SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 26, 1999.
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
_________________ TO _________________
COMMISSION FILE NUMBER 1-11098
SOLECTRON CORPORATION
(Exact Name of Registrant as specified in its Charter)
Delaware 94-2447045
(State or other jurisdiction (IRS Employer
of Incorporation or Organization) Identification Number)
777 Gibraltar Drive, Milpitas, California 95035
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 957-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At December 31, 1999, 296,331,101 shares of Common Stock of the Registrant were
outstanding.
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SOLECTRON CORPORATION
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
November 30, 1999 and August 31, 1999 3
Condensed Consolidated Statements of Income for
the three months ended November 30, 1999
and 1998 4
Condensed Consolidated Statements of Comprehensive
Income for the three months ended November 30, 1999
and 1998 5
Condensed Consolidated Statements of Cash Flows
for the three months ended November 30, 1999
and 1998 6 - 7
Notes to Condensed Consolidated Financial
Statements 8 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 30
Item 3. Quantitative and Qualitative Disclosures About 31
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
Signature 33
2
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ITEM 1. FINANCIAL STATEMENTS
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
November 30, August 31,
1999 1999
ASSETS ----------- -----------
Current assets:
Cash, cash equivalents and
short-term investments $ 1,470.7 $ 1,688.4
Accounts receivable, net 1,250.8 1,118.3
Inventories 1,495.7 1,080.1
Prepaid expenses and other
current assets 116.5 107.3
---------- ----------
Total current assets 4,333.7 3,994.1
Net property and equipment 675.7 653.6
Other assets 217.7 187.0
---------- ----------
Total assets $ 5,227.1 $ 4,834.7
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 29.8 $ 21.4
Accounts payable 1,129.6 902.6
Accrued employee compensation 75.2 88.9
Accrued expenses 55.1 40.4
Other current liabilities 83.9 59.9
---------- ----------
Total current liabilities 1,373.6 1,113.2
Long-term debt 943.9 922.6
Other long-term liabilities 9.1 5.8
---------- ----------
Total liabilities 2,326.6 2,041.6
---------- ----------
Commitments
Stockholders' equity:
Common stock 0.3 0.3
Additional paid-in capital 1,935.5 1,910.1
Retained earnings 1,069.2 971.2
Accumulated other comprehensive losses (104.5) (88.5)
---------- ----------
Total stockholders' equity 2,900.5 2,793.1
---------- ----------
Total liabilities and
stockholders' equity $ 5,227.1 $ 4,834.7
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
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SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
Net sales $ 2,501.8 $ 1,945.6
Cost of sales 2,268.7 1,769.7
---------- ----------
Gross profit 233.1 175.9
Operating expenses:
Selling, general and administrative 85.4 70.8
Research and development 8.8 7.9
---------- ----------
Operating income 138.9 97.2
Interest income 21.2 4.4
Interest expense (10.9) (5.5)
---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 149.2 96.1
Income taxes 47.7 32.2
---------- ---------
Income before cumulative effect of change
in accounting principle 101.5 63.9
Cumulative effect of change in accounting
principle for start-up costs, net of $1.6
income tax benefit (3.5) -
---------- ---------
Net income $ 98.0 $ 63.9
========== =========
Basic net income per share:
Income before cumulative effect of change
in accounting principle $ 0.37 $ 0.27
Cumulative effect of change in accounting
principle (0.01) -
---------- ---------
Net income per share $ 0.36 $ 0.27
========== =========
Diluted net income per share:
Income before cumulative effect of change
in accounting principle $ 0.36 $ 0.26
Cumulative effect of change in accounting
principle (0.01) -
---------- ---------
Net income per share $ 0.35 $ 0.26
========== =========
Shares used to compute net income per share:
Basic 271.7 236.8
Diluted 283.5 257.5
See accompanying notes to condensed consolidated financial statements.
4
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SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
Net income $ 98.0 $ 63.9
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income tax benefit of $0.4 in 1999 (15.7) 2.2
Unrealized loss on investments, net of
income tax benefit of $0.1 in 1999 (0.3) -
---------- ---------
Comprehensive income $ 82.0 $ 66.1
========== =========
- ---------------
Accumulated foreign currency translation losses were $103.2 million at November
30, 1999 and $87.5 million at August 31, 1999. For fiscal year 1999, the foreign
currency translation loss primarily resulted from the devaluation of the
Brazilian real. Most of Solectron's foreign currency translation adjustment
amounts relate to investments which are permanent in nature. To the extent that
such amounts relate to investments which are permanent in nature, no adjustment
for income taxes is made. Accumulated unrealized losses on investments were $1.3
million at November 30, 1999 and $1.0 million at August 31, 1999.
See accompanying notes to condensed consolidated financial statements.
5
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SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 98.0 $ 63.9
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 49.0 40.6
Non-cash interest 7.7 -
Tax benefit associated with the
exercise of stock options 7.1 -
Cumulative effect of change in accounting
principle for start-up costs 3.5 -
Other 2.4 0.6
Changes in operating assets and
liabilities:
Accounts receivable (133.9) (201.7)
Inventories (404.5) (99.2)
Prepaid expenses and other
current assets (8.0) (18.2)
Accounts payable 227.3 177.6
Accrued expenses and other
current liabilities 22.9 17.7
---------- ---------
Net cash used in operating
activities (128.5) (18.7)
---------- ---------
Cash flows from investing activities:
Sales and maturities of short-term
investments 144.5 56.4
Purchases of short-term investments (816.2) (9.7)
Acquisition of manufacturing locations (38.1) (24.6)
Capital expenditures (103.7) (118.8)
Proceeds from sale of property and equipment 24.6 5.0
Other (12.6) 0.3
---------- ---------
Net cash used in investing
activities (801.5) (91.4)
---------- ---------
(continued on next page)
6
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SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
(Unaudited)
Three Months Ended
November 30,
------------------------
1999 1998
---------- ----------
Cash flows from financing activities:
Net proceeds from bank lines of credit 8.4 11.2
Proceeds from long-term debt 13.5 -
Net proceeds from stock issued under
option and employee purchase plans 18.3 25.6
Other 4.2 3.9
---------- ----------
Net cash provided by financing
activities 44.4 40.7
---------- ----------
Effect of exchange rate changes on
cash and cash equivalents (3.8) 2.2
---------- ---------
Net decrease in cash and
cash equivalents (889.4) (67.2)
Cash and cash equivalents at
beginning of period 1,325.6 225.2
---------- ----------
Cash and cash equivalents at
end of period $ 436.2 $ 158.0
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 6.2 $ 9.1
Interest $ 5.8 $ 12.6
See accompanying notes to condensed consolidated financial statements.
7
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SOLECTRON CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets as of November
30, 1999 and August 31, 1999, and the related unaudited condensed consolidated
statements of income for the three months ended November 30, 1999 and 1998, and
the unaudited condensed consolidated statements of comprehensive income for the
three months ended November 30, 1999 and 1998, and the unaudited condensed
consolidated statements of cash flows for the three months ended November 30,
1999 and 1998 have been prepared on substantially the same basis as the annual
consolidated financial statements. Management believes the financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, operating
results and cash flows for the periods presented. The results of operations for
the three months ended November 30, 1999 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, 1999
included in the Company's Annual Report to Stockholders.
