-----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, Vrl+J70OqcW6PNL8I9jSEmm4uL1So7qIPHXO4AOaipup+CDk7C8qwnCKJvt4qCdd dOHaIspYAlxzk/1Hk2tXYw== 0000835541-97-000006.txt : 19970714 0000835541-97-000006.hdr.sgml : 19970714 ACCESSION NUMBER: 0000835541-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970530 FILED AS OF DATE: 19970711 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: 97639372 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 MAY 30, 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 June 30, 1997, 56,857,401 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 May 31, 1997 and August 31, 1996 3 Condensed Consolidated Statements of Income for for the three and nine months ended May 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 1997 and 1996 5 - 6 Notes to Condensed Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signature 24 2 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
May 31, August 31, 1997 1996 ___________ ___________ ASSETS Current assets: Cash, cash equivalents and short-term investments $ 541,545 $ 410,350 Accounts receivable, net 404,069 341,200 Inventories 486,063 368,862 Prepaid expenses and other current assets 37,845 24,312 ___________ ___________ Total current assets 1,469,522 1,144,724 Net property and equipment 285,001 249,570 Other assets 54,047 57,904 ___________ ___________ Total assets $1,808,570 $1,452,198 ___________ ___________ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued interest and current portion of long-term debt $ 2,593 $ 14,094 Accounts payable 457,022 280,840 Accrued employee compensation 49,447 38,216 Accrued expenses 15,334 9,280 Other current liabilities 35,767 15,939 ___________ ___________ Total current liabilities 560,163 358,369 Long-term debt 387,480 386,927 Other long-term liabilities 3,593 6,333 ___________ ___________ Total liabilities 951,236 751,629 ___________ ___________ Stockholders' equity: Common stock 57 53 Additional paid-in capital 432,103 378,266 Retained earnings 431,130 320,553 Cumulative translation adjustment and other (5,956) 1,697 ___________ ___________ Total stockholders' equity 857,334 700,569 ___________ ___________ Commitments Total liabilities and stockholders' equity $1,808,570 $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 Nine Months Ended May 31, May 31, ____________________ ____________________ 1997 1996 1997 1996 _________ _________ _________ _________ Net sales $ 983,222 $ 680,554 $2,649,645 $2,028,354 Cost of sales 867,345 608,761 2,345,422 1,824,854 _________ _________ _________ _________ Gross profit 115,877 71,793 304,223 203,500 Operating expenses: Selling, general & administrative 48,546 25,614 123,730 71,035 Research & development 4,712 1,478 10,025 5,017 Acquisition costs - - 4,000 - _________ _________ _________ _________ Operating income 62,619 44,701 166,468 127,448 Interest income 7,102 4,456 20,851 7,027 Interest expense (6,787) (7,158) (19,781) (9,148) _________ _________ _________ _________ Income before income taxes 62,934 41,999 167,538 125,327 Income tax expense 21,397 14,279 56,961 42,610 _________ _________ _________ _________ Net income $ 41,537 $ 27,720 $ 110,577 $ 82,717 _________ _________ _________ _________ Net income per share: Primary $ 0.71 $ 0.53 $ 1.94 $ 1.60 _________ _________ _________ _________ Fully diluted $ 0.71 $ 0.53 $ 1.93 $ 1.57 _________ _________ _________ _________ Weighted average number of shares: Primary 58,272 52,456 57,068 51,675 _________ _________ _________ _________ Fully diluted 62,032 57,018 60,845 54,621 _________ _________ _________ _________ See accompanying notes to condensed consolidated financial statements.
