-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QRH5O/MJwlioLB2OW4uAd/bSTHyfM7S9cdOgPumFxNjS5ZeyRHfwf54bZQcYn35y Zn4Y14crZAqQQ9bM+oZ05g== 0000835541-97-000004.txt : 19970415 0000835541-97-000004.hdr.sgml : 19970415 ACCESSION NUMBER: 0000835541-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970414 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLECTRON CORP CENTRAL INDEX KEY: 0000835541 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 942447045 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11098 FILM NUMBER: 97579355 BUSINESS ADDRESS: STREET 1: 847 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089578500 MAIL ADDRESS: STREET 1: 847 GIBRALTAR DR CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997. __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________ COMMISSION FILE NUMBER 1-11098 SOLECTRON CORPORATION (Exact Name of Registrant as specified in its Charter) Delaware 94-2447045 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification Number) 777 Gibraltar Drive, Milpitas, California 95035 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (408) 957-8500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At March 31, 1997, 54,402,511 shares of Common Stock of the Registrant were outstanding. SOLECTRON CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at February 28, 1997 and August 31, 1996 3 Condensed Consolidated Statements of Income for for the three and six months ended February 28, 1997 and for the three and six months ended February 29, 1996 4 Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 1997 and February 29, 1996 5 - 6 Notes to Condensed Consolidated Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 - 21 Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 2 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
February 28, August 31, 1997 1996 ___________ ___________ ASSETS Current assets: Cash, cash equivalents and short-term investments $ 511,341 $ 410,350 Accounts receivable, net 370,484 341,200 Inventories 445,424 368,862 Prepaid expenses and other current assets 38,387 24,312 ___________ ___________ Total current assets 1,365,636 1,144,724 Net property and equipment 249,159 249,570 Other assets 59,918 57,904 ___________ ___________ Total assets $1,674,713 $1,452,198 ___________ ___________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued interest and current portion of long-term debt $ 3,342 $ 14,094 Accounts payable 369,111 280,840 Accrued employee compensation 49,103 38,216 Accrued expenses 26,605 9,280 Other current liabilities 30,898 15,939 ___________ ___________ Total current liabilities 479,059 358,369 Long-term debt 389,015 386,927 Other long-term liabilities 1,787 6,333 ___________ ___________ Total liabilities 869,861 751,629 ___________ ___________ Stockholders' equity: Common stock 56 53 Additional paid-in capital 420,996 378,266 Retained earnings 389,593 320,553 Cumulative translation adjustment and other (5,793) 1,697 ___________ ___________ Total stockholders' equity 804,852 700,569 ___________ ___________ Commitments Total liabilities and stockholders' equity $1,674,713 $1,452,198 ___________ ___________ See accompanying notes to condensed consolidated financial statements.
3 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three Months Ended Six Months Ended Feb. 28, Feb. 29, Feb. 28, Feb. 29, 1997 1996 1997 1996 _________ _________ _________ _________ Net sales $ 858,698 $ 657,176 $1,666,423 $1,347,800 Cost of sales 756,500 591,815 1,478,077 1,216,093 _________ _________ _________ _________ Gross profit 102,198 65,361 188,346 131,707 Operating expenses: Selling, general & administrative 42,512 21,380 75,184 45,421 Research & development 4,123 2,037 5,313 3,539 Acquisition costs - - 4,000 - _________ _________ _________ _________ Operating income 55,563 41,944 103,849 82,747 Interest income 7,536 1,125 13,749 2,571 Interest expense (6,183) (1,176) (12,994) (1,990) _________ _________ _________ _________ Income before income taxes 56,916 41,893 104,604 83,328 Income tax expense 19,351 14,243 35,564 28,331 _________ _________ _________ _________ Net income $ 37,565 $ 27,650 $ 69,040 $ 54,997 _________ _________ _________ _________ Net income per share: Primary $ 0.65 $ 0.54 $ 1.22 $ 1.07 _________ _________ _________ _________ Fully diluted $ 0.65 $ 0.52 $ 1.22 $ 1.03 _________ _________ _________ _________ Weighted average number of shares: Primary 58,219 51,530 56,509 51,280 _________ _________ _________ _________ Fully diluted 61,621 53,848 59,913 53,730 _________ _________ _________ _________ See accompanying notes to condensed consolidated financial statements.
