The Company
is seeking to have the tax holiday extended. If the tax
holiday is not extended, the Company's effective income tax
rate would likely increase.
Availability of Components
A substantial portion of the Company's net sales are
derived from turnkey manufacturing in which the Company
provides both materials procurement and assembly. In
turnkey manufacturing, the Company potentially bears the
risk of component price increases, which could adversely
affect the Company's gross profit margins. At various times
there have been shortages of components in the electronics
industry. If significant shortages of components should
occur, the Company may be forced to delay manufacturing and
shipments, which could have a materially adverse effect on
the Company's results of operations.
Potential Fluctuations in Operating Results
The Company's operating results are affected by a
number of factors, including the mix of turnkey and
consignment projects, capacity utilization, price
competition, the degree of automation that can be used in
the assembly process, the efficiencies that can be achieved
by the Company in managing inventories and fixed assets, the
timing of orders from major customers, fluctuations in
demand for customer products, the timing of expenditures in
anticipation of increased sales, customer product delivery
requirements and increased costs and shortages of components
or labor. The Company's turnkey manufacturing, which
typically results in higher net sales and gross profits but
lower gross profit margins than assembly and testing
services, represents a substantial percentage of net sales.
All of these factors can cause fluctuations in the Company's
operating results.
Competition
The electronics assembly and manufacturing industry is
comprised of a large number of companies, several of which
have achieved substantial market share. The Company also
faces competition from current and prospective customers
which evaluate Solectron's capabilities against the merits
of manufacturing products internally. Solectron competes
with different companies depending on the type of service or
geographic area. Certain of the Company's competitors have
broader 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 be competitive, the Company must provide
technologically advanced manufacturing services, high
product quality levels, flexible delivery schedules, and
reliable delivery of finished products on a timely and price
competitive basis. 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.
Intellectual Property Protection
The Company's ability to compete may be affected by its
ability to protect its proprietary information. The Company
obtained a limited number of U.S. patents in 1995 related to
the process and equipment used in it's surface mount
technology. The Company believes these patents are
valuable. However, there can be no assurance that these
patents will provide meaningful protection for the Company's
manufacturing process and equipment innovations.
There can be no assurance that third parties will not
assert infringement claims against the Company or its
customers in the future. In the event a third party does
assert an infringement claim, the Company may be required to
expend significant resources to develop a non-infringing
manufacturing process or to obtain licenses to the
manufacturing process which is the subject of litigation.
There can be no assurance that the Company would be
successful in such development or that any such licenses
would be available on commercially acceptable terms, if at
all. In addition, such litigation could be lengthy and
costly and could have a material adverse effect on the
Company's financial condition regardless of the outcome of
such litigation.
Environmental Compliance
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.
Dependence on Key Personnel and Skilled Employees
The Company's continued success depends to a large
extent upon the efforts and abilities of key managerial and
technical employees. The loss of services of certain key
personnel could have a material adverse effect on the
Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers
and skilled employees. Failure to do so could adversely
affect the Company's operations.
Possible Volatility of Market Price of Common Stock
The trading price of the common stock is subject to
significant fluctuations in response to variations in
quarterly operating results, general conditions in the
electronics industry and other factors. In addition, the
stock market is subject to price and volume fluctuations
which affect the market price for many high technology
companies in particular, and which often are unrelated to
operating performance.
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
The Company is pleased to announce that on April
3, Heinz Fridrich was elected to the Company's
board of directors. Mr. Fridrich, a native of
Stuttgart, Germany was the vice president of
corporate manufacturing upon his retirement from
IBM in 1993. He is currently a resident of
Florida and a member of the faculty of the
University of Florida. He also serves on the
board of directors of Central Hudson Gas and
Electric Company in Poughkeepsie, New York. Mr.
Fridrich holds an M.S. degree in industrial
engineering from the Massachusetts Institute of
Technology and a B.S. degree in engineering from
the University of Esslingen, in Germany.
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
On March 15, 1996 the Company filed a current
report on form 8-K announcing its senior debt offering.
On April 15, 1996 the Company filed a current
report on form 8-K announcing the Company had
effected the purchase of Texas Instruments Incorporated's
(TI) custom manufacturing business (CMS) in Austin, Texas,
and certain assets of TI's CMS business in
Kuala Lumpur, Malaysia. The filing included
pro forma financial data reflecting the TI CMS acquisition.
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: July 8, 1996 By: /s/ Koichi Nishimura
Dr. Koichi Nishimura
President &
Chief Executive Officer
Date: July 8, 1996 By: /s/ Susan S. Wang
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
SOLECTRON CORPORATION AND SUBSIDIARIES Exhibit 11.1
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(in thousands, except per share data)
Three Months Ended Nine Months Ended
May 31, May 31,
1996 1995 1996 1995
Weighted average number of shares
of common stock equivalents:
Primary:
Common Stock 50,928 41,656 50,211 41,497
Common stock equivalents - 1,528 833 1,464 808
stock options
52,456 42,489 51,675 42,305
Fully diluted:
Common shares issuable upon
assumed conversion of
convertible converible
subordinated notes 4,562 9,543 2,834 9,543
Incremental increase in common
stock equivalents using end
ofperiod market price 0 148 112 233
57,018 52,180 54,621 52,081
Net income - primary $27,720 $20,328 $82,717 $56,556
Interest accretion on
convertible subordinated notes,
net of taxes 2,579 1,602 3,293 4,749
Net income- fully diluted $30,299 $21,930 $86,010 $61,305
Net income per share - primary $0.53 $0.48 $1.60 $1.34
Net income per share - fully
diluted $0.53 $0.42 $1.57 $1.18
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