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 26, 2000.
__ 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, 2000, 601,513,793 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, 2000 and August 31, 1999 3
Condensed Consolidated Statements of Income
for the three months and nine months ended
May 31, 2000 and 1999 4 - 5
Condensed Consolidated Statements of Comprehensive
Income for the three months and nine months ended
May 31, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended May 31, 2000 and 1999 7 - 8
Notes to Condensed Consolidated Financial
Statements 9 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 34
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 2. Changes in Securities 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 36
Signature 37
2
ITEM 1. FINANCIAL STATEMENTS
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
May 31, August 31,
2000 1999
ASSETS ----------- -----------
Current assets:
Cash, cash equivalents and
short-term investments $ 3,419.9 $ 1,881.6
Accounts receivable, net 1,839.6 1,237.9
Inventories 2,522.5 1,170.1
Prepaid expenses and other
current assets 233.6 120.9
---------- ----------
Total current assets 8,015.6 4,410.5
Net property and equipment 833.1 705.6
Other assets 305.9 203.2
---------- ----------
Total assets $ 9,154.6 $ 5,319.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 39.5 $ 21.4
Accounts payable 1,826.1 1,013.7
Accrued employee compensation 117.5 97.5
Accrued expenses 119.7 44.0
Other current liabilities 172.0 70.4
---------- ----------
Total current liabilities 2,274.8 1,247.0
Long-term debt 3,295.8 922.6
Other long-term liabilities 15.2 9.2
---------- ----------
Total liabilities 5,585.8 2,178.8
---------- ----------
Commitments
Stockholders' equity:
Common stock 0.6 0.3
Additional paid-in capital 2,195.6 2,057.6
Retained earnings 1,493.3 1,171.1
Accumulated other comprehensive losses (120.7) (88.5)
---------- ----------
Total stockholders' equity 3,568.8 3,140.5
---------- ----------
Total liabilities and
stockholders' equity $ 9,154.6 $ 5,319.3
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $3,592.3 $2,366.0 $9,227.6 $6,729.5
Cost of sales 3,290.2 2,130.9 8,377.5 6,077.9
-------- -------- -------- --------
Gross profit 302.1 235.1 850.1 651.6
Operating expenses:
Selling, general and
administrative 107.2 90.5 308.5 257.1
Research and
development 15.7 11.8 44.7 32.5
Acquisition and
restructuring costs 7.0 - 32.0 -
-------- -------- -------- --------
Operating income 172.2 132.8 464.9 362.0
Interest income 24.0 10.6 67.4 23.4
Interest expense (15.5) (11.0) (37.7) (26.0)
-------- -------- -------- --------
Income before income taxes
and cumulative effect
of change in accounting
principle 180.7 132.4 494.6 359.4
Income tax expense 57.8 42.4 158.3 115.0
-------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle 122.9 90.0 336.3 244.4
Cumulative effect of change
in accounting principle
for start-up costs, net of
$1.6 income tax benefit - - (3.5) -
-------- -------- -------- --------
Net income $ 122.9 $ 90.0 $ 332.8 $ 244.4
======== ======== ======== ========
(continued on next page)
4
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)
(In millions, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
Basic net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.21 $ 0.16 $ 0.57 $ 0.46
Cumulative effect of change
in accounting principle - - (0.01) -
-------- -------- -------- --------
$ 0.21 $ 0.16 $ 0.56 $ 0.46
======== ======== ======== ========
Diluted net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.20 $ 0.16 $ 0.55 $ 0.44
Cumulative effect of change
in accounting principle - - (0.01) -
-------- -------- -------- --------
$ 0.20 $ 0.16 $ 0.54 $ 0.44
======== ======== ======== ========
Shares used to compute
net income per share:
Basic 597.8 550.3 594.1 530.7
======== ======== ======== ========
Diluted 620.1 574.0 618.9 570.0
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
5
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 122.9 $ 90.0 $ 332.8 $ 244.4
Other comprehensive
income (loss):
Foreign currency translation
adjustments, net of income
tax benefit of $0.4 for
three months and $1.0 for
nine months in fiscal 2000 (19.7) 12.8 (30.6) (57.9)
Unrealized loss on
investments, net of income
tax benefit of $0.5 for three
months and $1.0 for nine
months in fiscal 2000 (0.8) - (1.6) -
-------- -------- -------- --------
Comprehensive income $ 102.4 $ 102.8 $ 300.6 $ 186.5
======== ======== ======== ========
- ---------------
Accumulated foreign currency translation losses were $118.1 million at May 31,
2000 and $87.5 million at August 31, 1999. For the nine-month period of fiscal
year 1999, the foreign currency translation loss primarily resulted from the
devaluation of the Brazilian real. The translation loss for the nine-month
period of fiscal year 2000 was principally due to the weakened French franc and
British sterling. Most of Solectron's foreign currency translation adjustment
amounts relate to investments which are permanent in nature. To the extent that
such amounts relate to investments which are permanent in nature, no adjustment
for income taxes is made. Accumulated unrealized losses on investments were $2.6
million at May 31, 2000 and $1.0 million at August 31, 1999.
See accompanying notes to condensed consolidated financial statements.
6
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
-----------------------
May 31, May 31,
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 332.8 $ 244.4
Adjustments to reconcile net income
to net cash (used in) provided by operating
activities:
Depreciation and amortization 169.1 136.7
Non-cash interest expense 27.4 10.6
Tax benefit associated with the
exercise of stock options 52.6 21.5
Cumulative effect of change in accounting
principle for start-up costs 3.5 -
Other (4.4) (15.1)
Changes in operating assets and
liabilities:
Accounts receivable (633.5) (247.4)
Inventories (1,185.8) (164.1)
Prepaid expenses and other
current assets (93.6) (8.4)
Accounts payable 870.5 43.7
Accrued expenses and other
current liabilities 188.4 10.3
---------- ---------
Net cash (used in) provided by
operating activities (273.0) 32.2
---------- ---------
Cash flows from investing activities:
Sales and maturities of short-term
investments 699.8 286.7
Purchases of short-term investments (1,079.0) (494.6)
Acquisition of manufacturing assets
and locations (297.7) (108.4)
Capital expenditures (318.6) (320.1)
Proceeds from sale of property and equipment 71.7 16.8
Other (13.1) (13.3)
---------- ---------
Net cash used in investing
activities (936.9) (632.9)
---------- ---------
(continued on next page)
7
SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In millions)
(Unaudited)
Nine Months Ended
-----------------------
May 31, May 31,
2000 1999
---------- ----------
Cash flows from financing activities:
Net proceeds from bank lines of credit 5.0 16.6
Net proceeds from long-term debt 2,296.8 731.4
Net proceeds from stock issued under
option and employee purchase plans 97.1 55.1
Repurchases of common stock - (7.2)
Other 8.1 15.8
---------- ----------
Net cash provided by financing
activities 2,407.0 811.7
---------- ----------
Effect of exchange rate changes on
cash and cash equivalents (15.2) (0.1)
---------- ---------
Net increase in cash and
cash equivalents 1,181.9 210.9
Cash and cash equivalents at
beginning of period 1,416.8 300.7
---------- ----------
Cash and cash equivalents at
end of period $ 2,598.7 $ 511.6
========== ==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period:
Income taxes $ 102.2 $ 85.4
Interest $ 12.8 $ 26.0
Non-cash investing and financing activities:
Issuance of common stock upon
conversion of long-term debt $ - $ 230.0
Issuance of common stock for business
combination, net of cash acquired 1.0 -
See accompanying notes to condensed consolidated financial statements.
8
SOLECTRON CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets as of May 31,
2000 and August 31, 1999, and the related unaudited condensed consolidated
statements of income for the three- and nine-month periods ended May 31, 2000
and 1999, and the unaudited condensed consolidated statements of comprehensive
income for the three- and nine-month periods ended May 31, 2000 and 1999, and
the unaudited condensed consolidated statements of cash flows for the nine
months ended May 31, 2000 and 1999 have been prepared on substantially the same
basis as the annual consolidated financial statements. Management believes the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position, operating results and cash flows for the periods presented.
The results of operations for the three- and nine-month periods ended May 31,
2000 are not necessarily indicative of results to be expected for the entire
year. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended August 31, 1999 included in the Company's Current Report on Form 8-K
filed on April 11, 2000.
For clarity of presentation, the Company has indicated its third fiscal quarters
as ending on May 31, 2000 and 1999, and its fiscal year as ending on August 31,
1999. In fact, the Company's third quarter of fiscal 2000 ended on May 26, 2000,
its third quarter of fiscal 1999 ended on May 28, 1999 and its 1999 fiscal year
ended on August 27, 1999.
NOTE 2 - Inventories
Inventories consisted of (in millions):
May 31, August 31,
2000 1999
----------- -----------
Raw materials $ 1,984.1 $ 841.2
Work-in-process 375.9 232.6
Finished goods 162.5 96.3
----------- -----------
Total $ 2,522.5 $ 1,170.1
=========== ===========
9
NOTE 3 - Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share for the three- and nine-month periods ended May 31, 2000 and 1999.
