SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
______________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
______________________________________________
Mark One
[x] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended August 28, 1998,
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 of (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock traded on New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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 report(s), and (2) has
been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by non-
affiliates on October 31, 1998 (based upon the last reported price of
the Common Stock on the New York Stock Exchange on such date) was
approximately $4,220 million.
As of October 31, 1998, there were approximately 118,587,395 shares of
the Registrant's Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 12, 1999, which the Company will file
with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this report, is incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
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SOLECTRON CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
Part I
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 58
Part III
Item 10. Directors and Executive Officers of the
Registrant 59
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial
Owners and Management 62
Item 13. Certain Relationships and Related Transactions 62
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 63
Signatures 64
Solectron and the Solectron logo are registered trademarks of Solectron
Corporation. All other names are trademarks and/or registered trademarks
of their respective owners.
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PART I
ITEM 1: SOLECTRON BUSINESS
Solectron Corporation (the Company or Solectron) is an independent
provider of customized manufacturing services to electronics original
equipment manufacturers (OEMs). Solectron provides a wide variety of
pre-manufacturing, manufacturing and post-manufacturing services.
Solectron's goal is to offer its customers the significant competitive
advantages that can be obtained from manufacturing outsourcing such as
access to advanced manufacturing technologies, shortened product time-
to-market, reduced cost of production and more effective asset
utilization. Solectron has manufacturing operations in locations
throughout the world, including North America, Europe, the Asia/Pacific
region and Brazil. Solectron believes that the geographically diverse
locations of its facilities enable it to build closer regional
relationships with its customers and to better meet its customers' cost
and local market content requirements.
Solectron Corporation was originally incorporated in California in
August 1977 and reincorporated in Delaware in February 1997. Solectron's
corporate headquarters are located at 777 Gibraltar Drive, Milpitas,
California 95035. Its telephone number is (408) 957-8500 and its
Internet address is www.Solectron.com.
The information contained within this overview of the business is
qualified in its entirety by, and is subject to, the detailed
information, consolidated financial statements and notes thereto
contained elsewhere within this document under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Financial Statements and Supplementary Data".
Industry Overview
Solectron is benefiting from increased worldwide market acceptance of,
and reliance upon, the use of manufacturing specialists by many
electronics OEMs. Solectron believes the trend towards outsourcing
manufacturing will continue. OEMs utilize manufacturing specialists for
many reasons including the following:
Reduce Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and therefore have a growing need to reduce the time
required to bring a product to market. OEMs can reduce their time to
market by using a manufacturing specialist's manufacturing expertise and
infrastructure.
Reduce Investment. As electronic products have become more
technologically advanced and are shipped in greater unit volumes, the
necessary investment required for internal manufacturing has increased
significantly for working capital, capital equipment, labor, systems and
infrastructure. Use of manufacturing specialists enables OEMs to gain
access to advanced manufacturing capabilities while substantially
reducing overall resource requirements.
Focus Resources. Because the electronics industry is experiencing
greater levels of competition and more rapid technological change, many
OEMs increasingly are seeking to focus their resources on activities and
technologies in which they add the greatest value. By offering
comprehensive electronics assembly and related manufacturing services,
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manufacturing specialists allow OEMs to focus on their own core
competencies such as product development and marketing.
Access Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly
sophisticated and complex, making it difficult for OEMs to maintain the
necessary technological expertise to manufacture products internally.
OEMs are motivated to work with a manufacturing specialist in order to
gain access to the specialist's expertise in interconnect, test and
process technologies.
Improve Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes,
short product life-cycles, large investments in electronic components,
component price fluctuations and the need to achieve economies of scale
in materials procurement. OEMs can reduce production costs by using a
manufacturing specialist's volume procurement capabilities. In addition,
a manufacturing specialist's expertise in inventory management can
provide better control over inventory levels and increase the OEM's
return on assets.
Access Worldwide Manufacturing Capabilities. OEMs are increasing their
international activities in an effort to lower costs and access foreign
markets. Manufacturing specialists with worldwide capabilities are able
to offer such OEMs a variety of manufacturing location options to better
address their objectives regarding cost, shipping location, frequency of
interaction with manufacturing specialists and local content
requirements of end-market countries.
Strategy
Solectron's goal is to offer its customers the significant competitive
advantages of manufacturing outsourcing, such as access to advanced
manufacturing technologies, shortened product time-to-market, lowest
landed cost and more effective asset utilization. To achieve this goal
Solectron's strategy emphasizes the following key elements:
Quality. Solectron believes that product quality is a critical success
factor in the electronics manufacturing market. Solectron strives for
continuous improvement of its processes and has adopted a number of
quality improvement and measurement techniques to monitor its
performance. Solectron has received numerous superior service and
quality awards, including the Malcolm Baldrige National Quality Award in
1991 and again in 1997, the Best Manufacturing Plant in North America
Award from Industry Week in 1998, the North Carolina Quality Leadership
Award in 1996, Malaysian Quality Management Excellence Award in 1996 as
well as the Malaysian Prime Minister's Quality Award in 1997, the Texas
Quality Award in 1996 and numerous awards from its customers. All of
Solectron's manufacturing facilities, except for Fine Pitch Technology,
Inc. and the recently-established facility in Romania, are certified
under ISO-9000 standards, which are international quality standards for
design, manufacturing and distribution management systems.
Manufacturing Partnerships. An important element of Solectron's
strategy is to establish partnerships with major and emerging OEM
leaders in diverse segments across the electronics industry. Solectron's
customer base consists of leaders in industry segments such as
networking, telecommunications, workstations, personal computers,
computer peripherals, instrumentation, semiconductor equipment and
avionics. Due to the costs inherent in supporting customer
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relationships, Solectron focuses its efforts on customers with which the
opportunity exists to develop long-term business partnerships.
Solectron's goal is to provide its customers with total manufacturing
solutions for both new and more mature products, as well as across
product generations. Solectron's manufacturing services range from
providing design and New Product Introduction services, to just-in-time
delivery on low to medium volume turnkey and consignment projects and
projects that require more value-added services, to servicing OEMs that
require price-sensitive, high-volume production.
Turnkey Capabilities. Another element of Solectron's strategy is to
provide a complete range of manufacturing management and value-added
services, including materials management, board design, concurrent
engineering, assembly of complex printed circuit boards and other
electronic assemblies, test engineering, software manufacturing,
accessory packaging and post-manufacturing services. Solectron believes
that as manufacturing technologies become more complex and as product
life-cycles shorten, OEMs will increasingly contract for manufacturing
on a turnkey basis as they seek to reduce their time to market and
capital asset and inventory costs. A substantial portion of Solectron's
revenue is from its turnkey business. Solectron believes that the
ability to manage and support large turnkey projects is a critical
success factor and a significant barrier to entry for the market it
serves. In addition, Solectron believes that due to the difficulty and
long lead-time required to change manufacturers, turnkey projects
generally increase an OEM's dependence on its manufacturing specialist,
resulting in greater stability of Solectron's customer base and in
closer working relationships. Solectron has been successful in
establishing sole source positions with many of its customers for
certain of their products.
Advanced Manufacturing Process Technology. Solectron intends to
continue to offer its customers the most advanced manufacturing process
technologies, including surface mount technology (SMT) and ball-grid
array (BGA) assembly and testing and emerging interconnect technologies.
Solectron has developed substantial SMT expertise including advanced,
vision-based component placement equipment. Solectron believes that the
cost of SMT assembly facilities and the technical capability required to
operate a high-yield SMT operation are significant competitive factors
in the market for electronic assembly. Solectron also has the capability
to manufacture using tape-automated-bonding, chip-on-substrate and other
more advanced manufacturing processes.
Diverse Geographic Operations. An important element of Solectron's
strategy is to establish production facilities in areas of high customer
density or where manufacturing efficiencies can be achieved. Solectron
currently has operations throughout the United States and in Mexico,
Brazil, Europe and Asia. Solectron believes that its facilities in these
diverse geographic locations enable Solectron to better address its
customers' objectives regarding cost, shipping location, frequency of
interaction with manufacturing specialists and local content
requirements of endmarket countries. In addition, Solectron has its
Asia/Pacific headquarters office in Taipei, Taiwan, and program offices
in Japan and Israel. Solectron intends to continue to expand its
operations as necessary to continue to serve its existing customers and
to develop new business.
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International Manufacturing Capability
Western United States. Solectron's headquarters and largest
manufacturing operations are located in Silicon Valley, principally in
Milpitas, California, in the midst of one of the largest concentrations
of OEM electronics manufacturers. This facility offers a full range of
services that span the product life cycle, including printed circuit
board and systems design and prototyping; printed circuit board
assembly; build-to-order, configure-to-order and complex systems
assembly; end-of-life manufacturing; and depot repair. In addition,
Solectron has a smaller site strategically located in Everett,
Washington to help serve Solectron's customers in the Pacific Northwest
and elsewhere.
The Company's subsidiary, Force Computers, Inc. (Force), is a leading
designer and supplier of open, scalable system- and board-level embedded
computer platforms for the telecomunications, industrial and command and
control markets. Unlike general purpose computers, embedded computers
are incorporated into systems and equipment to perform a single or
limited number of critical control functions and are generally
integrated into larger automated systems. A processor independent
company, Force delivers products based on SPARC, Pentium, PowerPC and
68K technologies and has expertise in system design, board design,
system integration and manufacturing. Force also provides support
services, such as system configurations, application consulting and
training to its customers. Force further enhances the Company's array of
services, particularly in pre-manufacturing areas. Force's corporate
headquarters are located in San Jose, California. Its European
headquarters are located in Munich, Germany. In addition to its
headquarters locations, Force has sales support offices located
throughout the United States and in various international locations.
Another of the Company's subsidiaries, Fine Pitch Technology, Inc. (Fine
Pitch), is also headquartered in San Jose, California. Fine Pitch
provides extensive prototype services for electronics OEMs, further
enhancing Solectron's ability to address the needs of design teams who
require almost immediate availability of highly complex prototype
assemblies.
Southwestern United States. Solectron believes that its facility in
Austin, Texas is situated in a geographic region with strong growth of
electronics OEMs that will allow Solectron to better service its
existing customers and to attract new ones. This facility, which has
recently completed a major expansion, offers a full range of integrated
solutions that span the product life cycle, from complex ASIC circuit
design to printed circuit board and systems assembly and fulfillment to
end-of-life services.
Eastern United States. The Company's Eastern United States facility is
located in Westborough, Massachusetts, near Boston, in the center of a
geographic region with a large concentration of electronics OEMs. This
facility offers circuit design services, printed circuit board and
complex systems assembly and end-of-life manufacturing. The facility is
located adjacent to a Fine Pitch site that specializes in quick-turn
prototype services. The two groups work together to shorten customers'
product development and manufacturing cycles, ultimately reducing their
products' time-to-market.
Southeastern United States. Solectron's Southeastern United States
operations are located in Charlotte, North Carolina, Columbia, South
Carolina and Duluth and Braselton, Georgia. The Company's operations in
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Charlotte, North Carolina, which were recently augmented by the
acquisition of International Business Machine Corporation's (IBM)
Electronic Card Assembly and Test (ECAT) manufacturing assets,
specializes in low- to medium-volume, highly complex printed circuit
board assembly. This site also provides printed circuit boards to the
Columbia, South Carolina site, which specializes in customized systems
design services and complex computer systems assembly. The facility in
Duluth, Georgia is Solectron's East Coast center for build-to-order and
configure-to-order systems assembly. The facility in Braselton, Georgia
was acquired from Mitsubishi Consumer Electronics America, Inc. (MCEA),
a subsidiary of Mitsubishi Electric Corporation, in October 1998 and
will provide a full range of manufacturing services to MCEA's Cellular
Mobile Telephone division. The Company expects to merge the two Georgia
locations into a new facility in Suwanee, Georgia during fiscal 1999.
The locations in Columbia, South Carolina and Duluth, Georgia were
recently acquired from NCR Corporation. Solectron believes that these
facilities allow it to better pursue new business opportunities with new
and existing customers having Southeastern United States operations, in
particular because of Charlotte's status as a transportation hub and its
relative proximity to major Southeastern United States electronics
markets.
Mexico. Solectron's site in Guadalajara, Mexico began providing a full
range of printed circuit board assembly and systems build manufacturing
services in the first quarter of fiscal 1998. This site was established
to offer customers a low-cost, high volume manufacturing facility in
North America.
Brazil. Solectron's manufacturing operation in Sao Paulo, Brazil was
acquired from Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson) in October 1997. This site provides full systems build
capabilities, engineering, printed circuit board and flex assembly,
custom packaging and distribution services, primarily to multinational
customers seeking access to the Latin American market.
Europe. Solectron has manufacturing operations in Bordeaux, France,
Herrenberg, Germany, Dublin, Ireland, Timisoara, Romania and
Dunfermline, Scotland. Each of these sites provides a full range of
manufacturing capabilities to a multinational customer base. In
addition, each site is developing an area of specific expertise to offer
to all customers. The facility in France is the site of choice for depot
repair in Europe, partly because of its centralized location, and also
serves as a New Product Introduction Center. Germany offers design
support, prototype services and low-volume, high-mix manufacturing
services. In addition, Force's European headquarters are located in
Munich, Germany. The Ireland facility provides systems design, build-to-
order, configure-to-order and complex systems assembly. Romania provides
a low-cost, high-volume manufacturing center for the European region.
Scotland specializes in building printed circuit board assemblies,
subassemblies and systems for multinational customers seeking entry into
the European market. The Company also has a New Product Introduction
Center in Sweden, which offers a full range of electronics product
development services, including design and layout, concurrent
engineering, test development and prototype engineering.
Asia. Solectron's Southeast Asia manufacturing operations are located
in Penang and Johor, Malaysia. The operations were established to better
serve the needs of OEMs requiring price-sensitive, high-volume
production capabilities and to provide more efficient manufacturing
services to customers located in Southeast Asia. The facilities
currently provide electronics assembly, materials management and other
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services to customers located in Malaysia, Singapore, Japan, the United
States and other locations. Solectron's facility in Suzhou, China began
operations in fiscal 1997. This facility currently provides a full range
of low-cost high volume manufacturing services.
New Product Introduction Center. The Company's New Product Introduction
(NPI) Center, is located in Sweden. The NPI Center offers a full range
of electronics product development services, including design and
layout, concurrent engineering, test development and prototype
engineering.
