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 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 December 31, 1997, 115,222,388 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
November 30, 1997 and August 31, 1997 3
Condensed Consolidated Statements of Income for
for the three months ended November 30, 1997
and 1996 4
Condensed Consolidated Statements of Cash Flows
for the three months ended November 30, 1997
and 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 - 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
2
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
November 30, August 31,
1997 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 412,892 $ 482,902
Accounts receivable, net 519,493 418,682
Inventories 590,058 494,622
Prepaid expenses and other
current assets 59,209 79,426
---------- ----------
Total current assets 1,581,652 1,475,632
Net property and equipment 378,199 326,361
Other assets 50,173 50,426
---------- ----------
Total assets $2,010,024 $1,852,419
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 1,464
Accounts payable 513,581 415,896
Accrued employee compensation 49,087 56,218
Accrued expenses 17,133 24,787
Other current liabilities 60,529 45,577
---------- ----------
Total current liabilities 640,330 543,942
Long-term debt 386,785 385,850
Other long-term liabilities 3,510 3,558
---------- ----------
Total liabilities 1,030,625 933,350
---------- ----------
Stockholders' equity:
Common stock 115 115
Additional paid-in capital 462,006 451,093
Retained earnings 523,500 478,612
Cumulative translation adjustment (6,222) (10,751)
---------- ----------
Total stockholders' equity 979,399 919,069
---------- ----------
Commitments
Total liabilities and
stockholders' equity $2,010,024 $1,852,419
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Three Months Ended
November 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net sales $1,136,820 $ 807,725
Cost of sales 1,013,061 721,577
---------- ----------
Gross profit 123,759 86,148
Operating expenses:
Selling, general
& administrative 51,939 32,672
Research &
development 4,382 1,190
Acquisition costs -- 4,000
---------- ----------
Operating income 67,438 48,286
Interest income 6,577 6,213
Interest expense (6,513) (6,811)
---------- ----------
Income before
income taxes 67,502 47,688
Income tax expense 22,614 16,213
---------- ----------
Net income $ 44,888 $ 31,475
========== ==========
Net income per share:
Primary $ 0.38 $ 0.29
========== ==========
Fully diluted $ 0.38 $ 0.29
========== ==========
Weighted average number
of shares:
Primary 119,236 109,026
========== ==========
Fully diluted 126,039 116,601
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended
November 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 44,888 $ 31,475
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 32,597 26,419
Tax benefit associated with the
exercise of stock options -- 3,792
Other 5,329 3,033
Changes in operating assets and
liabilities:
Accounts receivable (98,360) (18,828)
Inventories (92,287) (26,515)
Prepaid expenses and other
current assets 20,979 (5,677)
Accounts payable 94,774 54,718
Accrued expenses and other
current liabilities (89) 7,613
---------- ----------
Net cash provided by operating
activities 7,831 76,030
---------- ----------
Cash flows from investing activities:
Sales and maturities of short-term
investments 278,592 64,376
Purchases of short-term investments (319,709) (108,696)
Capital expenditures (88,500) (22,348)
Other (799) 4,621
---------- ----------
Net cash used in investing
activities (130,416) (62,047)
---------- ----------
(continued on next page)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<CAPTION>
Three Months Ended
November 30,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt (886) (457)
Net proceeds from sale of common stock 10,910 11,950
Other -- (187)
---------- ----------
Net cash provided by financing
activities 10,024 11,306
---------- ----------
Effect of exchange rate changes on
cash and cash equivalents 1,435 1,004
---------- ----------
Net increase in cash and
cash equivalents (111,126) 26,293
Cash and cash equivalents at
beginning of period 225,073 228,830
---------- ----------
Cash and cash equivalents at
end of period $ 113,947 $ 255,123
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 19,393 $ 7,737
Interest $ -- $ 12,816
Non-cash investing and financing
activities:
Issuance of common stock for
business combination $ -- $ 18,335
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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 November
30, 1997 (unaudited) and August 31, 1997, the unaudited condensed
consolidated statements of income for the three-month periods ended
November 30, 1997 and 1996, and the unaudited condensed consolidated
statements of cash flows for the three months ended November 30, 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 periods ended
November 30, 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, 1997 included
in the Company's Annual Report to Stockholders.
For clarity of presentation, the Company has indicated its first fiscal
quarter as ending on November 30, and its fiscal year as ending on
August 31, whereas in fact, the Company's first quarter of fiscal 1998
ended on November 28, 1997, its first quarter of fiscal 1997 ended on
November 29, 1996 and its 1997 fiscal year ended on August 29, 1997.