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
(in millions, except per share data)
Income before cumulative
effect of change in
accounting principle $ 122.9 $ 90.0 $ 336.3 $ 244.4
Cumulative effect of change
in accounting principle,
net of income tax benefit - - (3.5) -
Interest expense from
convertible subordinated
notes, net of income taxes - - - 5.0
-------- -------- -------- --------
Net income - diluted $ 122.9 $ 90.0 $ 332.8 $ 249.4
======== ======== ======== ========
Weighted average shares - basic 597.8 550.3 594.1 530.7
Common shares issuable upon
exercise of stock options 22.3 22.8 24.8 20.9
Common shares issuable
upon assumed conversion of
convertible subordinated notes - 0.9 - 18.4
-------- -------- -------- --------
Weighted average shares - diluted 620.1 574.0 618.9 570.0
======== ======== ======== ========
Basic net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.21 $ 0.16 $ 0.57 $ 0.46
Cumulative effect of change
in accounting principle - - (0.01) -
-------- -------- -------- --------
Net income per share $ 0.21 $ 0.16 $ 0.56 $ 0.46
======== ======== ======== ========
Diluted net income per share:
Income before cumulative
effect of change in
accounting principle $ 0.20 $ 0.16 $ 0.55 $ 0.44
Cumulative effect of change
in accounting principle - - (0.01) -
-------- -------- -------- --------
Net income per share $ 0.20 $ 0.16 $ 0.54 $ 0.44
======== ======== ======== ========
10
For the three- and nine-month periods ended May 31, 2000, options to purchase
1.9 million shares of the Company's common stock with exercise prices greater
than the average fair market values of its common stock for such periods at
$38.66 and $39.43, respectively, were not included in the calculation because
the effect would have been antidilutive.
Prior to fiscal 2000, the fiscal years of Solectron and SMART differed.
Solectron's condensed consolidated statements of income for the three- and
nine-month periods ended May 31, 1999 were combined with SMART's condensed
consolidated statements of income for the three- and nine-month periods ended
July 31, 1999. For Solectron, options to purchase 620,000 and 3.4 million
shares, respectively, of Solectron's common stock with exercise prices greater
than the average fair market values of its common stock at $25.04 and $19.69,
respectively, for the three- and nine-month periods ended May 31, 1999 were not
included in the calculation because the effect would have been antidilutive. For
SMART, options to purchase 1.5 million shares of SMART's common stock with
exercise prices greater than the average fair market values of its common stock
at $17.44 and $18.31, respectively, for the three- and nine-month periods ended
July 31, 1999 were not included in the calculation because the effect would have
been antidilutive.
In addition, the calculation above did not include the 24.7 million and 49.6
million common shares issuable upon conversion of the zero-coupon senior
convertible notes due 2019 and 2020, respectively, as they would have been
antidilutive.
NOTE 4 - Commitments
Solectron leases various facilities under operating lease agreements. The
facility leases expire at various dates through 2014. Most of such leases
require Solectron to pay property taxes, insurance and normal maintenance costs.
Payments of some leases are periodically adjusted based on LIBOR rates. Certain
leases for Solectron's facilities, including Milpitas, Fremont and San Jose,
California; Everett, Washington; Suwanee, Georgia; and Columbia, South Carolina,
provide Solectron with an option at the end of the lease term of either
acquiring the property at its original cost or arranging for the property to be
acquired. For these leases, Solectron is contingently liable under a first loss
clause for a decline in market value of such leased facilities up to 85% of the
original costs, or approximately $170 million in total as of May 31, 2000, in
the event Solectron does not purchase the properties at the end of the
respective lease terms. Under such agreements, the Company must also maintain
compliance with financial covenants similar to its $100 million unsecured
multicurrency revolving credit facility.
Additionally, Solectron periodically enters into lease arrangements with
third-party leasing companies under which it sells fixed assets and leases them
back from the leasing companies. Solectron is accounting for these leases as
operating leases.
NOTE 5 - Segment Information
The Company has transitioned its operations into three strategic business units
- - manufacturing and operations, technology solutions, and global services. Each
business unit has its own president and support staff. Solectron's management
uses an internal management reporting system, which provides important financial
data, to evaluate performance and allocate resources for these three business
units. Intersegment adjustments were related primarily to intersegment sales
that were generally recorded at prices that approximated arm's length
transactions. Certain corporate expenses were allocated to these operating
segments and were included for performance evaluation. Some amortization
expenses were also allocated to these operating segments, but the related
intangible assets were not allocated. The accounting policies for the segments
were the same as for Solectron taken as a whole.
Segment information by business units for the three- and nine-month periods
ended May 31, 2000 and 1999, was as follows:
11
Three Months Ended Nine Months Ended
-------------------- ----------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- --------- ---------
(in millions)
Net sales:
Manufacturing and operations $3,217.1 $2,123.5 $8,157.3 $5,935.9
Technology solutions 368.3 261.8 1,044.5 851.8
Global services 55.9 - 110.3 -
Intersegment adjustments (49.0) (19.3) (84.5) (58.2)
-------- -------- -------- --------
$3,592.3 $2,366.0 $9,227.6 $6,729.5
======== ======== ======== ========
Depreciation and amortization:
Manufacturing and operations $ 56.2 $ 42.8 $ 126.0 $ 116.6
Technology solutions 6.3 4.6 19.3 15.3
Global services 1.3 - 9.5 -
Corporate 3.5 3.1 14.3 4.8
-------- -------- -------- --------
$ 67.3 $ 50.5 $ 169.1 $ 136.7
======== ======== ======== ========
Interest income:
Manufacturing and operations $ 1.9 $ 2.0 $ 5.8 $ 5.8
Technology solutions 1.9 1.6 5.1 5.2
Global services 0.1 - 0.1 -
Corporate 33.7 11.6 82.2 23.8
Intersegment adjustments (13.6) (4.6) (25.8) (11.4)
-------- -------- -------- --------
$ 24.0 $ 10.6 $ 67.4 $ 23.4
======== ======== ======== ========
Interest expense:
Manufacturing and operations $ 14.8 $ 5.1 $ 28.0 $ 13.0
Technology solutions 0.2 0.4 0.8 0.9
Global services 0.2 - 0.2 -
Corporate 14.3 10.1 34.9 23.5
Intersegment adjustments (14.0) (4.6) (26.2) (11.4)
-------- -------- -------- --------
$ 15.5 $ 11.0 $ 37.7 $ 26.0
======== ======== ======== ========
Pre-tax income:
Manufacturing and operations $ 163.0 $ 125.7 $ 456.1 $ 338.3
Technology solutions 21.5 23.0 44.9 59.9
Global services (4.3) - (0.7) -
Corporate 0.5 (16.3) (10.8) (38.8)
-------- -------- -------- --------
$ 180.7 a $ 132.4 $ 489.5 b,c $ 359.4
======== ======== ======== ========
12
Three Months Ended Nine Months Ended
-------------------- ----------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- --------- ---------
(in millions)
Capital expenditures:
Manufacturing and operations $ 109.7 $ 83.9 $ 267.8 $ 282.5
Technology solutions 7.9 7.8 21.6 15.9
Global services 2.6 - 9.6 -
Corporate 6.9 1.2 19.6 21.7
-------- -------- -------- --------
$ 127.1 $ 92.9 $ 318.6 $ 320.1
======== ======== ======== ========
May 31, August 31,
2000 1999
------------ ----------
(in millions)
Total assets:
Manufacturing and operations $ 5,183.8 $ 3,265.9
Technology solutions 602.8 556.7
Global services 109.4 42.4
Corporate 5,611.0 2,717.0
Intersegment adjustments (2,352.4) (1,262.7)
------------ ----------
$ 9,154.6 $ 5,319.3
============ ==========
- ----------------------------
a.Reflects acquisition costs of $5.2 million recorded in global services and
$1.8 million recorded as restructuring costs in manufacturing and operations.
b.Reflects acquisition costs of $16.5 million, $5.2 million and $3.8 million,
respectively, recorded in technology solutions, global services and
corporate; and restructuring costs of $2.8 million, $1.9 million and $1.8
million, respectively, recorded in technology solutions, global services and
manufacturing and operations.
c.Includes $5.1 million for cumulative effect of change in accounting principle
for start-up costs.
NOTE 5 - Zero-Coupon Convertible Senior Notes
In May 2000, Solectron issued 4,025,000 zero-coupon convertible senior notes at
an issue price of $579.12 per note which resulted in gross proceeds to Solectron
of approximately $2.3 billion under an effective registration statement filed
with the Securities and Exchange Commission. These notes are unsecured and
unsubordinated indebtedness of Solectron with a maturity value aggregating
$4.025 billion. There will be no interest payment by Solectron prior to
maturity. Each note has a yield of 2.75% with a maturity value of $1,000 on May
8, 2020. Solectron is amortizing the issue discount using the effective interest
method over the term of the notes. Each note is convertible at any time by the
holder at a conversion rate of 12.3309 shares per note. Holders may require
Solectron to purchase all or a portion of their notes on May 8, 2003 and May 8,
2010, at a price of $628.57 and $761.00 per note, respectively. Also, each
holder may require Solectron to repurchase all or a portion of such holder's
notes upon a change in control of the Company occurring on or before May 8,
2003. Solectron, at its option, may redeem all or a portion of the notes at any
time on or after May 8, 2003.
13
NOTE 6 - Pooling of Interests
On April 28, 2000, Solectron completed the acquisition of AMERICOM Wireless
Services (AMERICOM) in its entirety, a privately held corporation which
specializes in wireless handset repair and refurbishment and outsourced
technical customer support services. Solectron issued approximately 1.8 million
shares of its common stock to exchange for all outstanding stock and to
extinguish obligations under the stock appreciation rights plan of AMERICOM.
