UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 29, 1998.
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO
_________________
COMMISSION FILE NUMBER 1-11098
SOLECTRON CORPORATION
(Exact Name of Registrant as specified in its Charter)
Delaware 94-2447045
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
777 Gibraltar Drive, Milpitas, California 95035
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 957-8500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At June 30, 1998, 117,081,797 shares of Common Stock of the Registrant
were outstanding.
<PAGE>
SOLECTRON CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
May 31, 1998 and August 31, 1997 3
Condensed Consolidated Statements of Income for
for the three months and nine months ended
May 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended May 31, 1998
and 1997 5 - 6
Notes to Condensed Consolidated Financial
Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
May 31, August 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments $ 352,133 $ 482,902
Accounts receivable, net 563,993 418,682
Inventories 734,715 494,622
Prepaid expenses and other
current assets 96,226 79,426
---------- ----------
Total current assets 1,747,067 1,475,632
Net property and equipment 406,272 326,361
Other assets 50,844 50,426
---------- ----------
Total assets $2,204,183 $1,852,419
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 1,464
Accounts payable 581,341 415,896
Accrued employee compensation 50,148 56,218
Accrued expenses 15,794 24,787
Other current liabilities 74,164 45,577
---------- ----------
Total current liabilities 721,447 543,942
Long-term debt 386,542 385,850
Other long-term liabilities 10,195 3,558
---------- ----------
Total liabilities 1,118,184 933,350
---------- ----------
Commitments
Stockholders' equity:
Common stock 116 115
Additional paid-in capital 473,323 451,093
Retained earnings 621,520 478,612
Cumulative translation adjustment (8,960) (10,751)
---------- ----------
Total stockholders' equity 1,085,999 919,069
---------- ----------
Total liabilities and
stockholders' equity $2,204,183 $1,852,419
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $1,278,167 $ 983,222 $3,601,818 $2,649,645
Cost of sales 1,145,044 867,345 3,218,775 2,345,422
--------- --------- --------- ---------
Gross profit 133,123 115,877 383,043 304,223
Operating expenses:
Selling, general
& administrative 55,374 48,546 155,296 123,730
Research &
development 5,378 4,712 14,706 10,025
Acquisition costs - - - 4,000
--------- --------- --------- ---------
Operating income 72,371 62,619 213,041 166,468
Interest income 6,526 7,102 19,645 20,851
Interest expense (4,945) (6,787) (17,784) (19,781)
--------- --------- --------- ---------
Income before
income taxes 73,952 62,934 214,902 167,538
Income tax expense 24,774 21,397 71,994 56,961
--------- --------- --------- ---------
Net income $ 49,178 $ 41,537 $ 142,908 $ 110,577
========= ========= ========= =========
Net income per share:
Basic $ 0.42 $ 0.37 $ 1.24 $ 1.00
========= ========= ========= =========
Diluted $ 0.41 $ 0.36 $ 1.19 $ 0.97
========= ========= ========= =========
Shares used to compute
net income per share:
Basic 116,027 113,356 115,425 110,646
========= ========= ========= =========
Diluted 126,835 123,347 126,470 114,135
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 142,908 $ 110,577
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 90,560 79,627
Tax benefit associated with the
exercise of stock options 2,681 5,265
Other 19,646 (37)
Changes in operating assets and
liabilities:
Accounts receivable (144,021) (47,885)
Inventories (159,839) (104,722)
Prepaid expenses and other
current assets (19,397) (7,111)
Accounts payable 152,788 174,526
Accrued expenses and other
current liabilities 5,256 68
---------- ----------
Net cash provided by operating
activities 90,582 210,308
---------- ----------
Cash flows from investing activities:
Sales and maturities of short-term
investments 256,300 123,245
Purchases of short-term investments (164,882) (226,216)
Capital expenditures (186,868) (110,827)
Acquisition of facilities (79,465)
Proceeds from leasing transactions 25,528 --
Other (2,078) 8,444
---------- ----------
Net cash used in investing
activities (151,465) (205,354)
---------- ----------
(continued on next page)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<CAPTION>
Nine Months Ended
May 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt (1,619) (2,343)
Net proceeds from sale of common stock 22,231 29,619
Other (108) (1,727)
---------- ----------
Net cash provided by financing
activities 20,504 25,549
---------- ----------
Effect of exchange rate changes on
cash and cash equivalents 1,027 (2,279)
---------- ----------
Net (decrease) increase in cash and
cash equivalents (39,352) 28,224
Cash and cash equivalents at
beginning of period 225,073 228,830
---------- ----------
Cash and cash equivalents at
end of period $ 185,721 $ 257,054
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 55,509 $ 64,493
Interest $ 12,487 $ 25,572
Non-cash investing and financing
activities:
Issuance of common stock for
business combination $ -- $ 18,335
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying condensed consolidated balance sheets as of May 31,
1998 (unaudited) and August 31, 1997, the unaudited condensed
consolidated statements of income for the three- and nine-month periods
ended May 31, 1998 and 1997, and the unaudited condensed consolidated
statements of cash flows for the nine months ended May 31, 1998 and 1997
have been prepared on substantially the same basis as the annual
consolidated financial statements. Management believes the financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's
financial position, operating results and cash flows for the periods
presented. The results of operations for the three- and nine-month
periods ended May 31, 1998 are not necessarily indicative of results to
be expected for the entire year. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended August 31, 1997 included
in the Company's Annual Report to Stockholders.