Alliance with Ingram Micro Inc. In October 1998, the Company announced
that it had signed a definitive agreement with Ingram Micro Inc. under
which the two companies will enter into a strategic alliance to provide
global build-to-order and configure-to-order assembly services for
personal computers, servers and related products in the United States,
Canada, Europe, Asia and Latin America. The alliance will be managed by
both companies under a joint management matrix that will include a sales
and marketing staff, program management, information technology
resources and test and process engineers and will, in most part, utilize
existing facilities, systems and personnel. The companies expect that
shipments to customers will begin in early calendar 1999.
As Solectron manages the existing operations and expands geographically,
it may experience certain inefficiencies from the management of
geographically dispersed operations. In addition, Solectron's results of
operations will be adversely affected if these new facilities do not
achieve revenue growth sufficient to offset increased expenditures
associated with geographic expansion.
In fiscal 1998, approximately 33.8% of Solectron's sales were from
operations outside of the United States. As a result of continuous
customer demand overseas, Solectron expects foreign sales to increase.
Solectron's foreign sales and operations are subject to risks of doing
business abroad, including fluctuations in the value of currency, export
duties, import controls and trade barriers (including quotas),
restrictions on the transfer of funds, associate turnover, work
stoppages, longer payment cycles, greater difficulty in accounts
receivable collection, burdens of complying with a wide 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
Solectron's results of operations, there can be no assurance that there
will not be such an impact in the future.
Manufacturing
Solectron's Approach
To achieve excellence in manufacturing, Solectron combines advanced
manufacturing technology, such as computer-aided manufacturing and
testing, with manufacturing techniques including just-in-time
manufacturing, total quality management, statistical process control and
continuous flow manufacturing. Just-in-time manufacturing is a
production technique which minimizes work-in-process inventory and
manufacturing cycle time while enabling Solectron to deliver products to
customers in the quantities and time frame required. Total quality
management is a management philosophy which seeks to impart high levels
of quality in every operation of Solectron and is accomplished by the
setting of quality objectives for every operation, tracking performance
against those objectives, identifying work flow and policy changes
required to achieve higher quality levels and a commitment by executive
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management to support changes required to deliver higher quality.
Statistical process control is a set of analytical and problem-solving
techniques based on statistics and process capability measurements
through which Solectron can track process inputs and resulting quality
and determine whether a process is operating within specified limits.
The goal is to reduce variability in the process, as well as eliminate
aberrations that contribute to quality below the acceptable range of
each process performance standard.
In order to successfully implement these management techniques,
Solectron has developed the ability to collect and utilize large amounts
of data in a timely manner. Solectron believes this ability is critical
to a successful assembly operation and represents a significant
competitive factor, especially in large turnkey projects. To manage this
data, Solectron uses sophisticated computer systems for material
resource planning, shop floor control, work-in-process tracking,
statistical process control and activity-based product costing.
Electronics Assembly and Other Services
Solectron's electronics assembly activities consist primarily of the
placement and attachment of electronic and mechanical components on
printed circuit boards and flexible cables. Solectron also assembles
higher-level sub-systems and systems incorporating printed circuit
boards and complex electromechanical components, in some cases
manufacturing and packaging products for shipment directly to its
customers' distributors. In addition, Solectron provides other
manufacturing services including refurbishment and remanufacturing.
Solectron manufactures on a turnkey basis, directly procuring some or
all of the components necessary for production and on a consignment
basis, where the OEM customer supplies all or some components for
assembly.
In conjunction with its assembly activities, Solectron also provides
computer-aided testing of printed circuit boards, sub-systems and
systems, which contributes significantly to Solectron's ability to
deliver high quality products on a consistent basis. Solectron has
developed specific strategies and routines to test board and system
level assemblies. In-circuit tests verify that all components have been
properly inserted and that the electrical circuits are complete.
Functional tests determine if the board or system assembly is performing
to customer specifications. Solectron either designs and procures test
fixtures and develops its own test software or utilizes its customers'
existing test fixtures and test software. In addition, Solectron
provides environmental stress tests of the board or system assembly.
Solectron provides turnkey manufacturing management to meet its
customers' requirements, including procurement and materials management
and consultation on board design and manufacturability. Individual
customers may select various services from among Solectron's full range
of turnkey capabilities.
Procurement and materials management consists of the planning,
purchasing, expediting, warehousing, preparing and financing of the
components and materials required to assemble a printed circuit board or
electronic system. OEMs have increasingly utilized electronic
manufacturing specialists to purchase all or some components directly
from component manufacturers or distributors and to finance and
warehouse the components.
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Solectron also assists its customers in evaluating board designs for
manufacturability. Solectron evaluates the board design for ease and
quality of manufacture and, when appropriate, recommends design changes
to reduce manufacturing costs or lead times or to increase the quality
of finished assemblies. Board design services consist of the engineering
and design associated with the arrangement and interconnection of
specified components on printed circuit boards to achieve an OEM's
desired level of functionality. Solectron also offers ASIC design
services and its subsidiary, Force Computers, offers product design
services for the embedded computer market.
Sales and Marketing
Sales and marketing at Solectron is an integrated process involving
direct salespersons and project managers, as well as Solectron's senior
executives. Solectron's sales resources are directed at multiple
management and staff levels within targeted accounts. Solectron also
uses independent sales representatives in certain geographic areas.
Solectron receives unsolicited inquiries resulting from advertising and
public relations activities, as well as referrals from current
customers. These opportunities are evaluated against Solectron's
customer selection criteria and are assigned to direct salespersons or
independent sales representatives, as appropriate. Historically,
Solectron has had substantial recurring sales from existing customers.
Over 92% of Solectron's net sales during fiscal 1998 were derived from
customers which were also customers during fiscal 1997. Although
Solectron seeks to diversify its customer base, a small number of
customers currently are responsible for a significant portion of
Solectron's net sales. During fiscal 1998, 1997 and 1996, Solectron's
ten largest customers accounted for 68.7%, 65.5% and 64.0% of
consolidated net sales, respectively. Several customers each accounted
for more than 10% of net sales during these years. Hewlett-Packard
Company represented 13.9%, 13.5% and 10.7% of net sales in fiscal 1998,
1997 and 1996, respectively. Cisco Systems, Inc. and Sun Microsystems,
Inc. accounted for 10.7% and 10.5%, respectively, of consolidated net
sales in fiscal 1998. Nortel Networks, Inc., formerly Bay Networks,
Inc., accounted for 10.4% of net sales in fiscal 1997. No other
individual customer accounted for more than 10% of Solectron's net sales
in any of these years.
Backlog
Backlog consists of contracts or purchase orders with delivery dates
scheduled within the next twelve months. At August 31, 1998, Solectron's
backlog was approximately $1.3 billion. The backlog was approximately
$875 million at August 31, 1997. Because customers may cancel or
reschedule deliveries, backlog is not a meaningful indicator of future
financial results.
Competition
The electronic manufacturing services industry is comprised of a large
number of companies, several of which have achieved substantial market
share. Solectron also faces competition from current and prospective
customers that 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 Solectron's competitors may have greater manufacturing, financial,
research and development and marketing resources than Solectron.
Solectron believes that the primary basis of competition in its targeted
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markets is manufacturing technology, quality, responsiveness, the
provision of value-added services and price. To remain competitive,
Solectron must continue to provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. Solectron 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.
Associates
As of August 31, 1998, Solectron employed 24,857 associates worldwide,
including 4,857 temporary associates. Solectron's international
operations employed 11,888 associates.
Patents and Trademarks
Solectron has obtained a limited number of U.S. patents related to the
process and equipment used in its surface mount technology. The
Company's subsidiary, Force Computers, holds a number of patents related
to VME technology. In addition, as part of its recent acquisition of the
IBM-ECAT manufacturing assets, the Company has access to a number of IBM
patents. The Company also has registered trademarks in the United States
and many countries throughout the world. These patents and trademarks
are considered valuable to Solectron.
Although Solectron does not believe that its trademarks, manufacturing
process, Force's technology or the IBM patents to which it has access
infringe on the intellectual property rights of third parties, there can
be no assurance that third parties will not assert infringement claims
against Solectron in the future. If such an assertion were to be made,
it may become necessary or useful for Solectron to enter into licensing
arrangements or to resolve such an issue through litigation. However,
there can be no assurance that such license rights would be available to
Solectron on commercially acceptable terms or that any such litigation
could be resolved favorably. Additionally, such litigation could be
lengthy and costly and could have an adverse material effect on
Solectron's financial condition regardless of the outcome of such
litigation.
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ITEM 2: PROPERTIES
The Company's manufacturing facilities are located throughout North
America, Europe and Asia. The table below lists the locations and square
feet owned or leased for the Company's major operations.
<TABLE>
<CAPTION>
Square Feet Lease
---------------------- Termination
Location Owned Leased Dates
- -------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Americas:
Milpitas, California (1) -- 1,385,000 1998 - 2005
San Jose, California -- 95,000 1999 - 2001
Duluth, Georgia -- 146,000 1999
Westborough, Massachusetts -- 100,000 2002
Charlotte, North Carolina 620,000 75,000 2001
Columbia, South Carolina -- 208,000 2000
Austin, Texas -- 783,000 2002
Everett, Washington -- 254,000 2003
Guadalajara, Mexico (2) 500,000 --
Sao Paulo, Brazil (3) -- 124,000 1999
Europe:
Bordeaux, France 319,000 --
Herrenberg, Germany 181,000 --
Munich, Germany -- 210,000 1999 - 2001
Dublin, Ireland 41,000 71,000 1999
Timisoara, Romania (3) -- 18,000 1999
Dunfermline, Scotland 212,000 --
Norkopping, Sweden -- 32,000 2002
Asia:
Suzhou, China 340,000 --
Johor, Malaysia -- 173,000 2001
Penang, Malaysia 190,000 179,000 2002
</TABLE>
(1) Includes facilities located nearby in Fremont and Newark,
California.
(2) Includes approximately 37,000 square feet leased to a third party on
a short-term lease.
(3) Facilities owned by the Company are currently under construction at
these locations.
Around the world, 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.
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ITEM 3: LEGAL PROCEEDINGS
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock Information
The following table sets forth the quarterly high and low per share
sales prices of Solectron's Common Stock for the two-year period ended
August 31, 1998, as quoted on the New York Stock Exchange under the
symbol SLR.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
Fiscal 1997
First Quarter 29 15/16 17 1/8
Second Quarter 30 11/16 25 3/4
Third Quarter 32 1/2 23 9/16
Fourth Quarter 45 9/16 29 9/16
Fiscal 1998
First Quarter 47 7/16 33 15/16
Second Quarter 49 5/8 28 7/8
Third Quarter 48 9/16 36 7/16
Fourth Quarter 53 1/8 35 7/16
</TABLE>
Solectron has not paid any dividends since its inception and does not
intend to pay any dividends in the foreseeable future. Additionally, the
covenants to the Company's financing agreements prohibit the payment of
cash dividends. As of August 31, 1998, there were approximately 1,011
stockholders of record based on data obtained from the Company's
transfer agent.
15
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following selected historical financial information of Solectron has
been derived from the historical consolidated financial statements and
should be read in conjunction with the consolidated financial statements
and the notes included therein.
Five Year Selected Financial Highlights
(in thousands, except per share data)
Consolidated Statements of Income Data:
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $5,288,294 $3,694,385 $2,817,191 $2,065,559 $1,456,779
Operating income 298,989 236,422 175,425 123,434 88,350
Income before
income taxes 298,983 238,407 173,077 120,494 84,159
Net income 198,824 158,059 114,232 79,526 55,545
Basic net income
per share (1) $1.72 $1.42 $1.12 $0.93 $0.68
Diluted net income
per share (1) $1.65 $1.37 $1.08 $0.82 $0.59
</TABLE>
Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of August 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital $1,046,724 $ 931,690 $ 786,355 $ 355,603 $ 309,203
Total assets 2,410,568 1,876,419 1,452,198 940,855 766,395
Long-term debt 385,519 385,850 386,927 30,043 140,709
Stockholders' equity 1,181,326 919,069 700,569 538,141 330,789
</TABLE>
(1) All net income per share amounts have been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
16
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion
and Analysis of Financial Condition and Results of Operations,
including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," and words of similar
import, constitute 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 provides integrated solutions that
span the entire product life cycle - from pre-production planning and
design, to manufacturing, distribution and end-of-life product service
and support. Solectron offers its customers competitive outsourcing
advantages such as access to advanced manufacturing technologies,
shortened time-to-market, reduced cost of production and more effective
asset utilization. A discussion of some of the potential fluctuations in
operating results is included under "Trends and Uncertainties".
The Company has manufacturing operations in locations throughout the
world, including North America, Europe, Asia/Pacific and Latin America.
Solectron also has its Asia/Pacific headquarters office in Taipei,
Taiwan and program offices located in Japan and Israel. The Company's
subsidiaries, 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.
During 1997, the Company established a strategic, global manufacturing
partnership with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson). The Company established a New Product Introduction center in
Sweden, and production from certain Ericsson plants worldwide was
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 Sao Paulo, Brazil. In addition, Solectron's subsidiary,
Solectron Brasil Ltda., hired approximately 370 associates formerly
employed by Ericsson Telecomunicacoes S.A. in Brazil.
In April 1998, the Company acquired NCR Corporation's (NCR)
manufacturing assets in three cities for a purchase price of
approximately $79.5 million, subject to adjustment. The acquisition was
accounted for as a purchase of assets and the purchase price was
allocated to the assets acquired based on the relative fair values of
the assets at the date of acquisition. Under the terms of the agreement,
NCR will outsource the manufacturing of certain computer components to
Solectron for at least five years and Solectron hired approximately
1,200 NCR manufacturing and related support associates.
17
<PAGE>
In June 1998, the Company acquired International Business Machines
Corporation's (IBM) Electronic Card Assembly and Test (ECAT)
manufacturing assets in Charlotte, North Carolina and non-exclusive
rights to certain IBM intellectual property for a purchase price of
approximately $95.4 million, subject to adjustment. The acquisition was
accounted for as a purchase of assets and the purchase price was
allocated to the assets acquired, including the intellectual property
rights, based on their relative fair values at the date of acquisition.