For clarity of presentation, the Company has indicated its first fiscal quarters
as ending on November 30, and its fiscal year as ending on August 31. In fact,
the Company's first quarter of fiscal 2000 ended on November 26, 1999, its first
quarter of fiscal 1999 ended on November 27, 1998 and its 1999 fiscal year ended
on August 27, 1999.
NOTE 2 - Inventories
Inventories consisted of (in millions):
November 30, August 31,
1999 1999
----------- -----------
Raw materials $ 1,138.3 $ 789.6
Work-in-process 262.2 211.1
Finished goods 95.2 79.4
----------- -----------
Total $ 1,495.7 $ 1,080.1
=========== ===========
8
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NOTE 3 - Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share for the three months ended November 30, 1999 and 1998.
Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
(in millions,
except per share data)
Net income before cumulative effect of
change in accounting principle $ 101.5 $ 63.9
Cumulative effect of change in
accounting principle, net of taxes (3.5) -
Interest expense from convertible
subordinated notes, net of taxes - 2.4
---------- ----------
Net income - diluted $ 98.0 $ 66.3
========== ==========
Weighted average shares - basic 271.7 236.8
Common stock equivalents - stock options 11.8 7.1
Common shares issuable upon assumed
conversion of convertible subordinated notes - 13.6
---------- ----------
Weighted average shares - diluted 283.5 257.5
========== ==========
Basic net income per share:
Income before cumulative effect of change
in accounting principle $ 0.37 $ 0.27
Cumulative effect of change in accounting
principle (0.01) -
---------- ---------
Net income per share $ 0.36 $ 0.27
========== =========
Diluted net income per share:
Income before cumulative effect of change
in accounting principle $ 0.36 $ 0.26
Cumulative effect of change in accounting
principle (0.01) -
---------- ---------
Net income per share $ 0.35 $ 0.26
========== =========
For the first quarter ended November 30, 1999, options to purchase 273,000
shares of common stock with exercise prices greater than the average fair market
value of the Company's stock for the period of $76.80 were not included in the
calculation because the effect would have been antidilutive. For the first
quarter ended November 30, 1998, options to purchase 489,000 shares of common
stock with exercise prices greater than the average fair market value of the
Company's stock for the period of $26.77 were not included in the calculation
because the effect would have been antidilutive. In addition, the calculation
above did not include the 12.4 million common shares issuable upon conversion of
the zero-coupon senior notes as they would have been antidilutive.
9
<PAGE>
NOTE 4 - Commitments
Solectron leases various facilities under operating lease agreements. The
facility leases expire at various dates through 2008. All such leases require
Solectron to pay property taxes, insurance and normal maintenance costs.
Payments of some leases are periodically adjusted based on LIBOR rates. Certain
leases for Solectron's facilities, including Milpitas and San Jose, California;
Everett, Washington; Suwanee, Georgia; and Columbia, South Carolina, provide
Solectron with an option at the end of the lease term of either acquiring the
property at its original cost or arranging for the property to be acquired. For
these leases, Solectron is contingently liable under a first loss clause for a
decline in market value of such leased facilities up to 85% of the original
costs, or approximately $149 million in total as of November 30, 1999, in the
event Solectron does not purchase the properties at the end of the respective
lease terms. Under such agreements, the Company must also maintain compliance
with financial covenants similar to its $100 million unsecured multicurrency
revolving credit facility.
Additionally, Solectron periodically enters into lease arrangements with
third-party leasing companies under which it sells fixed assets and leases them
back from the leasing companies. Solectron is accounting for these leases as
operating leases.
NOTE 5 - Segment Information
Solectron is operated and managed geographically. Each region has its own
president and support staff. Solectron's management uses an internal management
reporting system, which provides important financial data, to evaluate
performance and allocate Solectron's resources on a geographic basis. However,
the current management reporting structure may be subject to changes as
Solectron is transitioning into a global supply-chain facilitator offering a
complete range of integrated supply-chain solutions to its customers for the
entire product cycle. The Company is realigning its operations into three
strategic business units - technology solutions, manufacturing and operations,
and Global Services.
As of November 30, 1999, Solectron's three reportable operating segments were
the Americas, Europe and Asia. Intersegment adjustments were related primarily
to intersegment sales that were generally recorded at prices that approximated
arm's length transactions. Certain corporate expenses were allocated to these
operating segments and were included for performance evaluation. Some
amortization expenses were also allocated to these operating segments, but the
related intangible assets were not allocated. The accounting policies for the
segments were the same as for Solectron taken as a whole. Information about the
operating segments for the three months ended November 30, 1999 and 1998, was as
follows:
10
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Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
(in millions)
Net sales:
Americas $ 1,909.9 $ 1,336.0
Europe 347.4 315.5
Asia 341.0 312.5
Intersegment adjustments (96.5) (18.4)
---------- ----------
$ 2,501.8 $ 1,945.6
========== ==========
Depreciation and amortization:
Americas $ 28.2 $ 21.9
Europe 6.6 7.6
Asia 8.8 10.1
Corporate 5.4 1.0
---------- ----------
$ 49.0 $ 40.6
========== ==========
Interest income:
Americas $ 4.1 $ 4.7
Europe 1.2 0.9
Asia 0.7 0.3
Corporate 24.2 5.0
Intersegment adjustments (9.0) (6.5)
---------- ----------
$ 21.2 $ 4.4
========== ==========
Interest expense:
Americas $ 7.9 $ 5.2
Europe 1.4 1.7
Asia 0.1 0.1
Corporate 10.5 5.0
Intersegment adjustments (9.0) (6.5)
---------- ----------
$ 10.9 $ 5.5
========== ==========
Pre-tax income:
Americas $ 123.0 $ 80.9
Europe 14.2 7.6
Asia 26.5 20.2
Corporate (19.6) (12.6)
---------- ----------
$ 144.1* $ 96.1
========== ==========
Capital expenditures:
Americas $ 59.2 $ 59.6
Europe 18.5 11.4
Asia 11.3 29.5
Corporate 14.7 18.3
---------- ----------
$ 103.7 $ 118.8
========== ==========
- ---------------
*Includes $5.1 million for cumulative effect of change in accounting principle
for start-up costs.
11
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November 30, August 31,
1999 1999
------------ ----------
(in millions)
Total assets:
Americas $ 2,719.3 $ 2,492.8
Europe 601.9 491.7
Asia 544.8 480.1
Corporate 2,365.0 2,317.9
Intersegment adjustments (1,003.9) (947.8)
------------ ----------
$ 5,227.1 $ 4,834.7
============ ==========
NOTE 6 - Purchase of Business
In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX),
a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in
Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment.
The purchase price was approximately $4.5 million, subject to adjustments. The
acquisition was accounted for as a purchase of a business resulting in goodwill
of approximately $1.4 million. The condensed consolidated financial statements
include the operating results of NULOGIX from the date of acquisition. Pro forma
results of operations are not presented because the effect of this acquisition
is not significant.
NOTE 7 - Purchase of Manufacturing Assets
In September 1999, Solectron entered into an agreement to acquire the
manufacturing assets, primarily inventory and equipment, of IBM's Netfinity
server operations in Greenock, Scotland in several phases for approximately $27
million, subject to adjustments. In addition, Solectron acquired certain IBM
intellectual property rights included in the design and manufacture of PC server
motherboards for $19.7 million. Under the terms of the agreement, the Company
assumed NPI and manufacturing responsibility for the PCB assemblies used in
IBM's Netfinity server lines which were formerly manufactured at IBM's Greenock
operations. The Company will provide IBM full-service NPI management which
includes a full range of premanufacturing services, specifically component and
concurrent engineering, test development, prototype, procurement and assembly.