For clarity of presentation, the Company has indicated its third fiscal
quarter as ending on May 31, and its fiscal year as ending on August 31,
whereas in fact, the Company's third quarter of fiscal 1998 ended on May
29, 1998, its third quarter of fiscal 1997 ended on May 30, 1997 and its
1997 fiscal year ended on August 29, 1997.
NOTE 2 - Inventories
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
May 31, August 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 523,426 $ 365,630
Work-in-process 211,289 128,992
----------- -----------
Total $ 734,715 $ 494,622
=========== ===========
</TABLE>
NOTE 3 - Net Income Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share," replaced the previously reported primary and fully diluted
net income per share with basic and diluted net income 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.
7
<PAGE>
All net income per share amounts for all periods have been presented,
and where necessary, restated to conform to the requirements of SFAS No.
128.
The following table sets forth the computation of basic and diluted
income per share for the three- and nine-month periods ended May 31,
1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income - basic $ 49,178 $ 41,537 $142,908 $110,577
Interest expense from
convertible subordinated
notes, net of taxes 2,398 2,380 7,194 --
-------- -------- -------- --------
Net income - diluted $ 51,576 $ 43,917 $150,102 $110,577
======== ======== ======== ========
Shares used to compute
net income per share:
Basic:
Weighted average shares 116,027 113,356 115,425 110,646
======== ======== ======== ========
Diluted:
Weighted average shares 116,027 113,356 115,425 110,646
Common stock equivalents -
stock options 4,004 3,187 4,241 3,489
Common shares issuable
upon assumed conversion
of convertible subordinated
notes 6,804 6,804 6,804 --
-------- -------- -------- --------
Total diluted shares 126,835 123,347 126,470 114,135
======== ======== ======== ========
Net income per share - basic $ 0.42 $ 0.37 $ 1.24 $ 1.00
======== ======== ======== ========
Net income per share - diluted $ 0.41 $ 0.36 $ 1.19 $ 0.97
======== ======== ======== ========
</TABLE>
For the three- and nine-month periods ended May 31, 1998, options to
purchase 1.7 million shares of common stock with exercise prices greater
than the average fair market value of the Company's stock for the period
of $42.52 and $41.41, respectively, are not included in the calculation
because the effect would have been antidilutive. For the three- and
nine-month periods ended May 31, 1997, options to purchase 1.3 million
shares of common stock with exercise prices greater than the average
fair market value of the Company's stock for the period of $27.17 and
$26.97, respectively, are not included in the calculation because the
effect would have been antidilutive. In addition, the calculation for
the nine-month period ended May 31, 1997 does not include the 6.8
million common shares issuable upon conversion of the convertible
subordinated notes as they would also have been antidilutive.
8
<PAGE>
NOTE 4 - Asset Securitization Arrangement
In September 1997, the Company entered into an asset securitization
arrangement with a bank under which it may sell up to $120 million of
eligible accounts receivable. The arrangement is subject to certain
financial covenants and management representations. No transaction has
occurred under this arrangement.
NOTE 5 - Commitments
The Company leases various facilities under operating lease agreements.
These leases expire at various dates through the year 2014.