4 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended February 28, February 29, 1997 1996 ________________ ________________ Cash flows from operating activities: Net income $ 69,040 $ 54,997 Adjustments to reconcile net income to net cash provided(used) by operating activities: Depreciation and amortization 51,742 38,662 Interest accretion on zero-coupon subordinated notes - 1,110 Additions to allowance for doubtful accounts 355 682 Other 3,812 (116) Changes in operating assets and liabilities: Accounts receivable (14,480) (34,257) Inventories (63,987) (50,590) Prepaid expenses and other current assets (7,703) (4,930) Accounts payable 86,639 (7,975) Accrued expenses and other current liabilities 10,256 4,392 __________ __________ Net cash provided by operating activities 135,674 1,975 __________ __________ Cash flows from investing activities: Sales and maturities of short-term investments 105,879 412,972 Purchases of short-term investments (202,277) (363,617) Capital expenditures (53,915) (71,109) Other 5,556 - __________ __________ Net cash used in investing activities (144,757) (21,754) __________ __________ (continued on next page) See accompanying notes to condensed consolidated financial statements.
5 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands)
Six Months Ended February 28, February 29, 1997 1996 _______________ _______________ Cash flows from financing activities: Proceeds from issuance of long-term debt - 224,292 Repayments of long-term debt and capital lease obligations (106) (2,309) Net proceeds from sale of common stock 18,512 7,192 Other (3,429) - __________ __________ Net cash provided by financing activities 14,977 229,175 __________ __________ Effect of exchange rate changes on cash and cash equivalents (1,301) 448 __________ __________ Net increase in cash and cash equivalents 4,593 209,844 Cash and cash equivalents at beginning of period 228,830 89,959 __________ __________ Cash and cash equivalents at end of period $ 233,423 $ 299,803 __________ __________ SUPPLEMENTAL DISCLOSURES Cash paid during the period: Income taxes $ 42,590 $ 32,584 Interest $ 13,134 $ 209 Non-cash investing and financing activities: Issuance of common stock for business combination $ 18,335 - Issuance of common stock upon conversion of long-term debt - $ 4,838 Tax benefit associated with exercise of stock options $ 5,265 $ 760 See accompanying notes to condensed consolidated financial statements.
6 SOLECTRON CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Basis of Presentation The accompanying condensed consolidated balance sheets as of February 28, 1997 (unaudited) and August 31, 1996, the unaudited condensed consolidated statements of income for the three-month and six- month periods ended February 28, 1997 and February 29, 1996, and the unaudited condensed consolidated statements of cash flows for the six months ended February 28, 1997 and February 29, 1996 have been prepared on substantially the same basis as the annual consolidated financial statements. Management believes the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results of operations for the three-month and six-month periods ended February 28, 1997 are not necessarily indicative of results to be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended August 31, 1996 included in the Company's Annual Report to Stockholders. For clarity of presentation, the Company has indicated its second quarter as ending on the last day of February, and its fiscal year as ending on August 31, whereas in fact, the Company's second quarter of 1997 ended on February 28, 1997, its second quarter of 1996 ended on February 23, 1996 and its 1996 fiscal year ended on August 30, 1996. NOTE 2 - Reincorporation On February 25, 1997, the Company was reincorporated in the State of Delaware. In connection with the reincorporation, as approved by the stockholders, the number of authorized shares of the Company's Common Stock was increased to two hundred million (200,000,000) and each share of Common Stock was assigned a par value of $.001. NOTE 3 - Inventories Inventories consisted of (in thousands):
February 28, August 31, 1997 1996 ----------- ----------- Raw materials $ 327,974 $ 253,646 Work-in-process 117,450 115,216 ----------- ----------- Total $ 445,424 $ 368,862 =========== ===========
7 NOTE 4 - Net Income per Share Primary net income per share is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during the related period. Common equivalent shares consist of stock options which are computed using the treasury stock method. Fully diluted net income per share assumes full conversion of the Company's outstanding convertible notes. NOTE 5 - Commitments The Company leases various facilities under operating lease agreements. These leases expire at various dates through the year 2000. Substantially all leases require the Company to pay property taxes, insurance, and normal maintenance costs. All of the Company's leases have fixed minimum lease payments except the lease for certain facilities in California. Payments under this lease are periodically adjusted based on LIBOR rates. This lease provides the Company with the option at the end of the lease of either acquiring the property at its original cost or arranging for the property to be acquired. The Company is contingently liable under a first loss clause for a decline in the market value of the property up to $44.2 million in the event that the Company does not purchase the property at the end of the five-year lease term. The Company must also maintain compliance with financial covenants similar to its credit facilities. Future minimum lease payments related to lease obligations are $13.9 million, $12.4 million, $9.2 