Under the terms of the agreement, Solectron hired approximately 700 IBM
manufacturing and related support associates and the Company will
provide printed circuit board assembly services to IBM in North America
for the next three years. In addition, IBM has made available to
Solectron 115 patents and 51 disclosures (collectively the intellectual
property rights) covering a wide spectrum of technologies and
capabilities. IBM will also provide to Solectron failure analysis and
characterization tools for process development and manufacturing,
including fault detection and isolation.
In October 1998, the Company acquired the wireless telephone
manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s
(MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia.
MCEA is a subsidiary of Mitsubishi Electric Corporation (Mitsubishi).
The acquisition is expected to be accounted for as a purchase of assets
and the purchase price will be allocated to the assets acquired based on
the relative fair values of the assets at the date of acquisition. Under
the terms of the agreement, the Company will provide MCEA-CMT with a
full range of manufacturing services for five years, including New
Product Introduction management, printed circuit board assembly and full
systems assembly for MCEA's branded and private-label cellular products
sold within North America. In addition, Solectron has hired
approximately 400 MCEA-CMT manufacturing and support associates.
Also in October 1998, the Company announced that it had signed a
definitive agreement with Ingram Micro Inc. under which the two
companies will enter into a strategic alliance to provide global build-
to-order and configure-to-order assembly services for personal
computers, servers and related products in the United States, Canada,
Europe, Asia and Latin America. The alliance will be managed by both
companies under a joint management matrix that will include a sales and
marketing staff, program management, information technology resources
and test and process engineers and will, in most part, utilize existing
facilities, systems and personnel. The companies expect that shipments
to customers will begin in early calendar 1999.
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 Consolidated Financial Statements and Notes
thereto.
18
<PAGE>
<TABLE>
<CAPTION>
Years Ended August 31,
-----------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.8 88.4 90.0
----- ----- -----
Gross profit 10.2 11.6 10.0
Operating expenses:
Selling, general and administrative 4.1 4.7 3.6
Research and development 0.4 0.4 0.2
Acquisition costs -- 0.1 --
----- ----- -----
Operating income 5.7 6.4 6.2
Net interest income (expense) 0.0 0.1 (0.1)
----- ----- -----
Income before income taxes 5.7 6.5 6.1
Income taxes 1.9 2.2 2.1
----- ----- -----
Net income 3.8% 4.3% 4.0%
===== ===== =====
</TABLE>
Net Sales
The Company's net sales have increased significantly in each of the past
several years, reflecting the growing trend toward outsourcing within
the electronics industry. For the year ended August 31, 1998, net sales
grew to $5.3 billion, an increase of 43.1% over fiscal 1997 net sales.
Fiscal 1997 net sales of $3.7 billion were 31.1% greater than net sales
in fiscal 1996. The sales growth in fiscal 1998 was attributable to
significant increases in sales volume from both existing and new
customers worldwide, including the completion of the transfer of
production from certain Ericsson plants to various Solectron locations
around the world. The new locations in Mexico, Brazil and Sweden and the
ramp up of the Massachusetts location to full production also
contributed to the increase in net sales. In addition, the acquisition
of the three NCR sites and the IBM-ECAT manufacturing assets contributed
four months and three months of sales, respectively, totaling $367
million to the 1998 period. The fiscal 1997 sales growth was due to
significant increases in sales volume from both existing and new
customers in North America, higher international sales, the acquisition
of Force Computers in November 1996 and a full twelve months of sales
from the Custom Manufacturing Services (CMS) business, located in
Austin, Texas, which was acquired from Texas Instruments in March 1996.
Within the Americas, the sites that benefited most from start-up and
major new programs had substantial increases in net sales in fiscal 1998
over fiscal 1997. Sales growth at the Texas and Massachusetts sites was
particularly strong as a result of these factors. In addition, the new
sites in Mexico and Brazil, as well as the newly-acquired sites from NCR
and IBM, contributed incremental net sales to fiscal 1998. The growth in
fiscal 1997 sales over fiscal 1996 reflected increases in sales at all
locations to existing and new customers. The overall increase in sales
in fiscal 1997 over fiscal 1996 was partially offset by the effect of
several ongoing programs reaching end of life and management actions to
improve global load balancing and transitioning specific product
programs.
Sales in all of the Company's European and Asian manufacturing locations
increased in fiscal 1998 over fiscal 1997 primarily as a result of core
business growth and new accounts. Sales growth in the Company's location
19
<PAGE>
in Scotland was particularly strong due to the ramp up of major
customers' printed circuit board assembly activities in that location.
Fiscal 1997 sales in most of the Company's European and Asian operations
increased over fiscal 1996 sales as a result of the global load
balancing efforts noted above, as well as higher sales to existing and
new customers. These increases were partially offset by declines in
sales during fiscal 1997 at the facility in France and some Asian
locations related to older programs as these programs reached end of
life. 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.
Several major customers accounted for more than 10% of the Company's net
sales in fiscal 1998, 1997 and 1996. The following table lists these
customers and the percentage of net sales attributed to them.
<TABLE>
<CAPTION>
Years Ended August 31,
---------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Hewlett-Packard Company (HP) 13.9% 13.5% 10.7%
Cisco Systems, Inc. (Cisco) 10.7% * *
Sun Microsystems, Inc. (Sun) 10.5% * *
Nortel Networks, Inc. (formerly
Bay Networks, Inc.) * 10.4% *
- -------------
* Less than 10%
</TABLE>
No other customers accounted for more than 10% of net sales during any
of the years presented.
Solectron's top ten customers accounted for 68.7%, 65.5% and 64.0% of
consolidated net sales in fiscal 1998, 1997 and 1996, respectively.
Solectron is still dependent upon continued revenues from HP, Cisco, Sun
and its other 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.
Net sales at Solectron's international sites, as a percentage of
consolidated net sales, have varied over the last three fiscal years.
International locations contributed 33.8% of consolidated net sales in
fiscal 1998, compared to 26.8% and 30.9% in fiscal 1997 and 1996,
respectively. In addition to the sales growth factors for Europe and
Asia noted above, the Company's fiscal 1998 international sales also
benefited from the addition in fiscal 1998 of new sites in Mexico and
Brazil and the acquisition of the site in Ireland from NCR in April
1998. In fiscal 1997, international sales decreased as a percentage of
consolidated sales due to strong growth in domestic sales, aided by the
acquisition of the CMS business in Austin, Texas, which is substantially
comprised of domestic sales, as well as the end-of-life issues described
above.
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
20
<PAGE>
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," "-- Foreign Exchange Rate Sensitivity" and
"-- Euro Conversion Issues" for further discussion of potential
fluctuations in operating results associated with the risks of doing
business abroad.
Solectron's operations in Milpitas, California contributed a substantial
portion of Solectron's net sales and operating income during fiscal
1998, 1997 and 1996. 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 to be 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 achieving 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 was 10.2%, 11.6% and 10.0% for fiscal 1998,
1997 and 1996, respectively. The decrease in fiscal 1998 from fiscal
1997 was due primarily to a shift toward higher volume projects and
systems build projects that typically have lower margins, as well as
start-up costs associated with the Company's operations in China and
Mexico. In addition, gross margins of the newly acquired NCR operations
are lower than the overall average margins of the rest of the Company
primarily due to the fact that the majority of its net sales are derived
from systems integration activities, which normally generate lower gross
margins than printed circuit board assembly, as well as current
underutilization of these facilities. The improvement in fiscal 1997
over fiscal 1996 was primarily due to the inclusion of Force since its
acquisition in November 1996. Gross profit margins on Force's products
are significantly higher than those of the rest of the Company. Without
Force's contribution, gross margins for fiscal 1997 would have been
10.4%. In addition to the impact of Force, the improved gross margin
percentage in fiscal 1997 reflects a shift in product mix toward the
higher margin market segments, projects with a higher than normal
consignment content and increased manufacturing efficiencies at the
Dunfermline, Scotland and Austin, Texas sites.
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 systems build
projects, pricing within the electronics industry and the cost structure
21
<PAGE>
at individual sites. Over time, gross margins at the individual sites
and for the Company as a whole may continue to fluctuate. The Company
anticipates that a larger percentage of its sales may be derived from
systems build projects in future periods. Systems build projects
typically have lower gross margin percentages than printed circuit board
assembly projects. Increases in systems build 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 that 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 26.3% in fiscal 1998 over fiscal 1997 and 72.4% in fiscal 1997
over fiscal 1996. The fiscal 1998 increase and a portion of the fiscal
1997 increase was due 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. The inclusion of Force
since its acquisition in November 1996 and the Austin, Texas site for
the full year of fiscal 1997 accounted for approximately half of the
fiscal 1997 increase. The addition in fiscal 1998 and 1997 of new sites
in China, Massachusetts, Mexico, Brazil and Sweden and the NCR and IBM
sites also contributed to the growth in SG&A expenses. As a percentage
of net sales, SG&A expenses were 4.1%, 4.7% and 3.6% in fiscal 1998,
1997 and 1996, respectively. 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 net sales, 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 the use of microprocessors in embedded
applications. Research and development expenses, in absolute dollars
and as a percentage of net sales, respectively, were $20.9 million and
0.4% in fiscal 1998, $15.0 million and 0.4% in fiscal 1997 and $6.7
million and 0.2% in fiscal 1996. The increase in R&D expenses in fiscal
1998 compared to fiscal 1997 was due to increased R&D efforts at Force.
The fiscal 1997 increase over fiscal 1996 was a result of 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 and the newly acquired
NCR and IBM sites continue to invest in their R&D efforts. In addition,
certain new R&D projects will be undertaken at some of the Company's
22
<PAGE>
Asian sites, particularly at the Malaysia sites in connection with the
tax holiday. (See "Income Taxes.")
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 in November 1996.
Net Interest Income (Expense)
Net interest income was zero in fiscal 1998 and $2.0 million in fiscal
1997 compared to net interest expense of $2.3 million in fiscal 1996.
The Company issued convertible subordinated notes in February 1996 and
senior notes in March 1996. Interest expense on the debt is
approximately $24.9 million annually and in fiscal 1998 and 1997 was
offset by interest earned on undeployed cash and investments. In fiscal
1998, the Company capitalized approximately $1.7 million of interest
expense related to construction of its new facilities in China and
Mexico. The Company used a portion of its cash and short-term
investments to fund its acquisitions from NCR and IBM. Solectron expects
to utilize more of the undeployed cash during future periods 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 $100.2 million in 1998 from $80.3 million in
fiscal 1997 and $58.8 million in fiscal 1996, primarily due to increased
income before income taxes. Solectron's effective income tax rate
decreased slightly to 33.5% in fiscal 1998 from 33.7% in fiscal 1997 and
34.0% in fiscal 1996.
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 Malaysia sites. The Malaysian tax
holiday is effective through January 31, 2002, subject to certain
conditions, including certain levels of research and development
expenditures. 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 $1.0 billion at August 31, 1998 compared to $932
million at the end of fiscal 1997. A major component of working capital
at August 31, 1998 continued to be undeployed cash from the proceeds of
the two debt offerings during fiscal 1996. In the third and fourth
quarters of fiscal 1998, the Company used approximately $175 million of
its cash and short-term investments to fund its acquisitions of the NCR
and IBM-ECAT manufacturing assets. In the first quarter of fiscal 1999,
the Company used additional funds for its acquisition of the wireless
telephone manufacturing assets of MCEA's CMT division. 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.
However, the Company may need to raise additional funds to finance more
23
<PAGE>
rapid expansion, including establishing new locations or financing
additional acquisitions. There can be no assurance that such funds, if
needed, will be available on terms acceptable to the Company or at all.
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 that 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. The increase in inventory levels at year end 1998 from year
end 1997 is substantially a result of overall growth and the greater
number of manufacturing locations at August 31, 1998 compared to August
31, 1997, as each location must maintain a level of inventory adequate
to allow the location to respond to customer manufacturing requirements.
Cash provided by operating activities was $150 million, $202 million and
$102 million in fiscal 1998, 1997 and 1996, respectively. The decrease
in fiscal 1998 from fiscal 1997 was primarily due to increased levels of
accounts receivable and inventory partially offset by increases in net
income, depreciation and amortization and current liabilities. The
increase in fiscal 1997 from fiscal 1996 reflects increased net income,
depreciation and amortization and current liabilities balances,
partially offset by increases in accounts receivable and inventory
balances.
During fiscal 1998, the Company invested approximately $244 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 that 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 Company expects capital expenditures in fiscal 1999 to
be in the range of $225 million to $275 million. During fiscal 1998, the
Company entered into an arrangement with a third-party leasing company
under which certain of the Company's fixed assets have been sold to the
leasing company and leased back. The Company is accounting for these
transactions as operating leases.
In addition to working capital as of August 31, 1998, which included
cash and cash equivalents of $225 million and short-term investments of
$84 million, the Company has available a $100 million unsecured
multicurrency revolving credit facility that expires in April 2002 and a
$120 million asset securitization arrangement that expires in August
1999. Both of these facilities are subject to financial covenants. The
Company also has approximately $92 million in available foreign credit
facilities.
24
<PAGE>
"Year 2000" Issues
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000
approaches. The Year 2000 problem is pervasive and complex, as many
computer systems, manufacturing equipment and industrial control systems
will be affected in some way by the rollover of the two-digit year value
to 00. Systems that do not properly recognize such dates could generate
erroneous information or cause a system to fail. The Year 2000 issue
creates risk for the Company from unforeseen problems in its own systems
and from third parties with whom the Company deals on business
transactions worldwide. Failures of the Company's and/or third parties'
computer systems, manufacturing equipment and industrial control systems
would have an adverse material impact on the Company's ability to
conduct its business.
The Company has formed a worldwide task force and has implemented a
comprehensive program to analyze the Company's internal systems as well
as all external systems (such as vendor, customer, banking systems,
etc.) upon which the Company is dependent, to identify and evaluate any
potential Year 2000 issues. This task force meets regularly and tracks
progress against the program, modifying it as needed to help ensure
timely completion. The Company is committed to achieving Year 2000
compliance; however, because a significant portion of the problem is
external to the Company and therefore outside of its direct control,
there can be no assurances that the Company will be fully or even
significantly Year 2000 compliant at the critical juncture. In addition,
as full testing of Year 2000 functionality must occur in a simulated
environment, the Company will not be able to test full system Year 2000
interfaces and capabilities prior to the Year 2000.