Substantially all leases require the Company to pay property taxes,
insurance, and normal maintenance costs. All of the Company's leases
have fixed minimum lease payments except the lease for certain
facilities in Milpitas, California. Payments under this lease are
periodically adjusted based on LIBOR rates. This lease provides the
Company with the option at the end of the lease of either acquiring the
property at its original cost or arranging for the property to be
acquired. The Company is contingently liable under a first loss clause
for a decline in the market value of the property of up to $52.1 million
in the event that the Company does not purchase the property at the end
of the lease term. The Company must also maintain compliance with
financial covenants similar to its credit facilities. Future minimum
lease payments related to lease obligations are approximately $17.0
million, $11.8 million, $9.0 million, $6.5 million and $4.2 million in
each of the years in the five year period ending August 31, 2002 and an
aggregate $1.1 million for periods after that date.
NOTE 6 - Acquisition of NCR Operations
On April 27, 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 has
been accounted for as a purchase of assets and the purchase price has
been 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 components to Solectron for at least five years and Solectron
has hired approximately 1,200 NCR manufacturing and related support
employees.
NOTE 7 - Subsequent Event
On June 1, 1998, the Company acquired International Business Machine
Corporation's (IBM) electronic card assembly and test (ECAT) operations
in Charlotte, North Carolina for a purchase price of approximately $95.4
million, subject to adjustment. The acquisition has been accounted for
as a business combination and the purchase price has been allocated to
the assets acquired based on the fair market value of the assets at the
date of acquisition. Under the terms of the agreement, Solectron has
hired approximately 700 IBM manufacturing and related support employees
and the Company will provide printed circuit board assembly services to
IBM in North America for the next three years. In addition, IBM will
make available to Solectron 115 patents and 51 disclosures 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.
9
<PAGE>
ITEM 2. 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 uses advanced manufacturing
technologies in assembly and manufacturing management of complex printed
circuit boards and electronics systems. Solectron also provides pre-
manufacturing and post-manufacturing services. A discussion of some of
the potential fluctuations in operating results is included under
"Trends and Uncertainties".
The Company has manufacturing operations in locations throughout the
world, including North America, Europe, the Asia/Pacific region and
Brazil. Solectron also has its Asia/Pacific headquarters office in
Taipei, Taiwan and a program office located in Japan. The Company's
Force Computers and Fine Pitch Technologies subsidiaries are both
headquartered in San Jose, California. Force's European headquarters
and a significant portion of its operations are located in Munich,
Germany. In addition to its headquarters locations, Force has sales
support offices in various locations in the United States and
internationally. Fine Pitch has operations in California and in
Massachusetts.
During 1997, the Company established a strategic, global manufacturing
partnership with Ericsson Telecom AB's Business Area Infocom Systems
(Ericsson). The Company has established a New Product Introduction
center in Norrkoping and Stockholm, Sweden, and production from certain
Ericsson plants worldwide has been 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
Paolo, Brazil. In addition, Solectron's subsidiary, Solectron Brasil
Ltda., hired approximately 370 persons 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 has
been accounted for as a purchase of assets and the purchase price has
been 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 components to Solectron for at least five years and Solectron
has hired approximately 1,200 NCR manufacturing and related support
employees.
10
<PAGE>
In June 1998, the Company acquired International Business Machine
Corporation's (IBM) electronic card assembly and test (ECAT) operations
in Charlotte, North Carolina for a purchase price of approximately $95.4
million, subject to adjustment. The acquisition has been accounted for
as a business combination and the purchase price has been allocated to
the assets acquired based on the fair market value of the assets at the
date of acquisition. Under the terms of the agreement, Solectron has
hired approximately 700 IBM manufacturing and related support employees
and the Company will provide printed circuit board assembly services to
IBM in North America for the next three years. In addition, IBM will
make available to Solectron 115 patents and 51 disclosures 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 June 1998, the Company also announced that it intended to enter into
a strategic alliance with Ingram Micro Inc. 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 agreement between the companies is subject to
negotiation of definitive agreements. The agreement is expected to be
completed by the end of calendar 1998.
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.
