<PAGE>
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 30, 1997.
__ 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)
Delaware 94-2447045
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification 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, 1997, 56,857,401 shares of Common Stock of the Registrant
were outstanding.
<PAGE>
SOLECTRON CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
May 31, 1997 and August 31, 1996 3
Condensed Consolidated Statements of Income for
for the three and nine months ended May 31,
1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended May 31, 1997 and 1996 5 - 6
Notes to Condensed Consolidated Financial
Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
2
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<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
May 31, August 31,
1997 1996
___________ ___________
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 541,545 $ 410,350
Accounts receivable, net 404,069 341,200
Inventories 486,063 368,862
Prepaid expenses and other
current assets 37,845 24,312
___________ ___________
Total current assets 1,469,522 1,144,724
Net property and equipment 285,001 249,570
Other assets 54,047 57,904
___________ ___________
Total assets $1,808,570 $1,452,198
___________ ___________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued interest and current
portion of long-term debt $ 2,593 $ 14,094
Accounts payable 457,022 280,840
Accrued employee compensation 49,447 38,216
Accrued expenses 15,334 9,280
Other current liabilities 35,767 15,939
___________ ___________
Total current liabilities 560,163 358,369
Long-term debt 387,480 386,927
Other long-term liabilities 3,593 6,333
___________ ___________
Total liabilities 951,236 751,629
___________ ___________
Stockholders' equity:
Common stock 57 53
Additional paid-in capital 432,103 378,266
Retained earnings 431,130 320,553
Cumulative translation
adjustment and other (5,956) 1,697
___________ ___________
Total stockholders' equity 857,334 700,569
___________ ___________
Commitments
Total liabilities and
stockholders' equity $1,808,570 $1,452,198
___________ ___________
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
____________________ ____________________
1997 1996 1997 1996
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Net sales $ 983,222 $ 680,554 $2,649,645 $2,028,354
Cost of sales 867,345 608,761 2,345,422 1,824,854
_________ _________ _________ _________
Gross profit 115,877 71,793 304,223 203,500
Operating expenses:
Selling, general
& administrative 48,546 25,614 123,730 71,035
Research &
development 4,712 1,478 10,025 5,017
Acquisition costs - - 4,000 -
_________ _________ _________ _________
Operating income 62,619 44,701 166,468 127,448
Interest income 7,102 4,456 20,851 7,027
Interest expense (6,787) (7,158) (19,781) (9,148)
_________ _________ _________ _________
Income before
income taxes 62,934 41,999 167,538 125,327
Income tax expense 21,397 14,279 56,961 42,610
_________ _________ _________ _________
Net income $ 41,537 $ 27,720 $ 110,577 $ 82,717
_________ _________ _________ _________
Net income per share:
Primary $ 0.71 $ 0.53 $ 1.94 $ 1.60
_________ _________ _________ _________
Fully diluted $ 0.71 $ 0.53 $ 1.93 $ 1.57
_________ _________ _________ _________
Weighted average number
of shares:
Primary 58,272 52,456 57,068 51,675
_________ _________ _________ _________
Fully diluted 62,032 57,018 60,845 54,621
_________ _________ _________ _________
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
__________________________________
1997 1996
________________ ________________
<S> <C> <C>
Cash flows from operating activities:
Net income $ 110,577 $ 82,717
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 79,627 61,200
Interest accretion on zero-coupon
subordinated notes - 1,420
Additions to allowance for
doubtful accounts 238 534
Other (37) 1,260
Changes in operating assets and
liabilities:
Accounts receivable (48,123) (31,286)
Inventories (104,722) (42,724)
Prepaid expenses and other
current assets (7,111) (5,582)
Accounts payable 174,526 (33,914)
Accrued expenses and other
current liabilities 5,333 8,306
__________ __________
Net cash provided by operating
activities 210,308 41,931
__________ __________
Cash flows from investing activities:
Sales and maturities of short-term
investments 123,245 570,578
Purchases of short-term
investments (226,216) (652,763)
Acquisition of new operations - (132,169)
Capital expenditures (110,827) (92,428)
Other 8,444 4,408
__________ __________
Net cash used in investing
activities (205,354) (302,374)
__________ __________
(continued on next page)
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
