<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 FEBRUARY 28, 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 March 31, 1997, 54,402,511 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
February 28, 1997 and August 31, 1996 3
Condensed Consolidated Statements of Income for
for the three and six months ended February 28,
1997 and for the three and six months ended
February 29, 1996 4
Condensed Consolidated Statements of Cash Flows
for the six months ended February 28, 1997 and
February 29, 1996 5 - 6
Notes to Condensed Consolidated Financial
Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20 - 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
2
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<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
February 28, August 31,
1997 1996
___________ ___________
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 511,341 $ 410,350
Accounts receivable, net 370,484 341,200
Inventories 445,424 368,862
Prepaid expenses and other
current assets 38,387 24,312
___________ ___________
Total current assets 1,365,636 1,144,724
Net property and equipment 249,159 249,570
Other assets 59,918 57,904
___________ ___________
Total assets $1,674,713 $1,452,198
___________ ___________
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued interest and current
portion of long-term debt $ 3,342 $ 14,094
Accounts payable 369,111 280,840
Accrued employee compensation 49,103 38,216
Accrued expenses 26,605 9,280
Other current liabilities 30,898 15,939
___________ ___________
Total current liabilities 479,059 358,369
Long-term debt 389,015 386,927
Other long-term liabilities 1,787 6,333
___________ ___________
Total liabilities 869,861 751,629
___________ ___________
Stockholders' equity:
Common stock 56 53
Additional paid-in capital 420,996 378,266
Retained earnings 389,593 320,553
Cumulative translation
adjustment and other (5,793) 1,697
___________ ___________
Total stockholders' equity 804,852 700,569
___________ ___________
Commitments
Total liabilities and
stockholders' equity $1,674,713 $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 Six Months Ended
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
1997 1996 1997 1996
_________ _________ _________ _________
<S> <C> <C> <C> <C>
Net sales $ 858,698 $ 657,176 $1,666,423 $1,347,800
Cost of sales 756,500 591,815 1,478,077 1,216,093
_________ _________ _________ _________
Gross profit 102,198 65,361 188,346 131,707
Operating expenses:
Selling, general
& administrative 42,512 21,380 75,184 45,421
Research &
development 4,123 2,037 5,313 3,539
Acquisition costs - - 4,000 -
_________ _________ _________ _________
Operating income 55,563 41,944 103,849 82,747
Interest income 7,536 1,125 13,749 2,571
Interest expense (6,183) (1,176) (12,994) (1,990)
_________ _________ _________ _________
Income before
income taxes 56,916 41,893 104,604 83,328
Income tax expense 19,351 14,243 35,564 28,331
_________ _________ _________ _________
Net income $ 37,565 $ 27,650 $ 69,040 $ 54,997
_________ _________ _________ _________
Net income per share:
Primary $ 0.65 $ 0.54 $ 1.22 $ 1.07
_________ _________ _________ _________
Fully diluted $ 0.65 $ 0.52 $ 1.22 $ 1.03
_________ _________ _________ _________
Weighted average number
of shares:
Primary 58,219 51,530 56,509 51,280
_________ _________ _________ _________
Fully diluted 61,621 53,848 59,913 53,730
_________ _________ _________ _________
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>
Six Months Ended
February 28, February 29,
1997 1996
________________ ________________
<S> <C> <C>
Cash flows from operating activities:
Net income $ 69,040 $ 54,997
Adjustments to reconcile net income
to net cash provided(used) by
operating activities:
Depreciation and amortization 51,742 38,662
Interest accretion on zero-coupon
subordinated notes - 1,110
Additions to allowance for
doubtful accounts 355 682
Other 3,812 (116)
Changes in operating assets and
liabilities:
Accounts receivable (14,480) (34,257)
Inventories (63,987) (50,590)
Prepaid expenses and other
current assets (7,703) (4,930)
Accounts payable 86,639 (7,975)
Accrued expenses and other
current liabilities 10,256 4,392
__________ __________
Net cash provided by operating
activities 135,674 1,975
__________ __________
Cash flows from investing activities:
Sales and maturities of short-term
investments 105,879 412,972
Purchases of short-term
investments (202,277) (363,617)
Capital expenditures (53,915) (71,109)
Other 5,556 -
__________ __________
Net cash used in investing
activities (144,757) (21,754)
__________ __________
(continued on next page)
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<CAPTION>
Six Months Ended
February 28, February 29,
1997 1996
_______________ _______________
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of
long-term debt - 224,292
Repayments of long-term debt and
capital lease obligations (106) (2,309)
Net proceeds from sale of
common stock 18,512 7,192
Other (3,429) -
__________ __________
Net cash provided by financing
activities 14,977 229,175
__________ __________
Effect of exchange rate changes on
cash and cash equivalents (1,301) 448
__________ __________
Net increase in cash and
cash equivalents 4,593 209,844
Cash and cash equivalents at
beginning of period 228,830 89,959
__________ __________
Cash and cash equivalents at
end of period $ 233,423 $ 299,803
__________ __________
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 42,590 $ 32,584
Interest $ 13,134 $ 209
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 - $ 4,838
Tax benefit associated with
exercise of stock options $ 5,265 $ 760
See accompanying notes to condensed consolidated financial statements.