Solectron will also provide to IBM for the next three years fully integrated PCB
assembly services including early prototyping, new product launch, assembly and
test, volume production, end-of-life support and life cycle management.
NOTE 8 - Pending Acquisition of Manufacturing Assets
In November 1999, Solectron announced the signing of memoranda of understanding
for Solectron to acquire the complex systems manufacturing assets of Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France,
and Ostersund, Sweden. As part of the agreement, Solectron will provide a
complete range of integrated supply-chain solutions to Ericsson. This includes
supply-base management, early prototyping, NPI management, complex PCB assembly,
configure-to-order and build-to-order complex systems assembly, and global
services. The transaction is expected to be completed by the first quarter of
calendar year 2000. Completion of the transaction is subject to applicable
government approvals and various conditions of closing.
12
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NOTE 9 - Newly Adopted Accounting Pronouncement
Effective in the first quarter of fiscal 1999, the Company adopted the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
98-5, "Reporting on the Costs of Start-up Activities." This SOP requires
companies to expense all costs incurred in connection with start-up activities.
The Company recorded a cumulative effect of change in accounting principle of
$3.5 million, net of $1.6 million tax benefit.
NOTE 10 - Subsequent Event
On November 30, 1999, Solectron completed its acquisition of SMART Modular
Technologies, Inc (SMART). Under the terms of the agreement, each share of SMART
common stock was exchanged for 0.51 shares of Solectron common stock. As a
result, Solectron issued approximately 23.8 million shares of Solectron common
stock and assumed all stock options held by SMART employees. The acquisition is
being accounted for as a pooling of interests. SMART is a designer and
manufacturer of memory modules and memory cards, embedded computers and I/O
products.
Since the fiscal years for Solectron and SMART differ, SMART has changed its
fiscal year to coincide with Solectron's starting in the first quarter of fiscal
2000. The following pro forma combined financial information gives effect to the
acquisition of SMART using the pooling of interests method of accounting. This
pro forma combined financial information includes certain adjustments for the
elimination of net sales, cost of sales and income taxes related to shipments by
SMART to Solectron as well as for reclassification of other, net of SMART to
selling, general and administrative to conform with Solectron's financial
statement presentation. There were no adjustments necessary to conform the
accounting policies of the combining companies.
Pro Forma
Three Months Ended
November 30,
-----------------------
1999 1998
---------- ----------
(in millions)
Net sales $ 2,775.6 $ 2,203.1
Operating income $ 154.8 $ 113.0
The combined pro forma financial information presented is not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been in effect during the periods indicated, nor is
such information indicative of the future operating results or financial
positions of the combined company after the merger.
13
<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 provides electronics manufacturing services to original equipment
manufacturers (OEMs) who design and sell networking equipment, workstations,
personal and notebook computers, computer peripherals, telecommunications
equipment or other electronic equipment. These OEMs include Cisco Systems, Inc.,
Hewlett-Packard Company, Inc., International Business Machines Corporation
(IBM), and Sun Microsystems, Inc. These companies contract with Solectron to
build their products for them or to obtain other related services from
Solectron.
Solectron furnishes integrated supply-chain solutions that span the entire
product life cycle - from technology, to manufacturing, to global services.
These solutions include the following range of services:
- - Product design;
- - New Product Introduction management;
- - Materials purchasing and management;
- - Prototyping;
- - Printed circuit board assembly (the process of placing components on
an electrical printed circuit board that controls the processing functions
of a personal computer or other electronic equipment);
- - System assembly (for example, building complete systems such as mobile
telephones and testing them to ensure functionality);
- - Distribution;
- - Product repair; and
- - Warranty services.
Solectron's performance of these services allows its customers to remain
competitive by focusing on their core competencies of sales, marketing, and
research and development. We have manufacturing facilities in the Americas,
Europe and Asia. This geographic presence gives our customers access to
manufacturing services in the locations where they need to be close to their
expanding markets for faster product delivery.
During 1997, Solectron established a strategic, global manufacturing partnership
with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson). We
established a New Product Introduction (NPI) center in Sweden and transferred
production from certain Ericsson plants worldwide to our manufacturing sites
around the world. In October 1997, we acquired certain assets, primarily
equipment and inventory, of Ericsson's printed circuit board (PCB) assembly
operation located in Sao Paulo, Brazil.
In April 1998, Solectron acquired NCR Corporation's (NCR) manufacturing assets
in Columbia, South Carolina; Duluth, Georgia; and Dublin, Ireland. Under the
terms of the agreement, NCR will outsource the manufacturing of certain computer
components to Solectron for at least
14
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five years. The site in Duluth was subsequently merged with the Braselton,
Georgia, site into a newly constructed manufacturing facility in Suwanee,
Georgia, in October 1999. The Braselton site was originally acquired from
Mitsubishi in October 1998.
In June 1998, Solectron 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. Under the terms of the agreement, we will provide PCB assembly
services to IBM in North America for the next three years. In addition, IBM has
made available to Solectron intellectual property rights covering a wide
spectrum of technologies and capabilities. IBM also provided to Solectron
failure analysis and characterization tools for process development and
manufacturing, including fault detection and isolation.
In October 1998, Solectron acquired the wireless telephone manufacturing assets
of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile
Telephone (CMT) division in Braselton, Georgia. MCEA was a subsidiary of
Mitsubishi Electric Corporation (Mitsubishi). Under the terms of the agreement,
we will provide MCEA-CMT with a full range of manufacturing services for five
years, including NPI management, PCB assembly and full systems assembly for
MCEA's branded and private-label cellular products sold in North America. In
October 1999, we combined the operations of Braselton and Duluth into a newly
constructed manufacturing facility in Suwanee, Georgia.
Also in October 1998, Solectron signed a definitive agreement with Ingram Micro
Inc. under which the two companies entered 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 is managed by both companies under a joint
management matrix that includes a sales and marketing staff, program management,
materials management, information technology resources, test and process
engineers, and in most cases, uses existing facilities, systems and personnel.
Shipments to customers under the arrangement began in April 1999.
In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test
(ECAT) manufacturing assets in Austin, Texas, and non-exclusive rights to
certain IBM intellectual property. Under the terms of the agreement, for the
next three years we will provide PCB assembly for motherboards used in IBM's
mobile computer products manufactured worldwide. This includes physical design,
early prototyping, new product launch, PCB assembly and test, volume production,
end-of-life support, field return services and life cycle management. We will
also provide IBM's worldwide design teams a full range of integrated NPI
services which involve pre-manufacturing support, such as design and layout,
component and concurrent engineering, test development, prototype, procurement
and assembly.
In July 1999, Solectron issued common stock to acquire Sequel, Inc. (Sequel).
Sequel was a privately held corporation specializing in notebook computer and
liquid crystal display repair service and support. We have assumed
responsibility for Sequel's business operations in San Jose, California;
Memphis, Tennessee; and Reading, United Kingdom. We have also assumed Sequel's
ownership in joint-venture operations in Japan and Taiwan. The acquisition is
expected to enable us to expand our global support services capabilities by
adding quick-turn service
15
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operations, customer service centers and help-desk support for the end-users of
Solectron-built products.