11
<PAGE>
The following table sets forth, for the periods indicated, certain items
in the Condensed Consolidated Statements of Income as a percentage of
net sales. The financial information and the discussion below should be
read in conjunction with the Condensed Consolidated Financial Statements
and Notes thereto.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.6 88.2 89.4 88.5
------- ------- ------- -------
Gross profit 10.4 11.8 10.6 11.5
Operating expenses:
Selling, general &
administrative 4.3 4.9 4.3 4.7
Research & development .4 .5 .4 .4
Acquisition costs - - - .1
------- ------- ------- -------
Operating income 5.7 6.4 5.9 6.3
Interest (income)
expense, net (.1) - (.1) -
------- ------- ------- -------
Income before
income taxes 5.8 6.4 6.0 6.3
Income taxes 1.9 2.2 2.0 2.1
------- ------- ------- -------
Net income 3.9% 4.2% 4.0% 4.2%
======= ======= ======= =======
</TABLE>
Net Sales
Net sales for the three- and nine-month periods of fiscal 1998 grew to
$1.3 billion and $3.6 billion, respectively, increases of 30.0% and
35.9%, respectively, over the same periods in fiscal 1997. The sales
growth is 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 and the acquisition of the three
NCR sites, which contributed one month of revenue to the 1998 periods.
Within the Americas, sites that benefited most from start up and major
new programs had substantial increases in net sales for the fiscal 1998
periods compared to the fiscal 1997 periods. Sales growth at the Texas
site 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, contributed incremental net sales to the fiscal 1998 periods.
Sales related to printed circuit board assembly at the Milpitas,
California site decreased in the three- and nine-month periods of fiscal
1998 compared to the same periods of fiscal 1997 primarily due to
deliberate management actions initiated in the fourth quarter of fiscal
1997 to achieve improved global load balancing and specific product
program transitioning; however, sales related to systems assembly at the
Milpitas site increased in both fiscal 1998 periods compared to the
fiscal 1997 periods. Sales in all of the Company's European and Asian
locations, except for the program office in Japan, increased in the
fiscal 1998 periods over the comparable periods of fiscal 1997 primarily
as a result of core business growth and new accounts. Sales growth in
the Company's location in Scotland was particularly strong due to the
12
<PAGE>
ramp up of major customers' printed circuit board assembly activities in
that operation. 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 of the Company's customers accounted for more than 10% of the
Company's net sales in the three- and nine-month periods of fiscal 1998
and 1997. The following table details these customers and the percentage
of net sales attributed to them.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Hewlett-Packard Company (HP) 13.8% 12.0% 14.3% 13.3%
Cisco Systems, Inc. 12.8% 11.0% 11.2% *
Sun Microsystems, Inc. 11.0% * 11.1% *
Bay Networks, Inc. * 10.2% * 10.8%
- -------------
* Less than 10%
</TABLE>
No other customer accounted for more than 10% of net sales during any of
the periods presented.
Solectron's top ten customers accounted for 66.8% and 65.7% of
consolidated net sales in the first nine months of fiscal 1998 and 1997,
respectively. Solectron is still dependent upon continued revenues from
HP and the rest of its top ten customers and there can be no guarantee
that these or any other customers will not increase or decrease as a
percentage of consolidated net sales either individually or as a group.
Consequently, any material decrease in sales to these or other customers
could have an adverse material effect on Solectron's results of
operations.
In the first nine months of fiscal 1998, international locations
contributed 34.1% of consolidated net sales compared to 25.8% in the
same period of fiscal 1997. In addition to the sales growth factors for
Europe and Asia noted above, the Company's international sales also
benefited from the addition in fiscal 1998 of the sites in Mexico and
Brazil and the acquisition of the site in Ireland from NCR in April
1998. The rate of international versus domestic sales, as well as
international sales versus domestic sales as a percentage of the
Company's overall sales can fluctuate significantly over time.
As a result of Solectron's international sales and facilities,
Solectron's operations are subject to risks of doing business abroad.
While to date these dynamics have not had an adverse material effect on
Solectron's results of operations, there can be no assurance that there
will not be such an impact in the future. See "Trends and Uncertainties
- -- International Operations" for a further discussion of potential
fluctuations in operating results associated with the risks of doing
business abroad.
Solectron's operations in Milpitas, California contributed a substantial
portion of Solectron's net sales and operating income during the first
nine months of fiscal 1998 and fiscal 1997. In recent quarters,
management has undertaken deliberate actions to achieve improved global
13
<PAGE>
load balancing by transferring certain projects from the Milpitas site
to other sites worldwide. However, the performance of the Milpitas
operation is expected to continue as a significant factor in the overall
financial performance of Solectron. Any adverse material change to the
customer base, product mix, efficiency, or other attributes of this site
could have an adverse material effect on Solectron's consolidated
results of operations.