4 SOLECTRON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended May 31, __________________________________ 1997 1996 ________________ ________________ Cash flows from operating activities: Net income $ 110,577 $ 82,717 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 79,627 61,200 Interest accretion on zero-coupon subordinated notes - 1,420 Additions to allowance for doubtful accounts 238 534 Other (37) 1,260 Changes in operating assets and liabilities: Accounts receivable (48,123) (31,286) Inventories (104,722) (42,724) Prepaid expenses and other current assets (7,111) (5,582) Accounts payable 174,526 (33,914) Accrued expenses and other current liabilities 5,333 8,306 __________ __________ Net cash provided by operating activities 210,308 41,931 __________ __________ Cash flows from investing activities: Sales and maturities of short-term investments 123,245 570,578 Purchases of short-term investments (226,216) (652,763) Acquisition of new operations - (132,169) Capital expenditures (110,827) (92,428) Other 8,444 4,408 __________ __________ Net cash used in investing activities (205,354) (302,374) __________ __________ (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)
Nine Months Ended May 31, ________________________________ 1997 1996 _______________ _______________ Cash flows from financing activities: Proceeds from issuance of long-term debt - 380,000 Debt acquisition costs - (7,675) Repayments of long-term debt and capital lease obligations (2,343) (1,047) Net proceeds from sale of common stock 29,619 14,134 Other (1,727) 4,641 __________ __________ Net cash provided by financing activities 25,549 390,053 __________ __________ Effect of exchange rate changes on cash and cash equivalents (2,279) 620 __________ __________ Net increase in cash and cash equivalents 28,224 130,230 Cash and cash equivalents at beginning of period 228,830 89,959 __________ __________ Cash and cash equivalents at end of period $ 257,054 $ 220,189 __________ __________ SUPPLEMENTAL DISCLOSURES Cash paid during the period: Income taxes $ 64,493 $ 41,697 Interest $ 25,572 $ 363 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 - $ 30,570 Tax benefit associated with exercise of stock options $ 5,265 $ 2,201 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 May 31, 1997 (unaudited) and August 31, 1996, the unaudited condensed consolidated statements of income for the three-month and nine-month periods ended May 31, 1997 and 1996, and the unaudited condensed consolidated statements of cash flows for the nine months ended May 31, 1997 and 1996 have been prepared on substantially the same basis as the annual consolidated financial statements. Management believes the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results of operations for the three-month and nine-month periods ended May 31, 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 third quarter as ending on May 31, and its fiscal year as ending on August 31, whereas in fact, the Company's third quarter of 1997 ended on May 30, 1997, its third quarter of 1996 ended on May 24, 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):
May 31, August 31, 1997 1996 ----------- ----------- Raw materials $ 350,497 $ 253,646 Work-in-process 135,566 115,216 ----------- ----------- Total $ 486,063 $ 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 and 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 - Line of Credit On April 30, 1997, the Company replaced its existing $100 million unsecured domestic revolving line of credit with a new $100 million senior unsecured multicurrency revolving credit facility, which expires April 30, 2002. Borrowings under the credit facility bear interest, at the Company's option, at either the bank's prime rate, the London interbank offering rate (LIBOR) plus a margin or the bank's certificate of deposit (CD) rate plus a margin. The margin under the LIBOR or CD rate options will vary depending on the Company's Standard & Poor's Corporation and/or Moody's Investor Services, Inc. rating for its long-term senior unsecured debt and was 0.4375% at May 31, 1997. There were no borrowings outstanding under this line of credit at May 31, 1997. Under the agreement, the Company must meet certain financial covenants. NOTE 6 - Commitments The Company leases various facilities under operating lease agreements. These leases expire at various dates through the year 2002. Substantially all leases require the Company to pay property taxes, insurance, and normal maintenance costs. All of the Company's leases have fixed minimum lease payments except the lease for certain facilities in Milpitas, California. Payments under this lease are periodically adjusted based on LIBOR rates. This lease provides the Company with the option at the end of the lease of either acquiring the property at its original cost or arranging for the property to be acquired. In May 1997, the Company modified the terms of this lease to extend the lease term through April 2002 and remove the requirement for collateral for its obligation under the lease. The Company is contingently liable under a first loss clause for a decline in the market value of the property of up to $52.1 million in the event that the Company does not purchase the property at the end of the lease term. The Company must also maintain compliance with financial covenants similar to its credit facilities. Future minimum lease payments related to lease obligations are approximately $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. 