This transaction was accounted for as a pooling of interests. As the results of
operations of AMERICOM prior to this acquisition were not considered material to
the Company's consolidated results of operations, the Company's historical
financial statements have not been restated to reflect the financial position
and results of operations of AMERICOM, and pro-forma financial information has
not been disclosed. However, the Company has signed a definitive agreement for
the acquisition of Bluegum Group in its entirety and expects to complete the
acquisition in July 2000. The combined effect of Bluegum Group and AMERICOM may
be deemed to be material to the Company's consolidated results of operations.
Upon the completion of the acquisition of Bluegum Group, the Company's
historical financial statements will be restated to reflect the financial
position and results of operations of Bluegum Group and AMERICOM. Bluegum Group
is a leading electronics contract manufacturer in Australia, and the acquisition
is subject to various conditions of closing.
Acquisition costs of $5.2 million were recorded in connection with the
acquisition of AMERICOM. These costs included direct transaction fees, as well
as legal fees, accounting fees, registration fees and other incidentals.
NOTE 7 - Acquisitions of Manufacturing Assets and Business
On March 1, 2000, Solectron completed the acquisition of the complex systems
manufacturing assets of Ericsson Telecom AB's telecommunications infrastructure
equipment operations in Longuenesse, France, and Ostersund, Sweden. The total
purchase price for the manufacturing assets and intangible assets was
approximately $162.2 million, subject to adjustment. The transaction was
accounted for as a purchase of assets, and the purchase price was allocated to
the assets acquired based on the relative fair values of the assets at the date
of acquisition. As part of the agreement, Solectron will provide a complete
range of integrated supply-chain solutions to Ericsson Telecom AB. This includes
supply-base management, early prototyping, New Product Introduction (NPI)
management, complex printed circuit board (PCB) assembly, configure-to-order and
build-to-order complex systems assembly, and global services.
On March 31, 2000, Solectron completed the acquisition of Alcatel's
manufacturing business in Aguadilla, Puerto Rico. The purchase price was
approximately $48.2 million, subject to adjustments. The acquisition was
accounted for as a purchase of a business resulting in goodwill of approximately
$13.3 million, subject to adjustment. The condensed consolidated financial
statements include the operating results of this operation from the date of
acquisition. Pro forma results of operations are not presented because the
effect of this acquisition is not significant. Alcatel is a world leader in
building next-generation networks and end-to-end data voice solutions. As part
of the acquisition of Alcatel's manufacturing business in Aguadilla, Solectron
will assume full manufacturing responsibility for Alcatel's PCB products focused
on the networking and telecommunication industries. Additionally, Solectron will
provide a full range of manufacturing services to Alcatel for the next three
years including prototyping and high-volume PCB assembly.
On April 6, 2000, Solectron announced the completion of acquisition of the
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of Zhone Technologies, Inc. (Zhone). The total purchase price for the
manufacturing assets and intangible assets was approximately $15.5 million,
subject to adjustment. The transaction was accounted for as a purchase of
assets, and the purchase price was allocated to the assets acquired based on the
relative fair values of the assets
14
at the date of acquisition. Zhone is a communications equipment
providerintegrating expertise in voice, video and data communications. Under the
agreement, Solectron becomes Zhone's virtual supply-chain partner and signed a
five-year commitment with Zhone to provide product life cycle management
services, including NPI through repair and end-of-life services.
NOTE 8 - Subsequent Events
On June 5, 2000, Solectron acquired the manufacturing assets of four Nortel
manufacturing facilities including Calgary, Canada; Research Triangle Park,
North Carolina; Monterrey, Mexico; and Cwmcarn, Wales. Solectron will provide
prototyping, PCB assembly, small sub-assembly and repair services to Nortel in
these locations. On June 30, 2000, the Company completed the purchase of
manufacturing assets at two Nortel Networks manufacturing and repair facilities
located in Pont de Buis and Douarnenez, France, and Monkstown, Northern Ireland
for which Solectron will offer prototyping, PCB assembly, small sub-assembly and
repair services to Nortel Networks. Solectron expects to complete an additional
asset acquisition at Nortel Networks manufacturing and repair operation in
Turkey by the end of August 2000 which is subject to various conditions of
closing. Under the terms of the agreements and the proposed agreements, assuming
certain conditions are met, Solectron will pay approximately $900 million to
assume the assets contemplated in these agreements. The companies also entered
into a multi-year supply agreement, valued in excess of $10 billion in sales,
with the option to renew.
NOTE 9 - Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." As amended
by SFAS No. 137 and 138, SFAS No. 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Solectron anticipates that the
adoption of SFAS No. 133 will not have a material impact on its financial
position, results of operations or cash flows. The Company will adopt SFAS No.
133 in its first fiscal quarter of 2001.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC and was effective the first
fiscal quarter of fiscal years beginning after December 15, 1999 and requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board opinion 20, "Accounting Changes." Subsequently, SAB No.101A and
101B were issued to delay the implementation of SAB No. 101. It will be
effective for Solectron in the Company's fourth quarter of fiscal 2001. The
Company is currently evaluating the impact, if any, SAB No. 101 will have on its
financial position or results of operations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements which involve risks and uncertainties. Solectron's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those factors set forth
under "Trends and Uncertainties" below.
General
Solectron provides electronics manufacturing services to original equipment
manufacturers (OEMs) who design and sell networking equipment, workstations,
personal and notebook computers, computer peripherals, telecommunications
equipment or other electronic equipment. These OEMs include Cisco Systems, Inc.
(Cisco), Compaq Computer Corporation (Compaq), Ericsson Telecom AB (Ericsson),
Hewlett-Packard Company, Inc. (HP), International Business Machines Corporation
(IBM) and Nortel Networks Limited (Nortel). These companies contract with
Solectron to build their products or to obtain other related services.
Solectron furnishes integrated supply-chain solutions that span the entire
product life cycle - from technology solutions, to manufacturing and operations,
to global services. These services include the following range of services:
- - Advanced building block design solutions;
- - Product design and manufacturing;
- - New product introduction management;
- - Materials purchasing and management;
- - Prototyping;
- - Printed circuit board assembly (the process of placing components on an
electrical printed circuit board that controls the processing functions of
a personal computer or other electronic equipment);
- - Systems assembly (for example, building complete systems such as mobile
telephones and testing them to ensure functionality);
- - Distribution;
- - Product repair; and
- - Warranty services.
Solectron's performance of these services allows its customers to remain
competitive by focusing on their core competencies of sales, marketing, and
research and development. We have manufacturing facilities in the Americas,
Europe and Asia. This geographic presence gives our customers access to
manufacturing services in the locations where they need to be close to their
expanding markets for faster product delivery.
During 1997, Solectron established a strategic, global manufacturing partnership
with Ericsson Telecom AB's Business Area Infocom Systems. We established a New
Product Introduction (NPI) center in Sweden and transferred production from
certain Ericsson Telecom AB (Ericsson) plants worldwide to our manufacturing
sites around the world. In October 1997, we acquired certain assets, primarily
equipment and inventory, of Ericsson's printed circuit board (PCB) assembly
operation located in Sao Paulo, Brazil.
In April 1998, Solectron acquired NCR Corporation's (NCR) manufacturing assets
in Columbia, South Carolina; Duluth, Georgia; and Dublin, Ireland. Under the
terms of the agreement, NCR outsourced the manufacturing of certain computer
components to Solectron for at least five years.
16
In June 1998, Solectron acquired International Business Machines Corporation's
(IBM) Electronic Card Assembly and Test (ECAT) manufacturing assets in
Charlotte, North Carolina, and non-exclusive rights to certain IBM intellectual
property. Under the terms of the agreement, we will provide PCB assembly
services to IBM in North America for three years. In addition, IBM has made
available to Solectron intellectual property rights covering a wide spectrum of
technologies and capabilities. IBM also provided to Solectron failure analysis
and characterization tools for process development and manufacturing, including
fault detection and isolation.
In October 1998, Solectron acquired the wireless telephone manufacturing assets
of Mitsubishi Consumer Electronics America, Inc.'s (MCEA) Cellular Mobile
Telephone (CMT) division in Braselton, Georgia. MCEA was a subsidiary of
Mitsubishi Electric Corporation (Mitsubishi). Under the terms of the agreement,
we will provide MCEA-CMT with a full range of manufacturing services for five
years, including NPI management, PCB assembly and full systems assembly for
MCEA's branded and private-label cellular products sold in North America. In
October 1999, we combined the operations of Braselton and Duluth into a newly
constructed manufacturing facility in Suwanee, Georgia.
In February 1999, Solectron acquired IBM's Electronic Card Assembly and Test
(ECAT) manufacturing assets in Austin, Texas, and non-exclusive rights to
certain IBM intellectual property. Under the terms of the agreement, we will
provide PCB assembly for motherboards used in IBM's mobile computer products
manufactured worldwide for three years. This includes physical design, early
prototyping, new product launch, PCB assembly and test, volume production,
end-of-life support, field return services and life cycle management. We will
also provide IBM's worldwide design teams a full range of integrated NPI
services which involve pre-manufacturing support, such as design and layout,
component and concurrent engineering, test development, prototype, procurement
and assembly.
In July 1999, Solectron issued common stock to acquire Sequel, Inc. (Sequel).
Sequel was a privately held corporation specializing in notebook computer and
liquid crystal display repair service and support. We have assumed
responsibility for Sequel's business operations in San Jose, California;
Memphis, Tennessee; and Reading, United Kingdom. We have also assumed Sequel's
ownership in joint-venture operations in Japan and Taiwan. The acquisition is
expected to enable us to expand our global support services capabilities by
adding quick-turn service operations, customer service centers and help-desk
support for the end-users of Solectron-built products.