million, $6.2 million and $1.1 million in each of the years in the five year period ending August 31, 2001. Note 6 - Acquisitions On November 26, 1996, Solectron exchanged approximately $205 million in shares of common stock and options for all of the outstanding stock and options of Force Computers Inc. (Force), a designer and provider of computer platforms for the embedded market. This transaction was accounted for under the pooling of interests method. The results of operations of Force prior to its acquisition were not considered material to the Company's consolidated results of operations. Accordingly, the Company's historical financial statements have not been restated to reflect the financial position and results of operations of Force, and pro-forma financial information has not been disclosed. Note 7 - Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes a different method of computing net income per share than is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share is expected to be higher than the currently presented primary net income 8 per share as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to the currently presented fully diluted net income per share. Solectron plans to adopt SFAS No. 128 in its fiscal quarter ending February 27, 1998 and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. Note 8 - Subsequent Events On March 25, 1997, the Company announced the signing of a memorandum of understanding with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson) to establish a strategic, global manufacturing partnership. Under the terms of the memorandum of understanding, the Company will assume responsibility for a selected Ericsson operation, set up a New Product Introduction center in Stockholm, Sweden and transfer production from certain Ericsson plants worldwide to Solectron manufacturing sites around the world. Solectron and Ericsson expect to sign definitive agreements during the Company's fourth fiscal quarter. Completion of the transaction is subject to successful negotiation of the definitive agreements, approval of the boards of directors of both companies and applicable government approvals. On April 2, 1997, the Company announced the establishment of Solectron de Mexico, S.A. de C.V., a wholly owned subsidiary of the Company, in Guadalajara, Mexico. This new location is expected to begin offering manufacturing services to OEM customers by the end of fiscal 1997. 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward- looking statements as a result of certain factors, including those factors set forth under "Trends and Uncertainties" below. General Solectron's net sales are derived from sales to electronics system original equipment manufacturers. The majority of the Company's customers compete in the networking and datacommunications, workstation, personal computer and computer peripherals segments of the electronics industry. The Company uses advanced manufacturing technologies in assembly and manufacturing management of complex printed circuit boards and electronics systems. A discussion of some of the potential fluctuations in operating results is discussed under "Trends and Uncertainties" below. On November 26, 1996, Solectron exchanged approximately $205 million in shares of common stock and options for all of the outstanding stock and options of Force Computers Inc. (Force) a designer and provider of computer platforms for the embedded market. This transaction was accounted for under the pooling of interests method. The results of operations of Force prior to its acquisition were not considered material to the Company's consolidated results of operations. Accordingly, the Company's historical financial statements have not been restated to reflect the financial position and results of operations of Force, and pro-forma financial information has not been disclosed. As of February 28, 1997, excluding the locations of the Force Computers and Fine Pitch Technologies subsidiaries, the Company had manufacturing operations in eleven locations, six of which are overseas. On April 2, 1997, the Company announced its twelfth manufacturing location in Guadalajara, Mexico, which is expected to begin offering manufacturing services to OEM customers by the end of fiscal 1997. Solectron has a sales support office located in Japan. Force Computers and Fine Pitch Technologies are both headquartered in San Jose, California. Force's European headquarters and the significant portion of its operations are located in Munich, Germany. In addition to its headquarters locations, Force has twelve sales support offices in the United States and six sales support offices in various international locations. Fine Pitch has additional operations in other California locations and in Massachusetts. Results of Operations The electronics industry is subject to rapid technological change, product obsolescence and price competition. These and other 10 factors affecting the electronics industry, or any of the Company's major customers in particular, could have a materially adverse effect on the Company's results of operations. See "Trends and Uncertainties" - "Potential Fluctuations in Operating Results" and "Competition" below for further discussion of potential fluctuations in operating results. The following table sets forth, for the three months and six months ended February 28, 1997 and February 29, 1996, certain items as a percentage of net sales. The operating results for the six months of 1997 include only three months of Force Computers' operating results as Force Computers was acquired on November 26, 1996. The table and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes thereto that appear elsewhere in this report.