As of the end of fiscal 1998, the Company had completed an inventory of
internal systems, hardware, software, manufacturing equipment and
embedded chips in industrial control instruments. Each of these items
was identified as mission critical, mission essential, mission impaired
or mission non-critical. The Company is in the process of prioritizing
and evaluating mission critical and mission essential items, identifying
fixes and resources as appropriate, and performing and testing
corrective measures. While the Company believes that its evaluation has
been comprehensive, there can be no assurance that all systems critical
to Year 2000 compliance have been identified, or that the corrective
actions identified will be completed on time.
As of the end of fiscal 1998, the Company had inventoried every key
supplier of goods and services to the Company, and considered the
potential impact on the Company and its customers of Year 2000
compliance by these suppliers. The Company also mailed surveys to many
of these key suppliers, and is in the process of evaluating responses
and sending follow-up letters. The Company plans to disqualify
potentially non-compliant sources, look for alternative sources and re-
qualify new suppliers to help mediate potential business disruptions.
The Company is also involved with various geographic Year 2000
consortiums worldwide, with the intent to leverage contacts and
information for commonly used suppliers and services such as utility
companies. In addition, the Company is in the process of reviewing EDI
linkages and data transmission for its customers and suppliers. While
the Company believes that it will be able to qualify alternative
suppliers as needed, until all supplier and customer survey responses
have been received and evaluated, the Company can not fully evaluate the
extent of potential problems and the costs associated with corrective
actions.
25
<PAGE>
The Company estimates the cost to complete its current compliance
program to be in the range of $28 million to $42 million. Of this
amount, approximately $7 million is associated with the replacement of
capital equipment, of which approximately half is being purchased to
replace non-compliant systems that would not otherwise have been
replaced at this time. The variability in these estimates depends
largely on the response from the Company's suppliers and the extent to
which supplier re-qualification is needed. Cost estimates will also be
re-evaluated as the status of the overall compliance program is updated.
There can be no assurance that actual costs will not be materially
higher than currently anticipated. A significant portion of these costs
is not likely to be incremental costs to the Company, but rather will
represent the redeployment of existing information technology resources.
Certain other information technology projects have been delayed due to
the focus on Year 2000 issues. The potential costs of the redeployment
of personnel and delays in implementing other projects is not known but
could be substantial.
Although the Company has identified general contingency plans, such as
the replacement and re-qualification of suppliers, the stockpiling of
supplies and purchase of generators, a formal contingency plan will not
be established until at least the third quarter of fiscal 1999 when the
evaluation of suppliers is expected to be completed. The Company is
unable to determine what effect the failure of systems because of Year
2000 issues by the Company or its suppliers or customers will have, but
any significant failures could have an adverse material effect on the
Company's results of operations and financial condition.
Trends and Uncertainties
Customer Concentration; Dependence on the Electronics Industry
In fiscal 1998, 1997 and 1996, the Company's ten largest customers
accounted for as much as 68.7% 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 fiscal 1998, HP, Cisco and Sun
accounted for 13.9%, 10.7% and 10.5%, respectively, of net sales,
compared to 13.5% for HP and less than 10% for each of Cisco and Sun
during fiscal 1997. There can be no assurance that the Company will
continue to do business with HP, Cisco, Sun 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 long-term contracts
(generally for terms of three to five years) with Ericsson, NCR, IBM and
Mitsubishi under which these customers have committed to source
production of certain products and components from the Company. However,
these commitments to source production do not include firm volume
purchase commitments. In addition, the Company has no firm long-term
volume purchase commitments from its other customers, and over the past
few years has experienced reduced lead times in customer orders. Also,
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
26
<PAGE>
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 that 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 $1.5 billion in fiscal 1994 to
$5.3 billion in fiscal year 1998. 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 April 1998, the Company announced plans to open a
manufacturing facility in Timisoara, Romania, and in May 1998, announced
the establishment of a program office in Israel. In addition, in April,
June and October 1998, the Company completed its acquisitions of certain
manufacturing facilities and associates from NCR, IBM and Mitsubishi,
respectively. (See "Acquisition of NCR, IBM and Mitsubishi Assets.") In
October 1998, the Company signed a definitive agreement with Ingram
Micro, Inc. under which the two companies will enter into a strategic
alliance. (See "Alliance with Ingram Micro.") During fiscal 1997, the
Company announced the establishment of new manufacturing facilities in
Suzhou, China; began operations at its manufacturing facility near
Boston, 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 facilities in China, Mexico, Brazil
and Romania, the partnership with and acquisitions from Ericsson, the
acquisitions from NCR, IBM and Mitsubishi, the alliance with Ingram
Micro or any other businesses or assets 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 transaction with Mitsubishi is completed. Should the Company
increase its expenditures in anticipation of a future level of sales
that does not materialize, its profitability would be adversely
affected. On occasion, customers may require rapid increases in
production that can place an excessive burden on the Company's
resources.
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.
The Company established a New Product Introduction center in Sweden, and
production from certain Ericsson plants worldwide was transferred to
Solectron manufacturing sites around the world. In October 1997,
27
<PAGE>
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 associates formerly employed by Ericsson
Telecomunicacoes S.A. in Brazil. Under the terms of the agreement,
Ericsson contracted 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 and new business from other customers.
The transactions with Ericsson entail a number of risks, including
successfully managing the integration of the operations, retention of
key associates, 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 has increased
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 that Solectron will
successfully manage the risks of these transactions.
Acquisitions of NCR, IBM and Mitsubishi Assets
On April 27, 1998, the Company acquired NCR's manufacturing assets in
three cities, two in the United States and one in Ireland, for a
purchase price of approximately $79.5 million, subject to adjustment. As
part of the transaction, Solectron hired approximately 1,200 NCR
manufacturing and related support associates currently employed at these
locations. Under the terms of the agreement, NCR will outsource the
manufacturing of certain computer, computer peripheral and server
components to Solectron for at least five years. Thereafter, Solectron
will bear the risk of filling the manufacturing capacity at the sites
with renewed business from NCR and new business from other customers.
On June 1, 1998, the Company acquired IBM's ECAT manufacturing assets in
Charlotte, North Carolina and non-exclusive rights to certain IBM
intellectual property for a purchase price of approximately $95.4
million, subject to adjustment. Under the terms of the agreement,
Solectron hired approximately 700 IBM manufacturing and related support
associates and the Company will provide printed circuit board assembly
services to IBM in North America for the next three years. In addition,
IBM has made available to Solectron 115 patents and 51 disclosures
(collectively the intellectual property rights) covering a wide spectrum
of technologies and capabilities. IBM will also provide to Solectron
failure analysis and characterization tools for process development and
manufacturing, including fault detection and isolation.
On October 1, 1998, the Company acquired the wireless telephone
manufacturing assets of Mitsubishi Consumer Electronics America, Inc.'s
(MCEA) Cellular Mobile Telephone (CMT) division in Braselton, Georgia.
MCEA is a subsidiary of Mitsubishi Electric Corporation (Mitsubishi).
Under the terms of the agreement, the Company will provide MCEA-CMT with
a full range of manufacturing services for five years, including New
Product Introduction management, printed circuit board assembly and full
systems assembly for MCEA'
s branded and private-label cellular products
sold within North America. In addition, Solectron has hired
approximately 400 MCEA-CMT manufacturing and support associates.
The transactions with NCR, IBM and Mitsubishi entail a number of risks,
including successfully managing the integration of the operations,
28
<PAGE>
retention of key associates, integrating purchasing operations and
information systems, managing an increasingly larger and more
geographically disparate business, obtaining customers other than NCR,
IBM and Mitsubishi for these facilities and renewing each of the NCR,
IBM and Mitsubishi business or replacing it with new business after
expiration of NCR's, IBM's and Mitsubishi's respective commitments. In
addition, the transactions with NCR, IBM and Mitsubishi 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 that Solectron will
successfully manage the risks of these transactions.
Alliance with Ingram Micro
On October 1, 1998, the Company announced that it had signed a
definitive agreement with Ingram Micro Inc. under which the two
companies will enter into a strategic alliance to provide global build-
to-order and configure-to-order assembly services for personal
computers, servers and related products in the United States, Canada,
Europe, Asia and Latin America. The alliance will be managed by both
companies under a joint management matrix that will include a sales and
marketing staff, program management, information technology resources
and test and process engineers and will, in most part, utilize existing
facilities, systems and personnel.
The alliance with Ingram Micro entails a number of risks, including
successfully establishing the joint management matrix for the alliance,
retention of key associates, integrating purchasing operations and
information systems and obtaining customers for the services to be
provided by the alliance. In addition, the alliance with Ingram Micro
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 that Solectron
will successfully manage the risks of this alliance or that the terms of
the alliance will be finalized.
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, associate 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.
In addition, the Company has operations in several locations that are
considered to have highly inflationary economies or volatile currencies,
including Mexico, Brazil, China and Romania. 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.
Southeast Asia and Latin America are currently experiencing currency,
economic and political instability. To date, the Company's operations
have not experienced significant adverse effects from this instability.
However, to the extent the Company's worldwide customers sell the
products manufactured by Solectron into the Southeast Asia and Latin
America markets, the customers' 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
29
<PAGE>
materialize and if it does, whether it will have an adverse material
effect on the Company's results of operations.
The Malaysian government recently adopted currency exchange controls,
including controls on ringgit held outside Malaysia, and established a
fixed exchange rate for the ringgit against the U.S. dollar. The Company
does not hold ringgit outside of Malaysia and therefore will not be
affected by these controls. The fixed exchange rate, when applied to
local expenses denominated in ringgit, will result in higher expenses
when translated to U.S. dollars. However, such local expenses represent
a small percentage of the Company's total costs and therefore the
Company's results of operations will not be significantly affected in
the near future. The long term impact of such controls is not
predictable due to dynamic economic conditions that also affect or are
affected by other regional or global economies.
The Company has been granted a tax holiday for its Malaysia sites 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 the current tax holidays will
not be terminated or modified or that any future tax holidays that the
Company may seek will be granted. If the current tax holidays are
terminated or modified or if additional tax holidays are not granted in
the future, the Company's effective income tax rate would likely
increase.
Foreign Exchange Rate Sensitivity
The Company does not use derivative financial instruments for
speculative purposes. The Company's policy is to hedge its foreign
currency denominated transactions in a manner that substantially offsets
the effects of changes in foreign currency exchange rates. The Company
uses foreign currency borrowings and foreign currency forward contracts
to hedge the currency risks of transactions denominated in foreign
currencies. Gains and losses on these foreign currency hedges are
generally offset by corresponding losses and gains on the underlying
transaction. There were no material deferred gains or losses at August
31, 1998, and the Company does not hold or issue foreign exchange
contracts for trading purposes. In addition, the Company's international
operations in some instances act as a natural hedge because both
operating expenses and a portion of sales are denominated in local
currency. In these instances, although an unfavorable change in the
exchange rate of a foreign currency against the U.S. dollar will result
in lower sales when translated to U.S. dollars, operating expenses will
also be lower in these circumstances. However, because less than 10% of
net sales are denominated in currencies other than the U.S. dollar, the
Company does not believe its total exposure to be significant. See Note
7 of Notes to Consolidated Financial Statements.
Euro Conversion Issues
On January 1, 1999, 11 of the 15 member countries of the European Union
(the participating countries) are scheduled to establish fixed
conversion rates between their existing sovereign currencies and the
euro. For three years after the introduction of the euro, the
participating countries can perform financial transactions in either the
euro or their original local currencies. This will result in a fixed
exchange rate among the participating countries, whereas the euro (and
the participating countries' currencies in tandem) will continue to
30
<PAGE>
float freely against the U.S. dollar and other currencies of non-
participating countries.
The Company has established a task force that is evaluating the effects
of the euro conversion on the Company and monitoring its readiness for
the conversion. The Company does not believe that significant
modifications of its information technology systems will be needed in
order to handle euro transactions and reporting, and the Company is in
the process of evaluating its tax positions and all outstanding
contracts in currencies of the participating countries to determine the
effects, if any, of the euro conversion. The Company does not expect the
euro conversion to have a significant impact on its derivatives (see
Note 7 of Notes to Consolidated Financial Statements) as the Company has
already modified its hedging policies to take the euro conversion into
account, and approximately 84% of its derivative instruments at August
31, 1998, mature in three months or less. While the Company believes
that it will be ready for the euro conversion by the end of calendar
1998, and that the effects of the conversion will not have a significant
adverse material effect on the Company's business and operations, there
can be no assurances that such conversion will not have an adverse
material effect on the Company's results of operations and financial
position due to competitive and other factors that may be affected by
the conversion that cannot be predicted by the Company.
Availability of Components
A substantial portion of the Company's net sales is 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, the mix of
printed circuit board assembly and systems build 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 margin 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 start-up 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.
31
<PAGE>
Interest Rate Sensitivity
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company
maintains its portfolio of cash equivalents and short-term investments
in a variety of securities, including both government and corporate
obligations, certificates of deposit and money market funds. As of
August 31, 1998, approximately 93% of the Company's total portfolio
matures in one year or less, with the remainder maturing in less than
two years. See Note 2 of Notes to Consolidated Financial Statements.
The following table presents the amounts of the Company's cash
equivalents and short-term investments that are subject to interest rate
risk by year of expected maturity and average interest rates as of
August 31, 1998:
<TABLE>
<CAPTION>
1999 2000 Total Fair Value
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Cash equivalents and short-
term investments $110,382 $21,275 $131,657 $131,657
Average interest rates 5.50% 5.78%
</TABLE>
The Company's debt instruments are subject to fixed interest rates and,
in the case of the convertible notes, to fixed conversion ratios into
the Company's common stock. In addition, the amount of principal to be
repaid at maturity is also fixed. Therefore, the Company is not subject
to market risk from its debt instruments. See Note 6 of Notes to
Consolidated Financial Statements.
Competition
The electronics manufacturing services 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 that 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
competitors may have greater manufacturing, financial, research and
development and marketing resources than the Company. The Company
believes that the primary bases of competition in its targeted markets
are 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. The Company's subsidiary, Force Computers, also 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.
32
<PAGE>
There can be no assurance that third parties will not assert
infringement claims against the Company or its customers in the future,
either against the patents the Company holds itself or against the IBM
patents that the Company has access to. 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 that 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.