8 NOTE 7 - 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 8 - Pending Acquisition and New Location 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 set up a New Product Introduction center in Stockholm, Sweden, transfer production from certain Ericsson plants worldwide to Solectron manufacturing sites around the world and assume responsibility for a selected Ericsson operation. On June 10, 1997, the Company announced that the selected Ericsson operation that it will acquire is Ericsson's printed circuit board manufacturing operation in Brazil. Under the terms of the acquisition agreement, Solectron will acquire certain assets, including equipment and inventory, as well as approximately 370 employees associated with the printed circuit board assembly operations of Ericsson Telecomunicacoes S/A. On July 7, 1997, Solectron and Ericsson signed definitive agreements upon completion of negotiations of the general terms and conditions for Solectron's supply of certain products to Ericsson, for the establishment of the New Product Introduction center and for the transfer of certain manufacturing operations and assets to Solectron. The agreements related to the transfer of Ericsson's printed circuit board manufacturing operation in Brazil are being negotiated. Completion of the transaction is subject to successful negotiation of additional definitive agreements, applicable government approvals, if any, and certain other conditions. 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. NOTE 9 - 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 9 per share and diluted net income per share. Basic net income per share is expected to be higher than the currently presented primary net income per share as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to the currently presented fully diluted net income per share. Solectron 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 10 - Subsequent Event On July 10, 1997, the Company announced a two-for-one stock split to be effected as a stock dividend for stockholders of record as of July 21, 1997. The new shares to be issued as a result of the stock dividend are expected to be distributed on or about August 4, 1997. 10 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 data communications, 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 May 31, 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 operations in California and in Massachusetts. 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 11 Company intends to set up a New Product Introduction center in Stockholm, Sweden, transfer production from certain Ericsson plants worldwide to Solectron manufacturing sites around the world and acquire Ericsson's printed circuit board manufacturing operation in Brazil. Under the terms of the acquisition, Solectron will acquire certain assets, including equipment and inventory, as well as approximately 370 employees associated with the printed circuit operations of Ericsson Telecomunicacoes S/A. On July 7, 1997, Solectron and Ericsson signed definitive agreements upon completion of negotiations of the general terms and conditions for Solectron's supply of certain products to Ericsson, for the establishment of the New Product Introduction center and for the transfer of certain manufacturing operations and assets to Solectron. The agreements related to the transfer of Ericsson's printed circuit board manufacturing operation in Brazil are being negotiated. Completion of the transaction is subject to successful negotiation of additional definitive agreements, applicable government approvals, if any, and certain other conditions. 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 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 nine months ended May 31, 1997 and 1996, certain items as a percentage of net sales. The operating results for the nine months of 1997 include only six 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. 12
Three Months Ended Nine Months Ended May 31, May 31, ------------------ ------------------ 1997 1996 1997 1996 ------- ------- ------- ------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 88.2 89.5 88.5 90.0 ------- ------- ------- ------- Gross profit 11.8 10.5 11.5 10.0 Operating expenses: Selling, general & administrative 4.9 3.8 4.7 3.5 Research & development 0.5 0.2 0.4 0.2 Acquisition costs - - 0.1 - ------- ------- ------- ------- Operating income 6.4 6.5 6.3 6.3 Interest (income) expense, net - 0.3 - 0.1 ------- ------- ------- ------- Income before income taxes 6.4 6.2 6.3 6.2 Income taxes 2.2 2.1 2.1 2.1 ------- ------- ------- ------- Net income 4.2% 4.1% 4.2% 4.1%