________________________________
1997 1996
_______________ _______________
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of
long-term debt - 380,000
Debt acquisition costs - (7,675)
Repayments of long-term debt and
capital lease obligations (2,343) (1,047)
Net proceeds from sale of
common stock 29,619 14,134
Other (1,727) 4,641
__________ __________
Net cash provided by financing
activities 25,549 390,053
__________ __________
Effect of exchange rate changes on
cash and cash equivalents (2,279) 620
__________ __________
Net increase in cash and
cash equivalents 28,224 130,230
Cash and cash equivalents at
beginning of period 228,830 89,959
__________ __________
Cash and cash equivalents at
end of period $ 257,054 $ 220,189
__________ __________
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 64,493 $ 41,697
Interest $ 25,572 $ 363
Non-cash investing and financing
activities:
Issuance of common stock for
business combination $ 18,335 -
Issuance of common stock upon
conversion of long-term debt - $ 30,570
Tax benefit associated with
exercise of stock options $ 5,265 $ 2,201
See accompanying notes to condensed consolidated financial statements.
</TABLE>
6
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated balance sheets as of
May 31, 1997 (unaudited) and August 31, 1996, the unaudited condensed
consolidated statements of income for the three-month and nine-month
periods ended May 31, 1997 and 1996, and the unaudited condensed
consolidated statements of cash flows for the nine months ended May 31,
1997 and 1996 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, 1997 are not necessarily indicative of results to
be expected for the entire year. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended August 31, 1996 included
in the Company's Annual Report to Stockholders.
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 1997 ended on
May 30, 1997, its third quarter of 1996 ended on May 24, 1996 and its
1996 fiscal year ended on August 30, 1996.
NOTE 2 - Reincorporation
On February 25, 1997, the Company was reincorporated in the State of
Delaware. In connection with the reincorporation, as approved by the
stockholders, the number of authorized shares of the Company's Common
Stock was increased to two hundred million (200,000,000) and each share
of Common Stock was assigned a par value of $.001.
NOTE 3 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 350,497 $ 253,646
Work-in-process 135,566 115,216
----------- -----------
Total $ 486,063 $ 368,862
=========== ===========
</TABLE>
7
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NOTE 4 - Net Income Per Share
Primary net income per share is computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding during the related period. Common equivalent shares consist
of stock options and are computed using the treasury stock method.
Fully diluted net income per share assumes full conversion of the
Company's outstanding convertible notes.
NOTE 5 - Line of Credit
On April 30, 1997, the Company replaced its existing $100
million unsecured domestic revolving line of credit with a new $100
million senior unsecured multicurrency revolving credit facility, which
expires April 30, 2002. Borrowings under the credit facility bear
interest, at the Company's option, at either the bank's prime rate, the
London interbank offering rate (LIBOR) plus a margin or the bank's
certificate of deposit (CD) rate plus a margin. The margin under the
LIBOR or CD rate options will vary depending on the Company's Standard &
Poor's Corporation and/or Moody's Investor Services, Inc. rating for its
long-term senior unsecured debt and was 0.4375% at May 31, 1997. There
were no borrowings outstanding under this line of credit at May 31,
1997. Under the agreement, the Company must meet certain financial
covenants.
NOTE 6 - Commitments
The Company leases various facilities under operating lease
agreements. These leases expire at various dates through the year 2002.
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 Milpitas, 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. In May 1997, the Company modified the terms of this lease to
extend the lease term through April 2002 and remove the requirement for
collateral for its obligation under the lease. The Company is
contingently liable under a first loss clause for a decline in the
market value of the property of up to $52.1 million in the event that
the Company does not purchase the property at the end of the 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 approximately $13.9 million, $12.4 million,
$9.2 million, $6.2 million and $1.1 million in each of the years in the
five year period ending August 31, 2001.