Three Months Ended Six Months Ended Feb. 28 Feb. 29 Feb. 28 Feb. 29 1997 1996 1997 1996 ------- ------- ------- ------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 88.1 90.1 88.7 90.2 ------- ------- ------- ------- Gross profit 11.9 9.9 11.3 9.8 Operating expenses: Selling, general & administrative 4.9 3.2 4.5 3.4 Research & development .5 .3 .3 .3 Acquisition costs - - .2 - ------- ------- ------- ------- Operating income 6.5 6.4 6.3 6.1 Interest (income) expense, net (.2) - - (.1) ------- ------- ------- ------- Income before income taxes 6.7 6.4 6.3 6.2 Income taxes 2.3 2.2 2.1 2.1 ------- ------- ------- ------- Net income 4.4% 4.2% 4.2% 4.1%
Net sales for the three months and six months ended February 28, 1997 increased 30.7% and 23.6%, respectively, over the same periods of fiscal 1996. The increases in net sales for both the three- and six- month periods are predominantly due to the acquisitions of the Austin, Texas site in March 1996 and Force in November 1996 as well as net increases in sales volume from both existing and new customers. Sales in the North American region were strong, led by increases in sales to existing and new customers. The overall increase in sales is partially offset by the effect of several ongoing programs reaching end-of-life, projects with higher than normal consignment content and the impact of lower international sales. Sales in the Company's European region 11 reflect declines in revenues from older programs in the Bordeaux facility as these programs reach end-of-life. Revenues in Asia were also reduced due to many of the same end-of-life factors as in Europe, compounded by an increase in consignment mix. Although the Company does not currently anticipate any future decline in sales, to lessen the potential impact of any possible future decline to customers within any particular region or market segment, the Company is committed to seeking diversification of its customer base among many countries, market segments and product lines within market segments. The Company's largest customer during the first half of fiscal 1997 was Hewlett-Packard Corporation (HP). Net sales to HP during the three- and six-month periods ended February 28, 1997 accounted for 15.5% and 14.0%, respectively, of consolidated net sales, compared to 12.0% and 10.5%, respectively, for the same periods in fiscal 1996. In addition, net sales to Bay Networks, Inc. were 11.0% and 11.1% of consolidated net sales for the three- and six-month periods of fiscal 1997 compared to less than 10% in the fiscal 1996 periods. No other customer accounted for more than 10% of net sales during any of the periods presented. Net sales to the Company's top ten customers during the first half of fiscal 1997 accounted for 65.8% of consolidated net sales, down from 69.0% in the first half of fiscal 1996. Net sales at the Company's foreign locations contributed approximately 24.4% of consolidated net sales in the first half of fiscal 1997, compared to 32.6% in the first half of fiscal 1996. The decrease in foreign sales as a percentage of total sales is due to the decreases in sales volume at some of the larger sites in Europe and Asia and the strong increase in domestic sales volume primarily due to the purchase of the site in Austin, Texas in March 1996. The rate of foreign versus domestic sales, as well as foreign versus domestic sales as a percentage of the Company's overall sales, can fluctuate significantly over time. See "Trends and Uncertainties" below for a further discussion of potential fluctuations in operating results. The Company's operations in Milpitas, California contributed a substantial portion of the Company's net sales and operating income during the first half of fiscal 1997 and fiscal 1996. The results of the Company's Milpitas operations are expected to continue as a significant factor in the overall financial results of the Company. Any material change to the customer base, product mix, efficiency or other attributes of this site could have a material adverse effect on the Company's results of operations. The Company believes that its ability to continue to achieve growth will depend upon growth in sales to existing customers for their current and future product generations and successful marketing to new customers. Customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business cannot be assured. In addition, there can be no assurance that any of the Company's current customers will continue to utilize the Company's services. The Company does not have any firm long-term volume purchase commitments from any of its customers. Because of these factors, there can be no assurance that the 12 Company's historical revenue growth rate will continue. See "Trends and Uncertainties" below for a discussion of certain factors affecting the management of growth, geographic expansion and potential fluctuations in sales and results of operations. The gross margin percentage improved to 11.3% for the first half of fiscal 1997 from 9.8% for the first half of fiscal 1996. Approximately half of this improvement resulted from the inclusion of Force in the second quarter of 1997. Profit margins on Force's products are significantly higher than those of the rest of the Company. Without Force's contribution, gross margins for the first half of fiscal 1997 would have been 10.6%. In addition to the impact of Force, the improved gross margin percentage in the first half of fiscal 1997 reflects a shift in product mix toward the higher margin workstation and networking and datacommunications market segments as well as projects with a higher than normal consignment content. Over time, gross margins at the individual sites and for the Company as a whole may continue to fluctuate. Consignment projects typically have higher gross margins than turnkey projects. Increases in turnkey business, additional costs associated with new projects, and price erosion within the electronics industry could adversely affect the Company's