Solectron believes that its ability to continue to achieve growth will
depend upon growth in sales to existing customers for their current and
future product generations, successful marketing to new customers and
future geographic expansion. Customer contracts can be canceled and
volume levels can be changed or delayed. The timely replacement of
delayed, canceled or reduced orders with new business cannot be assured.
In addition, there can be no assurance that any of Solectron's current
customers will continue to utilize Solectron's services. Because of
these factors, there can be no assurance that Solectron's historical
revenue growth rate will continue. See "Trends and Uncertainties" for a
discussion of certain factors affecting the management of growth,
geographic expansion and potential fluctuations in sales and results of
operations.
Gross Profit
The gross margin percentage decreased to 10.6% for the first nine months
of fiscal 1998 period from 11.5% for the same period of fiscal 1997. The
decrease was due primarily to start-up costs associated with the
Company's operations in China and Mexico, as well as a shift toward
higher volume projects and system build projects that typically have
lower margins. 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 system integration activities, which normally generate
lower gross margins than printed circuit board assembly.
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 system build
projects, pricing within the electronics industry and the cost structure
at individual sites. Over time, gross margins at the individual sites
and for the Company as a whole may continue to fluctuate. Printed
circuit board assembly projects typically have higher gross margin
percentages than system build projects. Increases in system 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 14.1% and 25.5%, respectively, for the three- and nine-month
periods of fiscal 1998 over the same periods in fiscal 1997. For the
14
<PAGE>
third quarter of fiscal 1998, the increase is due to growth within the
Company's Force Computers subsidiary plus the addition of new sites in
China, Mexico, Brazil and Sweden and the NCR sites, partially offset by
cost-containment measures in established locations. In addition to the
increases related to these new sites and the inclusion of Force for the
full fiscal 1998 period, the increase for the nine-month period of
fiscal 1998 resulted from investment in infrastructure such as personnel
and related departmental expenses at all manufacturing locations as well
as continuing investment in information systems to support the increased
size and complexity of the Company's business. As a percentage of net
sales, SG&A expenses were 4.3% in each of the fiscal 1998 periods and
4.9% and 4.7%, respectively, in the three- and nine-month periods of
fiscal 1997. The most significant reason for the fiscal 1998 decrease in
SG&A expenses as a percentage of net sales is the significant increase
in the sales base partially offset by the inclusion of Force, which has
a more sales-intensive operating structure, and the costs associated
with starting up new sites and investments in the Company's information
systems. The Company anticipates SG&A expenses will continue to
increase in terms of absolute dollars in the future, and may possibly
increase as a percentage of revenue, as the Company continues to invest
in 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 micro-processors in
embedded applications. Research and development expenses, as a
percentage of net sales, were 0.4% in both the three- and nine-month
periods of fiscal 1998 and 0.5% and 0.4%, respectively, in the fiscal
1997 periods. The increase in R&D expenses in the first nine months of
fiscal 1998 compared to the first nine months of fiscal 1997 is due to
the acquisition of Force in November 1996. The Company expects that R&D
expenses will increase in absolute dollars in the future and may
increase as a percentage of net sales as Force 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
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 during the quarter ended November 30, 1996.
Net Interest Income (Expense)
Net interest income was $1.6 million and $1.9 million, respectively, for
the three- and nine-month periods of fiscal 1998 compared to $0.3
million and $1.1 million, respectively, for the fiscal 1997 periods.
Interest expense on the Company's long-term debt is approximately $6.2
million per quarter and has been offset by interest earned on undeployed
15
<PAGE>
cash and short-term investments. In the first nine months of fiscal
1998, the Company capitalized approximately $1.7 million of interest
expense related to the construction of its new facilities in Mexico and
China. Solectron used a portion of its cash and short-term investments
to fund its acquisitions from NCR and IBM. The Company 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 $72.0 million in the first nine months of
fiscal 1998 from $57.0 million in the fiscal 1997 period primarily due
to increased income before income taxes. Solectron's effective income
tax rate decreased slightly to 33.5% in the fiscal 1998 period from 34%
in the first nine months of fiscal 1997.
In general, the effective income tax rate is largely a function of the
balance between income from domestic and international operations.