8
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NOTE 7 - Acquisitions
On November 26, 1996, Solectron exchanged approximately $205
million in shares of common stock and options for all of the outstanding
stock and options of Force Computers Inc. (Force), a designer and
provider of computer platforms for the embedded market. This
transaction was accounted for under the pooling of interests method.
The results of operations of Force prior to its acquisition were not
considered material to the Company's consolidated results of operations.
Accordingly, the Company's historical financial statements have not been
restated to reflect the financial position and results of operations of
Force, and pro-forma financial information has not been disclosed.
NOTE 8 - Pending Acquisition and New Location
On March 25, 1997, the Company announced the signing of a
memorandum of understanding with Ericsson Telecom AB's Business Area
Infocom Systems (Ericsson) to establish a strategic, global
manufacturing partnership. Under the terms of the memorandum of
understanding, the Company will set up a New Product Introduction center
in Stockholm, Sweden, transfer production from certain Ericsson plants
worldwide to Solectron manufacturing sites around the world and assume
responsibility for a selected Ericsson operation. On June 10, 1997, the
Company announced that the selected Ericsson operation that it will
acquire is Ericsson's printed circuit board manufacturing operation in
Brazil. Under the terms of the acquisition agreement, Solectron will
acquire certain assets, including equipment and inventory, as well as
approximately 370 employees associated with the printed circuit board
assembly operations of Ericsson Telecomunicacoes S/A. On July 7, 1997,
Solectron and Ericsson signed definitive agreements upon completion of
negotiations of the general terms and conditions for Solectron's supply
of certain products to Ericsson, for the establishment of the New
Product Introduction center and for the transfer of certain
manufacturing operations and assets to Solectron. The agreements
related to the transfer of Ericsson's printed circuit board
manufacturing operation in Brazil are being negotiated. Completion of
the transaction is subject to successful negotiation of additional
definitive agreements, applicable government approvals, if any, and
certain other conditions.
On April 2, 1997, the Company announced the establishment of
Solectron de Mexico, S.A. de C.V., a wholly owned subsidiary of the
Company, in Guadalajara, Mexico. This new location is expected to begin
offering manufacturing services to OEM customers by the end of fiscal
1997.
NOTE 9 - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS No. 128). SFAS No. 128 establishes a different method
of computing net income per share than is currently required under the
provisions of Accounting Principles Board Opinion No. 15. Under SFAS
No. 128, the Company will be required to present both basic net income
9
<PAGE>
per share and diluted net income per share. Basic net income per share
is expected to be higher than the currently presented primary net income
per share as the effect of dilutive stock options will not be considered
in computing basic net income per share. Diluted net income per share
is expected to be comparable to the currently presented fully diluted
net income per share.
Solectron plans to adopt SFAS No. 128 in its fiscal quarter
ending February 27, 1998 and at that time all historical net income per
share data presented will be restated to conform to the provisions of
SFAS No. 128.
NOTE 10 - Subsequent Event
On July 10, 1997, the Company announced a two-for-one stock
split to be effected as a stock dividend for stockholders of record as
of July 21, 1997. The new shares to be issued as a result of the stock
dividend are expected to be distributed on or about August 4, 1997.
10
<PAGE>
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 networking and data communications,
workstation, personal computer and computer peripherals 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.
On November 26, 1996, Solectron exchanged approximately $205
million in shares of common stock and options for all of the outstanding
stock and options of Force Computers Inc. (Force), a designer and
provider of computer platforms for the embedded market. This
transaction was accounted for under the pooling of interests method.
The results of operations of Force prior to its acquisition were not
considered material to the Company's consolidated results of operations.
Accordingly, the Company's historical financial statements have not been
restated to reflect the financial position and results of operations of
Force, and pro-forma financial information has not been disclosed.
As of May 31, 1997, excluding the locations of the Force
Computers and Fine Pitch Technologies subsidiaries, the Company had
manufacturing operations in eleven locations, six of which are overseas.
On April 2, 1997, the Company announced its twelfth manufacturing
location in Guadalajara, Mexico, which is expected to begin offering
manufacturing services to OEM customers by the end of fiscal 1997.