gross margin. Additionally, changes in product mix could cause the Company's gross margin to fluctuate. Also, while the availability of raw materials appears adequate to meet the Company's current revenue projections for the foreseeable future, component availability is still subject to lead time and other constraints which could possibly limit the Company's revenue growth. Because of these factors and others discussed under "Trends and Uncertainties" below, there can be no assurance that the Company's gross margin will not fluctuate or decrease in future periods. In absolute dollars, selling, general and administrative (SG&A) expenses increased 98.8% and 65.5%, respectively, for the three- and six-month periods of fiscal 1997 over the same periods of fiscal 1996. Approximately half of these increases relates to the inclusion of Force and the Austin, Texas site operating results in the fiscal 1997 periods. The remainder of the increases can be substantially attributed to growth in infrastructure such as personnel and related departmental expenses at all manufacturing locations to support the increased size and complexity of the Company's business and the addition of other new sites in Malaysia (Johor), California (Fine Pitch Technologies), China and most recently, Westborough, Massachusetts. The most significant reasons for the increase in the fiscal 1997 periods of SG&A expenses as a percentage of net sales are the inclusion of Force, which has a more sales-intensive operating structure, the costs associated with investments in starting up new sites and investments in the Company's information systems. The Company anticipates SG&A expenses will continue to increase in terms of absolute dollars in the future, and may possibly increase as a percentage of revenue, as the Company continues to build the infrastructure necessary to support its current and prospective business. With the exception of its Force Computers operation, the Company's research and development activities have been focused primarily on the development of prototype and engineering design 13 capabilities, fine pitch interconnecting technologies (which include ball-grid array, tape-automated bonding, multichip modules, chip-on- flex, chip-on-board, and flip chip), high reliability environmental stress test technology, and the implementation of environmentally- friendly assembly processes, such as VOC-free and no-clean. Force's research and development efforts are concentrated on new product development and improvement of product designs through improvements in functionality and support of next generation micro-processors. The increase in R&D expenses in the fiscal 1997 periods compared to the fiscal 1996 periods is due to the acquisition of Force in November 1996. Research and development expenses are not expected to change significantly in the near future. A one time charge for acquisition costs of approximately $4.0 million was incurred as a result of the acquisition of Force Computers during the quarter ended November 30, 1996. As a result of issuing convertible subordinated notes in February 1996 and senior notes in March 1996, interest expense for the three months and six months ended February 28, 1997 has increased significantly over the same periods in fiscal 1996. Interest expense on the debt is expected to be approximately $25 million annually and will be partially offset by interest earned on undeployed cash and investments. Liquidity and Capital Resources Working capital was $887 million as of February 28, 1997 compared to $786 million at the end of fiscal 1996. In addition to increases in working capital resulting from the acquisition of new sites, the increase is largely due to an increase in working capital generated from the existing sites. Management expects Solectron to continue to grow in size; consequently the Company is expected to utilize greater amounts of working capital to support its growth in operations. The Company believes its current level of working capital together with cash generated from operations and the Company's available credit will provide adequate working capital for the foreseeable future. Inventory levels fluctuate directly with the volume of the Company's manufacturing. Changes or significant fluctuations in product market demands can cause fluctuations in inventory levels which may result in changes in levels of inventory turns and liquidity. Historically, the Company has been able to manage its inventory levels with regard to these fluctuations. However, should material fluctuations occur in product demand, the Company could experience slower turns and reduced liquidity. During the first six months of fiscal 1997, the Company invested approximately $54 million in capital expenditures. Approximately $11 million of this investment was used to replace or upgrade equipment which was retired or sold. The net book value of the retired and sold equipment was not significant. The remaining investment was mainly in new equipment, primarily surface mount assembly 14 and test equipment, to meet current and expected production levels. For the remainder of fiscal 1997 total capital expenditures at existing facilities are expected to be in the range of $75 to $115 million. In addition to the Company's working capital as of February 28, 1997, the Company has available a $100 million unsecured domestic revolving credit facility. The Company also has approximately $79 million and $8 million in available foreign and domestic credit facilities respectively. In addition, the Company is currently negotiating an asset securitization line of credit for at least $100 million which is expected to close during the third quarter of fiscal 1997. Beginning in September 1997, the Company will be required to pledge approximately $52 million of cash or marketable securities as collateral for its obligation under the terms of the Company's operating lease for its facilities in Milpitas, California. The lease expires September, 1999. The