SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED NOVEMBER 29, 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
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 December 31, 1996, 53,485,350 shares of Common Stock of
the Registrant were outstanding.
SOLECTRON CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
November 30, 1996 and August 31, 1996 3
Condensed Consolidated Statements of Income for
the three months ended November 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the three months ended November 30, 1996 and 1995 5 - 6
Notes to Condensed Consolidated Financial
Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
November 30, August 31,
1996 1996
___________ ____________
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 480,963 $ 410,350
Accounts receivable, net 378,698 341,200
Inventories 412,086 368,862
Prepaid expenses and other
current assets 36,959 24,312
___________ ___________
Total current assets 1,308,706 1,144,724
Net property and equipment 254,119 249,570
Other assets 60,706 57,904
___________ ___________
Total assets $ 1,623,531 $ 1,452,198
___________ ___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued interest and current
portion of long-term debt $ 9,715 $ 14,094
Accounts payable 339,896 280,840
Accrued employee compensation 39,728 38,216
Accrued expenses 41,759 9,280
Other current liabilities 25,511 15,939
___________ __________
Total current liabilities 456,609 358,369
Long-term debt 389,718 386,927
Other long-term liabilities 6,049 6,333
___________ ___________
Total liabilities 852,376 751,629
___________ ___________
Shareholders' equity:
Common stock 414,495 378,319
Retained earnings 352,028 320,553
Cumulative translation
adjustment and other 4,632 1,697
___________ ___________
Total shareholders' equity 771,155 700,569
___________ ___________
Commitments
Total liabilities and
shareholders' equity $ 1,623,531 $ 1,452,198
___________ ___________
See accompanying notes to condensed consolidated financial statements.
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
November 30,
__________________________________
1996 1995
___________ ___________
Net sales $ 807,725 $ 690,624
Cost of sales 721,577 624,278
___________ ___________
Gross profit 86,148 66,346
Operating expenses:
Selling, general &
administrative 32,672 24,041
Research & development 1,190 1,502
Acquisition costs 4,000 -
___________ ___________
Operating income 48,286 40,803
Interest income 6,213 1,446
Interest expense (6,811) ( 814)
___________ ___________
Income before income taxes 47,688 41,435
Income tax expense 16,213 14,088
___________ ___________
Net income $ 31,475 $ 27,347
Net income per share:
Primary $ 0.58 $ 0.54
____________ ____________
$ 0.58 $ 0.52
____________ ____________
Weighted average number of shares:
Primary 54,513 51,033
____________ ____________
Fully diluted 58,300 53,034
____________ ____________
See accompanying notes to condensed consolidated financial statements.
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
November 30,
__________________________________
1996 1995
__________ ___________
Cash flows from operating activities:
Net income $ 31,475 $ 27,347
Adjustments to reconcile net income
to net cash provided(used) by
operating activities:
Depreciation and amortization 26,419 18,819
Interest accretion on zero-coupon
subordinated notes - 532
Interest accrual on long-term debt 6,418 -
Additions to (reductions of)
allowance for doubtful accounts 221 520
Other 2,812 609
Changes in operating assets and
liabilities:
Accounts receivable (18,828) (57,465)
Inventories (26,515) (47,416)
Prepaid expenses and other
current assets (5,677) 254
Accounts payable 54,718 28,741
Accrued expenses and other
current liabilities 4,987 28,994
__________ __________
Net cash provided by operating
activities 76,030 935
__________ __________
Cash flows from investing activities:
Sales and Maturites of short-term
investments 64,376 183,397
Purchases of short-term
investments (108,696) (141,637)
Capital expenditures (22,348) (44,374)
Other 4,621 132
___________ __________
Net cash used in investing
activities (62,047) (2,482)
___________ __________
(continued on next page)
See accompanying notes to condensed consolidated financial statements.
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Three Months Ended
November 30,
________________________________
1996 1995
___________ ___________
Cash flows from financing activities:
Proceeds from short-term debt - (3,004)
Repayments of long-term debt and
capital lease obligations (457) (505)
Net proceeds from sale of
common stock 11,950 3,494
Other (187) 465
____________ ___________
Net cash provided by financing
activities 11,306 450
___________ ___________
Effect of exchange rate changes on
cash and cash equivalents 1,004 664
___________ ___________
Net increase (decrease) in cash and
cash equivalents $ 26,293 $ (433)
Cash and cash equivalents at
beginning of period 228,830 89,959
____________ ___________
Cash and cash equivalents at
end of period $ 225,123 $ 89,526
____________ ___________
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 7,737 $ 5,144
Interest $ 12,816 $ 38
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 - $ 399
Tax benefit associated with
exercise of stock options $ 3,792 $ 264
See accompanying notes to condensed consolidated financial statements.
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying consolidated balance sheets as of
November 30, 1996 (unaudited) and August 31, 1996, the
unaudited consolidated statements of income for the three-
month period ended November 30, 1996 and 1995, and the
unaudited consolidated statements of cash flows for the
three months ended November 30, 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 period ended November 30,
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, 1996 included in the Company's Annual
Report to Shareholders.