In August 1999, Solectron acquired the manufacturing assets of Trimble
Navigation Limited (Trimble) in Sunnyvale, California, and assumed full
manufacturing responsibility of Trimble's Global Positioning System (GPS) and
related radio frequency (RF) technology products for three years. Trimble is a
leader in RF products enabled by GPS technology. We also acquired certain
intellectual property rights related to RF technology. Under the terms of the
agreement, we will provide Trimble a full range of integrated services across
the entire product life cycle including design consultation, prototyping, NPI
management, and volume PCB and systems assembly.
In September 1999, Solectron announced the acquisition of manufacturing assets
in several phases of IBM's Netfinity server operations in Greenock, Scotland. In
addition, we acquired certain IBM intellectual property rights included in the
design and manufacture of PC server motherboards. Under the terms of the
agreement, we assumed NPI and manufacturing responsibility for the PCB
assemblies used in IBM's Netfinity server lines which were formerly manufactured
at IBM's Greenock operations. We will provide IBM full-service NPI management
which includes a full range of premanufacturing services, specifically component
and concurrent engineering, test development, prototype, procurement and
assembly. We will also provide IBM for three years fully integrated PCB assembly
services including early
17
prototyping, new product launch, assembly and test, volume production,
end-of-life support and life cycle management. The volume PCB assembly services
will be transferred from IBM's Greenock facility to our existing global
manufacturing operations. In addition, we have established a new, full-service
NPI center in Port Glasgow, Scotland, to support the IBM design teams.
In October 1999, Solectron signed a definitive agreement with Acer, Inc. (Acer),
a core unit of the Acer Group, the world's third-largest PC manufacturer, to
form a strategic alliance to provide global design, manufacturing and service
solutions for OEM-branded personal computers, servers and workstations. As a
result of the alliance, it is expected that customers will be able to access the
extensive technology, motherboard and system-level design services, and global
supply-base, manufacturing, distribution, logistics and global services
operations of both companies to further streamline their global supply chain.
Solectron and Acer plan to leverage their combined resources, including
facilities, systems and personnel, to provide the industry's first fully
integrated, global and optimized end-to-end design, manufacturing and services
solution. The companies will manage this alliance under a joint management
matrix.
In November 1999, Solectron acquired NULOGIX Technical Services, Inc. (NULOGIX),
a wholly owned subsidiary of IBM Canada, in its entirety. NULOGIX is located in
Vaughan, Canada, and specializes in repair, remanufacturing and refurbishment.
With this acquisition, we expect to be able to provide the Canadian market a
full range of value-added global service solutions. These services include
product repair, upgrades, remanufacturing and maintenance through factory and
fast-hub service centers located around the world; help-desk support through
customer call centers for end-users; logistics and parts management; returns
processing; warehousing; engineering change management; and end-of-life
manufacturing.
In November 1999, Solectron completed its acquisition of SMART Modular
Technologies, Inc. (SMART) which was accounted for as a pooling of interests.
SMART is a designer and manufacturer of memory modules and memory cards,
embedded computers, and I/O products. Through the acquisition, Solectron has
gained a manufacturing presence in Aguada, Puerto Rico, and additional
manufacturing capacity through SMART's facilities in Fremont, California;
Penang, Malaysia; and East Kilbride, Scotland. In addition, Solectron has gained
design centers in Fremont, California; Bangalore, India; Boston, Massachusetts;
and Ayr, Scotland. The acquisition enables Solectron to expand its service
capabilities and infrastructure by integrating SMART into the technology
business unit with Force Computers, Inc. (Force). In addition, Solectron is
benefiting from the business purchase transaction of Compaq Computer
Corporation's embedded and real-time product business in Fremont, California and
Scotland by SMART in August 1999.
In March 2000, Solectron completed the acquisition of the complex systems
manufacturing assets of Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France, and Ostersund, Sweden. As part of the
agreement, Solectron will provide a complete range of integrated supply-chain
solutions to Ericsson. This includes supply-base management, early prototyping,
NPI management, complex PCB assembly, configure-to-order and build-to-order
complex systems assembly, and global services.
In March 2000, Solectron completed the acquisition of Alcatel's manufacturing
business in Aguadilla, Puerto Rico. Alcatel is a world leader in building
next-generation networks and end-to-end data voice solutions. As part of the
acquisition, Solectron will assume full manufacturing responsibility for
Alcatel's PCB products focused on the networking and telecommunication
industries. Additionally, Solectron will provide a full range of manufacturing
services to Alcatel for the next three years including prototyping and
high-volume PCB assembly.
In April 2000, Solectron announced the completion of acquisition of the
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of
18
Zhone Technologies, Inc. (Zhone). Zhone is a communications equipment
provider integrating expertise in voice, video and data communications. Under
the agreement, Solectron becomes Zhone's virtual supply-chain partner and signed
a five-year commitment with Zhone to provide product life cycle management
services, including NPI through repair and end-of-life services.
In April 2000, Solectron Completed the acquisition of AMERICOM Wireless Services
(AMERICOM) in its entirety, a privately held corporation which specializes in
wireless handset repair and refurbishment and outsourced technical customer
support services. As part of the transaction, Solectron will gain specialized
repair and testing equipment and assume responsibility for AMERICOM's business
operations in Los Angeles, California; Louisville, Kentucky; Baltimore,
Maryland; and Dallas, Texas; as well as AMERICOM's field technicians and support
operations throughout the United States.
In May 2000, Solectron announced the signing of a definitive agreement for the
acquisition of Bluegum Group, Australia's leading electronics contract
manufacturer, in its entirety. It is expected that Solectron will gain NPI,
manufacturing, systems assembly, and services capability in Liverpool, New South
Wales; Wangaratta, and Melbourne, Victoria; and program offices in Sydney, North
Melbourne and Singapore. The acquisition is expected to be completed by the end
of July 2000, subject to various conditions of closing.
On June 5, 2000, Solectron acquired the manufacturing assets of four Nortel
manufacturing facilities including Calgary, Canada; Research Triangle Park,
North Carolina; Monterrey, Mexico; and Cwmcarn, Wales. Solectron will provide
prototyping, PCB assembly, small sub-assembly and repair services to Nortel in
these locations. On June 30, 2000, the Company completed the purchase of
manufacturing assets at two Nortel Networks manufacturing and repair facilities
located in Pont de Buis and Douarnenez, France, and Monkstown, Northern Ireland
for which Solectron will offer prototyping, PCB assembly, small sub-assembly and
repair services to Nortel Networks. Solectron expects to complete an additional
asset acquisition at Nortel Networks manufacturing and repair operation in
Turkey by the end of August 2000, subject to various conditions of closing.
Following the transaction in Northern Ireland, Solectron purchased a 50,000
square-foot (4,645 square-meter) facility in Carrickfergus, just outside of
Belfast. During renovations, Solectron will operate from Nortel Networks'
facility in Monkstown and will transfer work to the new site, which is expected
to be fully operational in September 2000. The new site will be a NPI center
that will serve Nortel Networks telecommunications needs and manufacture optical
networking products. Under the terms of the agreements and the proposed
agreements, assuming certain conditions are met, Solectron will pay
approximately $900 million to assume the assets contemplated in these
agreements. The companies also entered into a multi-year supply agreement,
valued in excess of $10 billion in sales, with the option to renew.
On June 30, 2000, Solectron completed the acquisition of IBM Corporation's
manufacturing operations in Hortolandia, Sao Paulo state, Brazil. Solectron will
assume responsibility for the systems configuration and assembly of IBM's
Personal Systems Group, Retail Systems Solutions Group, and Enterprise Systems
Group products sold into the Brazilian, Mercosul and Andean markets. As part of
the multi-year agreement, Solectron will provide IBM with an extensive range of
integrated services including NPI support, PCB and systems assembly, product
configuration services, repair and end-of-life product support.
Results of Operations
The electronics industry is subject to rapid technological change, product
obsolescence and price competition. These and other factors affecting the
electronics industry, or any of Solectron's major customers in particular, could
materially harm Solectron's results of operations. See "Trends and
Uncertainties"
19
for factors relating to possible fluctuation of operating results and our
competitors.
The following table sets forth, for the periods indicated, certain items in the
Consolidated Statements of Income as a percentage of net sales. The financial
information and the discussion below should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto.
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.6 90.1 90.8 90.3
-------- -------- -------- --------
Gross profit 8.4 9.9 9.2 9.7
Operating expenses:
Selling, general and
administrative 3.0 3.8 3.3 3.8
Research and
Development 0.4 0.5 0.5 0.5
Acquisition and
restructuring costs 0.2 - 0.4 -
-------- -------- -------- --------
Operating income 4.8 5.6 5.0 5.4
Interest income 0.6 0.5 0.7 0.3
Interest expense (0.4) (0.5) (0.4) (0.4)
-------- -------- -------- --------
Income before income taxes
and cumulative effect
of change in accounting
principle 5.0 5.6 5.3 5.3
Income tax expense 1.6 1.8 1.7 1.7
-------- -------- -------- --------
Income before cumulative
effect of change in
accounting principle 3.4 3.8 3.6 3.6
Cumulative effect of change
in accounting principal
for start-up costs - - - -
-------- -------- -------- --------
Net income 3.4% 3.8% 3.6% 3.6%
======== ======== ======== ========
Net Sales
Net sales for the three- and nine-month periods of fiscal 2000 were $3.6 billion
and $9.2 billion, respectively, and increased 51.8% and 37.1%, respectively,
over the same periods in fiscal 1999. The growth in sales was primarily
attributable to major new program ramp-ups, strong demand from our customers
worldwide and acquisitions made during fiscal 1999 and through the third quarter
of fiscal 2000. However, the sales increase was constrained by component
shortages.