Certain reclassifications have been made to the fiscal 1997 condensed
consolidated financial statements to conform to the fiscal 1998
presentation.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
November 30, August 31,
1997 1997
----------- -----------
<S> <C> <C.
Raw materials $ 427,749 $ 365,630
Work-in-process 162,309 128,992
----------- -----------
Total $ 590,058 $ 494,622
=========== ===========
</TABLE>
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 and are computed using the treasury stock method.
Fully diluted net income per share assumes full conversion of the
Company's outstanding convertible notes.
7
<PAGE>
NOTE 4 - Asset Securitization Arrangement
In September 1997, the Company entered into an asset securitization
arrangement with a bank under which it may sell up to $120 million of
eligible accounts receivable. The arrangement is subject to certain
financial covenants and management representations. No transactions have
occurred under this arrangement.
NOTE 5 - Commitments
The Company leases various facilities under operating lease agreements.
These leases expire at various dates through the year 2006.
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. 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 $17.0
million, $11.8 million, $9.0 million, $6.5 million and $4.2 million in
each of the years in the five year period ending August 31, 2002 and an
aggregate $1.1 million for periods after that date.
NOTE 6 - 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
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 will 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.
8
<PAGE>
NOTE 7 - Subsequent Event
On December 19, 1997, the Company announced that it had signed a letter
of intent with NCR Corporation (NCR) under which Solectron will acquire
NCR's manufacturing assets in three cities for approximately $100
million. Under the terms of the letter of intent, NCR will outsource the
manufacturing of its computer and retail products to Solectron for at
least five years and Solectron will hire approximately 1,200 NCR
manufacturing and related support employees. The transaction is expected
to close in the Company's third fiscal quarter of 1998. 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.
9
<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. Solectron'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 systems
original equipment manufacturers (OEMs). The majority of Solectron's
customers compete in the networking, data and voice communications,
workstation, personal computer and computer peripheral segments of the
electronics industry. The Company uses advanced manufacturing
technologies in assembly and manufacturing management of complex printed
circuit boards and electronics systems. Solectron also provides pre-
manufacturing and post-manufacturing services. A discussion of some of
the potential fluctuations in operating results is included under
"Trends and Uncertainties".
On November 26, 1996, Solectron exchanged approximately 6.2 million
shares of common stock for all of the outstanding stock of Force
Computers Inc. (Force), and assumed all of the outstanding options of
Force, after giving effect to the exchange ratio. Force is 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 November 30, 1997, excluding the locations of the Force Computers
and Fine Pitch Technologies subsidiaries, the Company had manufacturing
operations in fourteen locations, of which six are located in North
America and eight are overseas. Solectron also has its Asia/Pacific
headquarters office in Taipei, Taiwan and 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 a significant portion of its operations are located in Munich,
Germany. In addition to its headquarters locations, Force has sales
support offices in various locations in the United States and
internationally. Fine Pitch has operations in California and in
Massachusetts.
During 1997, the Company established a strategic, global manufacturing
partnership with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson). The Company has established a New Product Introduction
center in Norrkoping and Stockholm, Sweden, and production from certain
Ericsson plants worldwide has been or will be transferred to Solectron
manufacturing sites around the world. In October 1997, Solectron
acquired certain assets, primarily equipment and inventory, of
Ericsson's printed circuit board assembly operation located in Brazil.
In addition, Solectron's subsidiary, Solectron Brasil Ltda., hired
approximately 370 persons formerly employed by Ericsson Telecomunicacoes
S.A. in Brazil.
10
<PAGE>
On December 19, 1997, the Company announced that it had signed a letter
of intent with NCR Corporation (NCR) under which Solectron will acquire
NCR's manufacturing assets in three cities for approximately $100
million. Under the terms of the letter of intent, NCR will outsource the
manufacturing of its computer and retail products to Solectron for at
least five years and Solectron will hire approximately 1,200 NCR
manufacturing and related support employees. The transaction is expected
to close in the Company's third fiscal quarter of 1998. 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.
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 Solectron's major
customers in particular, could have an adverse material effect on
Solectron's results of operations. See "Trends and Uncertainties --
Potential Fluctuations in Operating Results" and "Competition" for
further discussion of potential fluctuations in operating results.