In August 1999, Solectron acquired the manufacturing assets of Trimble
Navigation Limited (Trimble) in Sunnyvale, California, and assumed full
manufacturing responsibility of Trimble's Global Positioning System (GPS) and
related radio frequency (RF) technology products for the next three years.
Trimble is a leader in RF products enabled by GPS technology. We also acquired
certain intellectual property rights related to RF technology. Under the terms
of the agreement, we will provide Trimble a full range of integrated services
across the entire product life cycle including design consultation, prototyping,
NPI management, and volume PCB and systems assembly.
In September 1999, Solectron acquired the manufacturing assets of IBM's
Netfinity server operations in Greenock, Scotland. In addition, we acquired
certain IBM intellectual property rights included in the design and manufacture
of PC server motherboards. Under the terms of the agreement, we assumed NPI and
manufacturing responsibility for the PCB assemblies used in IBM's Netfinity
server lines which were formerly manufactured at IBM's Greenock operations. We
will provide IBM full-service NPI management which includes a full range of
premanufacturing services, specifically component and concurrent engineering,
test development, prototype, procurement and assembly. We will also provide IBM
for the next three years fully integrated PCB assembly services including early
prototyping, new product launch, assembly and test, volume production,
end-of-life support and life cycle management. The volume PCB assembly services
will be transferred from IBM's Greenock facility to our existing global
manufacturing operations. In addition, we have established a new, full-service
NPI center in Port Glasgow, Scotland, to support the IBM design teams.
In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer),
a core unit of the Acer Group, the world's third-largest PC manufacturer, to
form a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. As a
result of the alliance, it is expected that customers will be able to access the
extensive technology, motherboard and system-level design services, and global
supply-base, manufacturing, distribution, logistics and Global Services
operations of both companies to further streamline their global supply chain.
Solectron and Acer plan to leverage their combined resources, including
facilities, systems and personnel, to provide the industry's first fully
integrated, global and optimized end-to-end design, manufacturing and services
solution. The companies will manage this alliance under a joint management
matrix.
In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX),
a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in
Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment.
With this acquisition, we expect to be able to provide the Canadian market a
full range of value-added global service solutions. These services include
product repair, upgrades, remanufacturing and maintenance through factory and
fast-hub service centers located around the world; help-desk support through
customer call centers for end-users; logistics and parts management; returns
processing; warehousing; engineering change management; and end-of-life
manufacturing.
Also in November 1999, Solectron announced the signing of memoranda of
understanding for Solectron to acquire the complex systems manufacturing
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assets of Ericsson's telecommunications infrastructure equipment operations in
Longuenesse, France, and Ostersund, Sweden. As part of the agreement, Solectron
will provide a complete range of integrated supply-chain solutions to Ericsson.
This includes supply-base management, early prototyping, NPI management, complex
PCB assembly, configure-to-order and build-to-order complex systems assembly,
and global services. The transaction is expected to be completed by the first
quarter of calendar year 2000. Completion of the transaction is subject to
applicable government approvals and various conditions of closing.
On November 30, 1999, Solectron completed its acquisition of SMART Modular
Technologies, Inc (SMART). Under the terms of the agreement, each share of SMART
common stock was exchanged for 0.51 of a share of Solectron common stock.
Solectron issued approximately 23.8 million shares of Solectron common stock.
SMART is a designer and manufacturer of memory modules and memory cards,
embedded computers, and I/O products. The acquisition is another step in
enabling Solectron to expand its service capabilities and infrastructure as it
continues to transform itself into a global supply-chain facilitator. We have
gained a manufacturing presence in Aguada, Puerto Rico, and additional
manufacturing capacity through SMART's facilities in Fremont, California;
Penang, Malaysia; and East Kilbride, Scotland. In addition, we have gained
design centers in Fremont, California; Bangalore, India; Boston, Massachusetts;
and Ayr, Scotland.
On January 5, 2000, Solectron signed a letter of intent to acquire Alcatel's
manufacturing assets in Aguadilla, Puerto Rico, and Longview, Texas. Alcatel is
a world leader in building next-generation networks and end-to-end data voice
solutions. Solectron will assume full manufacturing responsibility for Alcatel's
build-to-order (BTO) RF communication systems and certain networking printed
circuit board (PCB) products. As part of the proposed agreement, Solectron will
provide a full range of manufacturing services to Alcatel for the next three
years including: prototyping and NPI management of RF systems, BTO systems build
and high-volume PCB assembly. The transaction is expected to be completed by the
end of the first quarter of calendar year 2000. Completion of the transaction is
subject to applicable government approvals and various conditions of closing.
On January 6, 2000, Solectron signed a letter of intent to acquire tbe
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of Zhone Technologies, Inc. (Zhone). Zhone is a communications equipment
provider integrating expertise in voice, video and data communications. Under
the proposed agreement, Solectron will become Zhone's virtual supply-chain
partner and will sign a five-year commitment with Zhone to provide product life
cycle management services, including NPI through repair and end-of-life
services. The transaction is expected to be completed by the end of the first
quarter of calendar year 2000. Completion of the transaction is subject to
applicable government approvals and various conditions of closing.
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
materially harm Solectron's results of operations. See "Trends and
Uncertainties" for factors relating to possible fluctuation of operating results
and our competitors.
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The following table sets forth, for the periods indicated, certain items in the
Consolidated Statements of Income as a percentage of net sales. The financial
information and the discussion below should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto.
Three Months Ended
November 30,
-------------------
1999 1998
------ ------
Net sales 100.0% 100.0%
Cost of sales 90.7 91.0
------ ------
Gross profit 9.3 9.0
Operating expenses:
Selling, general and administrative 3.4 3.6
Research and development 0.4 0.4
------ ------
Operating income 5.5 5.0
Net interest income (expense) 0.4 (0.1)
------ ------
Income before income taxes and cumulative
effect of change in accounting principle 5.9 4.9
Income taxes 1.9 1.6
------ ------
Income before cumulative effect of change
in accounting principle 4.0 3.3
Cumulative effect of change in accounting
principle for start-up costs (0.1) -
------ ------
Net income 3.9% 3.3%
====== ======
Net Sales
Net sales for the first quarter of fiscal 2000 grew to $2.5 billion, an increase
of 28.6% over the same period in fiscal 1999. The sales growth was primarily
attributable to strong demand from our customers worldwide and acquisitions made
during fiscal 1999. However, the demand increases were partially offset by
end-of-life products and component shortages in flash memory, tantalum
capacitors and saw filters.
Americas - The sales increase for the first quarter of fiscal 2000 compared to
the corresponding period in fiscal 1999 was primarily due to strong demand and
acquisitions of manufacturing assets of Mitsubishi in October 1998, IBM ECAT in
Austin, Texas in February 1999 and Trimble in August 1999. The business
acquisitions of Sequel in July 1999 and NULOGIX in November 1999 also
contributed incremental net sales to the first quarter of fiscal 2000. In
addition, the Mexico site and Milpitas site in California were the largest
contributors due to demand growth from our customers. The sales growth in
Milpitas site was partially offset by planned transfer of personal computer PCB
programs and computer peripherals systems assembly programs to Mexico and
networking business to Penang.
Solectron's operations in Milpitas, California, contributed a substantial
portion of Solectron's net sales and operating income during fiscal 1999, 1998
and 1997. In recent years, management has undertaken deliberate actions to
achieve improved global load balancing by
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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 materially harm Solectron's consolidated results
of operations.