Net sales for the three months and nine months ended May 31, 1997 increased 44.5% and 30.6%, respectively, over the same periods of fiscal 1996. The increases in net sales for both the three- and nine- month periods are predominantly due to significant increases in sales volume from both existing and new customers in North America, the acquisition of Force in November 1996 and higher international sales in the third quarter of 1997. In addition, the acquisition of the Austin, Texas site in March 1996 contributed to the increase for the nine-month period. Sales in the North American region were strong, reflecting increases in sales at all locations to existing and new customers in both the three- and nine-month periods of fiscal 1997 compared to the same periods of fiscal 1996. The overall increase in sales is partially offset by the effect of several ongoing programs reaching end-of-life as well as projects with higher than normal consignment content. Increased sales for both the three- and nine-month periods of fiscal 1997 in most of the Company's European operations were partially offset by declines in sales in both 1997 periods from older programs in the Bordeaux facility as these programs reach end-of-life. Asian sales increased for the three-month period of fiscal 1997 compared to the three-month period of fiscal 1996 but were lower for the nine-month period of fiscal 1997 than for the comparable period of fiscal 1996. Sales in Asia for the nine-month period of fiscal 1997 were affected by 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 declines to customers within any particular region or market segment, 13 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 nine months of fiscal 1997 was Hewlett-Packard Corporation (HP). Net sales to HP during the three- and nine-month periods ended May 31, 1997 accounted for 12.0% and 13.3%, respectively, of consolidated net sales, compared to 10.5% and 10.5%, respectively, for the same periods in fiscal 1996. Net sales to Cisco Systems, Inc. were 11.0% and 11.3% of the consolidated total for the three-month periods of 1997 and 1996, respectively, but less than 10% for the nine-month periods. In addition, net sales to Bay Networks, Inc. were 10.2% and 10.8% of consolidated net sales for the three- and nine-month periods of fiscal 1997 and less than 10% in the 1996 fiscal 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 nine months of fiscal 1997 accounted for 65.7% of consolidated net sales, down from 66.6% in the same period of fiscal 1996. Net sales at the Company's foreign locations contributed approximately 26.6% and 25.8% of consolidated net sales in the third quarter and first nine months of fiscal 1997, respectively, compared to 29.9% and 31.9%, respectively, for the comparable periods of fiscal 1996. International sales increased in absolute dollars for the fiscal 1997 periods compared to the same periods in fiscal 1996, with significant growth at some sites partially offset by volume decreases at the Bordeaux site in both the three- and nine-month periods of fiscal 1997 and at some Asian sites for the fiscal 1997 nine-month period due to the end-of-life situations noted above. The decrease in foreign sales as a percentage of total sales is primarily due to the strong increase in domestic sales volume across all domestic sites. 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 nine months of fiscal 1997 and fiscal 1996. The results of the Company's Milpitas operations are expected to continue to be 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 14 any firm long-term volume purchase commitments from any of its customers. Because of these factors, there can be no assurance that the 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 11.5% for the first nine months of fiscal 1997 from 10.0% for the first nine months of fiscal 1996. The improvement is primarily due to the inclusion of Force in the second and third quarters of 1997. Gross profit margins on Force's products are significantly higher than those of the rest of the Company. Without Force's contribution, gross margins for the first nine months of fiscal 1997 would have been 10.5%. In addition to the impact of Force, the improved gross margin percentage in fiscal 1997 reflects a shift in product mix toward the higher margin workstation and networking and data communications 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 89.5% and 74.2%, respectively, for the three- and nine-month periods of fiscal 1997 over the same periods of fiscal 1996. The inclusion of Force in the three- and nine-month periods and the Austin, Texas site for the full nine-month period of fiscal 1997 accounts for approximately half of the increases. The remainder of the increases is due primarily to investment 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. 15 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 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. The Company expects that research and development expenses will increase in absolute dollars in the future and may increase as a percentage of net sales as Force continues to invest in its research and development efforts and additional research and development projects are undertaken at certain of the Company's Asian sites. 