The following table sets forth, for the periods indicated, certain items
in the Consolidated Statements of Income as a percentage of net sales.
The financial information and the discussion below should be read in
conjunction with the Condensed Consolidated Financial Statements and
Notes thereto.
<TABLE>
<CAPTION>
Three Months Ended
November 30,
------------------
1997 1996
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 89.1 89.3
----- -----
Gross profit 10.9 10.7
Operating expenses:
Selling, general and administrative 4.6 4.1
Research and development 0.4 0.1
Acquisition costs -- 0.5
----- -----
Operating income 5.9 6.0
Net interest income (expense) -- (0.1)
----- -----
Income before income taxes 5.9 5.9
Income taxes 2.0 2.0
----- -----
Net income 3.9% 3.9%
===== =====
11
<PAGE>
Net Sales
Net sales for the first quarter of fiscal 1998 grew to $1.1 billion, an
increase of 40.7% over the same period in fiscal 1997. The sales growth
is attributable to significant increases in sales volume from both
existing and new customers in the Americas, the acquisition of Force
Computers, Inc. in November 1996 and higher European and Asian sales.
Sales in the Americas reflected increases in sales at all locations to
existing and new customers in the fiscal 1998 period compared to the
fiscal 1997 period. The sales increase at the Milpitas, California site
was partially offset by deliberate management actions initiated in the
fourth quarter of fiscal 1997 to achieve improved global load balancing
and specific product program transitioning. First quarter sales in the
Company's European and Asian operations increased in fiscal 1998 over
the same period of fiscal 1997 primarily as a result of core business
growth and new accounts. The global load balancing efforts noted above
made only a modest contribution to the sales growth in Europe and Asia
due to various customer-specific inventory and program management
issues. 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,
the Company is committed to seeking diversification of its customer base
among many countries, market segments and product lines within market
segments.
Hewlett-Packard Company (HP) was Solectron's largest customer in the
first quarters of both fiscal 1998 and 1997 and accounted for 15.5% and
12.5%, respectively, of consolidated net sales in those periods. In
addition, Sun Microsystems, Inc. accounted for 10.0% of net sales in the
first quarter of fiscal 1998 and Bay Networks, Inc. accounted for 11.2%
of net sales in the first quarter of fiscal 1997. No other customers
accounted for more than 10% of net sales during any of the periods
presented.
Solectron's top ten customers accounted for 67.3% and 66.1% of
consolidated net sales in the first three months of fiscal 1998 and
1997, respectively. Solectron is still dependent upon continued revenues
from HP and the rest of its top ten customers and there can be no
guarantee that these or any other customers will not increase or
decrease as a percentage of consolidated net sales either individually
or as a group. Consequently, any material decrease in sales to these or
other customers could have an adverse material effect on Solectron's
results of operations.
In the first quarter of fiscal 1998, international locations contributed
33.6% of consolidated net sales compared to 23.3% in the same period of
fiscal 1997. In addition to the sales growth factors for Europe and Asia
noted above, the Company's international sales also benefited from the
addition during the first quarter of fiscal 1998 of the sites in Mexico
and Brazil.
As a result of Solectron's international sales and facilities,
Solectron's operations are subject to risks of doing business abroad.
While to date these dynamics have not had an adverse material effect on
Solectron's results of operations, there can be no assurance that there
will not be such an impact in the future. See "Trends and Uncertainties
- -- International Operations" for a further discussion of potential
fluctuations in operating results associated with the risks of doing
business abroad.
12
<PAGE>
Solectron's operations in Milpitas, California contributed a substantial
portion of Solectron's net sales and operating income during the first
quarters of fiscal 1998 and fiscal 1997. In recent quarters, management
has undertaken deliberate actions to achieve improved global load
balancing by transferring certain projects from the Milpitas site to
other sites worldwide. However, the performance of the Milpitas
operation is expected to continue as a significant factor in the overall
financial performance of Solectron. Any adverse material change to the
customer base, product mix, efficiency, or other attributes of this site
could have an adverse material effect on Solectron's consolidated
results of operations.
Solectron believes that its ability to continue to achieve growth will
depend upon growth in sales to existing customers for their current and
future product generations, successful marketing to new customers and
future geographic expansion. Customer contracts can be canceled and
volume levels can be changed or delayed. The timely replacement of
delayed, canceled or reduced orders with new business cannot be assured.