Europe - Net sales increase in the first quarter of fiscal 2000 over the same
period of fiscal 1999 was principally due to increased demand from our
telecommunications customers. Additionally, the recently expanded Romania site
started ramping up its production to meet demand.
Asia - Net sales growth was primarily due to core business growth in the first
quarter of fiscal 2000 compared to the same period of fiscal 1999. The China and
Japan sites also experienced ramp-up production to meet demand growth.
Solectron's Penang operations in Malaysia continue to benefit from the transfer
of networking business from Milpitas, California.
In the first quarter of fiscal 2000, international locations contributed 40.1%
of consolidated net sales compared to 39.2% in the same period of fiscal 1999.
As a result of Solectron's international sales and facilities, Solectron's
operations are subject to the risks of doing business abroad. While, to date,
these dynamics have not materially harmed Solectron's results of operations, we
cannot assure that there will not be such an impact in the future. See "Trends
and Uncertainties" for factors pertaining to our international sales and
fluctuations in the exchange rates of foreign currency for further discussion of
potential adverse effects in operating results associated with the risks of
doing business abroad.
Net Sales to Major Customers - Several of our customers accounted for more than
10% of our net sales in the first three months of fiscal 2000 and 1999. The
following table details these customers and the percentage of net sales
attributed to them.
Three Months Ended
November 30,
-------------------
1999 1998
------ ------
Cisco Systems, Inc. (Cisco) 11.5% *
Lucent Technologies Inc. (Lucent)** 10.1% *
International Business Machines
Corporation (IBM) 10.0% *
Hewlett-Packard Company (HP) * 12.2%
- ----------------
* Less than 10%.
**Reflects the merger of Lucent and Ascend Communications, Inc.
No other customer accounted for more than 10% of net sales during any of the
periods presented.
Solectron's top ten customers accounted for approximately 72% of consolidated
net sales in the first three months of fiscal 2000 and 1999. We are dependent
upon continued revenues from Cisco, Lucent, IBM, and HP as well as our other top
ten customers. We cannot 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.
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Consequently, any material decrease in sales to these or other customers could
materially harm Solectron's 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, we cannot assure that any of
Solectron's current customers will continue to utilize Solectron's services.
Because of these factors, we cannot assure 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 increased to 9.3% for the first quarter of fiscal
2000 period from 9.0% for the same period of fiscal 1999. The increase was
primarily attributable to higher sales volume, manufacturing efficiency and cost
reduction, partially offset by the negative impacts from product mix and
non-linear production due to component shortages and integration of new
projects.
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 at individual sites. Over time,
gross margins at the individual sites and for Solectron as a whole may continue
to fluctuate. In future periods, we anticipate that a larger percentage of our
sales may be derived from systems-build projects which generally yield lower
profit margins than PCB assembly. Increases in the systems-build business,
additional costs associated with new projects, and price erosion within the
electronics industry could harm our gross margin.
In addition, we have recently experienced component shortages. While the
component availability fluctuates from time to time and is still subject to lead
time and other constraints, this could possibly limit our revenue growth and
might have a negative impact on our revenue projections for the foreseeable
future. Because of these factors and others discussed under "Trends and
Uncertainties" below, we cannot assure that Solectron'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 20.6% in the first quarter of fiscal 2000 over the same period of
fiscal 1999. The increase in fiscal 2000 period was primarily due to investment
in infrastructure such as marketing, sales, supply-base management as well as
continuing investment in information systems to support the increased size and
complexity of our business. As a percentage of net sales, SG&A expenses were
3.4% and 3.6% in the fiscal 2000 and fiscal 1999 periods, respectively. The
primary reason for the fiscal 2000 decrease in SG&A expenses as a percentage of
net sales is the significant increase in the sales base, offset partially by the
costs related to investments in our business infrastructure and
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information systems. We anticipate 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 we continue to build the infrastructure necessary to
support our current and prospective business.
Research and Development Expenses
With the exception of our Force Computers operation, Solectron'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.
In absolute dollars, R&D expenses were $8.8 million in the first quarter of
fiscal 2000 and $7.9 million in the same quarter of fiscal 1999. As a percentage
of net sales, R&D expenses were 0.4% in the first quarter of fiscal 2000 and
1999 periods. The increase in R&D expenses in the fiscal 2000 period compared to
fiscal 1999 period was primarily due to increased R&D effort at Force and new
R&D projects initiated at various sites. We expect that R&D expenses will
increase in absolute dollars in the future and may increase as a percentage of
net sales as SMART, our newly acquired operations, and Force will continue to
invest in their R&D efforts and additional R&D projects are undertaken at
certain sites.
Net Interest Income (Expense)
Net interest income was $10.3 million for the first three months of fiscal 2000
compared to net interest expense of $1.1 million in the same period of fiscal
1999. The net interest income in the fiscal 2000 period resulted from interest
income earned on undeployed cash and investments and the capitalization of
interest expense, partially offset by interest expense on our 4% yield
zero-coupon convertible senior notes and 7 3/8% senior notes. In the first
quarter of fiscal 2000, we capitalized approximately $0.3 million of interest
expense related to the costs of computer software developed for internal use. We
expect to utilize more of the undeployed cash during fiscal 2000 in order to
fund anticipated future growth. See "Trends and Uncertainties" for factors
relating to management growth and potential fluctuations in operating results.
Income Taxes
Income taxes increased to $47.7 million in the first quarter of fiscal 2000 from
$32.2 million in the fiscal 1999 period. The increase was primarily due to
increased income before income taxes, partially offset by the lower effective
income tax rate of 32.0% for the first quarter of fiscal 2000 comparing to 33.5%
for the same quarter of fiscal 1999.
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
those in the United States, primarily due to the tax holiday granted to
Solectron's sites in Malaysia. The Malaysian tax holiday is effective through
January 31, 2002, subject to some
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conditions, including certain levels of research and development expenditures.
Solectron has also been granted various tax holidays in China, which are
effective for various terms and are subject to some conditions.
Cumulative Effect of Change in Accounting Principle
See Note 9 of Notes to Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
Working capital was $3.0 billion at November 30, 1999 compared to $2.9 billion
at the end of fiscal 1999. During the first three-month period of fiscal 2000,
cash, cash equivalents and short-term investments decreased to $1.5 billion from
$1.7 billion which reflects funding for required investments in working capital
and capital expenditures to support sales growth. Additionally, we used
approximately $38.1 million for acquisitions of additional manufacturing assets
from Trimble in California, partial acquisition funding of manufacturing assets
at IBM's Netfinity server operations in Greenock of Scotland, and the business
acquisition of NULOGIX in Canada during the first quarter of fiscal 2000.
As we continue to grow, it is expected that we will require greater amounts of
working capital to support our operations. We believe that our current level of
working capital, together with cash generated from operations and our available
credit facilities, will provide adequate working capital for the foreseeable
future. However, we may need to raise additional funds to finance our rapid
expansion, including establishing new locations or financing additional
acquisitions. We cannot assure that such funds, if needed, will be available on
terms acceptable to us or at all.
Inventory levels fluctuate directly with the volume of Solectron's
manufacturing. Changes or significant fluctuations in product market demands can
cause fluctuations in inventory levels that may result in changes of inventory
turns and liquidity. Historically, we have been able to manage our inventory
levels for these fluctuations. However, should material fluctuations occur in
product demand, we could experience slower turns and reduced liquidity. The
increase in inventory levels at November 30, 1999 from fiscal year end 1999 was
primarily due to Y2K buffer inventory, bulk inventory buys from customers
associated with acquisitions and new business, and incomplete kits on hand
awaiting short components.