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. The Company issued convertible subordinated notes in February 1996 and senior notes in March 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. Interest expense for the three months ended May 31, 1997 decreased from the same period of fiscal 1996 because of the redemption and conversion to common stock of all of the Company's Liquid Yield Option Notes in May 1996. Interest expense for the nine-month period of fiscal 1997 increased significantly over the comparable period of fiscal 1996 because of the issuance of new notes in February and March 1996. Interest income increased for the three- and nine-month periods of fiscal 1997 as a result of interest earned on cash realized from the issuance of the notes. Liquidity and Capital Resources Working capital was $909 million as of May 31, 1997 compared to $786 million at the end of fiscal 1996. The increase is largely due to an increase in working capital generated from the existing sites and was augmented by working capital resulting from the acquisition of new sites. The Company is expected to utilize greater amounts of working capital in the future 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. 16 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 nine months of fiscal 1997, the Company invested approximately $111 million in capital expenditures. Approximately $15 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 in new equipment, primarily surface mount assembly and test equipment, to meet current and expected production levels, as well as for the acquisition of land and buildings for new manufacturing sites. For the remainder of fiscal 1997 total capital expenditures are expected to be approximately $40 million. In addition to the Company's working capital as of May 31, 1997, the Company has available various credit facilities. On April 30, 1997, the Company replaced its existing $100 million unsecured domestic revolving line of credit with a new $100 million senior unsecured multicurrency revolving credit facility, which expires April 30, 2002. Borrowings under the credit facility bear interest, at the Company's option, at either the bank's prime rate, the London interbank offering rate (LIBOR) plus a margin or the bank's certificate of deposit (CD) rate plus a margin. The margin under the LIBOR or CD rate options will vary depending on the Company's Standard & Poor's Corporation and/or Moody's Investor Services, Inc. rating for its long-term senior unsecured debt and was 0.4375% at May 31, 1997. There were no borrowings outstanding under this line of credit at May 31, 1997. Under the agreement, the Company must meet certain financial covenants. The Company also has approximately $82 million and $8 million in available foreign and domestic credit facilities respectively. In addition, the Company is currently negotiating an asset securitization arrangement for at least $100 million which is expected to close during the fourth quarter of fiscal 1997. Effective May 1, 1997, the Company modified the terms of the operating lease for its facilities in Milpitas, California. The term of the lease has been extended through April 2002 and the requirement that the Company pledge approximately $52 million of cash or marketable securities as collateral for its obligation under the lease has been removed. Trends and Uncertainties Customer Concentration; Dependence on 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 nine- month periods ended May 31, 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 17 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 nine months of fiscal 1997, Hewlett-Packard Corporation (HP) and Bay Networks, Inc. accounted for 13.3% and 10.8%, respectively, of net sales, compared to 10.5% and less than 10%, respectively, during the same period of fiscal 1996. There can be no assurance 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. 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 announced the establishment of new manufacturing facilities in Suzhou, China and Guadalajara, Mexico; began 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 set up a New Product Introduction center in Stockholm, Sweden, transfer production from certain Ericsson plants worldwide to Solectron manufacturing sites around the world and assume responsibility for a selected Ericsson operation. On June 10, 1997, the Company announced that the selected Ericsson operation that it will acquire is Ericsson's printed circuit board manufacturing operation in Brazil. Under the terms of the acquisition, if completed, Solectron will acquire certain assets, including equipment and inventory, as well as approximately 370 employees associated with the printed circuit board assembly operations of Ericsson Telecomunicacoes S/A. Additionally, the Company continually evaluates growth and acquisition opportunities and may pursue additional 18 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. The completion of the proposed transaction with Ericsson will increase the Company's expenses and working capital requirements. 