</TABLE>
6
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SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated balance sheets as of
February 28, 1997 (unaudited) and August 31, 1996, the unaudited
condensed consolidated statements of income for the three-month and six-
month periods ended February 28, 1997 and February 29, 1996, and the
unaudited condensed consolidated statements of cash flows for the six
months ended February 28, 1997 and February 29, 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 six-month periods ended February 28, 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
second quarter as ending on the last day of February, and its fiscal
year as ending on August 31, whereas in fact, the Company's second
quarter of 1997 ended on February 28, 1997, its second quarter of 1996
ended on February 23, 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>
February 28, August 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 327,974 $ 253,646
Work-in-process 117,450 115,216
----------- -----------
Total $ 445,424 $ 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 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 5 - 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 6 - 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 7 - 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
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
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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 8 - Subsequent Events
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 assume responsibility for a selected
Ericsson operation, set up a New Product Introduction center in
Stockholm, Sweden and transfer production from certain Ericsson plants
worldwide to Solectron manufacturing sites around the world. Solectron
and Ericsson expect to sign definitive agreements during the Company's
fourth fiscal quarter. Completion of the transaction is subject to
successful negotiation of the definitive agreements, approval of the
boards of directors of both companies and applicable government
approvals.
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.
9
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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 datacommunications, 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 February 28, 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 additional operations in other California
locations and in Massachusetts.
Results of Operations
The electronics industry is subject to rapid technological
change, product obsolescence and price competition. These and other
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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 six
months ended February 28, 1997 and February 29, 1996, certain items as a
percentage of net sales. The operating results for the six months of
1997 include only three 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Feb. 28 Feb. 29 Feb. 28 Feb. 29
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 88.1 90.1 88.7 90.2
------- ------- ------- -------
Gross profit 11.9 9.9 11.3 9.8
Operating expenses:
Selling, general &
administrative 4.9 3.2 4.5 3.4
Research & development .5 .3 .3 .3
Acquisition costs - - .2 -
------- ------- ------- -------
Operating income 6.5 6.4 6.3 6.1
Interest (income)
expense, net (.2) - - (.1)
------- ------- ------- -------
Income before
income taxes 6.7 6.4 6.3 6.2
Income taxes 2.3 2.2 2.1 2.1
------- ------- ------- -------
Net income 4.4% 4.2% 4.2% 4.1%
</TABLE>
Net sales for the three months and six months ended February
28, 1997 increased 30.7% and 23.6%, respectively, over the same periods
of fiscal 1996. The increases in net sales for both the three- and six-
month periods are predominantly due to the acquisitions of the Austin,
Texas site in March 1996 and Force in November 1996 as well as net
increases in sales volume from both existing and new customers. Sales
in the North American region were strong, led by increases in sales to
existing and new customers. The overall increase in sales is partially
offset by the effect of several ongoing programs reaching end-of-life,
projects with higher than normal consignment content and the impact of
lower international sales. Sales in the Company's European region
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reflect 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. 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 half of fiscal
1997 was Hewlett-Packard Corporation (HP). Net sales to HP during the
three- and six-month periods ended February 28, 1997 accounted for 15.5%
and 14.0%, respectively, of consolidated net sales, compared to 12.0%
and 10.5%, respectively, for the same periods in fiscal 1996. In
addition, net sales to Bay Networks, Inc. were 11.0% and 11.1% of
consolidated net sales for the three- and six-month periods of fiscal
1997 compared to less than 10% in the fiscal 1996 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 half of fiscal 1997 accounted for 65.8% of consolidated net
sales, down from 69.0% in the first half of fiscal 1996.