Solectron has a sales support office located in Japan. Force Computers
and Fine Pitch Technologies are both headquartered in San Jose,
California. Force's European headquarters and the significant portion
of its operations are located in Munich, Germany. In addition to its
headquarters locations, Force has twelve sales support offices in the
United States and six sales support offices in various international
locations. Fine Pitch has operations in California and in
Massachusetts.
On March 25, 1997, the Company announced the signing of a
memorandum of understanding with Ericsson Telecom AB's Business Area
Infocom Systems (Ericsson) to establish a strategic global manufacturing
partnership. Under the terms of the memorandum of understanding, the
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Company intends to set up a New Product Introduction center in
Stockholm, Sweden, transfer production from certain Ericsson plants
worldwide to Solectron manufacturing sites around the world and acquire
Ericsson's printed circuit board manufacturing operation in Brazil.
Under the terms of the acquisition, Solectron will acquire certain
assets, including equipment and inventory, as well as approximately 370
employees associated with the printed circuit operations of Ericsson
Telecomunicacoes S/A. On July 7, 1997, Solectron and Ericsson signed
definitive agreements upon completion of negotiations of the general
terms and conditions for Solectron's supply of certain products to
Ericsson, for the establishment of the New Product Introduction center
and for the transfer of certain manufacturing operations and assets to
Solectron. The agreements related to the transfer of Ericsson's printed
circuit board manufacturing operation in Brazil are being negotiated.
Completion of the transaction is subject to successful negotiation of
additional definitive agreements, applicable government approvals, if
any, and certain other conditions.
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, 1997 and 1996, certain items as a percentage of net
sales. The operating results for the nine months of 1997 include only
six months of Force Computers' operating results as Force Computers was
acquired on November 26, 1996. The table and the discussion below
should be read in conjunction with the condensed consolidated financial
statements and notes thereto that appear elsewhere in this report.
12
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.2 89.5 88.5 90.0
------- ------- ------- -------
Gross profit 11.8 10.5 11.5 10.0
Operating expenses:
Selling, general &
administrative 4.9 3.8 4.7 3.5
Research & development 0.5 0.2 0.4 0.2
Acquisition costs - - 0.1 -
------- ------- ------- -------
Operating income 6.4 6.5 6.3 6.3
Interest (income)
expense, net - 0.3 - 0.1
------- ------- ------- -------
Income before
income taxes 6.4 6.2 6.3 6.2
Income taxes 2.2 2.1 2.1 2.1
------- ------- ------- -------
Net income 4.2% 4.1% 4.2% 4.1%
</TABLE>
Net sales for the three months and nine months ended May 31,
1997 increased 44.5% and 30.6%, respectively, over the same periods of
fiscal 1996. The increases in net sales for both the three- and nine-
month periods are predominantly due to significant increases in sales
volume from both existing and new customers in North America, the
acquisition of Force in November 1996 and higher international sales in
the third quarter of 1997. In addition, the acquisition of the Austin,
Texas site in March 1996 contributed to the increase for the nine-month
period.
Sales in the North American region were strong, reflecting
increases in sales at all locations to existing and new customers in
both the three- and nine-month periods of fiscal 1997 compared to the
same periods of fiscal 1996. The overall increase in sales is partially
offset by the effect of several ongoing programs reaching end-of-life as
well as projects with higher than normal consignment content. Increased
sales for both the three- and nine-month periods of fiscal 1997 in most
of the Company's European operations were partially offset by declines
in sales in both 1997 periods from older programs in the Bordeaux
facility as these programs reach end-of-life. Asian sales increased for
the three-month period of fiscal 1997 compared to the three-month period
of fiscal 1996 but were lower for the nine-month period of fiscal 1997
than for the comparable period of fiscal 1996. Sales in Asia for the
nine-month period of fiscal 1997 were affected by many of the same end-
of-life factors as in Europe, compounded by an increase in consignment
mix. Although the Company does not currently anticipate any future
decline in sales, to lessen the potential impact of any possible future
declines to customers within any particular region or market segment,
13
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the Company is committed to seeking diversification of its customer base
among many countries, market segments and product lines within market
segments.