Company is attempting to re-negotiate the terms of the lease before September 1997. Trends and Uncertainties Customer Concentration; Dependence in the Electronics Industry A small number of customers are currently responsible for a significant portion of the Company's net sales. In the three- and six- month periods ended February 28, 1997 and in fiscal years 1996, 1995 and 1994, the Company's ten largest customers accounted for at least 64% of consolidated net sales. The Company is dependent upon continued revenues from its top ten customers. Any material delay, cancellation or reduction of orders from these or other significant customers could have a material adverse effect on the Company's results of operations. During the first half of fiscal 1997, Hewlett-Packard Corporation (HP) and Bay Networks, Inc. accounted for 14.0% and 11.1%, respectively, of net sales, compared to 10.5% and less than 10%, respectively, during the same period of fiscal 1996. There can be no assurances that the Company will continue to do business with HP, Bay Networks or any other customer. The percentage of the Company's sales to its major customers may fluctuate from period to period. Significant reductions in sales to any of these customers would have a materially adverse effect on the Company's results of operations. The Company has no firm long-term volume purchase commitments from its customers, and over the past few years has experienced reduced lead-times in customer orders. In addition, customer contracts can be canceled and volume levels can be changed or delayed. The timely replacement of canceled, delayed or reduced contracts with new business cannot be assured. These risks are increased because a majority of the Company's sales are to customers in the electronics industry, which is subject to rapid technological change and product obsolescence. The factors affecting the electronics industry in general, or any of the Company's major customers in particular, could have a material adverse effect on the Company's results of operations. 15 There can be no assurance that sales to customers within any particular market segment will not experience decreases which could have an adverse effect on the Company's sales. Management of Growth; Geographic Expansion The Company has experienced substantial growth over the last five fiscal years, with net sales increasing from $407 million in fiscal 1992 to $2.8 billion in fiscal year 1996. In recent years, the Company has acquired or established facilities in many locations. During fiscal 1997, the Company has announced the establishment of new manufacturing facilities in Suzhou, China and Guadalajara, Mexico; begun operations at its manufacturing facility in Westborough, Massachusetts; and, in November 1997, acquired Force Computers Inc., which has operations in California and Germany. On March 25, 1997, the Company announced the signing of a memorandum of understanding with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson) to establish a strategic, global manufacturing partnership under which Solectron will assume responsibility for a selected Ericsson operation, set up a New Product Introduction center in Stockholm, Sweden and transfer production from certain Ericsson plants worldwide to Solectron manufacturing sites around the world. Additionally, the Company continually evaluates growth and acquisition opportunities and may pursue additional opportunities over time. There can be no assurance that the Company's historical revenue growth will continue or that the Company will successfully manage the integration of Force Computers, the facility in Mexico, the partnership with and acquisitions from Ericsson or any other business it may acquire in the future. As the Company manages its existing operations and expands geographically, it may experience certain inefficiencies as it integrates new operations and manages geographically dispersed operations. In addition, the Company's results of operations could be adversely affected if its new facilities do not achieve growth sufficient to offset increased expenditures associated with geographic expansion. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its profitability would be adversely affected. On occasion, customers may require rapid increases in production which can place an excessive burden on the Company's resources. Acquisition of Force Computers Inc. The acquisition of Force Computers Inc. entails a number of risks, including successfully managing the integration of the operations, retention of key employees at Force Computers, and managing an increasingly larger and more geographically disparate business. In addition, Solectron has no significant prior experience in managing and operating a computer platform design business. There can be no assurance the Company will successfully manage this business or obtain the anticipated customer synergy. In the event that Solectron is unsuccessful in managing and integrating the Force Computers business, the acquisition could 16 require significant additional management attention. If the Company is unsuccessful in integrating and managing the Force Computers business, Solectron's results of operations could be materially adversely affected. Pending Acquisition of Ericsson Manufacturing Operation and Related Transactions On March 25, 1997, Solectron entered into a memorandum of understanding with Ericsson Telecom AB's Business Area Infocom Systems (Ericsson) to purchase an existing Ericsson printed circuit board manufacturing operation, set up a New Product Introduction center in Stockholm, Sweden and transfer a portion of production from certain Ericsson plants to Solectron manufacturing sites. Under the proposal, Ericsson will contract for Solectron's services from the purchased Ericsson plant for a specified term. Thereafter, Solectron will bear the risk of filling the manufacturing capacity at the purchased site with renewed business from Ericsson or new business from other