Net sales at the Company's foreign locations contributed
approximately 24.4% of consolidated net sales in the first half of
fiscal 1997, compared to 32.6% in the first half 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 in March 1996. 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 half 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 its
customers. Because of these factors, there can be no assurance that the
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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 11.3% for the first
half of fiscal 1997 from 9.8% for the first half of fiscal 1996.
Approximately half of this improvement resulted from the inclusion of
Force in the second quarter of 1997. 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 half of fiscal 1997
would have been 10.6%. In addition to the impact of Force, the improved
gross margin percentage in the first half of fiscal 1997 reflects a
shift in product mix toward the higher margin workstation and networking
and datacommunications 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 98.8% and 65.5%, respectively, for the three-
and six-month periods of fiscal 1997 over the same periods of fiscal
1996. Approximately half of these increases relates to the inclusion of
Force and the Austin, Texas site operating results in the fiscal 1997
periods. The remainder of the increases can be substantially 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 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.
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
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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.
Research and development expenses are not expected to change
significantly in the near future.
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.
As a result of issuing convertible subordinated notes in
February 1996 and senior notes in March 1996, interest expense for the
three months and six months ended February 28, 1997 has increased
significantly over the same periods in fiscal 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.
Liquidity and Capital Resources
Working capital was $887 million as of February 28, 1997
compared to $786 million at the end of fiscal 1996. In addition to
increases in working capital resulting from the acquisition of new
sites, the increase is largely due to an increase in working capital
generated from the existing 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 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 six months of fiscal 1997, the Company
invested approximately $54 million in capital expenditures.
Approximately $11 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 mainly in new equipment, primarily surface mount assembly
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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 $75 to $115 million.
In addition to the Company's working capital as of February
28, 1997, the Company has available a $100 million unsecured domestic
revolving credit facility. The Company also has approximately $79
million and $8 million in available foreign and domestic credit
facilities respectively. In addition, the Company is currently
negotiating an asset securitization line of credit for at least $100
million which is expected to close during the third quarter of fiscal
1997. 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 is attempting 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- and six-
month periods ended February 28, 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
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 half of fiscal 1997, Hewlett-Packard Corporation (HP)
and Bay Networks, Inc. accounted for 14.0% and 11.1%, respectively, of
net sales, compared to 10.5% and less than 10%, respectively, during the
same period of fiscal 1996. There can be no assurances 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.
15
<PAGE>
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 has announced the establishment of new manufacturing
facilities in Suzhou, China and Guadalajara, Mexico; begun 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 assume
responsibility for a selected Ericsson operation, set up a New Product
Introduction center in Stockholm, Sweden and transfer production from
certain Ericsson plants worldwide to Solectron manufacturing sites
around the world. 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, 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. 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
16
<PAGE>
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.
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
purchase an existing Ericsson printed circuit board manufacturing
operation, set up a New Product Introduction center in Stockholm, Sweden
and transfer a portion of production from certain Ericsson plants to
Solectron manufacturing sites. Under the proposal, Ericsson will
contract for Solectron's services from the purchased Ericsson plant for
a specified term. Thereafter, Solectron will bear the risk of filling
the manufacturing capacity at the purchased site with renewed business
from Ericsson or new business from other customers. The transactions
contemplated by the memorandum of understanding are expected to close by
the end of August 1997, subject to a successful negotiation of the
definitive agreements, approval of the boards of directors of both
companies, 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. In addition, the Company's tax
holiday in its Penang, Malaysia site expired on January 31, 1997. The
Company applied for and has been granted a new tax holiday which is
effective through January 31, 2002, subject to certain conditions. In
addition, the Company has 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
17
<PAGE>
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.
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.
18
<PAGE>
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
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.
19
<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
(a) The Company held its Annual Meeting of Stockholders
on January 9, 1997.