Dependence on Key Personnel and Skilled Associates
The Company's continued success depends to a large extent upon the
efforts and abilities of key managerial and technical associates. 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
associates. 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
that affect the market price for many high technology companies in
particular, and that often are unrelated to operating performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and
Results of Operations "Trend and Uncertainties -- Interest Rate
Sensitivity" and "-- Foreign Exchange Rate Sensitivity."
33
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by item 8 of form 10-K is presented here in the
following order:
Page
--------
Unaudited Quarterly Financial Information 34
Consolidated Balance Sheets 35
Consolidated Statements of Income 36
Consolidated Statements of Stockholders' Equity 37
Consolidated Statements of Cash Flows 38-39
Notes to Consolidated Financial Statements 40-56
Independent Auditors' Report 57
Unaudited Quarterly Financial Information
For each fiscal quarter during the two fiscal years ended August 31,
1998 (in thousands, except percentages and per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $1,136,820 $1,186,831 $1,278,167 $1,686,476
Gross profit $ 123,759 $ 126,162 $ 133,123 $ 155,262
Gross margin 10.9% 10.6% 10.4% 9.2%
Operating income $ 67,438 $ 73,232 $ 72,371 $ 85,948
Operating margin 5.9% 6.2% 5.7% 5.1%
Net income $ 44,888 $ 48,843 $ 49,178 $ 55,915
Basic net income
per share $ 0.39 $ 0.42 $ 0.42 $ 0.48
Diluted net income
per share $ 0.38 $ 0.41 $ 0.41 $ 0.46
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---------------------- ---------- ---------- ---------- ----------
Net sales $ 807,725 $ 858,698 $ 983,222 $1,044,740
Gross profit $ 86,148 $ 102,198 $ 115,877 $ 124,056
Gross margin 10.7% 11.9% 11.8% 11.9%
Operating income $ 48,286 $ 55,563 $ 62,619 $ 69,954
Operating margin 6.0% 6.5% 6.4% 6.7%
Net income $ 31,475 $ 37,565 $ 41,537 $ 47,482
Basic net income
per share (1) $ 0.30 $ 0.33 $ 0.37 $ 0.42
Diluted net income
per share (1) $ 0.29 $ 0.32 $ 0.36 $ 0.40
</TABLE>
(1) All net income per share amounts have been restated to conform with
the requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
34
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except
per share data)
<CAPTION>
As of August 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 225,228 $ 225,073
Short-term investments 83,576 257,829
Accounts receivable, less allowances of
$3,999 and $4,049, respectively 670,194 418,682
Inventories 788,519 494,622
Prepaid expenses and other current assets 120,041 103,426
---------- ----------
Total current assets 1,887,558 1,499,632
Net property and equipment 448,039 326,361
Other assets 74,971 50,426
---------- ----------
Total assets $2,410,568 $1,876,419
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 666,557 $ 415,896
Accrued employee compensation 72,053 56,218
Accrued expenses 34,906 48,787
Other current liabilities 67,318 47,041
---------- ----------
Total current liabilities 840,834 567,942
Long-term debt 385,519 385,850
Other long-term liabilities 2,889 3,558
---------- ----------
Total liabilities 1,229,242 957,350
---------- ----------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 1,200
shares authorized; no shares issued -- --
Common stock, $.001 par value; 200,000
shares authorized; 117,667 and 114,546
shares issued and outstanding,
respectively 117 115
Additional paid-in capital 510,757 451,093
Retained earnings 677,436 478,612
Cumulative translation adjustment (6,984) (10,751)
---------- ----------
Total stockholders' equity 1,181,326 919,069
---------- ----------
Total liabilities and stockholders'
equity $2,410,568 $1,876,419
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Years Ended August 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $5,288,294 $3,694,385 $2,817,191
Cost of sales 4,749,988 3,266,106 2,534,813
---------- ---------- ----------
Gross profit 538,306 428,279 282,378
Operating expenses:
Selling, general and
administrative 218,377 172,872 100,260
Research and development 20,940 14,985 6,693
Acquisition costs -- 4,000 --
---------- ---------- ----------
Operating income 298,989 236,422 175,425
Interest income 24,753 28,536 13,302
Interest expense (24,759) (26,551) (15,650)
---------- ---------- ----------
Income before income taxes 298,983 238,407 173,077
Income taxes 100,159 80,348 58,845
---------- ---------- ----------
Net income $ 198,824 $ 158,059 $ 114,232
========== ========== ==========
Net income per share:
Basic $ 1.72 $ 1.42 $ 1.12
Diluted $ 1.65 $ 1.37 $ 1.08
Weighted average number of shares:
Basic 115,833 111,502 101,676
Diluted 126,567 115,321 106,718
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Common Stock Additional Cumulative Total
---------------- Paid-In Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustment Equity
------- ------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of August 31, 1995 99,168 $ 99 $ 329,166 $206,321 $ 2,555 $ 538,141
Options exercised 1,238 1 10,163 -- -- 10,164
Stock issued under employee
purchase plan 278 -- 4,339 -- -- 4,339
Conversion of long-term debt 3,946 4 30,398 -- -- 30,402
Stock issued in business
combination 392 1 1,667 -- -- 1,668
Tax benefit associated with
exercise of stock options -- -- 2,481 -- -- 2,481
Net income -- -- -- 114,232 -- 114,232
Translation adjustment -- -- -- -- (858) (858)
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1996 105,022 105 378,214 320,553 1,697 700,569
Options exercised 3,008 3 31,316 -- -- 31,319
Stock issued under employee
purchase plan 325 1 6,758 -- -- 6,759
Stock issued in business
combination 6,191 6 24,012 -- -- 24,018
Tax benefit associated with
exercise of stock options -- -- 10,793 -- -- 10,793
Net income -- -- -- 158,059 -- 158,059
Translation adjustment -- -- -- -- (12,448) (12,448)
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1997 114,546 115 451,093 478,612 (10,751) 919,069
Options exercised 2,809 2 39,000 -- -- 39,002
Stock issued under employee
purchase plan 312 -- 11,326 -- -- 11,326
Tax benefit associated with
exercise of stock options -- -- 9,338 -- -- 9,338
Net income -- -- -- 198,824 -- 198,824
Translation adjustment -- -- -- -- 3,767 3,767
------- ------- ---------- -------- ----------- ------------
Balances as of August 31, 1998 117,667 $ 117 $ 510,757 $677,436 $ (6,984) $ 1,181,326
======= ======= ========== ======== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended August 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 198,824 $ 158,059 $ 114,232
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 124,200 104,590 84,804
Interest accretion on zero-
coupon subordinated notes -- -- 1,173
Interest accrual on
long-term debt 27 19 12,507
Tax benefit associated with the
exercise of stock options 9,338 10,793 2,481
Gain on disposal of fixed assets (2,277) -- --
Other (1,326) (7,135) (3,065)
Changes in operating assets
and liabilities:
Accounts receivable (250,575) (66,293) (32,379)
Inventories (164,058) (115,560) (27,053)
Prepaid expenses and other
current assets (40,424) (48,947) (234)
Accounts payable 235,765 135,287 (56,784)
Accrued expenses and other
current liabilities 40,291 31,124 6,272
--------- --------- ---------
Net cash provided by
operating activities 149,785 201,937 101,954
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments (150,518) (274,160) (781,266)
Sales and maturities of short-term
investments 324,772 197,851 658,436
Acquisition of manufacturing
locations (174,885) -- (131,893)
Capital expenditures (244,375) (188,171) (115,446)
Proceeds from leasing transactions 25,528 -- --
Proceeds from disposal of fixed
assets 34,692 10,639 8,694
Other (14,394) 16,637 9,806
--------- --------- ---------
Net cash used in investing activities (199,180) (237,204) (351,669)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank lines of credit -- -- 6,340
Proceeds from long-term debt -- -- 380,000
Debt acquisition costs -- -- (7,808)
Repayments of long-term debt (1,205) (3,079) (4,796)
Net proceeds from sale of
common stock 50,328 38,078 14,503
Other (2,184) -- --
--------- --------- ---------
Net cash provided by financing
activities 46,939 34,999 388,239
--------- --------- ---------
</TABLE>
(continued)
38
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<CAPTION>
Years Ended August 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Effect of exchange rate changes on
cash and cash equivalents 2,611 (3,489) 347
--------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents 155 (3,757) 138,871
Cash and cash equivalents at
beginning of year 225,073 228,830 89,959
--------- --------- ---------
Cash and cash equivalents at
end of year $ 225,228 $ 225,073 $ 228,830
========= ========= =========
Cash paid:
Interest $ 24,999 $ 38,306 $ 517
Income taxes $ 75,817 $ 93,420 $ 54,937
Non-cash investing and financing
activities:
Issuance of common stock upon
conversion of long-term debt $ -- $ -- $ 30,402
Issuance of common stock for
business combination $ -- $ 24,018 $ 1,668
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 1998 and 1997
Note 1: Summary of Significant Accounting Policies
(a) Description of Operations and Principles of Consolidation:
Solectron Corporation (the Company) is an independent provider of
customized manufacturing services to original equipment manufacturers in
the electronics industry and operates in this one industry segment. The
Company's primary services include the manufacture and testing of
printed circuit board assemblies as well as system level assembly and
testing. The Company also provides materials procurement and materials
management in support of its manufacturing, assembly and testing
services. In addition, the Company provides consultation on board design
and manufacturability and performs refurbishment, packaging and
remanufacturing services. Manufacturing and assembly services include
turnkey services, where the Company procures certain or all of the
materials required for product assembly, and consignment services, where
the customer supplies the materials necessary for product assembly.
Turnkey services include material procurement and warehousing in
addition to manufacturing and involve greater resource investment than
consignment services. The Company has manufacturing operations located
in North America, Europe, Asia and Latin America.
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries after elimination of intercompany
accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(b) Cash Equivalents and Short-Term Investments: Cash equivalents are
highly liquid investments purchased with an original maturity of less
than three months. Short-term investments are investment grade short-
term debt instruments with original maturities greater than three
months.
Investments in debt securities are classified as "available-for-sale."
Such investments are recorded at fair value, as determined from quoted
market prices, and the cost of securities sold is determined based on
the specific identification method. If material, unrealized gains and
losses are reported as a component of stockholders' equity.
(c) Inventories: Inventories are stated at the lower of weighted
average cost or market.
40
<PAGE>
(d) Property and Equipment: Property and equipment are recorded at
cost. Depreciation and amortization are computed based on the shorter of
the estimated useful lives or the related lease terms, using the
straight-line method. Estimated useful lives are presented below.
Machinery and equipment 2 - 5 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Lease term
Buildings 6 -50 years
(e) Other Assets: Other assets consist of intangible assets, including
intellectual property rights and goodwill, and debt issuance costs.
Intangible assets are amortized using the straight-line method over the
expected life of the asset -- ten years for intellectual property rights
and ten years for goodwill. Debt issuance costs are amortized using the
straight-line method, which does not differ materially from the interest
method, over the debt term (ten years).
(f) Impairment of Long-Lived Assets: The Company reviews property and
equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of property and equipment is measured by comparison of
its carrying amount, including the unamortized portion of goodwill
allocated to the property and equipment, to future net cash flows the
property and equipment are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the property and
equipment, including the allocated goodwill, if any, exceeds its fair
market value. The Company assesses the recoverability of enterprise
level goodwill by determining whether the unamortized goodwill balance
can be recovered through undiscounted future cash flows of the acquired
operation. The amount of enterprise level goodwill impairment, if any,
is measured based on projected discounted future cash flows using a
discount rate reflecting the Company's average cost of funds. To date,
no adjustments to the carrying value of the Company's long-lived assets
have been required.
(g) Income Taxes: The Company uses the asset and liability method of
accounting for income taxes. Deferred tax assets and liabilities are
recognized for the future consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. When necessary, a valuation
allowance is recorded to reduce tax assets to an amount whose
realization is more likely than not. The effect of changes in tax rates
is recognized in the period in which the rate change occurs.
(h) Net Income Per Share: Basic and diluted net income per share
amounts for all periods presented have been calculated, and where
necessary restated, to conform to the requirements of Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
Basic net income per share is calculated using the weighted average
number of common shares outstanding during the period. Diluted net
income per share is calculated using the weighted average number of
common shares plus dilutive common equivalent shares outstanding during
the period. Common equivalent shares consist of stock options that are
computed using the treasury stock method and shares issuable upon
conversion of the Company's outstanding convertible notes computed using
the as-if converted method.
(i) Revenue Recognition: The Company recognizes revenue upon shipment
of product to its customers.
41
<PAGE>
(j) Employee Stock Plans: The Company accounts for its stock option
plans and its Employee Stock Purchase Plan using the intrinsic value
method.
(k) Foreign Currency: Assets and liabilities of foreign subsidiaries
where the local currency is the functional currency are translated at
year-end exchange rates. The effects of these translation adjustments
are reported as a separate component of stockholders' equity. Exchange
gains and losses arising from transactions denominated in a currency
other than the functional currency of the entity involved and
remeasurement adjustments for foreign operations where the United States
dollar is the functional currency are included in income. To date, the
effect of such amounts on net income has not been material.
(l) Derivatives: Gains and losses on foreign currency forward exchange
contracts designated as hedges of assets and liabilities are included in
income concurrently with the offsetting losses and gains on the related
balance sheet item. Gains and losses on hedges of firm commitments and
anticipated transactions are deferred and included in the basis of the
transaction when it occurs.
(m) Year-End: The Company's financial reporting year consists of either
52-week or 53-week periods ending on the last Friday in August. Fiscal
years 1998 and 1997 each contained 52 weeks, and fiscal year 1996
contained 53 weeks. For purposes of presentation in the accompanying
financial statements and notes thereto, the Company has indicated its
accounting years as ending on August 31.
The Company's subsidiaries, Solectron Texas, Inc. (Texas) and Solectron
Brasil, Ltda. (Brazil) report their results one month in arrears. The
Company's consolidated financial position as of August 31, 1998 includes
the financial position of the Texas and Brazil operations as of July 31,
1998 and the Company's consolidated financial position as of August 31,
1997 includes the financial position of the Texas operation as of July
31, 1997. Similarly, the Company's consolidated results of operations
and cash flows for the year ended August 31, 1998 include the results of
operations and cash flows of the Texas and Brazil operations for the
twelve months ended July 31, 1998. The Company's consolidated results of
operations and cash flows for the years ended August 31, 1997 and 1996
include the results of operations and cash flows of the Texas operation
for the twelve months ended July 31, 1997 and the four-month period
since its acquisition ended July 31, 1996, respectively.