customers. The transactions contemplated by the memorandum of understanding are expected to close by the end of August 1997, subject to a successful negotiation of the definitive agreements, approval of the boards of directors of both companies, applicable government approvals and various closing conditions. The proposed transactions with Ericsson entail a number of risks, including successfully managing the integration of the operations, retention of key employees, integrating purchasing operations and information systems, managing an increasingly larger and more geographically disparate business and renewing the Ericsson business or replacing it with new business after expiration of the Ericsson commitment. In addition, the completion of the transactions with Ericsson will increase Solectron's expenses and working capital requirements. There can be no assurance the transactions contemplated by the memorandum of understanding will close or that Solectron will successfully manage the risks of this transaction. International Operations As a result of its foreign sales and facilities, the Company's operations are subject to risks of doing business abroad, including but not limited to, fluctuations in the value of currency, export duties, changes to import and export regulations (including quotas), possible restrictions on the transfer of funds, employee turnover, labor unrest, longer payment cycles, greater difficulty in collecting accounts receivable, the burdens and costs of compliance with a variety of foreign laws and, in certain parts of the world, political instability. While to date these factors have not had an adverse impact on the Company's results of operations, there can be no assurance that there will not be such an impact in the future. In addition, the Company's tax holiday in its Penang, Malaysia site expired on January 31, 1997. The Company applied for and has been granted a new tax holiday which is effective through January 31, 2002, subject to certain conditions. In addition, the Company has been granted various tax holidays in China. These tax holidays are effective for various terms and are subject to certain conditions. There is no assurance that any future tax holidays 17 that the Company may seek will be granted. If additional tax holidays are not granted in the future, the Company's effective income tax rate would likely increase. Availability of Components A substantial portion of the Company's net sales are derived from turnkey manufacturing in which the Company provides both materials procurement and assembly. In turnkey manufacturing, the Company potentially bears the risk of component price increases, which could adversely affect the Company's gross profit margins. At various times there have been shortages of components in the electronics industry. If significant shortages of components should occur, the Company may be forced to delay manufacturing and shipments, which could have a materially adverse effect on the Company's results of operations. Potential Fluctuations in Operating Results The Company's operating results are affected by a number of factors, including the mix of turnkey and consignment projects, capacity utilization, price competition, the degree of automation that can be used in the assembly process, the efficiencies that can be achieved by the Company in managing inventories and fixed assets, the timing of orders from major customers, fluctuations in demand for customer products, the timing of expenditures in anticipation of increased sales, customer product delivery requirements and increased costs and shortages of components or labor. The Company's turnkey manufacturing, which typically results in higher net sales and gross profits but lower gross profit margins than assembly and testing services, represents a substantial percentage of net sales. All of these factors can cause fluctuations in the Company's operating results. Competition The electronics assembly and manufacturing industry is comprised of a large number of companies, several of which have achieved substantial market share. The Company also faces competition from current and prospective customers which evaluate Solectron's capabilities against the merits of manufacturing products internally. Solectron competes with different companies depending on the type of service or geographic area. Certain of the Company's competitors have broader geographic breadth. They also may have greater manufacturing, financial, research and development and marketing resources than the Company. The Company believes that the primary basis of competition in its targeted markets is manufacturing technology, quality, responsiveness, the provision of value-added services and price. To be competitive, the Company must provide technologically advanced manufacturing services, high product quality levels, flexible delivery schedules, and reliable delivery of finished products on a timely and price competitive basis. The Company currently may be at a competitive disadvantage as to price when compared to manufacturers with lower cost structures, particularly with respect to manufacturers with established facilities where labor costs are lower. 