In the first quarter of fiscal 2000, Solectron invested $103.7 million in
capital expenditures. A large portion of these expenditures related to the
purchase of new equipment, primarily surface mount assembly and test equipment,
to meet current and expected production levels, as well as to replace or upgrade
older equipment which was retired or sold. Expenditures were also made for the
acquisition of land and buildings for the Mexico and Romania sites. We expect
total capital expenditures in fiscal 1999 to be approximately $500 million.
In addition to working capital as of November 30, 1999, which includes cash and
cash equivalents investments of $436.2 million and short-term investments of
$1,034.5 million, Solectron has available a $100 million unsecured multicurrency
revolving credit facility which is subject to financial covenants. We also have
approximately $115 million in unused foreign credit facilities of which $20
million is committed credit line.
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"Year 2000" Issues
Solectron developed a comprehensive program to address the issues associated
with the programming code in existing computer systems as the year 2000
approached. The Year 2000 problem was pervasive and complex, since computer
systems, manufacturing equipment and industrial control systems would have been
affected in some way by the rollover of the two-digit year value to 00. Systems
that could not properly recognize such dates could have generated erroneous
information or caused a system to fail. The Year 2000 issue created risk for us
from unforeseen problems in our systems and from those of third parties with
whom we do business. Any failure of Solectron's and/or third parties' computer
systems, manufacturing equipment and industrial control systems could have
materially harmed our ability to conduct business.
To deal with this issue we formed a worldwide task force and implemented a
comprehensive program to analyze our internal systems as well as all external
systems (including vendor, customer and banking systems) upon which we were
dependent, to identify and evaluate any potential Year 2000 issues. This task
force met regularly and tracked progress against the program, and then modified
the program as was needed to help ensure timely completion of all tasks. We were
committed to achieving Year 2000 compliance; however, because a significant
portion of the potential problem was external to us and therefore outside of our
direct control, we could not totally give assurance that we would be fully Year
2000 compliant. In addition, since full testing of Year 2000 functionality had
to occur in a simulated environment, we were not able to test full system Year
2000 interfaces and capabilities prior to the start of the year 2000.
As of November 30, 1999, we had completed an inventory, assessment, remediation
and testing of internal systems, hardware, software, manufacturing equipment and
embedded chips in industrial control instruments. While we believed that our
testing and evaluation had been entirely comprehensive, we could not give
assurance that all systems critical to Year 2000 compliance had been identified,
or that the corrective actions identified would be completely successful.
As of November 30, 1999, we had inventoried every key supplier of goods and
services to us and considered the potential impact of these suppliers being Year
2000 compliant on our customers and us. Also, we evaluated the key suppliers'
responses to our mailing surveys and then audited those suppliers. We
disqualified potentially non-compliant sources and qualified new suppliers as
needed. We were also involved with various geographic Year 2000 consortiums,
with the goal of leveraging contacts and information for commonly used suppliers
and services such as utility companies. We are a founding member of the High
Tech Consortium (HTC) - Year 2000 & Beyond, which through collaborative efforts
ensured that member companies were addressing Year 2000 readiness on a
coordinated basis. The HTC addressed the risk associated with the interconnected
supply chain. Detailed supplier audits by the HTC's independent consultants
began in late March. In addition, we completed the review of EDI linkages and
data transmission for our customers and suppliers.
We developed contingency plans for the replacement and re-qualification of
suppliers, the creation of certain buffer stock, the relocation of production
using our disaster recovery plans, and the purchase of emergency generators in
the event of power outages at locations we considered not to be low risk.
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We estimate the total cost of completing the program to be in the range of $32
million to $36 million. Of this amount, approximately $10 million was for the
replacement of capital equipment, approximately half of which comprises
non-compliant systems that would not otherwise have been replaced at that point
in time. A significant portion of these costs was not incremental to us, but
rather represents the redeployment of existing resources. Certain other
information technology projects have been delayed due to the focus on Year 2000
issues. The total amount spent on the program in the prior fiscal year ended
August 31, 1999, was $27 million, of which $18 million principally pertained to
payroll costs for personnel involved in the program and costs of outside
consultants and $9 million principally pertained to the replacement of capital
equipment. The total amount spent for the first quarter ended November 30, 1999
was $2.9 million in expense plus an additional $0.4 million on capital
expenditures. Prior to fiscal 1999, costs of software and hardware applications
incurred for Year 2000 compliance were not tracked separately, but were
estimated to be in the range of $2 million to $3 million.
Although we experienced no significant incidents as we passed the 12/31/99 date
and we do not believe that this issue will have material future costs for
reparations or that there will be any collateral legal costs, we cannot assure
such results.
Trends and Uncertainties
A majority of our net sales comes from a small number of customers; if we lose
any of these customers, our net sales could decline significantly.
A majority of our annual net sales comes from a small number of our customers.
Our ten largest customers accounted for 72% of net sales in the first quarter of
fiscal 2000 and 74% of net sales in fiscal 1999. Since we are dependent upon
continued net sales from our ten largest customers, any material delay,
cancellation or reduction of orders from these or other major customers could
cause our net sales to decline significantly. Some of these customers
individually account for more than ten percent of our annual net sales. We
cannot guarantee that we will be able to retain any of our ten largest customers
or any other accounts. In addition, our customers may materially reduce the
level of services ordered from us at any time. This could cause a significant
decline in our net sales and we may not be able to reduce the accompanying
expenses at the same time.
Our long-term contracts do not include minimum purchase requirements.
Although we have long-term contracts with a few of our top ten customers,
including Ericsson Telecom AB, NCR Corporation and IBM Corporation, under which
these customers are obligated to obtain services from us, they are not obligated
to purchase any minimum amount of services. As a result, we cannot guarantee
that we will receive any net sales from these contracts. In addition, these
customers with whom we have long-term contracts may materially reduce the level
of services ordered at any time. This could cause a significant decline in our
net sales and we may not be able to reduce our accompanying expenses at the same
time.
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Possible fluctuation of operating results from quarter to quarter could affect
the market price of our common stock.
Our quarterly earnings may fluctuate in the future due to a number of factors
including the following:
- - Differences in the profitability of the types of manufacturing services we
provide. For example, high velocity and low complexity systems assembly
services have lower gross margins than PCB assembly services;
- - Our ability to maximize the hours of use of our equipment and facilities
is dependent on the duration of the production run time for each job and
customer;
- - The amount of automation that we can use in the manufacturing process for
cost reduction varies depending upon the complexity of the product being
made;
- - Our ability to optimize the ordering of inventory as to timing and amount to
avoid holding inventory in excess of immediate production; and
- - Fluctuations in demand for our services or the products being manufactured.
Therefore, our operating results in the future could be below the expectations
of securities analysts and investors. If this occurs, the market price of our
common stock could be harmed.
We are dependent upon the electronics industry which continually produces
technologically advanced products with short life cycles; Our inability to
continually manufacture such products on a cost-effective basis would harm our
business.