In addition, there can be no assurance that any of Solectron's current
customers will continue to utilize Solectron's services. Because of
these factors, there can be no assurance that Solectron's historical
revenue growth rate will continue. See "Trends and Uncertainties" for a
discussion of certain factors affecting the management of growth,
geographic expansion and potential fluctuations in sales and results of
operations.
Gross Profit
The gross margin percentage improved to 10.9% for the fiscal 1998 period
from 10.7% for the first quarter of fiscal 1997. The first quarter of
fiscal 1998 reflects a full quarter of Force's contribution while the
first quarter of fiscal 1997 includes Force only from the date of its
acquisition, November 26, 1996. Gross profit margins on Force's products
are significantly higher than those of the rest of the Company. The
positive effect of Force's gross profit margins was partially offset by
start-up costs associated with the Company's operations in China,
Brazil, Mexico and Massachusetts, as well as a number of new programs
that were initiated with both new and existing customers in the first
quarter of fiscal 1998, which negatively affected gross margin
percentages during their start-up phases. In addition, there was a
somewhat seasonal shift in product mix toward the lower margin personal
computer products. After the calendar year end, the personal computer
industry typically reassesses demand based on inventory levels, and the
Company expects that its product mix may shift away from personal
computers to other industry segments in the second quarter.
For the foreseeable future, Solectron's gross margin is expected to
depend primarily on product mix, production efficiencies, utilization of
manufacturing capacity, start-up and integration costs of new and
acquired businesses, the percentage of sales derived from turnkey
manufacturing and pricing within the electronics industry. 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
margin percentages 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
13
<PAGE>
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 Expenses
In absolute dollars, selling, general and administrative (SG&A) expenses
increased 59.0% in the first quarter of fiscal 1998 over the same period
of fiscal 1997. Approximately one-third of the increase in fiscal 1998
is a result of the inclusion of Force and the new sites in Mexico,
Brazil and Sweden. The remainder of the increase in fiscal 1998 over
fiscal 1997 is due primarily to investment in infrastructure such as
personnel and related departmental expenses at all manufacturing
locations as well as continuing investment in information systems to
support the increased size and complexity of the Company's business. As
a percentage of net sales, SG&A expenses were 4.6% and 4.1% in the
fiscal 1998 and fiscal 1997 periods, respectively. The most significant
reasons for the fiscal 1998 increase in 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.
Research and Development Expenses
With the exception of its Force Computers operation, the Company's
research and development (R&D) 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 R&D efforts are concentrated on new
product development and improvement of product designs through
improvements in functionality and support of next generation micro-
processors. Research and development expenses, in absolute dollars and
as a percentage of net sales, respectively, were $4.4 million and 0.4%
in the first quarter of fiscal 1998 and $1.2 million and 0.1% in the
fiscal 1997 period. The increase in R&D expenses in fiscal 1998 compared
to fiscal 1997 is due to the acquisition of Force in November 1996. The
Company expects that R&D 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 R&D efforts and additional R&D projects are
undertaken at certain of the Company's Asian sites.
Acquisition Costs
A one time charge for acquisition costs of approximately $4.0 million
was incurred in fiscal 1997 as a result of the acquisition of Force
Computers during the quarter ended November 30, 1996.
14
<PAGE>
Net Interest Income (Expense)
Net interest income was $0.1 million for the first three months of
fiscal 1998 compared to net interest expense of $0.6 million in the same
period of fiscal 1997. Interest expense on the Company's long-term debt
is approximately $6.2 million per quarter and, in the fiscal 1998
quarter, has been offset by interest earned on undeployed cash and
investments. Solectron expects to utilize more of the undeployed cash
during fiscal 1998 in order to fund anticipated future growth. See
"Trends and Uncertainties -- Management of Growth," and "Potential
Fluctuations in Operating Results."
Income Taxes
Income taxes increased to $22.6 million in the first quarter of fiscal
1998 from $16.2 million in the fiscal 1997 period primarily due to
increased income before income taxes. Solectron's effective income tax
rate decreased slightly to 33.5% in the fiscal 1998 period from 34% in
the first quarter of fiscal 1997.
In general, the effective income tax rate is largely a function of the
balance between income from domestic and international operations.
Solectron's international operations, taken as a whole, have been taxed
at a lower rate than in the United States, primarily due to the tax
holiday granted to the Company's Penang, Malaysia site. The Malaysian
tax holiday is effective through January 31, 2002, subject to certain
conditions. The Company has also been granted various tax holidays in
China, which are effective for various terms and are subject to certain
conditions.