Solectron has three business units including manufacturing and operations,
technology solutions, and global services. Our core business group,
manufacturing and operations, provided 89% of net sales for both three-month
periods in fiscal 2000 and 1999, and 88% of net sales for both nine-month
periods in fiscal 2000 and
20
1999. Our newly established technology solutions group consisting of SMART and
Force contributed 10% and 11%, respectively, of net sales for the three- and
nine-month periods in fiscal 2000 compared to 11% and 12%, respectively, for the
same periods in fiscal 1999. The new global services unit contributed
approximately 1% of net sales for the three- and nine-month periods in fiscal
2000.
Manufacturing and Operations
Net sales from our worldwide manufacturing operations group grew to $3.2 billion
and $8.2 billion, respectively, for the three- and nine-month periods in fiscal
2000 compared to the same periods in fiscal 1999. These increases were 51.5% and
37.4% over the comparable periods of fiscal 1999. The increase in net sales was
principally due to strong demand growth from our customers and acquisitions
including manufacturing assets of Mitsubishi in October 1998; IBM ECAT in
Austin, Texas in February 1999; Trimble, California in August 1999; IBM's
Netfinity server operations in Greenock, Scotland in September 1999; Ericsson's
telecommunications infrastructure equipment operations in Longuenesse, France
and Ostersund, Sweden in March 2000; and Zhone, California in April 2000; as
well as the acquisition of Alcatel's manufacturing business in Aguadilla, Puerto
Rico in March 2000.
Within the Americas, the Milpitas site in California, Guadalajara site in Mexico
and Charlotte site in North Carolina were the largest contributors primarily due
to new programs from our customers. However, sales in the Americas were impeded
by the shortage of components. Sales growth in the Milpitas site continued
despite the planned transfer of personal computer PCB programs and computer
peripherals systems assembly programs to Mexico and networking business to
Penang.
In Europe, the net sales increase in the three- and nine-month periods of fiscal
2000 over the same periods of fiscal 1999 primarily resulted from greater demand
from our mobile phone and telecommunications customers. Additionally, the
acquisitions of manufacturing assets of IBM's Netfinity server operations in
Greenock, Scotland in September 1999 and Ericsson's telecommunications
infrastructure equipment operations in Longuenesse, France and Ostersund, Sweden
in March 2000 contributed incremental net sales for the three- and nine-month
periods in fiscal 2000.
In Asia, the net sales growth was primarily due to demand growth in mobile
phones, networking and personal computer projects for the three- and nine-month
periods in fiscal 2000 compared to the same periods of fiscal 1999.
Additionally, the China site started expanding in production to meet demand
growth. Our Penang site in Malaysia continues to benefit from the transfer of
networking business from Milpitas, California.
Technology Solutions
Net sales from our new technology solutions group, which includes SMART and
Force, grew 40.7% to $368.3 million and 22.6% to $1.0 billion for the three- and
nine-month periods, respectively, over the same periods of fiscal 1999. The
increase in net sales primarily resulted from an overall increase in the average
memory densities incorporated into the standard memory products and growth in
sales of communication card products and embedded computer modules. In addition,
the embedded and real-time product line acquired during August 1999 from Compaq
further contributed to the increase. The increase in net sales was partially
offset by declines in average selling prices.
Global Services
This newly established group reported net sales of $55.9 million and $110.3
million, respectively, for the three- and nine-month periods of fiscal 2000. Net
sales benefited from the business acquisitions of Sequel in July 1999, NULOGIX
in November 1999 and AMERICOM in April 2000.
21
Concentration of Sales - The operations in Milpitas, California, contributed a
substantial portion of Solectron's net sales and operating income during fiscal
1999, 1998 and 1997. In recent years, management has undertaken deliberate
actions to achieve improved global load balancing by transferring certain
projects from the Milpitas site to other sites worldwide. However, the
performance of the Milpitas operation is expected to continue to be a
significant factor in the overall financial performance of Solectron. Any
adverse material change to the customer base, product mix, efficiency or other
attributes of this site could materially harm Solectron's consolidated results
of operations.
International Sales - In the first nine months of fiscal 2000, international
locations contributed 42.3% of consolidated net sales compared to 36.4% in the
same period of fiscal 1999. As a result of Solectron's international sales and
facilities, Solectron's operations are subject to the risks of doing business
abroad. While these dynamics have not materially harmed Solectron's results of
operations, we cannot assure that there will not be such an impact in the
future. See "Trends and Uncertainties" for factors pertaining to our
international sales and fluctuations in the exchange rates of foreign currency
for further discussion of potential adverse effects in operating results
associated with the risks of doing business abroad.
Net Sales to Major Customers - Several of our customers accounted for 10% or
more of our net sales in the three- and nine-month periods of fiscal 2000 and
1999. The following table details these customers and the percentage of net
sales attributed to them.
Three Months Ended Nine Months Ended
------------------ ------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
Ericsson Telecom AB (Ericsson) 15% * 12% *
Cisco Systems, Inc. (Cisco) 13% 12% 12% 11%
Compaq Computer Corporation (Compaq) * 11% * 13%
Hewlett-Packard Company (HP) * * * 10%
- ----------------
* Less than 10%.
No other customer accounted for more than 10% of net sales during any of the
periods presented.
Solectron's top ten customers accounted for approximately 72% and 75%,
respectively, of consolidated net sales in the first nine months of fiscal 2000
and 1999. We are dependent upon continued revenues from Ericsson, Cisco, Compaq,
and HP, as well as our other top ten customers. We cannot guarantee that these
or any other customers will not increase or decrease as a percentage of
consolidated net sales either individually or as a group. Consequently, any
material decrease in sales to these or other customers could materially harm
Solectron's results of operations.
Solectron believes that its ability to continue achieving growth will depend
upon growth in sales to existing customers for their current and future product
generations, successful marketing to new customers, and future geographic
expansion. Customer contracts can be canceled and volume levels can be changed
or delayed. The timely replacement of delayed, canceled or reduced orders with
new business cannot be assured. In addition, we cannot assure that any of
Solectron's current customers will continue to utilize Solectron's services.
Because of these factors, we cannot assure that Solectron's historical revenue
growth rate will continue. See "Trends and Uncertainties" for a discussion of
certain factors affecting the management of
22
growth, geographic expansion, and potential fluctuations in sales and results of
operations.
Gross Profit
The gross margin percentage decreased to 8.4% and 9.2%, respectively, for the
three- and nine-month periods of fiscal 2000 compared with 9.9% and 9.7%,
respectively, for the same periods of fiscal 1999. The reduction was primarily
attributable to manufacturing inefficiencies due to non-linearity of materials
receipts, a high level of business development activities and new site
integration support expenditures, as well as capacity ramp-up for future demand
growth.
For our worldwide manufacturing operations, we anticipate that a larger
percentage of our sales may be derived from systems-build projects which
generally yield lower profit margins than PCB assembly. For our technology
solutions business, we expect that a majority of our sales from technology
solutions may continue to be derived from turnkey projects which typically yield
lower profit margins than the consignment projects. In addition, factors
affecting technology solutions' profit margins include the mix between sales of
specialty memory modules, standard memory modules, communication card products
and embedded computer modules, as well as changes in average memory densities
used in memory products. Currently, a significant majority of net sales are
derived from the sales of standard memory modules which typically have lower
profit margins than its specialty memory modules.
In the foreseeable future, Solectron's overall gross margin is expected to
depend primarily on product mix, production efficiencies, utilization of
manufacturing capacity, start-up and integration costs of new and acquired
businesses, percentage of sales derived from systems-build and turnkey projects,
pricing within the electronics industry, component costs and delivery linearity,
and the cost structure at individual sites. Over time, gross margins at the
individual sites and for Solectron as a whole may continue to fluctuate.
Increases in the systems-build business or turnkey projects, additional costs
associated with new projects, and price erosion within the electronics industry
could harm our gross margin.
In addition, we have experienced component shortages. While the component
availability fluctuates from time to time and is still subject to lead time and
other constraints, this could possibly limit our profit margin growth and might
have a negative impact on our sales projections for the foreseeable future.
Because of these factors and others discussed under "Trends and Uncertainties"
below, we cannot assure that Solectron's gross margin will not fluctuate or
decrease in future periods.
Selling, General and Administrative Expenses
In absolute dollars, selling, general and administrative (SG&A) expenses
increased 18.5% and 20.0%, respectively, for the three- and nine-month periods
of fiscal 2000 over the same periods of fiscal 1999. As a percentage of net
sales, SG&A expenses were 3.0% and 3.3%, respectively, for the three- and
nine-month periods in the fiscal 2000, and 3.8% for the comparable periods in
fiscal 1999. The increase in absolute dollars for the fiscal 2000 periods
primarily resulted from increased human resources and information systems costs
to support sales growth and increased costs of acquisition related activities.
The decline as a percentage of net sales for the fiscal 2000 periods reflects
our on-going effort to manage operating expenses relative to sales growth and
gross margin levels. We anticipate SG&A expenses will increase in terms of
absolute dollars in the future, and may possibly increase as a percentage of
revenue, as we continue to invest in our infrastructure such as marketing,
sales, supply-base management as well as continuing investment in information
systems to support the increased size and complexity of our business.