18 Intellectual Property Protection The Company's ability to compete may be affected by its ability to protect its proprietary information. The Company obtained a limited number of U.S. patents related to the process and equipment used in its surface mount technology. The Company believes these patents are valuable. However, there can be no assurance that these patents will provide meaningful protection for the Company's manufacturing process and equipment innovations. There can be no assurance that third parties will not assert infringement claims against the Company or its customers in the future. In the event a third party does assert an infringement claim, the Company may be required to expend significant resources to develop a non-infringing manufacturing process or to obtain licenses to the manufacturing process which is the subject of litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available on commercially acceptable terms, if at all. In addition, such litigation could be lengthy and costly and could have a material adverse effect on the Company's financial condition regardless of the outcome of such litigation. Environmental Compliance The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. Any failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. In addition, such regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Dependence on Key Personnel and Skilled Employees The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The loss of services of certain key personnel could have a material adverse effect on the Company. The Company's business also depends upon its ability to continue to attract and retain senior managers and skilled employees. Failure to do so could adversely affect the Company's operations. Possible Volatility of Market Price of Common Stock The trading price of the common stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics industry and other factors. In addition, the stock market is subject to price and volume fluctuations which affect the market price for many high technology companies in particular, and which often are unrelated to operating performance. 19 SOLECTRON CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 1: Legal Proceedings None Item 2: Changes in Securities None Item 3: Defaults upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders (a) The Company held its Annual Meeting of Stockholders on January 9, 1997. (b) At the meeting, the following proposals received the votes listed below: Proposal I: Election of Directors Dr. Koichi Nishimura Votes for: 44,503,322 Votes withheld: 47,483 Dr. Winston H. Chen Votes for: 44,503,877 Votes withheld: 46,928 Richard A. D'Amore Votes for: 44,484,292 Votes withheld: 66,513 Charles A. Dickinson Votes for: 44,430,610 Votes withheld: 120,195 Heinz Fridrich Votes for: 44,382,566 Votes withheld: 168,239 Dr. Kenneth E. Haughton Votes for: 44,450,183 Votes withheld: 50,622 Dr. Paul R. Low Votes for: 44,349,089 Votes withheld: 201,716 W. Ferrell Sanders Votes for: 44,496,185 Votes withheld: 54,620 Osamu Yamada Votes for: 44,375,706 Votes withheld: 175,099 20 Proposal II: Approval of a change in the Company's state of incorporation from California to Delaware Votes for: 27,001,516 Votes against 11,140,400 Abstentions 138,206 Proposal III: Approval of the establishment of a classified Board of Directors when the change in its state of incorporation occurs Votes for: 15,124,765 Votes against 15,373,399 Abstentions 7,781,958 Proposal IV: Approval of an increase in the number of authorized shares of Common Stock of the Company from eighty million (80,000,000) to two hundred million (200,000,000) when the change in its state of incorporation occurs Votes for: 30,087,132 Votes against 8,033,046 Abstentions 159,944 Proposal V: Approval of the form of indemnification agreement to be entered into between the Company and its directors and officers when the change in the Company's state of incorporation occurs Votes for: 37,492,039 Votes against 514,269 Abstentions 273,814 Proposal VI: Approval of an amendment to the Company's 1992 Stock Option Plan to increase the number of share of Common Stock reserved for issuance thereunder by two million five hundred thousand (2,500,000) shares to an aggregate of eight million five hundred thousand (8,500,000) shares Votes for: 32,156,310 Votes against 12,179,568 Abstentions 214,927 Proposal VII: Ratification of the appointment of KPMG Peat Marwick LLP as independent accountants of the Company for the fiscal year ended August 31, 1997 Votes for: 44,210,737 Votes against 38,274 Abstentions 54,647 21 Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement re: Computation of Net Income per Share (b) Reports on Form 8-K One Form 8-K was filed on February 25, 1997 describing the Company's reincorporation in the State of Delaware. 22 SOLECTRON CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLECTRON CORPORATION (Registrant) Date: April 11, 1997 By: /s/ Susan Wang ________________ ______________________ Susan Wang Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 23 EX-11 2 Exhibit 11.1 SOLECTRON CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share data)
Three Months Ended Six Months Ended Feb. 28, Feb. 29, Feb. 28, Feb. 29, 1997 1996 1997 1996 ________ ________ ________ ________ Weighted average number of shares of common stock and common stock equivalents: Primary: Common stock 56,276 49,989 54,610 49,856 Common stock equivalents - stock options 1,943 1,541 1,899 1,424 ________ ________ ________ ________ Total primary shares 58,219 51,530 56,509 51,280 ________ ________ ________ ________ Fully diluted: Common shares issuable upon assumed conversion of convertible subordinated notes 3,402 1,974 3,402 1,967 Incremental increase in common stock equivalents using end of period market price - 344 2 483 ________ ________ ________ ________ Total fully diluted shares 61,621 53,848 59,913 53,730 ________ ________ ________ ________ Net income - primary $ 37,565 $ 27,650 $ 69,040 $ 54,997 Interest accretion on convertible subordinated notes, net of taxes 2,380 241 4,657 591 ________ ________ ________ ________ Net income - fully diluted $ 39,945 $ 27,891 $ 73,697 $ 55,588 ________ ________ ________ ________ Net income per share - primary $ 0.65 $ 0.54 $ 1.22 $ 1.07 ________ ________ ________ ________ Net income per share - fully diluted $ 0.65 $ 0.52 $ 1.22$ 1.03 ________ ________ ________ ________ Equals primary amount as fully diluted calculation is anti-dilutive.
EX-27 3
5 1,000 6-MOS AUG-29-1997 FEB-28-1997 233,423 277,918 374,457 3,973 445,424 1,365,636 528,219 279,060 1,674,713 479,059 389,015 0 0 56 804,796 1,674,713 1,666,423 1,666,423 1,478,077 1,478,077 84,142 355 12,994 104,604 35,564 69,040 0 0 0 69,040 1.22 1.22
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