The Company's largest customer during the first nine months of
fiscal 1997 was Hewlett-Packard Corporation (HP). Net sales to HP
during the three- and nine-month periods ended May 31, 1997 accounted
for 12.0% and 13.3%, respectively, of consolidated net sales, compared
to 10.5% and 10.5%, respectively, for the same periods in fiscal 1996.
Net sales to Cisco Systems, Inc. were 11.0% and 11.3% of the
consolidated total for the three-month periods of 1997 and 1996,
respectively, but less than 10% for the nine-month periods. In
addition, net sales to Bay Networks, Inc. were 10.2% and 10.8% of
consolidated net sales for the three- and nine-month periods of fiscal
1997 and less than 10% in the 1996 fiscal periods. No other customer
accounted for more than 10% of net sales during any of the periods
presented. Net sales to the Company's top ten customers during the
first nine months of fiscal 1997 accounted for 65.7% of consolidated net
sales, down from 66.6% in the same period of fiscal 1996.
Net sales at the Company's foreign locations contributed
approximately 26.6% and 25.8% of consolidated net sales in the third
quarter and first nine months of fiscal 1997, respectively, compared to
29.9% and 31.9%, respectively, for the comparable periods of fiscal
1996. International sales increased in absolute dollars for the fiscal
1997 periods compared to the same periods in fiscal 1996, with
significant growth at some sites partially offset by volume decreases at
the Bordeaux site in both the three- and nine-month periods of fiscal
1997 and at some Asian sites for the fiscal 1997 nine-month period due
to the end-of-life situations noted above. The decrease in foreign
sales as a percentage of total sales is primarily due to the strong
increase in domestic sales volume across all domestic sites. The rate
of foreign versus domestic sales, as well as foreign versus domestic
sales as a percentage of the Company's overall sales, can fluctuate
significantly over time. 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 1997 and fiscal 1996. The
results of the Company's Milpitas operations are expected to continue to
be 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 and successful marketing to new
customers. 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. The Company does not have
14
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any firm long-term volume purchase commitments from any of its
customers. 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.
The gross margin percentage improved to 11.5% for the first
nine months of fiscal 1997 from 10.0% for the first nine months of
fiscal 1996. The improvement is primarily due to the inclusion of Force
in the second and third quarters of 1997. Gross profit margins on
Force's products are significantly higher than those of the rest of the
Company. Without Force's contribution, gross margins for the first nine
months of fiscal 1997 would have been 10.5%. In addition to the impact
of Force, the improved gross margin percentage in fiscal 1997 reflects a
shift in product mix toward the higher margin workstation and networking
and data communications market segments as well as projects with a
higher than normal consignment content. Over time, gross margins at the
individual sites and for the Company as a whole may continue to
fluctuate. Consignment projects typically have higher gross margins
than turnkey projects. 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. Also, while the availability of raw materials
appears adequate to meet the Company's current revenue projections for
the foreseeable future, component availability is still subject to lead
time and other constraints which could possibly 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.
In absolute dollars, selling, general and administrative
(SG&A) expenses increased 89.5% and 74.2%, respectively, for the three-
and nine-month periods of fiscal 1997 over the same periods of fiscal
1996. The inclusion of Force in the three- and nine-month periods and
the Austin, Texas site for the full nine-month period of fiscal 1997
accounts for approximately half of the increases. The remainder of the
increases is due primarily to investment 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 other new sites in Malaysia (Johor),
California (Fine Pitch Technologies), China and most recently,
Westborough, Massachusetts. The most significant reasons for the
increase in the fiscal 1997 periods of SG&A expenses as a percentage of
net sales are the inclusion of Force, which has a more sales-intensive
operating structure, the costs associated with investments in starting
up new sites and investments in the Company's information systems. The
Company anticipates SG&A expenses will continue to increase in terms of
absolute dollars in the future, and may possibly increase as a
percentage of revenue, as the Company continues to build the
infrastructure necessary to support its current and prospective
business.