23
Research and Development Expenses
With the exception of our technology solutions operations, Solectron's research
and development (R&D) activities have been focused primarily on the development
of prototype and engineering design capabilities, fine pitch interconnecting
technologies (which include ball-grid array, tape-automated bonding, multichip
modules, chip-on-flex, chip-on-board and flip chip), high-reliability
environmental stress test technology and the implementation of environmentally
friendly assembly processes such as VOC-free and no-clean. Technology solutions'
R&D efforts are concentrated on new product development and improvement of
product designs through improvements in functionality and the use of
microprocessors in embedded applications.
As a percentage of net sales, R&D expenses were 0.4% and 0.5%, respectively, for
the three- and nine month periods in fiscal 2000 and 0.5% for the comparable
periods of fiscal 1999. In absolute dollars, R&D expenses were $15.7 million and
$44.7 million, respectively, in the third quarter and first nine months of
fiscal 2000 compared to $11.8 million and $32.5 million in the same periods of
fiscal 1999. The increase in R&D expenses in the fiscal 2000 periods compared
to fiscal 1999 periods was primarily due to increased R&D effort at technology
solutions and new R&D projects initiated at various sites. We expect that R&D
expenses will increase in absolute dollars in the future and may increase as a
percentage of net sales as SMART and Force continue to invest in their R&D
efforts and additional R&D projects are undertaken at certain sites.
Acquisition and Restructuring Costs
For the three-month period of fiscal 2000, acquisition costs of $5.2 million
were recorded in connection with the acquisition of AMERICOM. These costs
included direct transaction fees, as well as legal fees, accounting fees,
registration fees and other incidentals. Restructuring costs of $1.8 million
related to re-alignment of the operations in Atlanta, Georgia. Such
restructuring costs consisted of severance costs, long-term assets written off
and other incidental costs.
For the nine-month period of fiscal 2000, acquisition costs of $25.5 million
included $20.3 million recorded in the second quarter of fiscal 1999 which
related to the merger of SMART consisting of investment banker fees, legal fees,
accounting fees, registration fees and other incidentals. Total restructuring
costs of $6.5 million comprised of $4.7 million which was recorded in the second
quarter of fiscal 2000 associated with the consolidation of certain facilities
as a result of the mergers with SMART and Sequel, Inc. These restructuring
transaction costs of $4.7 million included lease exit costs of approximately
$2.4 million, fixed asset write-offs and other incidental costs of approximately
$1.4 million, as well as severance costs of approximately $0.9 million.
As of May 31, 2000, liabilities related to restructuring activities, totaling
approximately $3.6 million, are expected to be paid out by the end of the
calendar year 2000.
Net Interest Income (Expense)
Net interest income was $8.5 million for the third quarter of fiscal 2000
compared to net interest expense of $0.4 million in the same period of fiscal
1999. For the first nine months of fiscal 2000, net interest income was $29.7
million compared to $2.6 million of net interest expense for the comparable
period of fiscal 1999. The net interest income in the fiscal 2000 periods
primarily resulted from interest income earned on undeployed cash and
investments from the proceeds of the 2.75% zero-coupon convertible senior notes
which were issued in May 2000, offset in part by interest expense on the 4% and
2.75 yield zero-coupon convertible senior notes as well as on the 7 3/8% senior
notes. In the first nine-month period of fiscal 2000, we capitalized
approximately $0.9 million of interest expense related to the costs
24
of computer software developed for internal use. We expect to utilize more of
the undeployed cash during fiscal 2000 in order to fund anticipated future
growth. See "Trends and Uncertainties" for factors relating to management growth
and potential fluctuations in operating results.
Income Taxes
For the nine-month period of fiscal 2000, income taxes increased to $158.3
million from $115.0 million in the fiscal 1999 period. The increase was
primarily due to increased income before income taxes. In general, the effective
income tax rate is largely a function of the balance between income from
domestic and international operations. Solectron's international operations,
taken as a whole, have been taxed at a lower rate than those in the United
States, primarily due to the tax holiday granted to Solectron's sites in
Malaysia. The Malaysian tax holiday is effective through January 31, 2002,
subject to some conditions, including certain levels of research and development
expenditures. Solectron has also been granted various tax holidays in China,
which are effective for various terms and are subject to some conditions.
Cumulative Effect of Change in Accounting Principle
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities." This SOP requires companies to expense all costs incurred in
connection with start-up activities. The Company recorded a cumulative effect of
change in accounting principle of $3.5 million, net of $1.6 million tax benefit
in the first quarter of fiscal 2000.
Liquidity and Capital Resources
Net working capital was $5.7 billion at May 31, 2000 compared to $3.2 billion at
the end of fiscal 1999. During the first nine months of fiscal 2000, cash, cash
equivalents and short-term investments increased to $3.4 billion from $1.9
billion that reflects the undeployed cash and investments from the proceeds of
2.75% yield zero-coupon convertible senior debt issued in May 2000.
Additionally, we used $297.7 million for acquisitions of additional
manufacturing assets from Trimble in California, acquisition funding of
manufacturing assets at IBM's Netfinity server operations in Greenock, Scotland;
Erisson in France and Sweden; and Zhone, California; as well as the business
acquisitions of NULOGIX in Canada and Compaq's embedded and real-time product
lines in Fremont, California and Scotland, and Alcatel Puerto Rico during the
first nine months of fiscal 2000.
As we continue to grow, it is expected that we will require greater amounts of
working capital to support our operations. We believe that our current level of
working capital, together with cash generated from operations and our available
credit facilities, will provide adequate working capital for our operations for
the foreseeable future. However, we may need to raise additional funds to
finance our rapid expansion, including establishing new locations or financing
additional acquisitions. We cannot assure that such funds, if needed, will be
available on terms acceptable to us or at all.
Inventory levels fluctuate directly with the volume of Solectron's
manufacturing. Changes or significant fluctuations in product market demands can
cause fluctuations in inventory levels that may result in changes of inventory
turns and liquidity. The increase in inventory levels at May 31, 2000 from
fiscal year end 1999 was primarily due to ramp-up programs, incomplete kits on
hand awaiting short components, and purchased inventory through asset
acquistions.
In the first nine months of fiscal 2000, Solectron invested $318.6 million in
capital expenditures. A large portion of these expenditures related to the
purchase of new equipment, primarily surface mount assembly and test equipment,
to meet
25
current and expected production levels, as well as to replace or upgrade older
equipment which was retired or sold. Expenditures were also made for the
construction of buildings for the sites in Mexico, Romania, North Carolina and
Massachusetts. We expect total capital expenditures in fiscal 2000 to be
approximately $450 million.
In addition to cash and cash equivalents of $2.6 billion and short-term
investments of $0.8 billion as of May 31, 2000, Solectron has available a $100
million unsecured multicurrency revolving credit facility that expires in April
2002. This credit facility is subject to certain financial covenants. We also
have approximately $101 million in unused foreign credit facilities of which $24
million is committed credit line.
TRENDS AND UNCERTAINTIES
A MAJORITY OF OUR NET SALES COMES FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE
ANY OF THESE CUSTOMERS, OUR NET SALES COULD DECLINE SIGNIFICANTLY.
A majority of our annual net sales comes from a small number of our customers.
Our ten largest customers accounted for approximately 72% of net sales in the
first nine months of fiscal 2000 and approximately 75%, 68%, and 63% of net
sales in fiscal 1999, 1998 and 1997, respectively. Since we are dependent upon
continued net sales from our ten largest customers, any material delay,
cancellation or reduction of orders from these or other major customers could
cause our net sales to decline significantly. Some of these customers
individually account for more than ten percent of our annual net sales. We
cannot guarantee that we will be able to retain any of our ten largest customers
or any other accounts. In addition, our customers may materially reduce the
level of services ordered from us at any time. This could cause a significant
decline in our net sales and we may not be able to reduce the accompanying
expenses at the same time. Moreover, our business, financial condition and
results of operations will continue to depend in significant part on our ability
to obtain orders from new customers, as well as on the financial condition and
success of our customers. Therefore, any adverse factors affecting any of our
customers or their customers could have a material adverse effect on our
business, financial condition and results of operations.
OUR LONG-TERM CONTRACTS DO NOT INCLUDE MINIMUM PURCHASE REQUIREMENTS.
Although we have long-term contracts with a few of our top ten customers,
including Ericsson and IBM under which these customers are obligated to obtain
services from us, they are not obligated to purchase any minimum amount of
services. As a result, we cannot guarantee that we will receive any net sales
from these contracts. In addition, these customers with whom we have long-term
contracts may materially reduce the level of services ordered at any time. This
could cause a significant decline in our net sales, and we may not be able to
reduce our accompanying expenses at the same time.
POSSIBLE FLUCTUATION OF OPERATING RESULTS FROM QUARTER TO QUARTER COULD AFFECT
THE MARKET PRICE OF OUR COMMON STOCK.
Our quarterly earnings may fluctuate in the future due to a number of factors
including the following:
- Differences in the profitability of the types of manufacturing services
we provide. For example, high velocity and low complexity PCB and systems
assembly services have lower gross margins than low volume/complex PCB
and systems assembly services;
- Our ability to maximize the hours of use of our equipment and facilities
is dependent on the duration of the production run time for each job and
customer;
26
- The amount of automation that we can use in the manufacturing process for
cost reduction varies, depending upon the complexity of the product being
made;
- Our ability to optimize the ordering of inventory as to timing and amount
to avoid holding inventory in excess of immediate production needs;
- Fluctuations in demand for our services or the products being
manufactured;
- Timing of expenditures in anticipation of increased sales;
- Cyclicality in our target markets; and
- Expenses associated with acquisitions.