For clarity of presentation, the Company has
indicated its first quarter as ending on November 30, and
its fiscal year as ending on August 31, whereas in fact, the
Company's first quarter of 1997 ended on November 29, 1996,
its first quarter of 1996 ended on November 24, 1995 and its
1996 fiscal year ended on August 30, 1996.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
November 30, August 31,
1996 1996
----------- -----------
Raw materials $ 282,973 $ 253,646
Work-in-process 129,113 115,216
----------- -----------
Total $ 412,086 $368,862
=========== ===========
NOTE 3 - 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 which are
computed using the treasury stock method. Fully diluted net
income per share assumes full conversion of the Company's
outstanding convertible 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 $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.
Note 5 - 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 are
not considered material to 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.
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.
On November 26, 1996, Solectron exhanged approximately
$205 million 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. The transaction was accounted for under the pooling
of interests method. The results of operations for Force
are not considerd material to the Comany's consolidated
results of operations. Accordingly, the Company's historical
financial statements have not been restated to reflect the
financial position and results of oprations of Force, and
pro-forma financial information has not been disclosed.
As of November 30, 1996, 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. Solectron has
a sales support office located in Japan. Force Computers'
corporate headquarters are located in San Jose, California.
Its European headquarters and the significant portion of its
operations are located in Munich, Germany. Force Computers
has sales support offices in the United Kingdom, France,
Sweden, Belgium, Israel and Japan. Fine Pitch Technologies
is headquartered in San Jose, California with additional
operations in Mountain View, California and Santa Ana,
California.
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 ended November 30, 1996 and 1995, certain items as a
percentage of net sales. The first quarter operating
results only included four days of Force Computers'
operating results as Force Computers was purchased on
November 26, 1996. The table and the discussion below
should be read in conjunction with the consolidated
financial statements and notes thereto that appear elsewhere
in this report.
Three Months Ended
November 30,
-------------------------
1996 1995
---------- ----------
Net sales 100.0% 100.0%
Cost of sales 89.3 90.4
---------- ----------
Gross profit 10.7 9.6
Operating expenses:
Selling, general & administrative 4.1 3.5
Research & development .1 .2
Acquisition costs .5 -
---------- ----------
Operating income 6.0 5.9
Interest (income) expense, net .1 (.1)
---------- ----------
Income before income taxes 5.9 6.0
Income taxes 2.0 2.0
---------- ----------
Net income 3.9% 4.0%
Net sales for the first quarter of fiscal 1997
increased 17% over the first quarter of fiscal 1996. The
increase in net sales is primarily due to the addition of new
sites to the Company, particularly the site acquired in Austin,
Texas, as well as the net increase in sales volume from both
existing and new customers. The overall increase in sales includes
the offsetting impact of several ongoing programs reaching
end of life and additionally, a shift in the product mix to
one with a somewhat higher overall consignment
content. The change in product mix is due to the
Company taking on some large volume consignment projects
which it may to convert to turn key over time. This resulted in
lower material revenues for these projects which in turn
lowered the Company's overall revenue growth
rate. During the first quarter, the Company initiated
activities on new programs in all regions. These new
programs are scheduled to "ramp-up" to full scale production
over the next few quarters. On a regional basis, sales in
the Company's European region were somewhat weaker primarily
due to declines in revenues from older programs in the
Bordeaux facility as these programs reach end of life.
Revenues in Asia were also reduced due to many of the same
end of life factors as in Europe, compounded by an
increase in consignment mix. Sales in the North American
Region were strong led by increases in sales to existing and
new customers. Sales at the Company's new site
in Austin, Texas also had a significant positive impact on the
North American sales results. Although the Company
does not currently anticipate any future decline in sales,
to lessen the potential impact of any possible future
decline to customers within any particular region
or market segment, 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
three months of fiscal 1997 was Hewlett-Packard Corporation
(HP). Net sales to HP during the three month period ended
November 30, 1996 accounted for 12.5% of consolidated net
sales, compared to less than 10% for the same period in
fiscal 1996. For the three month period ended November 30,
1995, International Business Machines (IBM) represented the
Company's largest customer with sales accounting for 11.7%
of consolidated net sales. For the three month period ended
November 30, 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 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 three months of fiscal 1997 accounted for 64.7% of
consolidated net sales, down from 71% in the first three
months of fiscal 1996.
Net sales at the Company's foreign locations
contributed approximately 24% of consolidated net sales in
the first three months of fiscal 1997, compared to 35% in
the first three months of fiscal 1996. The decrease in
foreign sales as a percentage of total sales is due to the
decreases in sales volume at some of the larger sites in
Europe and Asia and the strong increase in domestic sales
volume primarily due to the purchase of the site in
Austin, Texas. The rate of foreign versus domestic sales, as
well as foreign versus domestic sales rates 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 three months of fiscal
1997 and fiscal 1996. 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 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 any firm long-
term volume purchase commitments from any of it's 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 % for the first quarter in fiscal
1997 has improved over that of the first quarter in fiscal
1996 largely as a result of the changes in product mix
resulting in a greater percentage of consignment than in the
same period last year. Consignment projects typically have
higher gross margins than turnkey projects. Over time,
gross margins at the individual sites and for the Company as
a 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. 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.