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With the exception of its Force Computers operation, the
Company's research and development activities have been focused
primarily on the development of prototype and engineering design
capabilities, fine pitch interconnecting technologies (which include
ball-grid array, tape-automated bonding, multichip modules, chip-on-
flex, chip-on-board, and flip chip), high reliability environmental
stress test technology, and the implementation of environmentally-
friendly assembly processes, such as VOC-free and no-clean. Force's
research and development efforts are concentrated on new product
development and improvement of product designs through improvements in
functionality and support of next generation micro-processors. The
increase in R&D expenses in the fiscal 1997 periods compared to the
fiscal 1996 periods is due to the acquisition of Force in November 1996.
The Company expects that research and development expenses will increase
in absolute dollars in the future and may increase as a percentage of
net sales as Force continues to invest in its research and development
efforts and additional research and development projects are undertaken
at certain of the Company's Asian sites.
A one time charge for acquisition costs of approximately $4.0
million was incurred as a result of the acquisition of Force Computers
during the quarter ended November 30, 1996.
The Company issued convertible subordinated notes in February
1996 and senior notes in March 1996. Interest expense on the debt is
expected to be approximately $25 million annually and will be partially
offset by interest earned on undeployed cash and investments. Interest
expense for the three months ended May 31, 1997 decreased from the same
period of fiscal 1996 because of the redemption and conversion to common
stock of all of the Company's Liquid Yield Option Notes in May 1996.
Interest expense for the nine-month period of fiscal 1997 increased
significantly over the comparable period of fiscal 1996 because of the
issuance of new notes in February and March 1996. Interest income
increased for the three- and nine-month periods of fiscal 1997 as a
result of interest earned on cash realized from the issuance of the
notes.
Liquidity and Capital Resources
Working capital was $909 million as of May 31, 1997 compared
to $786 million at the end of fiscal 1996. The increase is largely due
to an increase in working capital generated from the existing sites and
was augmented by working capital resulting from the acquisition of new
sites. The Company is expected to utilize greater amounts of working
capital in the future to support its growth in operations. The Company
believes its current level of working capital together with cash
generated from operations and the Company's available credit will
provide adequate working capital for the foreseeable future.
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.
16
<PAGE>
Historically, the Company has been able to manage its inventory levels
with regard to these fluctuations. However, should material
fluctuations occur in product demand, the Company could experience
slower turns and reduced liquidity.
During the first nine months of fiscal 1997, the Company
invested approximately $111 million in capital expenditures.
Approximately $15 million of this investment was used to replace or
upgrade equipment which was retired or sold. The net book value of the
retired and sold equipment was not significant. The remaining
investment was in new equipment, primarily surface mount assembly and
test equipment, to meet current and expected production levels, as well
as for the acquisition of land and buildings for new manufacturing
sites. For the remainder of fiscal 1997 total capital expenditures are
expected to be approximately $40 million.
In addition to the Company's working capital as of May 31,
1997, the Company has available various credit facilities. On April 30,
1997, the Company replaced its existing $100 million unsecured domestic
revolving line of credit with a new $100 million senior unsecured
multicurrency revolving credit facility, which expires April 30, 2002.
Borrowings under the credit facility bear interest, at the Company's
option, at either the bank's prime rate, the London interbank offering
rate (LIBOR) plus a margin or the bank's certificate of deposit (CD)
rate plus a margin. The margin under the LIBOR or CD rate options will
vary depending on the Company's Standard & Poor's Corporation and/or
Moody's Investor Services, Inc. rating for its long-term senior
unsecured debt and was 0.4375% at May 31, 1997. There were no
borrowings outstanding under this line of credit at May 31, 1997. Under
the agreement, the Company must meet certain financial covenants. The
Company also has approximately $82 million and $8 million in available
foreign and domestic credit facilities respectively. In addition, the
Company is currently negotiating an asset securitization arrangement for
at least $100 million which is expected to close during the fourth
quarter of fiscal 1997.