(n) Recent Accounting Pronouncements: In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging
activities. The Company expects that the adoption of SFAS No. 133 will
have no material impact on its financial position, results of operations
or cash flows. The Company will be required to implement SFAS No. 133
for its fiscal year ending August 31, 2000.
42
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 requires that entities capitalize certain costs related to
internal-use software once certain criteria have been met. The Company
has not yet determined the impact of SOP 98-1 on its financial position,
results of operations and cash flows. The Company will be required to
implement SOP 98-1 for its fiscal year ending August 31, 2000.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related
to new operations must be expensed as incurred. In addition, all start-
up costs that were capitalized in the past must be written off when SOP
98-5 is adopted. The Company expects that the adoption of SOP 98-5 will
have no material impact on its financial position, results of operations
or cash flows. The Company will be required to implement SOP 98-5 for
its fiscal year ending August 31, 2000.
(o) Reclassifications: Certain prior year amounts have been
reclassified to conform to the 1998 presentation.
Note 2: Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consisted of the
following at August 31:
<TABLE>
<CAPTION>
Cash and Cash Short-Term
Equivalents Investments
------------- -----------
(in thousands)
<S> <C> <C>
1998
- -------
Cash $ 91,527 $ --
Money market funds 74,225 --
Certificates of deposit 42 11,353
Municipal market auction securities 800 --
U.S. government securities 27,778 47,118
Corporate obligations 6,026 17,509
Municipal obligations 5,424 --
Other 19,406 7,596
-------- --------
$225,228 $ 83,576
======== ========
1997
- -------
Cash $ 39,725 $ --
Money market funds 81,350 --
Certificates of deposit 9,822 23,249
Municipal market auction securities 7,723 --
Corporate market auction securities 14,206 --
U.S. government securities 6,685 173,304
Corporate obligations 58,422 51,542
Municipal obligations 7,140 --
Other -- 9,734
-------- --------
$225,073 $257,829
======== ========
</TABLE>
43
<PAGE>
Short-term investments are carried at fair market value, which
approximates cost. As of August 31, 1998 and 1997, unrealized gains and
losses were not material. Realized gains and losses for the years ended
August 31, 1998, 1997 and 1996 were not material. As of August 31, 1998,
all of the Company's short-term investments mature within two years.
Note 3: Inventories
Inventories as of August 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Raw materials $577,764 $365,630
Work-in-process 210,755 128,992
-------- --------
$788,519 $494,622
======== ========
</TABLE>
Note 4: Property and Equipment
Property and equipment as of August 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Land $ 23,074 $ 18,070
Buildings and improvements 94,012 46,441
Machinery and equipment 531,310 432,963
Furniture and fixtures 106,353 76,485
Leasehold improvements 46,653 41,647
Construction-in-progress 58,429 33,171
-------- --------
859,831 648,777
Less accumulated depreciation
and amortization 411,792 322,416
-------- --------
Net property and equipment $448,039 $326,361
======== ========
</TABLE>
Note 5: Lines of Credit
The Company has available a $100 million unsecured multicurrency
revolving line of credit that expires April 30, 2002. Borrowings under
the credit facility bear interest, at the Company's option, at either
the bank's prime rate, the London interbank offering rate (LIBOR) plus a
margin, or the bank's certificate of deposit (CD) rate plus a margin.
The margin under the LIBOR or CD rate options will vary depending on the
Company's Standard & Poor's Corporation and/or Moody's Investor
Services, Inc. rating for its long-term senior unsecured debt and was
0.4% at August 31, 1998. Under the agreement, the Company must meet
certain financial covenants. As of August 31, 1998 and 1997, there were
no borrowings outstanding under this line of credit.
The Company also has $114.9 million in foreign lines of credit and other
bank facilities. Borrowings are payable on demand. The interest rates
range from the bank's prime lending rate to the bank's prime rate plus
2.0%. As of August 31, 1998, borrowings and guaranteed amounts under
these lines of credit were $22.7 million, which had a weighted-average
interest rate of 4.9% per annum.
44
<PAGE>
The Company has 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. The arrangement expires in August 1999.
No transaction has occurred under this arrangement.
Note 6: Long-Term Debt
Long-term debt at August 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
6% subordinated notes due 2006, face value
$230,000, fair value of $333,500 in 1998
and $318,274 in 1997. Convertible into
6,804 shares of common stock $230,000 $230,000
7 3/8% senior notes due 2006, face value
$150,000, fair value of $157,680 in 1998
and $149,300 in 1997 149,771 149,745
Other, fair value of $5,748 in 1998 and
$6,105 in 1997 5,748 6,105
-------- --------
Total long-term debt $385,519 $385,850
======== ========
</TABLE>
In February 1996, the Company issued convertible, subordinated notes for
an aggregate principal amount of $230 million. These notes are in
denominations of and have a maturity value of $1,000 each, payable on
March 1, 2006. Interest is payable semi-annually at a rate of 6% per
annum. The notes are subordinated to all existing and future senior
indebtedness of the Company. Each note is convertible at any time by the
holder into shares of common stock at a conversion price of $33.81 per
share. Beginning on March 3, 1999, the notes are redeemable for cash at
the option of the Company, in whole or in part, at redemption prices
ranging from 104.2% of the principal amount in 1999 to 100% of the
principal amount in 2006. Upon a change in control of the Company, each
holder of the notes has the right to require the Company to repurchase
the notes for 100% of the principal amount.
In March 1996, the Company issued $150 million aggregate principal
amount of senior notes. The notes are in denominations of and have a
maturity value of $1,000 each and are due on March 1, 2006. Interest is
payable semi-annually at a rate of 7 3/8% per annum. The notes may not
be redeemed prior to maturity.
Note 7: Financial Instruments
Fair Value of Financial Instruments
The fair value of the Company's cash, cash equivalents, accounts
receivable and accounts payable approximates the carrying amount due to
the relatively short maturity of these items. The fair value of the
Company's short-term investments (see Note 2) is determined based on
quoted market prices. The fair value of the Company's long-term debt
(see Note 6) is determined based on broker trading prices.
45
<PAGE>
Derivatives
The Company enters into forward exchange contracts to hedge foreign
currency exposures on a continuing basis for periods consistent with its
committed exposures. These transactions generally do not subject the
Company to risk of accounting loss because gains and losses on these
contracts offset losses and gains on the assets, liabilities and
transactions being hedged. The Company is exposed to credit-related
losses in the event of non-performance by the parties in these
contracts. The counterparties to these contracts are substantial and
credit-worthy multinational commercial banks. The risk of counterparty
non-performance associated with these contracts is remote. Because these
contracts have maturities of less than six months, the amounts of
unrealized gains and losses are immaterial. The Company had $31.3
million and $75.6 million of aggregate foreign currency forward exchange
contracts outstanding at the end of fiscal years 1998 and 1997,
respectively, primarily for the purchase and sale of European
currencies, the Japanese yen, the Malaysian ringgit and the U.S. dollar
by the Company's international subsidiaries.
Business and Credit Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents, short-
term investments and trade accounts receivable. The Company's cash, cash
equivalents and short-term investments are managed by recognized
financial institutions that follow the Company's investment policy. The
Company's investments are comprised of investment grade short-term debt
instruments, and the Company's investment policy limits the amount of
credit exposure in any one issue. Concentrations of credit risk in
accounts receivable resulting from sales to major customers are
discussed in Note 13. The Company generally does not require collateral
for sales on credit. The Company closely monitors extensions of credit
and has not experienced significant credit losses in the past.
Note 8: Commitments
The Company leases various facilities under operating lease agreements.
The facility leases expire at various dates through 2006. Substantially
all leases require the Company to pay property taxes, insurance and
normal maintenance costs. Payments under certain leases are periodically
adjusted based on LIBOR rates. The leases for certain of the Company's
facilities in Milpitas and San Jose, California, and Everett,
Washington, provide the Company with the option at the end of each of
the leases 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 market value of these
leased facilities totaling up to $93.1 million in the event the Company
does not purchase the properties at the ends of the lease terms. The
Company must also maintain compliance with financial covenants similar
to its credit facilities.
During fiscal 1998, the Company entered into an arrangement with a
third-party leasing company under which certain of the Company's fixed
assets with a carrying value of approximately $31.3 million were sold to
the leasing company and leased back. The Company is accounting for these
transactions as operating leases.
46
<PAGE>
Future minimum payments related to lease obligations, including the
$93.1 million contingent liability discussed above, are $39.5 million,
$29.8 million, $20.9 million, $65.1 million and $44.9 million in each of
the years in the five-year period ending August 31, 2003 and an
aggregate $2.6 million for periods after that date. Rent expense was
$33.3 million, $22.9 million and $17.0 million for the years ended
August 31, 1998, 1997 and 1996, respectively.
Note 9: Retirement Plans
The Company has various retirement plans that cover a significant number
of its associates. The major pension plans are defined contribution
plans, which provide pension benefits in return for services rendered,
provide an individual account for each participant, and have terms that
specify how contributions to the participant's account are to be
determined rather than the amount of pension benefits the participant is
to receive. Contributions to these plans are based on varying
percentages of each participant's base salary. The Company's expense for
the defined contribution plans totaled $4.5 million, $3.0 million and
$2.3 million, in 1998, 1997 and 1996, respectively.
Note 10: Income Taxes
The components of income taxes for the years ended August 31, 1998, 1997
and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 74,123 $ 62,618 $ 48,817
State 15,319 10,923 7,151
Foreign 14,611 5,944 4,204
-------- -------- --------
104,053 79,485 60,172
-------- -------- --------
Deferred:
Federal (7,819) (8,808) (2,579)
State (1,586) (1,067) (233)
Foreign (3,827) (55) (996)
-------- -------- --------
(13,232) (9,330) (3,808)
-------- -------- --------
Charge in lieu of taxes
attributable to employee
stock plans 9,338 10,793 2,481
-------- -------- --------
Total $100,159 $ 80,348 $ 58,845
======== ======== ========
</TABLE>
47
<PAGE>
The overall effective income tax rate (expressed as a percentage of
financial statement income before income taxes) differed from the
expected U.S. income tax rate for the years ended August 31, 1998, 1997
and 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal tax rate 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit 3.2 3.1 2.8
Tax exempt interest -- -- (0.1)
Income of international subsidiaries
taxed at different rates (0.9) 0.2 0.5
Tax holiday (7.1) (3.8) (5.0)
Other 3.3 (0.8) 0.8
---- ---- ----
Effective income tax rate 33.5% 33.7% 34.0%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of August 31, 1998
and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accruals, allowances and reserves $ 18,696 $ 14,240
State income tax 6,137 3,054
Pre-operating costs 14 15
Acquired intangible assets 1,926 2,039
Net undistributed profits of
subsidiaries 2,220 1,635
Plant and equipment 5,839 1,778
Other 3,413 2,976
-------- --------
Total deferred tax assets 38,245 25,737
-------- --------
Deferred tax liabilities:
Other (359) (1,083)
-------- --------
Total deferred tax liabilities (359) (1,083)
-------- --------
Net deferred tax assets $ 37,886 $ 24,654
======== ========
</TABLE>
Based on the Company's historical operating income, management believes
it is more likely than not that the Company will realize the benefit of
the deferred tax assets recorded and, accordingly, has established no
valuation allowance.
Worldwide income before income taxes for the years ended August 31,
1998, 1997 and 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. $216,979 $198,029 $140,900
Non-U.S. 82,004 40,378 32,177
-------- -------- --------
Total $298,983 $238,407 $173,077
======== ======== ========
48
<PAGE>
During the fiscal year ended August 31, 1997, the Company adopted a
change regarding undistributed earnings of its German subsidiaries,
which previously were deemed to be permanently reinvested. The effect of
this change was the recognition of net deferred tax assets for foreign
tax credit utilization of approximately $0.6 million and $1.6 million
for the years ended August 31, 1998 and 1997, respectively.
Cumulative undistributed earnings of the international subsidiaries
amounted to $210.6 million as of August 31, 1998, of which approximately
$195.6 million is intended to be permanently reinvested. The amount of
income tax liability that would result had such earnings been
repatriated is estimated to be approximately $46.3 million.
The Company has been granted a tax holiday for its Malaysia sites which
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.
Note 11: Stockholders' Equity
Pro Forma Fair Value Disclosures
The Company accounts for its employee stock plans, consisting of fixed
stock option plans and an employee stock purchase plan, using the
intrinsic value method. Accordingly, no compensation expense related to
these plans has been recognized in the Company's financial statements.
The table below sets out the pro forma amounts of net income and net
income per share that would have resulted for the years ended August 31,
1998, 1997 and 1996 if the Company accounted for its employee stock
plans under the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income As reported $198,824 $158,059 $114,232
Pro forma $173,559 $144,786 $108,905
Net income per share:
Basic As reported $ 1.72 $ 1.42 $ 1.12
Pro forma $ 1.50 $ 1.30 $ 1.07
Diluted As reported $ 1.65 $ 1.37 $ 1.08
Pro forma $ 1.46 $ 1.27 $ 1.03
49
<PAGE>
For purposes of computing pro forma net income, the fair value of each
option grant and Employee Stock Purchase Plan purchase right is
estimated on the date of grant using the Black-Scholes option pricing
model. The assumptions used to value the option grants and purchase
rights are stated below.
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected life of
options 4 years 4.3 years 4.3 to 4.7 years
Expected life of
purchase rights 3 months 3 months 3 months
Volatility 44% 40% 40%
Risk-free interest
rate 5.1% to 5.9% 5.2% to 6.5% 5.1% to 6.7%
Dividend yield zero zero zero
</TABLE>
Options vest over several years and new option grants are generally made
each year. Because of this and because the provisions of SFAS No. 123
are effective only for fiscal years 1998, 1997 and 1996, the pro forma
amounts shown above may not be representative of the pro forma effect on
reported net income in future years.