Selling, general and administrative (SG&A)
expenses as a percentage of net sales for the three month
period ended November 30, 1996 were 4.1%. This compares to
3.5% for the same period of 1995. The most significant
reason for the increase in SG&A as a percentage of sales is
costs associated with investments in starting up or
purchasing new sites and investments in the Company's
information systems. In absolute dollars, the increase can
also be attributed 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 Malaysia (Johor), California (Fine Pitch
Technologies), Texas, China and most recently, Boston. 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.
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. 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 first
quarter of fiscal 1997 compared to the same period in fiscal
1996. Research and development expenses are not expected to
change significantly in the near future.
A one time charge for acquisition costs of
approximately four million dollars was incurred as a result
of the acquisition of Force Computers Inc. during the
quarter ended November 30, 1996.
As a result of issuing the new convertible
subordinated notes in February, 1996 and the senior notes in
March, 1996, interest expense for the three months ended
November 30, 1996 has increased over the same period in
fiscal 1996. 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 $852 million as of November
30, 1996 compared to $786 million at the end of fiscal 1996.
In addition to increases in working capital generated from
existing sites, the increase is largely due to an increase
in working capital resulting from the acquisition of new
sites. Management expects Solectron to continue to grow in
size, consequently the Company is expected to utilize
greater amounts of working capital 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. Historically,
the Company has been able to manage it's 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 three months of fiscal 1997, the
Company invested approximately $22 million in capital
expenditures. Approximately $6 million of this investment
went 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 mainly in
new equipment, primarily surface mount assembly and test
equipment, to meet current and expected production levels.
For the remainder of fiscal 1997 total capital expenditures
at existing facilities are expected to be in the range of
$110 to $145 million.
In addition to the Company's working capital as of
November 30, 1996, the Company has available a $100 million
unsecured domestic revolving credit facility. In addition,
Force Computers Inc. has a $26 million unsecured revolving
credit facility of which approximately $25 million is
available. Also, the Company has approximately $51 and $8 million
in available foreign and domestic credit facilities respectively.
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. The lease expires September, 1999. The Company
intends to re-negotiate the terms of the lease before
September 1997.
Trends and Uncertainties
Customer Concentration; Dependence in the Electronics
Industry
A small number of customers are currently
responsible for a significant portion of the Company's net
sales. In the three month period ended November 30, 1996
and in the 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 or reduction of orders from these or
other significant customers could have a material adverse
effect on the Company's results of operations. The Company's
largest customer during the first three months of fiscal
1997 was Hewlett-Packard Corporation (HP). Net sales to HP
during this period accounted for 12.5% of consolidated net
sales, compared to less than 10% in the first three months
of fiscal 1996. For the three months ended November 30,
1995, International Business Machines (IBM) represented the
Company's largest customer with sales accounting for 11.7%
of consolidated net sales. For the three months ended
November 30, 1996, sales to IBM were less than 10% of total
consolidated sales. 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.
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
facilities in many locations, including the Company's most
recent purchase of Force Computers Inc., which has
operations in California and Germany. Additionally, the
Company continually evaluates growth and acquisition
opportunities and may pursue additional 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
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.
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 customer 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, Solectron'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 on January 31,
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 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
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: Computation of Net Income per
Share
(b) Reports on Form 8-K
None
SOLECTRON CORPORATION
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: January 13, 1997 By: /s/ Koichi Nishimura
-----------------------
Koichi Nishimura, Ph.D.
President, Chief Executive Officer
and Chairman of the Board
Date: January 13, 1997 By: /s/ Koichi Nishimura
______________________
Susan Wang
Senior Vice President, Chief
Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
Exhibit 11.1
SOLECTRON CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
Three Months Ended
November 30,
_____________________
1996 1995
_________ _________
Weighted average number of shares of common
stock and common stock equivalents:
Primary:
Common stock 52,946 49,725
Common stock equivalents - stock options 1,567 1,308
________ ________
Total primary shares 54,513 51,033
-------- --------
Fully diluted:
Common shares issuable upon assumed
conversion of convertible subordinated
notes 3,402 1,960
Incremental increase in common stock
equivalents using end of period
market price 385 41
________ _________
Total fully diluted shares 58,300 53,034
________ _________
Net income - primary $ 31,475 $ 27,347
Interest accretion on convertible
subordinated notes, net of taxes 2,277 350
________ _________
Net income - fully diluted $ 33,752 $ 27,697
________ _________
Net income per share - primary $ 0.58 $ 0.54
________ ________
Net income per share - fully diluted $ 0.58 $ 0.52
________ ________
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