Effective May 1, 1997, the Company modified the terms of the
operating lease for its facilities in Milpitas, California. The term of
the lease has been extended through April 2002 and the requirement that
the Company pledge approximately $52 million of cash or marketable
securities as collateral for its obligation under the lease has been
removed.
Trends and Uncertainties
Customer Concentration; Dependence on the Electronics Industry
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, 1997 and in fiscal years 1996, 1995 and
1994, the Company's ten largest customers accounted for at least 64% of
consolidated net sales. The Company is dependent upon continued
revenues from its top ten customers. Any material delay, cancellation
17
<PAGE>
or reduction of orders from these or other significant customers could
have a material adverse effect on the Company's results of operations.
During the first nine months of fiscal 1997, Hewlett-Packard Corporation
(HP) and Bay Networks, Inc. accounted for 13.3% and 10.8%, respectively,
of net sales, compared to 10.5% and less than 10%, respectively, during
the same period of fiscal 1996. There can be no assurance that the
Company will continue to do business with HP, Bay Networks 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.
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.
Management of Growth; Geographic Expansion
The Company has experienced substantial growth over the last
five fiscal years, with net sales increasing from $407 million in fiscal
1992 to $2.8 billion in fiscal year 1996. In recent years, the Company
has acquired or established facilities in many locations. During fiscal
1997, the Company announced the establishment of new manufacturing
facilities in Suzhou, China and Guadalajara, Mexico; began operations at
its manufacturing facility in Westborough, Massachusetts; and, in
November 1997, acquired Force Computers Inc., which has operations in
California and Germany. On March 25, 1997, the Company announced the
signing of a memorandum of understanding with Ericsson Telecom AB's
Business Area Infocom Systems (Ericsson) to establish a strategic,
global manufacturing partnership under which Solectron will set up a New
Product Introduction center in Stockholm, Sweden, transfer production
from certain Ericsson plants worldwide to Solectron manufacturing sites
around the world and assume responsibility for a selected Ericsson
operation. On June 10, 1997, the Company announced that the selected
Ericsson operation that it will acquire is Ericsson's printed circuit
board manufacturing operation in Brazil. Under the terms of the
acquisition, if completed, Solectron will acquire certain assets,
including equipment and inventory, as well as approximately 370
employees associated with the printed circuit board assembly operations
of Ericsson Telecomunicacoes S/A. Additionally, the Company continually
evaluates growth and acquisition opportunities and may pursue additional
18
<PAGE>
opportunities over time. There can be no assurance that the Company's
historical revenue growth will continue or that the Company will
successfully manage the integration of Force Computers, the facility in
Mexico, the partnership with and acquisitions from Ericsson 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. The completion of the proposed transaction
with Ericsson will increase the Company's expenses and working capital
requirements. 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.
Acquisition of Force Computers Inc.
The acquisition of Force Computers Inc. entails a number
of risks, including successfully managing the integration of the
operations, retention of key employees at Force Computers, and
managing an increasingly larger and more geographically disparate
business. In addition, Solectron has no significant prior
experience in managing and operating a computer platform design
business. There can be no assurance the Company will successfully
manage this business or obtain the anticipated business synergy.
In the event that Solectron is unsuccessful in managing and
integrating the Force Computers business, the acquisition could
require significant additional management attention. If the
Company is unsuccessful in integrating and managing the Force
Computers business, Solectrons results of operations could be
materially adversely affected.