A majority of our net sales is to companies in the electronics industry, which
is subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, our customers' products could become obsolete and the
demand for our services could decline significantly. If we are unable to offer
technologically advanced, cost-effective, quick-response manufacturing services
to customers, demand for our services will also decline. In addition, a
substantial portion of our net sales is derived from our ability to offer
complete service solutions for our customers. For example, if we fail to
maintain high-quality design and engineering services, our net sales would
significantly decline.
We potentially bear the risk of price increases associated with potential
shortages in the availability of electronics components.
At various times, there have been shortages of components in the electronics
industry. One of the services that we perform for many customers is purchasing
electronics components used in the manufacturing of the customers' products. As
a result of this service, we potentially bear the risk of price increases for
these components because we are unable to purchase components at the same time
as we agree with our customers on the pricing for the components.
Our net sales could decline if our competitors provide comparable manufacturing
services at a lower cost.
We compete with different contract manufacturers, depending on the type of
service we provide or the geographic locale of our operations. These
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competitors may have greater manufacturing, financial, R&D and/or marketing
resources than we have. In addition, we may not be able to offer prices as low
as some of our competitors because those competitors may have lower cost
structures as a result of their geographic location or the services they
provide. Our inability to provide comparable or better manufacturing services at
a lower cost than our competitors could cause our net sales to decline.
If we are unable to manage our rapid growth and assimilate new operations in a
cost-effective manner, our profitability could decline.
We have experienced rapid growth over the last five fiscal years. Our historical
growth may not continue. In recent years, we have established operations in
different places throughout the world. For example, in fiscal 1998, we opened
offices in Taipei, Taiwan; Tel Aviv, Israel; and Norrkoping and Stockholm,
Sweden, and commenced manufacturing operations in Guadalajara, Mexico, and
Timisoara, Romania. Also in fiscal 1998, we acquired foreign facilities in Sao
Paulo, Brazil, and Dublin, Ireland. Furthermore, through acquisitions in fiscal
1998 and 1999, we acquired facilities in Duluth, Georgia; Columbia, South
Carolina; and Memphis, Tennessee, and enhanced our capabilities in Charlotte,
North Carolina; Austin, Texas; and Milpitas, California. Also during that
period, we announced a joint venture with Ingram Micro Inc.
During October and November of 1999, we completed the asset acquisition of IBM's
Netfinity server operations in Greenock, Scotland, and acquired IBM Canada's
NULOGIX Technical Services, Inc. subsidiary in Vaughan, Canada, in its entirety.
Also in October 1999, we signed a definitive agreement with Acer, Inc. (Acer), a
core unit of the Acer Group, the world's third-largest PC manufacturer, to form
a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. Also in
November 1999, we announced the signing of memoranda of understanding for
Solectron to acquire the complex systems manufacturing assets of Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France,
and Ostersund, Sweden.
On November 30, 1999, we completed the acquisition of SMART Modular
Technologies, Inc. On January 5, 2000, we signed a letter of intent to acquire
Alcatel's manufacturing assets in Aguadilla, Puerto Rico, and Longview, Texas.
On January 6, 2000, we signed a letter of intent to acquire tbe manufacturing
assets of Premisys Communications, Inc., a wholly owned subsidiary of Zhone
Technologies, Inc.
As we manage and continue to expand new operations, we may incur substantial
infrastructure and working capital costs. If we do not achieve sufficient growth
to offset increased expenses associated with rapid expansion, our profitability
will decline.
We need to manage integration of our acquisitions to maintain profitability.
In fiscal 1998 and 1999, we completed acquisitions of manufacturing assets and
facilities from Ericsson, NCR, IBM, Mitsubishi and Trimble Navigation Limited
and acquired all of the capital stock of Sequel, Inc. We also continue to
evaluate acquisition opportunities and may pursue additional acquisitions over
time. These acquisitions involve risks, including:
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- - Integration and management of the operations;
- - Retention of key personnel;
- - Integration of purchasing operations and information systems;
- - Management of an increasingly larger and more geographically
disparate business; and
- - Diversion of management's attention from other ongoing business
concerns.
Our profitability will suffer if we are unable to successfully integrate and
manage recent acquisitions, as well as any future acquisitions that we might
pursue, or if we do not achieve sufficient revenue to offset the increased
expenses associated with these acquisitions.
Our international sales are a significant and growing portion of our net sales;
we are increasingly exposed to risks associated with operating internationally.
In fiscal 1999, approximately 36% of our net sales came from outside of the
United States. As a result of our foreign sales and facilities, our operations
are subject to a variety of risks that are unique to international operations,
including the following:
- - Adverse movement of foreign currencies against the U.S. dollar in
which our results are reported;
- - Import and export duties, and value-added taxes;
- - Import and export regulation changes that could erode our profit margins
or restrict exports;
- - Potential restrictions on the transfer of funds;
- - Inflexible employee contracts in the event of business downturns;
and
- - The burden and cost of compliance with foreign laws.
In addition, we have operations in several locations that have inflationary
economies or potentially volatile currencies, including Guadalajara, Mexico; Sao
Paulo, Brazil; Suzhou, China; and Timisoara, Romania. In the future, these
factors may harm our results of operations. Markets in Southeast Asia, Latin
America and Eastern Europe have recently experienced and are experiencing
currency, economic and political instability. As of November 30, 1999, we
recorded $103.2 million in cumulative foreign exchange translation losses on our
balance sheet which were primarily the result of the devaluation of the
Brazilian real. While, to date, these factors have not had a significant adverse
impact on our results of operations, we cannot assure that there will not be
such an impact. Furthermore, while we may adopt measures to reduce the impact of
losses resulting from volatile currencies and other risks of doing business
abroad, we cannot assure that such measures will be adequate.
The Malaysian government adopted currency exchange controls, including controls
on its currency, the ringgit, held outside Malaysia, and established a fixed
exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate
provides a stable rate environment when applied to local expenses denominated in
ringgit. 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.
We have been granted a tax holiday which is effective through January 31, 2002,
subject to some conditions, for our Malaysian sites. We have also been granted
various tax holidays in China. These tax holidays are effective for various
terms and are subject to some conditions. It is possible that the current tax
holidays will be terminated or modified or
27
<PAGE>
that future tax holidays that Solectron may seek will not be granted. If the
current tax holidays are terminated or modified, or if additional tax holidays
are not granted in the future, Solectron's effective income tax rate would
likely increase.
We are exposed to fluctuations in the exchange rates of foreign currency.
We do not use derivative financial instruments for speculative purposes. Our
policy is to hedge our foreign currency denominated transactions in a manner
that substantially offsets the effects of changes in foreign currency exchange
rates. Presently, we use foreign currency borrowings and foreign currency
forward contracts to hedge only those currency exposures associated with certain
assets and liabilities denominated in nonfunctional currencies. Corresponding
gains and losses on the underlying transaction generally offset the gains and
losses on these foreign currency hedges.
As of November 30, 1999, all of the foreign currency hedging contracts were
scheduled to mature in less than three months and there were no material
deferred gains or losses. In addition, our 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, including our
current experience involving the devaluation of the Brazilian real, 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, we do
not believe our total exposure to be significant.
Fluctuations in the rate of exchange between the U.S. dollar and the currencies
of countries other than the U.S. in which we conduct business could seriously
harm our business, operating results and financial condition. For example, if
there is an increase in the rate at which a foreign currency is exchanged for
U.S. dollars, it will require more of the foreign currency to equal a specified
amount of U.S. dollars than before the rate increase. In such cases, and if we
price our products and services in the foreign currency, we will receive less in
U.S. dollars than we did before the rate increase went into effect. If we price
our products and services in U.S. dollars and competitors price their products
in local currency, an increase in the relative strength of the U.S. dollar could
result in our prices being uncompetitive in markets where business is transacted
in the local currency.