Stock Option Plans
The Company's stock option plans provide for grants of options to
associates to purchase common stock at the fair market value of such
shares on the grant date. The options vest over a four-year period
beginning generally on the grant date. The term of the options is five
years for options granted prior to November 17, 1993 and seven years for
options granted thereafter. In connection with the acquisition of Force
Computers, Inc. (see Note 15), the Company assumed all options
outstanding under the Force option plan, after the application of the
exchange ratio. Options under the Force plan generally vest over a
four-year period beginning on the grant date and have a ten-year term.
No further options may be granted under the Force plan.
50
<PAGE>
A summary of stock option activity under the plans for the years ended
August 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beg. of year 10,229,510 $18.99 9,431,576 $14.82 7,983,680 $11.69
Granted 2,676,682 $44.86 3,403,074 $26.82 3,173,878 $20.10
Assumed from
Force plan -- -- 839,264 $ 2.20 -- --
Exercised (2,809,115) $14.82 (3,007,754) $ 9.76 (1,237,774) $ 8.22
Canceled (630,743) $28.16 (436,650) $21.03 (488,208) $15.07
---------- ---------- ----------
Outstanding,
end of year 9,466,334 $26.93 10,229,510 $18.99 9,431,576 $14.82
========== ========== ==========
Exercisable
at year-end 4,735,145 $20.72 5,181,725 $15.85 5,023,686 $12.48
========== ========== ==========
Weighted-average
fair value of
options granted
during the year $18.61 $11.23 $ 8.47
</TABLE>
Information regarding the stock options outstanding at August 31, 1998
is summarized in the table below.
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.32-$ 5.14* 163,929 7.23 years $ 3.73 48,089 $ 3.20
$13.31-$19.00 3,292,447 2.94 years $16.08 2,786,199 $15.71
$20.38-$23.94 2,180,878 4.37 years $23.04 1,087,925 $22.91
$24.50-$29.63 1,140,920 5.30 years $27.85 383,793 $28.40
$37.16-$39.94 478,119 6.04 years $38.38 103,604 $38.04
$41.38-$50.75 2,210,041 6.38 years $45.70 325,535 $44.25
---------- ---------
$ 1.32-$50.75 9,466,334 4.59 years $26.93 4,735,145 $20.72
========== =========
</TABLE>
*Options in this range of exercise prices represent the options assumed
in connection with the acquisition of Force.
A total of 12,576,596 shares of common stock remain reserved for
issuance under the plans as of August 31, 1998.
On December 1 of each year, each independent member of the Company's
Board of Directors is granted an option to purchase 6,000 shares of
common stock at the then current fair market value. Such options vest
over one year.
51
<PAGE>
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan (the Purchase Plan),
associates meeting specific employment qualifications are eligible to
participate and can purchase shares quarterly through payroll deductions
at the lower of 85% of the fair market value of the stock at the
commencement or end of the offering period. The Purchase Plan permits
eligible associates to purchase common stock through payroll deductions
for up to 10% of qualified compensation. As of August 31, 1998,
2,155,194 shares remain available for issuance under the Purchase Plan.
The weighted-average fair value of the purchase rights granted in fiscal
1998, 1997 and 1996 was $9.98, $5.92 and $4.72, respectively.
Note 12: Geographic Information
Information about the Company's operations in different geographic
regions is presented in the table below:
<TABLE>
<CAPTION>
Operating Identifiable
Net Sales Income Assets
---------- --------- ------------
(in thousands)
<S> <C> <C> <C>
Fiscal 1998:
North America $3,857,545 $247,791 $1,562,667
Europe 1,067,231 37,142 461,639
Asia and other 363,518 14,056 386,262
---------- -------- ----------
$5,288,294 $298,989 $2,410,568
========== ======== ==========
Fiscal 1997:
North America $2,862,941 $200,664 $1,357,189
Europe 580,486 22,157 312,552
Asia and other 250,958 13,601 206,678
---------- -------- ----------
$3,694,385 $236,422 $1,876,419
========== ======== ==========
Fiscal 1996:
North America $1,981,788 $142,470 $1,117,875
Europe 490,606 7,775 224,172
Asia and other 344,797 25,180 110,151
---------- -------- ----------
$2,817,191 $175,425 $1,452,198
========== ======== ==========
</TABLE>
Net sales and operating income reflect the destination of the product
shipped.
52
<PAGE>
Note 13: Major Customers
Net sales to major customers as a percentage of consolidated net sales
for the years ended August 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Hewlett-Packard Corporation 14% 14% 11%
Cisco Systems, Inc. 11% * *
Sun Microsystems, Inc. 11% * *
Nortel Networks, Inc. (formerly
Bay Networks, Inc.) * 10% *
---------------------------
* net sales less than 10%
</TABLE>
The Company has concentrations of credit risk as a result of sales to
these and other of the Company's significant customers. In particular,
Hewlett-Packard Corporation accounts for approximately 13% of total
accounts receivable at August 31, 1998. The concentration of credit risk
is intensified due to the fact that the majority of the Company's
customers are in the same industry. The Company has considered its
concentrations of credit risk in establishing its reserves for bad debt
and considers such reserves to be adequate.
Note 14: Purchase of Assets
In October 1997, the Company acquired certain assets, primarily
equipment and inventory, of Ericsson Telecom AB's Business Area Infocom
Systems' (Ericsson) printed circuit board assembly operation located in
Sao Paulo, Brazil. The acquisition was accounted for as a purchase of
assets and the purchase price was allocated to the assets acquired based
on the relative fair values of the assets at the date of acquisition.
Under the terms of the agreement, Ericsson will contract for the
Company's services through its subsidiary, Solectron Brasil Ltda.
through September 1999. In addition Solectron Brasil Ltda. hired
approximately 370 associates formerly employed by Ericsson.
In April 1998, the Company acquired NCR Corporation's (NCR)
manufacturing assets in three cities for a purchase price of
approximately $79.5 million, subject to adjustment. The acquisition was
accounted for as a purchase of assets and the purchase price was
allocated to the assets acquired based on the relative fair values of
the assets at the date of acquisition. Under the terms of the agreement,
NCR will outsource the manufacturing of certain of its computer,
computer peripheral and server components to Solectron for at least five
years and Solectron hired approximately 1,200 NCR manufacturing and
related support associates.
In June 1998, the Company acquired International Business Machines
Corporation's (IBM) Electronic Card Assembly and Test (ECAT)
manufacturing assets in Charlotte, North Carolina. In addition, the
Company acquired non-exclusive rights to certain IBM intellectual
property. The total purchase price for the manufacturing assets and the
intellectual property rights was approximately $95.4 million, subject to
adjustment. The transaction was accounted for as a purchase of assets,
and the purchase price was allocated to the assets acquired based on the
relative fair values of the assets at the date of acquisition.
Approximately $17.0 million of the purchase price was allocated to the
intellectual property rights, which will be amortized on a straight-line
basis over ten years.
53
<PAGE>
Under the terms of the agreement, Solectron hired approximately 700 IBM
manufacturing and related support associates and the Company will
provide printed circuit board assembly services to IBM in North America
for the next three years. In addition, IBM has made available to
Solectron 115 patents and 51 disclosures (collectively the intellectual
property rights) covering a wide spectrum of technologies and
capabilities. IBM will also provide to Solectron failure analysis and
characterization tools for process development and manufacturing,
including fault detection and isolation.
Note 15: Business Combinations
Poolings of Interests
In November 1996, the Company 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 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. The Company incurred
transaction expenses of $4.0 million directly related to the acquisition
of Force.
In March 1996, the Company exchanged common stock and common stock
options for all of the outstanding stock and options of Fine Pitch
Technology, Inc. (Fine Pitch), a provider of prototype services. This
transaction was accounted for under the pooling of interests method. The
results of operations of Fine Pitch prior to its acquisition were not
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
Fine Pitch, and pro forma financial information has not been disclosed.
Purchases
In March 1996, the Company completed its purchase of Texas Instruments
Incorporated's Custom Manufacturing Services (CMS) business. This
business, principally located in Austin, Texas, was acquired for
approximately $132 million. Under the terms of the agreement, Solectron
purchased the CMS business in Austin, Texas and certain assets of the
CMS business in Kuala Lumpur, Malaysia (collectively the CMS
operations). The Company subsequently has moved the CMS business in
Kuala Lumpur to Solectron's Penang, Malaysia operations. This
transaction was accounted for under the purchase method of accounting.
The acquisition resulted in goodwill of approximately $38 million, which
is being amortized on a straight-line basis over 10 years.
54
<PAGE>
The following pro forma financial information gives effect to the
acquisition of the CMS operations on a purchase accounting basis for the
year ended August 31, 1996, as if the CMS operations had been acquired
at the beginning of that period. The preparation of this financial
information requires the use of management's estimates. This pro forma
financial information includes certain adjustments for goodwill
amortization, increased depreciation expense, a decrease in interest
income (related to the assumed liquidation of certain current
investments for the purchase of the CMS operations) and the related
income tax effects.
This pro forma combined information is not purported to be indicative of
the results that would have actually been obtained if the combination
had been in effect during the periods indicated, or that may be obtained
in the future. In addition, it does not reflect the effects of any
synergy that might be achieved from the newly combined operations.
Pro forma financial information:
Year Ended
August 31,
1996
----------
(in thousands,
except per
share data)
Net sales $3,152,962
Net income $ 115,085
Net income per share:
Basic $ 1.13
Diluted $ 1.09
55
<PAGE>
16. Net Income per Share
The following table sets forth the computation of basic and diluted net
income per share for the years ended August 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands,
except per share data)
<S> <C> <C> <C>
Net income - basic $198,824 $158,059 $114,232
Interest expense from convertible
subordinated notes, net of taxes 9,593 -- 739
-------- -------- --------
Net income - diluted $208,417 $158,059 $114,971
======== ======== ========
Weighted average shares - basic 115,833 111,502 101,676
Common stock equivalents-stock options 3,930 3,819 2,578
Common shares issuable upon assumed
conversion of convertible subordinated
notes 6,804 -- 2,464
-------- -------- --------
Weighted average shares - diluted 126,567 115,321 106,718
======== ======== ========
Net income per share - basic $ 1.72 $ 1.42 $ 1.12
======== ======== ========
Net income per share - diluted $ 1.65 $ 1.37 $ 1.08
======== ======== ========
</TABLE>
For the years ended August 31, 1998, 1997 and 1996 options to purchase
2.1 million, 0.5 million and 1.3 million shares, respectively, of common
stock with exercise prices greater than the average fair market value of
the Company's stock for the period of $42.52, $29.59 and $20.22,
respectively, were not included in the calculation because the effect
would have been antidilutive. In addition, the calculations for the
years ended August 31, 1997 and 1996 did not include the 6.8 million
common shares issuable upon conversion of the convertible subordinated
notes as they would also have been antidilutive.
56
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Solectron Corporation:
We have audited the accompanying consolidated balance sheets of
Solectron Corporation and subsidiaries as of August 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended
August 31, 1998. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement
schedule as listed in the Index at Item 14(a)(2). These consolidated
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Solectron Corporation and subsidiaries as of August 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended August 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Mountain View, California
September 14, 1998
57
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
58
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Solectron's executive officers and directors and their ages as of August
31, 1998 are as follows:
Name Age Position
- ---------------------------- ------ -------------------------------
Koichi Nishimura, Ph.D. 60 President, Chief Executive
Officer and Chairman of the Board
David Kynaston 57 Vice President and President
Solectron Europe
Stephen T. Ng 43 Senior Vice President and
Chief Materials Officer
Leslie T. Nishimura * 54 Senior Vice President and
President Solectron
Washington, Inc.
Ken Tsai 55 Senior Vice President and
President Solectron Asia
Susan S. Wang 47 Senior Vice President, Chief
Financial Officer and Secretary
Walter W. Wilson 54 Senior Vice President and
President Solectron Americas
Saeed Zohouri, Ph.D. 47 Senior Vice President, Chief
Technology Officer and
President Solectron North America
Winston H. Chen, Ph.D. (4) 57 Director
Richard A. D'Amore (4) 45 Director
Charles A. Dickinson (3)(4)(5) 74 Director
Heinz Fridrich (1)(2)(5) 65 Director
Philip V. Gerdine, Ph.D. (2) 59 Director
William A. Hasler (3)(5) 56 Director
Kenneth E. Haughton, Ph.D. (3) 70 Director
Paul R. Low, Ph.D. (1)(2) 65 Director
Osamu Yamada (4) 69 Director
- ---------------
* Resigned from the Company in September 1998.
(1) Member of the Audit Committee, which was replaced by the Audit and
Finance Committee effective September 1, 1998.
(2) Member of the Audit and Finance Committee.
(3) Member of the Compensation Committee
(4) Member of the Nominating Committee
(5) Member of Information Technology Committee
59
<PAGE>
Dr. Koichi Nishimura has served as a director since 1991, Chairman of
the Board since September 1996, Chief Executive Officer since 1992 and
President since 1990. He was Co-Chief Executive Officer from 1991 to
1992 and Chief Operating Officer from 1988 to 1991. From 1964 to 1988,
Dr. Nishimura was employed by International Business Machines
Corporation (IBM) in various technology and management positions. He
also serves as a director of Merix Corporation.
Mr. David Kynaston joined Solectron in February 1996 as Vice President
and President of Solectron Europe. Mr. Kynaston worked for Philips
Electronics for the previous 15 years in various capacities, including
Managing Director of Philips Mullard Ltd. subsidiary, Managing Director
of the Business Communications Systems Division and most recently,
Managing Director of the Private Mobile Radio Division. Mr. Kynaston has
also held senior technical management positions at EMI Medical Ltd. and
Cambridge Scientific Instruments Ltd.
Mr. Stephen T. Ng joined Solectron in September 1989 as Vice President,
Worldwide Material Purchasing and is currently Senior Vice President and
Chief Materials Officer of Solectron. Prior to joining Solectron, Mr. Ng
had 11 years experience in materials management in various capacities
with Xerox Corporation. His last position prior to joining Solectron was
Manager, Material Operations at Xerox Corporation.
Mr. Leslie T. Nishimura, a founder of the Company, resigned from the
Company in September 1998. He had served as Senior Vice President of
Solectron since 1989, President of Solectron Asia from 1991 to 1993,
Secretary of Solectron from 1989 to 1992 and Vice President,
Manufacturing Technology of Solectron from 1978 to 1989. Mr. Nishimura's
prior experience includes various materials, production control and
inventory control supervisory positions at Ritter Co., Burndy
Corporation and the Norden Division of United Technologies, Inc.