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 business synergy. In the event that Solectron is unsuccessful in managing and integrating the Force Computers business, the acquisition could require significant additional management attention. If the Company is unsuccessful in integrating and managing the Force Computers business, Solectrons 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 set up a New Product Introduction center in Stockholm, Sweden, transfer a portion of production from certain Ericsson plants to Solectron manufacturing sites and purchase an existing Ericsson printed circuit board manufacturing operation. On June 10, 1997, the Company announced that the existing Ericsson operation it will acquire is Ericsson's printed circuit board operation in Brazil. Under the terms of the acquisition, Solectron will acquire certain assets, including equipment and inventory, as well as approximately 370 employees associated with the printed circuit board assembly operations of Ericsson Telecomunicacoes S/A. Under the proposal, Ericsson will contract for Solectron's services from the newly established Solectron Brazilian plant for a specified term. Thereafter, Solectron will bear the risk of filling the manufacturing capacity at the site with renewed business from Ericsson or new business from other customers. On July 7, 19 1997, Solectron and Ericsson signed certain definitive agreements regarding these transactions. The series of transactions contemplated by the memorandum of understanding are expected to undergo multiple closings by the end of December 1997, subject to the successful negotiation of additional definitive agreements, 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. The Company has been granted a new tax holiday in its Penang, Malaysia site which is effective through January 31, 2002, subject to certain conditions. The Company has also been granted various tax holidays in China. These tax holidays are effective for various terms and are subject to certain conditions. There is no assurance that any future tax holidays that the Company may seek will be granted. If additional tax holidays are not granted in the future, the Company's effective income tax rate would likely increase. Availability of Components A substantial portion of the Company's net sales are derived from turnkey manufacturing in which the Company provides both materials procurement and assembly. In turnkey manufacturing, the Company potentially bears the risk of component price increases, which could adversely affect the Company's gross profit margins. At various times there have been shortages of components in the electronics industry. If significant shortages of components should occur, the Company may be forced to delay manufacturing and shipments, which could have a materially adverse effect on the Company's results of operations. 20 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. 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 21 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. 22 SOLECTRON CORPORATION AND SUBSIDIARIES Part II. OTHER INFORMATION Item 1: Legal Proceedings None Item 2: Changes in Securities None Item 3: Defaults upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement re: Computation of Net Income per Share 27 Financial Data Schedule (b) Reports on Form 8-K None 23 SOLECTRON CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLECTRON CORPORATION (Registrant) Date: July 11, 1997 By: /s/ Susan Wang ________________ ______________________ Susan Wang Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 24 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 Nine Months Ended May 31, May 31, __________________ __________________ 1997 1996 1997 1996 ________ ________ ________ ________ Weighted average number of shares of common stock and common stock equivalents: Primary: Common stock 56,678 50,928 55,323 50,211 Common stock equivalents - stock options 1,594 1,528 1,745 1,464 ________ ________ ________ ________ Total primary shares 58,272 52,456 57,068 51,675 ________ ________ ________ ________ Fully diluted: Common shares issuable upon assumed conversion of convertible subordinated notes 3,402 4,562 3,402 2,834 Incremental increase in common stock equivalents using end of period market price 358 - 375 112 ________ ________ ________ ________ Total fully diluted shares 62,032 57,018 60,845 54,621 ________ ________ ________ ________ Net income - primary $ 41,537 $ 27,720 $110,577 $ 82,717 Interest accretion on convertible subordinated notes, net of taxes 2,380 2,579 7,140 3,293 ________ ________ ________ ________ Net income - fully diluted $ 43,917 $ 30,299 $117,717 $ 86,010 ________ ________ ________ ________ Net income per share - primary $ 0.71 $ 0.53 $ 1.94 $ 1.60 ________ ________ ________ ________ Net income per share - fully diluted $ 0.71 $ 0.53 $ 1.93 $ 1.57 ________ ________ ________ ________
EX-27 3
5 1,000 9-MOS AUG-29-1997 MAY-30-1997 257,054 284,491 408,367 4,298 486,063 1,469,522 588,228 303,227 1,808,570 560,163 387,480 0 0 57 857,277 1,808,570 2,649,645 2,649,645 2,345,422 2,345,422 137,517 238 19,781 167,538 56,961 110,577 0 0 0 110,577 1.94 1.93
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