Liquidity and Capital Resources
Working capital was $941 million at November 30, 1997 compared to $932
million at the end of fiscal 1997. A major component of working capital
at November 30, 1997 continues to be undeployed cash from the proceeds
of the two debt offerings during fiscal 1996. As Solectron continues to
grow, it is expected that the Company will require greater amounts of
working capital to support its operations. The Company believes that its
current level of working capital together with cash generated from
operations and the Company's available credit facilities 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.
In the first quarter of fiscal 1998, the Company invested approximately
$89 million in capital expenditures. A large portion of these
expenditures related to the purchase of new equipment, primarily surface
mount assembly and test equipment, to meet current and expected
production levels, as well as to replace or upgrade older equipment
which was retired or sold. Significant expenditures were also made for
the acquisition of land and buildings for the Company's new
manufacturing sites, principally in China, Mexico and Brazil. The
15
<PAGE>
Company expects total capital expenditures in fiscal 1998 to be in the
range of $160 million to $200 million.
In addition to working capital as of November 30, 1997, which includes
cash and cash equivalents of $114 million and short-term investments of
$299 million, the Company has available a $100 million unsecured
multicurrency revolving credit facility and a $120 million asset
securitization arrangement. Both of these facilities are subject to
financial covenants. The Company also has approximately $65.8 million in
available foreign credit facilities.
Trends and Uncertainties
Customer Concentration; Dependence on the Electronics Industry
In the first quarter of fiscal 1998 and for the full years of fiscal
1997, 1996 and 1995, 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 an adverse material effect on the Company's results
of operations. During the first quarter of fiscal 1998, HP accounted for
15.5% of net sales compared to 12.5% during the same period of fiscal
1997. There can be no assurance that the Company will continue to do
business with 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 an adverse material 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 an adverse material 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 $836 million in fiscal 1993 to
$3.7 billion in fiscal year 1997. In recent years, the Company has
acquired or established facilities in many locations. In the first
quarter of fiscal 1998, the Company announced the opening of its
Asia/Pacific headquarters office in Taipei, Taiwan; began operations in
Guadalajara, Mexico; and, as further discussed in "Partnership with
Ericsson and Related Transactions," established a manufacturing facility
near Sao Paulo, Brazil, and opened a New Product Introduction center in
Sweden. In addition, in December 1997, the Company announced its
intention to acquire certain manufacturing facilities and employees from
16
<PAGE>
NCR. (See "Pending Acquisition of NCR Operations.") During fiscal 1997,
the Company announced the establishment of new manufacturing facilities
in Suzhou, China; began operations at its manufacturing facility in
Westborough, Massachusetts; and, in November 1996, acquired Force
Computers Inc., which has operations in California and Germany. 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 facilities in China and Mexico, the partnership with and
acquisitions from Ericsson, the proposed acquisition from NCR 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 Company's expenses and working capital
requirements will continue to increase as the new facilities become
fully operational and the transactions with Ericsson and NCR are
completed. 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. has created a number of
challenges, including managing the integration of the operations,
retaining 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, Solectron's results of operations could be materially
adversely affected.
Partnership with Ericsson and Related Transactions
During 1997, the Company established a strategic, global manufacturing
partnership with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson). The Company has established a New Product Introduction
center in Norrkoping and Stockholm, Sweden, and production from certain
Ericsson plants worldwide has been or will be transferred to Solectron
manufacturing sites around the world. In October 1997, Solectron
acquired certain assets, primarily equipment and inventory, of
Ericsson's printed circuit board assembly operation located in Brazil.
In addition, Solectron's subsidiary, Solectron Brasil Ltda., hired
approximately 370 persons formerly employed by Ericsson Telecomunicacoes
S.A. in Brazil. Under the terms of the agreement, Ericsson will contract
for Solectron's services from Solectron Brasil Ltda. through September
1999. 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.
17
<PAGE>
The 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 and there is no
assurance that Solectron will achieve sufficient revenue to offset the
increased expenses. There can be no assurance the remaining
transactions contemplated by the memorandum of understanding will close
completely or that Solectron will successfully manage the risks of these
transactions.