Solectron's international operations, taken as a whole, have been taxed
at a lower rate than in the United States, primarily due to the tax
holiday granted to the Company's Malaysia sites. The Malaysian tax
holiday is effective through January 31, 2002, subject to certain
conditions. The Company has also been granted various tax holidays in
China, which are effective for various terms and are subject to certain
conditions.
Liquidity and Capital Resources
Working capital was $1.0 billion at May 31, 1998 compared to $932
million at the end of fiscal 1997. A major component of working capital
at May 31, 1998 continues to be undeployed cash from the proceeds of the
two debt offerings during fiscal 1996. In the third quarter of fiscal
1998, the Company used approximately $79.5 million of its cash and
short-term investments to fund its acquisition of NCR's manufacturing
assets. In June 1998, the Company used an additional $95.4 million to
fund its acquisition IBM's ECAT business. As Solectron continues to
grow, it is expected that the Company will require greater amounts of
working capital to support its operations. The Company believes that its
current level of working capital together with cash generated from
operations and the Company's available credit facilities will provide
adequate working capital for the foreseeable future.
Inventory levels fluctuate directly with the volume of the Company's
manufacturing. Changes or significant fluctuations in product market
demands can cause fluctuations in inventory levels which may result in
changes in levels of inventory turns and liquidity. Historically, the
Company has been able to manage its inventory levels in response to
these fluctuations. However, should material fluctuations occur in
product demand, the Company could experience slower turns and reduced
liquidity.
In the first nine months of fiscal 1998, the Company invested
approximately $187 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
16
<PAGE>
total capital expenditures in fiscal 1998 to be in the range of $200
million to $225 million. In the second quarter of 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 as
operating leases.
In addition to working capital as of May 31, 1998, which includes cash
and cash equivalents of $186 million and short-term investments of $166
million less $95.4 million used in June to acquire the IBM ECAT
business, the Company has available a $100 million unsecured
multicurrency revolving credit facility and a $120 million asset
securitization arrangement. Both of these facilities are subject to
financial covenants. The Company also has approximately $89.4 million in
available foreign credit facilities.
Trends and Uncertainties
Customer Concentration; Dependence on the Electronics Industry
In the first nine months of fiscal 1998 and for the full years of fiscal
1997, 1996 and 1995, the Company's ten largest customers accounted for
at least 64% of consolidated net sales. The Company is dependent upon
continued revenues from its top ten customers. Any material delay,
cancellation or reduction of orders from these or other significant
customers could have an adverse material effect on the Company's results
of operations. During the first nine months of fiscal 1998, HP accounted
for 14.3% of net sales compared to 13.3% during the same period of
fiscal 1997. There can be no assurance that the Company will continue
to do business with HP or any other customer.
The percentage of the Company's sales to its major customers may
fluctuate from period to period. Significant reductions in sales to any
of these customers would have an adverse material effect on the
Company's results of operations. The Company has no firm long-term
volume purchase commitments from its customers, and over the past few
years has experienced reduced lead-times in customer orders. In
addition, customer contracts can be canceled and volume levels can be
changed or delayed. The timely replacement of canceled, delayed or
reduced contracts with new business cannot be assured. These risks are
increased because a majority of the Company's sales are to customers in
the electronics industry, which is subject to rapid technological change
and product obsolescence. The factors affecting the electronics
industry in general, or any of the Company's major customers in
particular, could have an adverse material effect on the Company's
results of operations.
There can be no assurance that sales to customers within any particular
market segment will not experience decreases which could have an adverse
effect on the Company's sales.
Management of Growth; Geographic Expansion
The Company has experienced substantial growth over the last five fiscal
years, with net sales increasing from $836 million in fiscal 1993 to
$3.7 billion in fiscal year 1997. In recent years, the Company has
acquired or established facilities in many locations. In the first
quarter of fiscal 1998, the Company announced the opening of its
Asia/Pacific headquarters office in Taipei, Taiwan; began operations in
Guadalajara, Mexico; and, as further discussed in "Partnership with
Ericsson and Related Transactions," established a manufacturing facility
17
<PAGE>
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
and June 1998, the Company completed its acquisitions of certain
manufacturing facilities and employees from NCR and IBM, respectively.