Pending Acquisition of Ericsson Manufacturing Operation and Related
Transactions
On March 25, 1997, Solectron entered into a memorandum of
understanding with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson) to set up a New Product Introduction center in Stockholm,
Sweden, transfer a portion of production from certain Ericsson plants to
Solectron manufacturing sites and purchase an existing Ericsson printed
circuit board manufacturing operation. On June 10, 1997, the Company
announced that the existing Ericsson operation it will acquire is
Ericsson's printed circuit board operation in Brazil. Under the terms
of the acquisition, Solectron will acquire certain assets, including
equipment and inventory, as well as approximately 370 employees
associated with the printed circuit board assembly operations of
Ericsson Telecomunicacoes S/A. Under the proposal, Ericsson will
contract for Solectron's services from the newly established Solectron
Brazilian plant for a specified term. Thereafter, Solectron will bear
the risk of filling the manufacturing capacity at the site with renewed
business from Ericsson or new business from other customers. On July 7,
19
<PAGE>
1997, Solectron and Ericsson signed certain definitive agreements
regarding these transactions. The series of transactions contemplated
by the memorandum of understanding are expected to undergo multiple
closings by the end of December 1997, subject to the successful
negotiation of additional definitive agreements, applicable government
approvals and various closing conditions. The proposed transactions
with Ericsson entail a number of risks, including successfully managing
the integration of the operations, retention of key employees,
integrating purchasing operations and information systems, managing an
increasingly larger and more geographically disparate business and
renewing the Ericsson business or replacing it with new business after
expiration of the Ericsson commitment. In addition, the completion of
the transactions with Ericsson will increase Solectron's expenses and
working capital requirements. There can be no assurance the
transactions contemplated by the memorandum of understanding will close
or that Solectron will successfully manage the risks of this
transaction.
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. The Company has been granted
a new tax holiday in its Penang, Malaysia site which is effective
through January 31, 2002, subject to certain conditions. The Company
has also been granted various tax holidays in China. These tax holidays
are effective for various terms and are subject to certain conditions.
There is no assurance that any future tax holidays that the Company may
seek will be granted. If additional tax holidays are not granted in the
future, 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.
20
<PAGE>
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 related to the process and equipment used
in its 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
21
<PAGE>
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.
22
<PAGE>
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
27 Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE>
SOLECTRON CORPORATION
SIGNATURE
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 11, 1997 By: /s/ Susan Wang
________________ ______________________
Susan Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
24
Exhibit 11.1
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
__________________ __________________
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Weighted average number of
shares of common stock and
common stock equivalents:
Primary:
Common stock 56,678 50,928 55,323 50,211
Common stock equivalents -
stock options 1,594 1,528 1,745 1,464
________ ________ ________ ________
Total primary shares 58,272 52,456 57,068 51,675
________ ________ ________ ________
Fully diluted:
Common shares issuable
upon assumed conversion
of convertible subordinated
notes 3,402 4,562 3,402 2,834
Incremental increase in
common stock equivalents
using end of period market
price 358 - 375 112
________ ________ ________ ________
Total fully diluted shares 62,032 57,018 60,845 54,621
________ ________ ________ ________
Net income - primary $ 41,537 $ 27,720 $110,577 $ 82,717
Interest accretion on
convertible subordinated
notes, net of taxes 2,380 2,579 7,140 3,293
________ ________ ________ ________
Net income - fully diluted $ 43,917 $ 30,299 $117,717 $ 86,010
________ ________ ________ ________
Net income per share - primary $ 0.71 $ 0.53 $ 1.94 $ 1.60
________ ________ ________ ________
Net income per share -
fully diluted $ 0.71 $ 0.53 $ 1.93 $ 1.57
________ ________ ________ ________
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1997
<PERIOD-END> MAY-30-1997
<CASH> 257,054
<SECURITIES> 284,491
<RECEIVABLES> 408,367
<ALLOWANCES> 4,298
<INVENTORY> 486,063
<CURRENT-ASSETS> 1,469,522
<PP&E> 588,228
<DEPRECIATION> 303,227
<TOTAL-ASSETS> 1,808,570
<CURRENT-LIABILITIES> 560,163
<BONDS> 387,480
0
0
<COMMON> 57
<OTHER-SE> 857,277
<TOTAL-LIABILITY-AND-EQUITY> 1,808,570
<SALES> 2,649,645
<TOTAL-REVENUES> 2,649,645
<CGS> 2,345,422
<TOTAL-COSTS> 2,345,422
<OTHER-EXPENSES> 137,517
<LOSS-PROVISION> 238
<INTEREST-EXPENSE> 19,781
<INCOME-PRETAX> 167,538
<INCOME-TAX> 56,961
<INCOME-CONTINUING> 110,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,577
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.93
</TABLE>