Pending Acquisition of NCR Operations
On December 19, 1997, the Company announced that it had signed a letter
of intent with NCR under which Solectron will acquire NCR's
manufacturing assets in three cities, two in the United States and one
in Ireland, for approximately $100 million. Solectron will hire
approximately 1,200 NCR manufacturing and related support employees
currently employed at these locations. Under the terms of the letter of
intent, NCR will outsource the manufacturing of its computer and retail
products to Solectron for at least five years. Thereafter, Solectron
will bear the risk of filling the manufacturing capacity at the site
with renewed business from NCR or new business from other customers. The
transaction is expected to close in the Company's third fiscal quarter
of 1998. 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.
The transaction with NCR entails 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 NCR business or replacing it with
new business after expiration of the NCR commitment. In addition, the
completion of the transactions with NCR will increase Solectron's
expenses and working capital requirements and there is no assurance that
Solectron will achieve sufficient revenue to offset the increased
expenses. There can be no assurance the transaction contemplated by the
letter of intent will close completely or that Solectron will
successfully manage the risks of this transaction.
International Operations
As a result of its international 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 material impact on
the Company's results of operations, there can be no assurance that
there will not be such an impact in the future.
18
<PAGE>
Southeast Asia is currently experiencing currency, economic and
political instability. To date, the Company's operations have not
experienced any adverse effects from this instability. However, to the
extent the Company's worldwide customers sell the products manufactured
by Solectron into the Southeast Asia market, the customer's sales may be
adversely affected, which could decrease demand for the Company's
manufacturing services. The Company cannot predict whether such a
decrease in demand will materialize and if it does, whether it will have
an adverse material effect on the Company's results of operations.
The Company has been granted a tax holiday for 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 an adverse
material 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. Turnkey manufacturing currently represents a
substantial portion of Solectron's sales. Turnkey projects, in which
Solectron procures some or all of the components necessary for
production, typically generate higher net sales and higher gross profits
with lower gross profit percentages than consignment projects due to the
inclusion in Solectron's operating results of sales and costs associated
with the purchase and sale of components. Solectron assembles products
with varying degrees of material content, which may cause Solectron's
gross margin to fluctuate. In addition, the degree of startup costs and
inefficiencies associated with new sites and new customer projects may
affect Solectron's gross margin. 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
19
<PAGE>
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 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 holds a limited number
of U.S. patents related to the process and equipment used in its surface
mount technology. In addition, the Company's subsidiary, Force
Computers, holds a number of patents related to VME 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 or Force's
technology.
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 technology or to obtain licenses
to the manufacturing process or technology 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 an adverse
material 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.
20
<PAGE>
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 an adverse material
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.
21
<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
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: January 9, 1998 By: /s/ Susan Wang
______________________
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
23
</TABLE>
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
November 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Weighted average number of
shares of common stock and
common stock equivalents:
Primary:
Common stock 114,834 105,892
Common stock equivalents -
stock options 4,402 3,134
-------- --------
Total primary shares 119,236 109,026
-------- --------
Fully diluted:
Common shares issuable
upon assumed conversion
of convertible subordinated
notes 6,803 6,804
Incremental increase in
common stock equivalents
using end of period market
price -- 771
-------- --------
Total fully diluted shares 126,039 116,601
======== ========
Net income - primary $ 44,888 $ 31,475
Interest expense for
convertible subordinated
notes, net of taxes 2,398 2,277
-------- --------
Net income - fully diluted $ 47,286 $ 33,752
======== ========
Net income per share - primary $ 0.38 $ 0.29
======== ========
Net income per share -
fully diluted $ 0.38 $ 0.29
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000835541
<NAME> SOLECTRON CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1998
<PERIOD-END> NOV-28-1997
<CASH> 113,947
<SECURITIES> 298,945
<RECEIVABLES> 523,678
<ALLOWANCES> (3,913)
<INVENTORY> 590,058
<CURRENT-ASSETS> 1,581,652
<PP&E> 729,939
<DEPRECIATION> (351,740)
<TOTAL-ASSETS> 2,010,024
<CURRENT-LIABILITIES> 640,330
<BONDS> 386,785
0
0
<COMMON> 115
<OTHER-SE> 979,284
<TOTAL-LIABILITY-AND-EQUITY> 2,010,024
<SALES> 1,136,820
<TOTAL-REVENUES> 1,136,820
<CGS> 1,013,061
<TOTAL-COSTS> 1,013,061
<OTHER-EXPENSES> 56,457
<LOSS-PROVISION> (136)
<INTEREST-EXPENSE> 6,513
<INCOME-PRETAX> 67,502
<INCOME-TAX> 22,614
<INCOME-CONTINUING> 44,888
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,888
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