(See "Acquisition of NCR and IBM Operations.") In June 1998, the Company
announced that it intended to enter into a strategic alliance with
Ingram Micro Inc. (See "Proposed 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 in Westborough, Massachusetts; and, in November
1996, acquired Force Computers Inc., which has operations in California
and Germany. The Company continually evaluates growth and acquisition
opportunities and may pursue additional opportunities over time. There
can be no assurance that the Company's historical revenue growth will
continue or that the Company will successfully manage the facilities in
China and Mexico, the partnership with and acquisitions from Ericsson,
the acquisitions from NCR and IBM, the proposed 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 transactions with Ericsson, NCR and IBM are completed. Should the
Company increase its expenditures in anticipation of a future level of
sales which does not materialize, its profitability would be adversely
affected. On occasion, customers may require rapid increases in
production which can place an excessive burden on the Company's
resources.
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 has established a New Product Introduction center in
Norrkoping and Stockholm, Sweden, and production from certain Ericsson
plants worldwide has been transferred to Solectron manufacturing sites
around the world. In October 1997, Solectron acquired certain assets,
primarily equipment and inventory, of Ericsson's printed circuit board
assembly operation located in Brazil. In addition, Solectron's
subsidiary, Solectron Brasil Ltda., hired approximately 370 persons
formerly employed by Ericsson Telecomunicacoes S.A. in Brazil. Under the
terms of the agreement, Ericsson will contract for Solectron's services
from Solectron Brasil Ltda. through September 1999. Thereafter,
Solectron will bear the risk of filling the manufacturing capacity at
the site with renewed business from Ericsson or new business from other
customers.
The transactions with Ericsson entail a number of risks, including
successfully managing the integration of the operations, retention of
key employees, integrating purchasing operations and information
systems, managing an increasingly larger and more geographically
disparate business and renewing the Ericsson business or replacing it
with new business after expiration of the Ericsson commitment. In
addition, the completion of the transactions with Ericsson will increase
Solectron's expenses and working capital requirements and there is no
18
<PAGE>
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 and IBM Operations
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 employees currently employed at these
locations. Under the terms of the agreement, NCR will outsource the
manufacturing of certain of its computer 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
or new business from other customers.
On June 1, 1998, the Company acquired IBM's ECAT operations in
Charlotte, North Carolina for a purchase price of approximately $95.4
million, subject to adjustment. Under the terms of the agreement,
Solectron has hired approximately 700 IBM manufacturing and related
support employees and the Company will provide printed circuit board
assembly services to IBM in North America for the next three years. In
addition, IBM will make available to Solectron 115 patents and 51
disclosures 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.
The transactions with NCR and IBM entail a number of risks, including
successfully managing the integration of the operations, retention of
key employees, integrating purchasing operations and information
systems, managing an increasingly larger and more geographically
disparate business, obtaining customers other than NCR and IBM for these
facilities and renewing each of the NCR and IBM business or replacing it
with new business after expiration of NCR's and IBM's respective
commitments. In addition, the transactions with NCR and IBM 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.
Proposed Alliance with Ingram Micro
In June 1998, the Company announced that it intended to enter into a
strategic alliance with Ingram Micro Inc. 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 agreement between the companies is subject to
negotiation of definitive agreements. The agreement is expected to be
completed by the end of calendar 1998.
The proposed alliance with Ingram Micro entails a number of risks,
including successfully establishing the joint management matrix for the
alliance, retention of key employees, 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
19
<PAGE>
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, employee turnover, labor unrest,
longer payment cycles, greater difficulty in collecting accounts
receivable, the burdens and costs of compliance with a variety of
foreign laws and, in certain parts of the world, political instability.
While to date these factors have not had an adverse material impact on
the Company's results of operations, there can be no assurance that
there will not be such an impact in the future.
Southeast Asia is 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 market, the customer's
sales may be adversely affected, which could decrease demand for the
Company's manufacturing services. The Company cannot predict whether
such a decrease in demand will materialize and if it does, whether it
will have an adverse material effect on the Company's results of
operations.
The Company has been granted a tax holiday for its 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.
Availability of Components
A substantial portion of the Company's net sales are derived from
turnkey manufacturing in which the Company provides both materials
procurement and assembly. In turnkey manufacturing, the Company
potentially bears the risk of component price increases, which could
adversely affect the Company's gross profit margins. At various times
there have been shortages of components in the electronics industry. If
significant shortages of components should occur, the Company may be
forced to delay manufacturing and shipments, which could have an adverse
material effect on the Company's results of operations.