Therefore, our operating results in the future could be below the expectations
of securities analysts and investors. If this occurs, the market price of our
common stock could be harmed.
WE ARE DEPENDENT UPON THE ELECTRONICS INDUSTRY WHICH CONTINUALLY PRODUCES
TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO
CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST EFFECTIVE BASIS WOULD HARM OUR
BUSINESS.
A majority of our net sales is to companies in the electronics industry, which
is subject to rapid technological change and product obsolescence. If our
customers are unable to create products that keep pace with the changing
technological environment, our customers' products could become obsolete and the
demand for our services could decline significantly. If we are unable to offer
technologically advanced, cost effective, quick response manufacturing services
to customers, demand for our services will also decline. In addition, a
substantial portion of our net sales is derived from our ability to offer
complete service solutions for our customers. For example, if we fail to
maintain high-quality design and engineering services, our net sales would
significantly decline.
For our technology solutions business, we have experienced, and may in the
future experience, delays from time to time in the development and introduction
of new products. Moreover, we cannot assure that we will be successful in
selecting, developing, manufacturing and marketing new products or enhancements.
We cannot assure that defects or errors will not be found in our products after
commencement of commercial shipments, which could result in the delay in market
acceptance of such products. The inability to introduce new products or
enhancements could harm our business, financial condition and results of
operations.
WE ARE DEPENDENT ON LIMITED OR SOLE SOURCE OF SUPPLIERS FOR CRITICAL COMPONENTS.
THE INABILITY TO OBTAIN SUFFICIENT COMPONENTS AS REQUIRED WOULD CAUSE SALES
REDUCTIONS.
We are dependent on certain suppliers, including limited and sole source
suppliers, to provide key components used in our products. We have experienced
and may continue to experience delays in component deliveries which could cause
delays in product shipments and require the redesign of certain products. Also
for our technology solutions business, we are dependent upon certain limited or
sole source suppliers for critical components used for our memory module,
communications card and embedded computer products. The electronics industry has
experienced in the past, and may experience in the future, shortages in
semiconductor devices, including DRAM, SRAM, Flash memory, tantalum capacitors
and other commodities that may be caused by such conditions as overall market
demand surges or supplier production capacity constraints. Except for certain
commodity parts, we generally have no written
27
agreements with our suppliers. We cannot assure that we will receive adequate
component supplies on a timely basis in the future. The inability to continue to
obtain sufficient components as required, or to develop alternative sources if
required, could cause delays, disruptions or reductions in product shipments or
require product redesigns which could damage relationships with current or
prospective customers, thereby causing sales reductions.
WE POTENTIALLY BEAR THE RISK OF PRICE INCREASES ASSOCIATED WITH POTENTIAL
SHORTAGES IN THE AVAILABILITY OF ELECTRONICS COMPONENTS.
At various times, there have been shortages of components in the electronics
industry. One of the services that we perform for many customers is purchasing
electronics components used in the manufacturing of the customers' products. As
a result of this service, we potentially bear the risk of price increases for
these components because we are unable to purchase components at the pricing
level anticipated to support the margins assumed in our agreements with our
customers.
OUR NET SALES COULD DECLINE IF OUR COMPETITORS PROVIDE COMPARABLE MANUFACTURING
SERVICES AND IMPROVED PRODUCTS AT A LOWER COST.
We compete with different contract manufacturers, depending on the type of
service we provide or the geographic locale of our operations. The memory
module, communications card and embedded computer subsystem industries are also
intensely competitive. These competitors may have greater manufacturing,
financial, R&D and/or marketing resources than we have. In addition, we may not
be able to offer prices as low as some of our competitors because those
competitors may have lower cost structures as a result of their geographic
location or the services they provide. Our inability to provide comparable or
better manufacturing services at a lower cost than our competitors could cause
our net sales to decline. We also expect our competitors to continue to improve
the performance of their current products or services, to reduce their current
products or service sales prices and to introduce new products or services that
may offer greater performance and improved pricing. Any of these could cause a
decline in sales, loss of market acceptance of our products or services, or
profit margin compression.
WE ARE DEPENDENT ON THE MEMORY MODULE PRODUCT MARKET.
A substantial majority of our technology solutions business' net sales is
derived from memory modular products. The market for these products is
characterized by frequent transitions in which products rapidly incorporate new
features and performance standards. A failure to develop products with required
feature sets or performance standards or a delay as short as a few months in
bringing a new product to market could reduce our net sales which may have a
material adverse effect on our business, financial condition and results of
operations. In addition, the market for semiconductor memory devices has been
cyclical. The industry has experienced significant economic downturns at various
times, characterized by diminished product demand, accelerated erosion of
average selling prices and excess production. In the past, there were
significant declines in the prices for DRAM, SRAM and Flash. Such occurrences
will reduce our profit.
WE ARE DEPENDENT ON THE CONTINUING TREND OF OUTSOURCING BY OEM'S.
A substantial factor in our revenue growth is attributable to the transfer of
manufacturing and supply base management activities from our OEM customers.
Future growth is partially dependent on new outsourcing opportunities. To the
extent that these opportunities are not available, our future growth would be
unfavorably impacted. These outsourcing opportunities may include the transfer
of assets such as facilities, equipment and inventory.
28
IF WE ARE UNABLE TO MANAGE OUR RAPID GROWTH AND ASSIMILATE NEW OPERATIONS IN A
COST EFFECTIVE MANNER, OUR PROFITABILITY COULD DECLINE.
We have experienced rapid growth over many years. Our historical growth may not
continue. In recent years, we have established operations in different places
throughout the world. For example, in fiscal 1998, we opened offices in Taipei,
Taiwan; Tel Aviv, Israel; Norrkoping and Stockholm, Sweden; and commenced
manufacturing operations in Guadalajara, Mexico; Suzhou, China; and Timisoara,
Romania. Also in fiscal 1998, we acquired foreign facilities in Sao Paulo,
Brazil and Dublin, Ireland. Furthermore, through acquisitions in fiscal 1998 and
1999, we acquired facilities in Columbia, South Carolina; Memphis, Tennessee;
and San Jose, California and enhanced our capabilities in Charlotte, North
Carolina; Austin, Texas; and Milpitas, California.
During October and November of 1999, we entered into an agreement to acquire the
assets of IBM's Netfinity server operations in Greenock, Scotland, and acquired
IBM Canada's NULOGIX Technical Services, Inc. subsidiary in Vaughan, Canada, in
its entirety. Also in October 1999, we signed a definitive agreement with Acer,
Inc. (Acer), a core unit of the Acer Group, the world's third largest PC
manufacturer, to form a strategic alliance to provide global design,
manufacturing and service solutions for OEM branded personal computers, servers
and workstations. On November 30, 1999, we completed the acquisition of SMART
Modular Technologies, Inc. which was accounted for as a pooling of interests. In
addition, we are benefiting from the business purchase transaction of Compaq
Computer Corporation's embedded and real time product business in Fremont,
California and Scotland by SMART in August 1999.
On March 1, 2000, we acquired the complex systems manufacturing assets of
Ericsson's telecommunications infrastructure equipment operations in
Longuenesse, France, and Ostersund, Sweden. On March 31, 2000, we completed the
acquisition of Alcatel's manufacturing business in Aguadilla, Puerto Rico. On
April 6, 2000, we announced the completion of the acquisition of the
manufacturing assets of Premisys Communications, Inc., a wholly owned subsidiary
of Zhone Technologies, Inc.
On April 28, 2000 we acquired Americom Wireless Services, Inc., a privately held
corporation which specializes in wireless handset repair and refurbishment and
outsourced technical customer support services, in its entirety. On May 31, 2000
we signed a definitive agreement to acquire Blue Gum Group, an Electronic
Manufacturing Services provider in Australia and New Zealand.
On June 5, 2000, we acquired the assets at four Nortel manufacturing facilities,
located in Calgary, Canada; North Carolina; Monterey, Mexico; and Cwmcarn,
Wales. On June 30, 2000, the Company completed the purchase of manufacturing
assets at two Nortel Networks manufacturing and repair facilities located in
Pont de Buis and Douarnenez, France, and Monkstown, Northern Ireland. Solectron
expects to complete an additional asset acquisition at Nortel Networks
manufacturing and repair operation in Turkey by the end of August 2000 which is
subject to various conditions of closing. Under the terms of the agreements and
the proposed agreements, assuming certain conditions are met, Solectron will pay
approximately $900 million to assume the assets contemplated in these
agreements. The companies also entered into a multi-year supply agreement,
valued in excess of $10 billion in sales, with the option to renew.
Also on June 30, 2000, we acquired IBM manufacturing operations in Hortolandia,
Sao Paulo state, Brazil.
Since we have been significantly expanding our operations, our growth has
resulted in a significant increase in responsibility for existing management
which has placed, and may continue to place, a heavy strain on our personnel and
management, manufacturing and other resources. Our ability to manage the
expansion to date, as well as any future expansion, will require progressive
increases in manufacturing
29
capacity, as well as enhancements or upgrades of accounting and other internal
management systems and the implementation of a variety of procedures and
controls. We cannot assure that significant problems in these areas will not
occur. Any failure to enhance or expand these systems and implement such
procedures and controls in an efficient manner and at a pace consistent with our
business activities could harm our financial condition and results of
operations. Also, in order to achieve anticipated revenue and other financial
performance targets, we will continue to be required to manage our assets and
operations efficiently. In addition, should we continue to expand
geographically, we may experience certain inefficiencies from the management of
geographically dispersed facilities.