(b) At the meeting, the following proposals received the
votes listed below:
Proposal I: Election of Directors
Dr. Koichi Nishimura Votes for: 44,503,322
Votes withheld: 47,483
Dr. Winston H. Chen Votes for: 44,503,877
Votes withheld: 46,928
Richard A. D'Amore Votes for: 44,484,292
Votes withheld: 66,513
Charles A. Dickinson Votes for: 44,430,610
Votes withheld: 120,195
Heinz Fridrich Votes for: 44,382,566
Votes withheld: 168,239
Dr. Kenneth E. Haughton Votes for: 44,450,183
Votes withheld: 50,622
Dr. Paul R. Low Votes for: 44,349,089
Votes withheld: 201,716
W. Ferrell Sanders Votes for: 44,496,185
Votes withheld: 54,620
Osamu Yamada Votes for: 44,375,706
Votes withheld: 175,099
20
<PAGE>
Proposal II: Approval of a change in the Company's
state of incorporation from California to Delaware
Votes for: 27,001,516
Votes against 11,140,400
Abstentions 138,206
Proposal III: Approval of the establishment of a
classified Board of Directors when the change in its
state of incorporation occurs
Votes for: 15,124,765
Votes against 15,373,399
Abstentions 7,781,958
Proposal IV: Approval of an increase in the number
of authorized shares of Common Stock of the Company
from eighty million (80,000,000) to two hundred
million (200,000,000) when the change in its state
of incorporation occurs
Votes for: 30,087,132
Votes against 8,033,046
Abstentions 159,944
Proposal V: Approval of the form of indemnification
agreement to be entered into between the Company and
its directors and officers when the change in the
Company's state of incorporation occurs
Votes for: 37,492,039
Votes against 514,269
Abstentions 273,814
Proposal VI: Approval of an amendment to the
Company's 1992 Stock Option Plan to increase the
number of share of Common Stock reserved for
issuance thereunder by two million five hundred
thousand (2,500,000) shares to an aggregate of eight
million five hundred thousand (8,500,000) shares
Votes for: 32,156,310
Votes against 12,179,568
Abstentions 214,927
Proposal VII: Ratification of the appointment of
KPMG Peat Marwick LLP as independent accountants of
the Company for the fiscal year ended August 31, 1997
Votes for: 44,210,737
Votes against 38,274
Abstentions 54,647
21
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
One Form 8-K was filed on February 25, 1997 describing
the Company's reincorporation in the State of Delaware.
22
<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: April 11, 1997 By: /s/ Susan Wang
________________ ______________________
Susan Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
23
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 Six Months Ended
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
1997 1996 1997 1996
________ ________ ________ ________
<S> <C> <C> <C> <C>
Weighted average number of
shares of common stock and
common stock equivalents:
Primary:
Common stock 56,276 49,989 54,610 49,856
Common stock equivalents -
stock options 1,943 1,541 1,899 1,424
________ ________ ________ ________
Total primary shares 58,219 51,530 56,509 51,280
________ ________ ________ ________
Fully diluted:
Common shares issuable
upon assumed conversion
of convertible subordinated
notes 3,402 1,974 3,402 1,967
Incremental increase in
common stock equivalents
using end of period market
price - 344 2 483
________ ________ ________ ________
Total fully diluted shares 61,621 53,848 59,913 53,730
________ ________ ________ ________
Net income - primary $ 37,565 $ 27,650 $ 69,040 $ 54,997
Interest accretion on
convertible subordinated
notes, net of taxes 2,380 241 4,657 591
________ ________ ________ ________
Net income - fully diluted $ 39,945 $ 27,891 $ 73,697 $ 55,588
________ ________ ________ ________
Net income per share - primary $ 0.65 $ 0.54 $ 1.22 $ 1.07
________ ________ ________ ________
Net income per share -
fully diluted $ 0.65 $ 0.52 $ 1.22<F1>$ 1.03
________ ________ ________ ________
<F1> Equals primary amount as fully diluted calculation is anti-dilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-29-1997
<PERIOD-END> FEB-28-1997
<CASH> 233,423
<SECURITIES> 277,918
<RECEIVABLES> 374,457
<ALLOWANCES> 3,973
<INVENTORY> 445,424
<CURRENT-ASSETS> 1,365,636
<PP&E> 528,219
<DEPRECIATION> 279,060
<TOTAL-ASSETS> 1,674,713
<CURRENT-LIABILITIES> 479,059
<BONDS> 389,015
0
0
<COMMON> 56
<OTHER-SE> 804,796
<TOTAL-LIABILITY-AND-EQUITY> 1,674,713
<SALES> 1,666,423
<TOTAL-REVENUES> 1,666,423
<CGS> 1,478,077
<TOTAL-COSTS> 1,478,077
<OTHER-EXPENSES> 84,142
<LOSS-PROVISION> 355
<INTEREST-EXPENSE> 12,994
<INCOME-PRETAX> 104,604
<INCOME-TAX> 35,564
<INCOME-CONTINUING> 69,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,040
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