We have a task force which evaluates the effect of the Euro conversion on us
from many perspectives. We continue to evaluate our tax positions and all
outstanding contracts in currencies of the participating countries to determine
the effects, if any, of the Euro conversion. It is possible that the Euro
conversion could significantly harm our results of operations and financial
position due to competitive and other factors relating to the conversion that we
cannot predict.
We are exposed to fluctuations in interest rates.
The primary objective of our investment activities is to preserve principal,
while at the same time, maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations, certificates of
28
<PAGE>
deposit and money market funds. As of November 30, 1999, approximately 63% of
our total portfolio was scheduled to mature in less than six months.
We have entered into an interest rate swap transaction under which we pay a
fixed rate of interest hedging against the variable interest rates charged by
the lessor for the facility lease at Milpitas, California. The interest rate
swap expires in the year 2002, which coincides with the maturity date of the
lease term. As we intend to hold the interest rate swap until the maturity date,
we are not subject to market risk. In fact, such interest rate swap has fixed
the interest rate for the facility lease, thus reducing interest rate risk.
Solectron's debt instruments are subject to fixed interest rates. In addition,
the amount of principal to be repaid at maturity is also fixed. In the case of
the convertible notes, such notes are based on fixed conversion ratios into
common stock. Therefore, we are not subject to market risk from our debt
instruments.
We may not be able to adequately protect or enforce our intellectual property
rights; and we could become involved in intellectual property disputes.
Our ability to effectively compete may be affected by our ability to protect our
proprietary information. We hold a number of patents and other license rights.
These patent and license rights may not provide meaningful protection for our
manufacturing processes and equipment innovations. On June 23, 1999, Solectron
was served, along with 87 other companies including SMART Modular Technologies,
Inc., as a defendant in a lawsuit brought by the Lemelson Medical, Education &
Research Foundation. The lawsuit alleges that Solectron has infringed certain of
the plaintiff's patents relating to machine vision and bar-code technology.
Solectron believes it has meritorious defenses to these allegations and does not
expect that this litigation will result in a material impact on its financial
condition or results of operations. In the future, third parties may assert
infringement claims against Solectron or its customers. In the event of an
infringement claim, we may be required to spend a significant amount of money to
develop a non-infringing alternative or to obtain licenses. We may not be
successful in developing such an alternative or obtaining a license on
reasonable terms, if at all. In addition, any such litigation could be lengthy
and costly and could harm our financial condition.
Failure to comply with environmental regulations could harm our business.
As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during our manufacturing
process. Although we have never sustained any significant loss as a result of
noncompliance with such regulations, any failure by us to comply with
environmental laws and regulations could result in liabilities or the suspension
of production. In addition, these laws and regulations could restrict our
ability to expand our facilities or require us to acquire costly equipment or
incur other significant costs to comply with regulations.
Our stock price may be volatile due to factors outside of our control.
Our stock price could fluctuate due to the following factors, among others:
29
<PAGE>
- - Announcements of operating results and business conditions by our customers;
- - Announcements by our competitors relating to new customers or
technological innovation or new services;
- - Economic developments in the electronics industry as a whole;
- - Political and economic developments in countries in which we have
operations; and
- - General market conditions.
Failure to retain key personnel and skilled associates could hurt our
operations.
Our continued success depends to a large extent upon the efforts and abilities
of key managerial and technical associates. Losing the services of key personnel
could harm us. Our business also depends upon our ability to continue to attract
and retain senior managers and skilled associates. Failure to do so could harm
our operations.
Year 2000 problems may have an adverse effect on our operations and ability to
offer products and services without interruption.
The Year 2000 issue was a result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
had this date-sensitive software could have recognized a date using "00" as the
year 1900 rather than the year 2000. This could have resulted in system failures
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, order
materials or otherwise engage in normal business activities. While we believe
the Year 2000 issue has been successfully addressed we are still highly
dependent on computer systems.
A key to our ability to successfully manage our operations is the responsiveness
of the supply chain for electronics components. Whether for issues such as Y2K
or others, the supply chain is dependent on processes that are often controlled
by computer systems which could fail. While Solectron controls some of these
systems, our vendors, our customers, transportation companies and other service
providers that are outside of Solectron's control operate some of these computer
systems, as well. If any of these computer systems failed, for any reason, it
could delay our receipt of previously ordered electronics components, thereby
causing us to delay, cancel or modify orders from our customers, which could
harm our business. Although we have now passed the 12/31/99 date without
incident or disruptions thus far, we cannot give assurance that disruptions will
not occur in the days and months ahead.
Our anti-takeover defense provisions may deter potential acquirors and may
depress our stock price.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of Solectron.
These provisions allow us to issue preferred stock with rights senior to those
of our common stock and impose various procedural and other requirements that
could make it more difficult for our stockholders to effect certain corporate
actions.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for factors related to fluctuations in the exchange rates of foreign
currency and fluctuations in interest rates under "Trend and Uncertainties."
31
<PAGE>
SOLECTRON CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
On June 23, 1999, Solectron was served, along with 87 other companies
including SMART Modular Technologies, Inc., as a defendant in a lawsuit
brought by the Lemelson Medical, Education & Research Foundation. The
lawsuit alleges that Solectron has infringed certain of the plaintiff's
patents relating to machine vision and bar-code technology. Solectron
believes it has meritorious defenses to these allegations and does not
expect that this litigation will result in a material impact on its
financial position or results of operations.
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
27.1 Financial Data Schedule - Three Months Ended
November 26, 1999
(b) Reports on Form 8-K
On September 17, 1999, Solectron filed a Current Report on Form 8-K
regarding the completion of a definitive merger agreement with
SMART Modular Technologies.
32
<PAGE>
SOLECTRON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOLECTRON CORPORATION
(Registrant)
Date: January 7, 2000 By: /s/ Susan Wang
----------------------
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
33
<PAGE>
EXHIBIT INDEX
Exhibit Number Document
- -------------- --------
27.1 Financial Data Schedule - Three Months Ended November 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000835541
<NAME> SOLECTRON CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-25-2000
<PERIOD-END> NOV-26-1999
<CASH> 436,166
<SECURITIES> 1,034,489
<RECEIVABLES> 1,256,910
<ALLOWANCES> 6,132
<INVENTORY> 1,495,754
<CURRENT-ASSETS> 4,333,724
<PP&E> 1,244,236
<DEPRECIATION> 568,508
<TOTAL-ASSETS> 5,227,197
<CURRENT-LIABILITIES> 1,373,620
<BONDS> 943,909
0
0
<COMMON> 272
<OTHER-SE> 2,900,312
<TOTAL-LIABILITY-AND-EQUITY> 5,227,197
<SALES> 2,501,803
<TOTAL-REVENUES> 2,501,803
<CGS> 2,268,689
<TOTAL-COSTS> 2,268,689
<OTHER-EXPENSES> 93,317
<LOSS-PROVISION> 899
<INTEREST-EXPENSE> 10,865
<INCOME-PRETAX> 149,256
<INCOME-TAX> 47,762
<INCOME-CONTINUING> 101,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,480)
<NET-INCOME> 98,014
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.35
</TABLE>