Mr. Ken Tsai is President of Solectron Asia and has served as Senior
Vice President of Solectron since May 1995. Mr. Tsai was Vice President
of Solectron from 1990 to 1995. He served as Director of Manufacturing
for Solectron from 1989 to 1990 and in various manufacturing and other
positions from 1984 to 1989. Prior to joining Solectron, Mr. Tsai served
in various management and business planning positions at American
Cyanamid Company from 1968 to 1984.
Ms. Susan S. Wang has served as Senior Vice President and Chief
Financial Officer of Solectron since 1990 and as Secretary since 1992.
She was Vice President, Finance and Chief Financial Officer of Solectron
from 1986 to 1990 and Director of Finance of Solectron from 1984 to
1986. Prior to joining Solectron, Ms. Wang held various accounting and
finance positions with Xerox Corporation. Ms. Wang also held accounting
and auditing positions with Westvaco Corp. and Price Waterhouse & Co.
She is a Certified Public Accountant.
Mr. Walter W. Wilson has served as President, Solectron Americas since
April 1997, President, Solectron North America from September 1995 to
March 1997, President Solectron California Corporation from March 1992
to February 1996 and Senior Vice President of Solectron since 1990. From
1989 to 1990 he served as an operational Vice President of Solectron.
From 1965 to 1989 Mr. Wilson was employed by IBM in manufacturing and
product development. During his IBM tenure, he held management positions
in the United States, West Germany and Japan.
60
<PAGE>
Dr. Saeed Zohouri has served as Senior Vice President and Chief
Technology Officer since 1994, President Solectron California
Corporation from March 1996 to August 1998 and President, Solectron
North America since August 1998. Dr. Zohouri joined Solectron in 1980;
he has held various management positions and has also served as Director
of Technology. His prior experience includes teaching chemistry at a
major international university.
Dr. Winston H. Chen is a founder of the Company and has served as a
director of Solectron since 1978, Chairman of the Board from 1990 to
1994, President from 1979 to 1990, Chief Executive Officer from 1984 to
1991 and as Co-Chief Executive Officer from 1991 through 1992. Dr. Chen
is currently Chairman of the Paramitas Foundation. From 1970 to 1978,
Dr. Chen served as Process Technology and Development Manager of IBM. He
also serves as a director of Intel Corporation and Edison International.
Mr. Richard A. D'Amore has served as a director of Solectron since 1985.
Mr. D'Amore has been a general partner of North Bridge Venture Partners
since 1992. He also serves as a director of Math Soft, Inc., VEECO
Instruments, Inc. and Xionics Document Technologies, Inc.
Mr. Charles A. Dickinson has served as a director of Solectron since
1984, and as Chairman of the Board of Directors from 1986 to 1990 and
from 1994 to September 1996. He served as an independent consultant to
Solectron from 1991 to 1993. He served as President, Solectron Europe
from September 1993 to February 1996. From 1986 to 1990, he was Chairman
of the Board of Directors, President and Chief Executive Officer of
Vermont Micro Systems, Inc. He also serves as a director of Trident
Microsystems, Inc., Aavid Thermal Technologies, Inc., Lecroy Corporation
and Dense Pac Microsystems, Inc.
Mr. Heinz Fridrich has served as a director of the Company since April
1996. Mr. Fridrich is currently a member of the faculty of the
University of Florida. From 1950 to 1993, Mr. Fridrich held a number of
manufacturing and operations management positions in Europe and the
United States with IBM. He currently serves as a director of Central
Hudson Gas & Electric Company and VEECO Instruments, Inc.
Dr. Philip V. Gerdine has served as a director of the Company since May
1998. Dr. Gerdine served as Executive Director, Siemens AG and as
managing director of The Plessey Company from September 1989 to
September 1998 and previously was Vice President-Corporate Development
of Siemens Corporation. Prior to joining Siemens in July 1988, Dr.
Gerdine held senior management positions with General Electric Co.,
Price Waterhouse, and The Boston Consulting Group. He currently serves
as a director of Applied Materials, Inc.
Mr. William A. Hasler has served as a director of the Company since May
1998. Mr. Hasler is currently co-chief executive officer of Aphton
Corporation, an international biotechnology firm. Prior to joining
Aphton, he was Dean and Department Chair of the Haas School of Business
at the University of California, Berkeley. He currently serves as a
director of Quickturn Design Systems Inc., Walker Interactive Systems
Inc., TCSI Corporation and Tenera, Inc.
Dr. Kenneth E. Haughton has served as a director of Solectron since
1985. Dr. Haughton is currently an independent consultant. From 1990 to
1991, he was Vice President of Engineering at Da Vinci Graphics, a
computer graphics firm. From 1989 to 1990, Dr. Haughton was an
independent consultant and from 1982 to 1989, he served as Dean of
Engineering at Santa Clara University. He also serves as a director of
Seagate Technology.
61
<PAGE>
Dr. Paul R. Low has served as a director of Solectron since 1993 and is
currently the President of PRL Associates. Prior to founding PRL
Associates, Dr. Low worked for IBM from 1957 to 1992. Dr. Low held
senior management and executive positions with successively increasing
responsibility, including President, General Technology Division and IBM
Corporate Vice President; President of General Products Division; and
General Manager, Technology Products business line, also serving on
IBM's corporate management board. He also serves as a director of
Applied Materials, Inc., VEECO, NCD and XION.
Mr. Osamu Yamada has served as a director of Solectron since 1994. From
1990 to 1991, he was Chairman and Chief Executive Officer of BankCal
Tri-State Corporation, a wholly owned subsidiary of The Mitsubishi Bank,
Limited. From 1987 to 1990, he was Senior Managing Director of The
Mitsubishi Bank, Limited, and in an overlapping period from 1985 to
1990, he was also Chairman, President and Chief Executive Officer of
Bank of California. Prior to that, he held a number of key management
positions with The Mitsubishi Bank, Limited organization. Mr. Yamada
currently serves on a number of boards of major universities and
cultural centers.
There is no family relationship among any of the foregoing individuals.
ITEM 11: EXECUTIVE COMPENSATION
The information required by item 11 of Form 10-K is incorporated by
reference to the information contained in the section captioned
"Executive Officer Compensation" of the Registrant's definitive Proxy
Statement (Notice of Annual Meeting of Stockholders) for the fiscal year
ended August 31, 1998 to be held on January 12, 1999 which the Company
will file with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information regarding this item is incorporated herein by reference from
the section entitled "Security Ownership of Certain Beneficial Owners
and Management" of the Registrant's definitive Proxy Statement (Annual
Meeting of Stockholders) for the fiscal year ended August 31, 1998.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated herein by
reference from the section entitled "Certain Transactions" of the
Registrant's definitive Proxy Statement (Annual Meeting of Stockholders)
for the fiscal year ended August 31, 1998.
62
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements. The financial statements listed in
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, above are
filed as part of this Annual Report on Form 10-K, beginning on
page 34.
2. Financial Statement Schedule. The financial statement
Schedule II - VALUATION AND QUALIFYING ACCOUNTS is filed as
part of this annual report on Form 10-K, at page 65.
3. Exhibits. The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K. During the fiscal quarter ended
August 31, 1998 no current reports on Form 8-K were filed.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: November 12, 1998 By /s/ Koichi Nishimura
(Koichi Nishimura, President,
Chief Executive Officer and
Chairman of the Board)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Title Date
- -------------------------- --------------------- -----------------
/s/ Koichi Nishimura President, Chief
Koichi Nishimura, Ph.D. Executive Officer,
and Chairman of the
Board November 12, 1998
/s/ Susan Wang Chief Financial
Susan S. Wang Officer (Principal
Financial and
Accounting Officer),
Senior Vice President
and Secretary November 12, 1998
/s/ Winston H. Chen Director November 12, 1998
Winston H. Chen, Ph.D.
/s/ Richard A. D'Amore Director November 12, 1998
Richard A. D'Amore
/s/ Charles A. Dickinson Director November 12, 1998
Charles A. Dickinson
/s/ Heinz Fridrich Director November 12, 1998
Heinz Fridrich
/s/ Philip V. Gerdine Director November 12, 1998
Philip V. Gerdine, Ph.D.
/s/ William A. Hasler Director November 12, 1998
William A. Hasler
/s/ Kenneth E. Haughton Director November 12, 1998
Kenneth E. Haughton, Ph.D.
/s/ Paul R. Low Director November 12, 1998
Paul R. Low, Ph.D.
/s/ Osamu Yamada Director November 12, 1998
Osamu Yamada
64
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Amounts
Balance at Charged Balance at
Beginning To End
Description of Period Operations (Deductions) Of Period
- ---------------------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended August 31, 1996:
Allowance for doubtful
accounts receivable $3,501 $1,651 $(2,160) $2,992
Year ended August 31, 1997:
Allowance for doubtful
accounts receivable $2,992 $2,319 $(1,262) $4,049
Year ended August 31, 1998:
Allowance for doubtful
accounts receivable $4,049 $2,254 $(2,304) $3,999
</TABLE>
65
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- ----------------------------------------------------------
2.1 [B] Agreement and Plan of Reorganization, by and among the
Company, Force Acq. Corp. and Force Computers, Inc. as
amended.
3.1 [I] Certificate of Incorporation of the Company.
3.2 [I] Bylaws of the Company.
10.1 [A] Preferred Stock Purchase Agreement dated September 29,
1983, together with amendments thereto dated February 28,
1984 and June 23, 1988.
10.2 [I] Form of Indemnification Agreement between the Company and
its officers, directors and certain other key employees.
10.3 [D] 1983 Incentive Stock Option Plan, as amended August 13,
1991.
10.4 [E] 1988 Employee Stock Purchase Plan, as amended October 1992.
10.5 [H] Amended and Restated 1992 Stock Option Plan.
10.6 [C]+ Asset Purchase Agreement dated as of January 29, 1996, as
amended and restated as of March 29, 1996 by and among
Solectron Texas, L.P., the Company and Texas Instruments,
Incorporated.
10.7 [F] Stock Acquisition Agreement dated August 28, 1993, between
the Company and Solectron California Corporation.
10.8 [G] Lease Agreement between BNP Leasing Corporation, as
Landlord, and the Company, as Tenant, Effective September
6, 1994.
10.9 [G] Purchase Agreement, by and between the Company and BNP
Leasing Corporation, dated September 6, 1994.
10.10 [G] Pledge and Security Agreement, by and between the Company,
as Debtor, and BNP Leasing Corporation, as Secured Party,
dated September 6, 1994.
10.11 [G] Assignment and Assumption Agreement between the Company and
Solectron California Corporation, dated November 9, 1994.
10.12 [G] Custodial Agreement by and between the Company, Banque
Nationale De Paris and BNP Leasing Corporation, dated
September 6, 1994.
10.13 [I] Modification Agreement (First Amendment to Purchase
Agreement and Second Amendment to Lease Agreement) by and
between the Company and BNP Leasing Corporation, dated
May 1, 1997.
10.14 [I] Credit Agreement between the Company and Bank of America
National Trust and Savings Association, as Agent and
Issuing Bank, dated April 30, 1997.
10.15a [I] Purchase and Sale Agreement among Solectron Corporation, as
Originator, Servicer and Guarantor, Solectron California
Corporation, as Originator, and Solectron Funding
Corporation, as the Initial Purchaser, dated September 17,
1997
10.15b [I] Receivables Purchase Agreement, among Solectron Funding
Corporation, as Seller, Solectron Corporation, individually
and as Servicer, Receivables Capital Corporation, as Issuer
and Bank of America National Trust and Savings Association,
as Administrator, dated September 17, 1997.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Auditors.
27.1 Financial Data Schedule.
66
<PAGE>
INDEX TO EXHIBITS (Continued)
Footnotes Description
[A] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-22840).
[B] Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-4 as amended, filed
November 20, 1996. (File No. 333-15983).
[C] Incorporated by reference to the Exhibits of the Company's
Form 10-Q for the quarter ended February 29, 1996.
[D] Incorporated by reference to the Exhibits to Company's
Registration Statement on Form S-8 (File No. 33-46686).
[E] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1992.
[F] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1993.
[G] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1994.
[H] Incorporated by reference to the Exhibits to Company's
Registration Statement on Form S-8 filed March 31, 1997
(File No. 333-24293).
[I] Incorporated by reference to the Exhibits to Company's Form
10-K for the year ended August 31, 1997.
+ Confidential treatment has been granted for certain portions
of these documents.
67
Exhibit 21.1
SOLECTRON CORPORATION SUBSIDIARIES
State or Other Jurisdiction of
Subsidiary Incorporation or Organization
- ------------ ------------------------------
The Americas
- ------------
Solectron California Corporation California
Solectron Georgia Corporation Georgia
Solectron Massachusetts Corporation California
Solectron South Carolina Corporation South Carolina
Solectron Technology, Inc. California
Solectron Texas, Inc. Delaware
Solectron Washington, Inc. California
Fine Pitch Technology, Inc. California
Force Computers, Inc. Delaware
Solectron Brasil, Ltda. Brazil
Solectron de Mexico, S.A. de C.V. Mexico
Europe
- ------------
Solectron France, S.A. France
Solectron GmbH Germany
Solectron Ireland Cayman Islands
Solectron Israel Ltd. Israel
Solectron Romania Srl Romania
Solectron Scotland Ltd Scotland
Solectron Sweden AB Sweden
Asia
- ------------
Solectron Japan, Inc. Japan
Solectron Technology (Suzhou) Co., Ltd Suzhou, Peoples Republic of
China
Solectron Technology SDN. BHD. Malaysia
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
SOLECTRON CORPORATION:
We consent to the incorporation by reference in the registration
statements (Nos. 333-24293, 333-02523, 333-17643, 33-58580, 33-46686,
33-57575, 33-75270 and 33-33461) on Forms S-3 and S-8 of Solectron
Corporation of our report dated September 14, 1998, relating to the
consolidated balance sheets of Solectron Corporation and subsidiaries
as of August 31, 1998 and 1997, and the related consolidated statements
of income, stockholders' equity and cash flows for each of the years in
the three-year period ended August 31, 1998, and the related schedule,
which report appears in the August 31, 1998, annual report on Form 10-K
of Solectron Corporation.
KPMG Peat Marwick LLP
Mountain View, California
November 11, 1998
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