Potential Fluctuations in Operating Results
The Company's operating results are affected by a number of factors,
including the mix of turnkey and consignment projects, capacity
utilization, price competition, the degree of automation that can be
used in the assembly process, the efficiencies that can be achieved by
the Company in managing inventories and fixed assets, the timing of
20
<PAGE>
orders from major customers, fluctuations in demand for customer
products, the timing of expenditures in anticipation of increased sales,
customer product delivery requirements and increased costs and shortages
of components or labor. Turnkey manufacturing currently represents a
substantial portion of Solectron's sales. Turnkey projects, in which
Solectron procures some or all of the components necessary for
production, typically generate higher net sales and higher gross profits
with lower gross profit percentages than consignment projects due to the
inclusion in Solectron's operating results of sales and costs associated
with the purchase and sale of components. Solectron assembles products
with varying degrees of material content, which may cause Solectron's
gross margin to fluctuate. In addition, the degree of startup costs and
inefficiencies associated with new sites and new customer projects may
affect Solectron's gross margin. All of these factors can cause
fluctuations in the Company's operating results.
Competition
The electronics assembly and manufacturing industry is comprised of a
large number of companies, several of which have achieved substantial
market share. The Company also faces competition from current and
prospective customers which evaluate Solectron's capabilities against
the merits of manufacturing products internally. Solectron competes
with different companies depending on the type of service or geographic
area. Certain of the Company's competitors may have greater
manufacturing, financial, research and development and marketing
resources than the Company. The Company believes that the primary basis
of competition in its targeted markets is manufacturing technology,
quality, responsiveness, the provision of value-added services and
price. To be competitive, the Company must provide technologically
advanced manufacturing services, high product quality levels, flexible
delivery schedules and reliable delivery of finished products on a
timely and price competitive basis. The Company currently may be at a
competitive disadvantage as to price when compared to manufacturers with
lower cost structures, particularly with respect to manufacturers with a
greater number of 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. In addition, as part of its recent
acquisition of the IBM ECAT business, the Company has access to a number
of IBM patents. However, there can be no assurance that these patents
will provide meaningful protection for the Company's manufacturing
process and equipment innovations or Force's technology.
There can be no assurance that third parties will not assert
infringement claims against the Company or its customers in the future,
either against the patents the Company holds itself or against the IBM
patents it 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 which is the subject of litigation. There can be no
assurance that the Company would be successful in such development or
that any such licenses would be available on commercially acceptable
terms, if at all. In addition, such litigation could be lengthy and
21
<PAGE>
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 Employees
The Company's continued success depends to a large extent upon the
efforts and abilities of key managerial and technical employees. The
loss of services of certain key personnel could have an adverse material
effect on the Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers and skilled
employees. Failure to do so could adversely affect the Company's
operations.
"Year 2000" Issues
The Company is aware of 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 data 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 financial transactions
worldwide. Failures of the Company's and/or third parties' computer
systems, manufacturing equipment and industrial control systems could
have a material impact on the Company's ability to conduct its business.
The Company has formed a worldwide task force that is currently
analyzing 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 any potential Year 2000 issues. Based on the
results of this analysis, which is expected to be completed in the
fourth quarter of fiscal 1998, the task force will develop a strategy to
address the issues and take appropriate corrective action. The Company
has not yet determined the timetable or the cost related to achieving
Year 2000 compliance.
Possible Volatility of Market Price of Common Stock
The trading price of the common stock is subject to significant
fluctuations in response to variations in quarterly operating results,
general conditions in the electronics industry and other factors. In
addition, the stock market is subject to price and volume fluctuations
which affect the market price for many high technology companies in
particular, and which often are unrelated to operating performance.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Approximately 80% of the Company's portfolio matures in less than 6
months. Because the Company's investments are diversified and of
relatively short maturity, a hypothetical 10% increase in interest rates
would not have a material effect on the Company's financial position.
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. In addition, the Company's international operations in many
instances act as a natural hedge because both sales and operating
expenses are denominated in local currency. Therefore, 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.
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.
23
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
24
<PAGE>
SOLECTRON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLECTRON CORPORATION
(Registrant)
Date: July 7, 1998 By: /s/ Susan Wang
______________________
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial Officer)
25
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