As we manage and continue to expand new operations, we may incur substantial
infrastructure and working capital costs. If we do not achieve sufficient growth
to offset increased expenses associated with rapid expansion, our profitability
will decline.
WE NEED TO MANAGE INTEGRATION OF OUR ACQUISITIONS TO MAINTAIN PROFITABILITY.
In fiscal 1998 and 1999, we completed acquisitions of manufacturing assets and
facilities from Ericsson, NCR, IBM, Mitsubishi and Trimble Navigation Limited
and acquired all of the capital stock of Sequel, Inc. During the first nine
months of fiscal 2000, we completed the asset acquisition of IBM's Netfinity
server operations in Greenock, Scotland, acquired IBM Canada's NULOGIX Technical
Services, Inc. subsidiary in Vaughan, Canada, in its entirety, and completed the
acquisition of SMART Modular Technologies, Inc. which was accounted for as a
pooling of interests. On March 1, 2000, we acquired the complex systems
manufacturing assets of Ericsson's telecommunications infrastructure equipment
operations in Longuenesse, France, and Ostersund, Sweden. On March 31, 2000, we
completed the acquisition of Alcatel's manufacturing business in Aguadilla,
Puerto Rico. On April 6, 2000, we announced the completion of acquisition for
the manufacturing assets of Premisys Communications, Inc., a wholly owned
subsidiary of Zhone Technologies, Inc. On April 28, 2000 we acquired Americom
Wireless Services, Inc., a privately held corporation which specializes in
wireless handset repair and refurbishment and outsourced technical customer
support services, in its entirety. On May 31, 2000 we signed a definitive
agreement to acquire Blue Gum Group, an Electronic Manufacturing Services
provider in Australia and New Zealand. On June 5, 2000, we acquired the assets
at four Nortel manufacturing facilities, located in Calgary, Canada; North
Carolina; Monterey, Mexico; and Cwmcarn, Wales. On June 30, 2000, we completed
the purchase of manufacturing assets at two Nortel Networks manufacturing and
repair facilities located in Pont de Buis and Douarnenez, France, and Monkstown,
Northern Ireland. Also on June 30, 2000, we acquired IBM manufacturing
operations in Hortolandia, Sao Paulo state, Brazil.
We also continue to evaluate acquisition opportunities and may pursue additional
acquisitions over time. These acquisitions involve risks, including:
- Integration and management of the operations;
- Retention of key personnel;
- Integration of purchasing operations and information systems;
- Management of an increasingly larger and more geographically disparate
business; and
- Diversion of management's attention from other ongoing business concerns.
Our profitability will suffer if we are unable to successfully integrate and
manage recent acquisitions and pending acquisitions, as well as any future
acquisitions that we might pursue, or if we do not achieve sufficient revenue to
offset the increased expenses associated with these acquisitions.
30
OUR NON-U.S. LOCATIONS ARE A SIGNIFICANT AND GROWING PORTION OF OUR NET SALES;
WE ARE INCREASINGLY EXPOSED TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY.
In the first nine months of fiscal 2000, approximately 42% of net sales came
from sites outside the United States, while approximately 36% of net sales came
from sites outside the United States in fiscal 1999. As a result of our foreign
sales and facilities, our operations are subject to a variety of risks that are
unique to international operations, including the following:
- Adverse movement of foreign currencies against the U.S. dollar in which
our results are reported;
- Import and export duties, and value added taxes;
- Import and export regulation changes that could erode our profit margins
or restrict exports;
- Potential restrictions on the transfer of funds;
- Inflexible employee contracts in the event of business downturns; and
- The burden and cost of compliance with foreign laws.
In addition, we have operations in several locations in emerging or developing
economies that have a potential for higher risk. The risks associated with these
economies include but are not limited to currency volatility, and other economic
or political risks. In the future, these factors may harm our results of
operations. Solectron locations in emerging or developing economies include
Mexico, Brazil, China, Malaysia and Romania. As of May 31, 2000, we recorded
$118.1 million in cumulative foreign exchange translation losses on our balance
sheet which was primarily due to the devaluation of the Brazilian real. While,
to date, these factors have not had a significant adverse impact on our results
of operations, we cannot assure that there will not be such an impact.
Furthermore, while we may adopt measures to reduce the impact of losses
resulting from volatile currencies and other risks of doing business abroad, we
cannot assure that such measures will be adequate.
The Malaysian government adopted currency exchange controls, including controls
on its currency, the ringgit, held outside Malaysia, and established a fixed
exchange rate for the ringgit against the U.S. dollar. The fixed exchange rate
provides a stable rate environment when applied to local expenses denominated in
ringgit. The long-term impact of such controls is not predictable due to dynamic
economic conditions that also affect or are affected by other regional or global
economies.
We have been granted a tax holiday which is effective through January 31, 2002,
subject to some conditions, for our Malaysian sites. We have also been granted
various tax holidays in China. These tax holidays are effective for various
terms and are subject to some conditions. It is possible that the current tax
holidays will be terminated or modified or that future tax holidays that we may
seek will not be granted. If the current tax holidays are terminated or
modified, or if additional tax holidays are not granted in the future, our
effective income tax rate would likely increase.
WE ARE EXPOSED TO FLUCTUATIONS IN THE EXCHANGE RATES OF FOREIGN CURRENCY.
We do not use derivative financial instruments for speculative purposes. Our
policy is to hedge our foreign currency denominated transactions in a manner
that substantially offsets the effects of changes in foreign currency exchange
rates. Presently, we use foreign currency borrowings and foreign currency
forward contracts to hedge only those currency exposures associated with certain
assets and
31
liabilities denominated in non functional currencies. Corresponding gains and
losses on the underlying transaction generally offset the gains and losses on
these foreign currency hedges.
As of May 31, 2000, all of the foreign currency hedging contracts were scheduled
to mature in less than three months and there were no material deferred gains or
losses. In addition, our international operations in some instances act as a
natural hedge because both operating expenses and a portion of sales are
denominated in local currency. In these instances, including our current
experience involving the devaluation of the Brazilian real, although an
unfavorable change in the exchange rate of a foreign currency against the U.S.
dollar will result in lower sales when translated to U.S. dollars, operating
expenses will also be lower in these circumstances.
We have currency exposures arising from both sales and purchases denominated in
currencies other than the functional currency of our sites. Fluctuations in the
rate of exchange between the currency of the exposure and the functional
currency of our site could seriously harm our business, operating results and
financial condition. For example, if there is an increase in the rate at which a
foreign currency is exchanged for U.S. dollars, it will require more of the
foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases, and if we price our products and services in the
foreign currency, we will receive less in U.S. dollars than we did before the
rate increase went into effect. If we price our products and services in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our prices being
uncompetitive in markets where business is transacted in the local currency.
WE ARE EXPOSED TO FLUCTUATIONS IN INTEREST RATES.
The primary objective of our investment activities is to preserve principal,
while at the same time, maximize yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including both government and
corporate obligations, certificates of deposit and money market funds. As of May
31, 2000, approximately 85% of our total portfolio was scheduled to mature in
less than six months. In addition, our investments are diversified and of
relatively short maturity. A hypothetical 10% increase in interest rates would
not have a material effect on our investment portfolios.
We have entered into an interest rate swap transaction under which we pay a
fixed rate of interest hedging against the variable interest rates charged by
the lessor for the facility lease at Milpitas, California. The interest rate
swap expires in the year 2002, which coincides with the maturity date of the
lease term. As we intend to hold the interest rate swap until the maturity date,
we are not subject to market risk. In fact, such interest rate swap has fixed
the interest rate for the facility lease, thus reducing interest rate risk.
Our long-term debt instruments are subject to fixed interest rates. In addition,
the amount of principal to be repaid at maturity is also fixed. In the case of
the convertible notes, such notes are based on fixed conversion ratios into
common stock. Therefore, we are not exposed to variable interest rates related
to our long-term debt instruments.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS; AND WE COULD BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES.
Our ability to effectively compete may be affected by our ability to protect our
proprietary information. We hold a number of patents and other license rights.
These patent and license rights may not provide meaningful protection for our
manufacturing processes and equipment innovations. On June 23, 1999, we were
served,
32
along with 87 other companies including SMART, as a defendant in a lawsuit
brought by the Lemelson Medical, Education & Research Foundation. The lawsuit
alleges that we have infringed certain of the plaintiff's patents relating to
machine vision and bar code technology. We believe we have meritorious defenses
to these allegations and do not expect that this litigation will result in a
material impact on our financial condition or results of operations. In the
semiconductor, computer, telecommunications and networking industries, companies
receive notices from time to time alleging infringement of patents, copyrights,
or other intellectual property rights or others. We are currently being sued by
a party who alleges that certain of our technology solutions business'
communications card products have infringed and continue to infringe upon the
party's intellectual property rights. Similarly, in January of this year SMART
filed a lawsuit seeking to have declared invalid, and/or not infringed, three
patents purportedly applicable to industry standard memory products, including
those manufactured by SMART and the other manufacturers of these industry
standard memory products. The owner of these patents brought a cross-complaint
alleging patent infringement against SMART, and has also brought suit against
several other memory product manufacturers alleging infringement of the three
patents. We believe that SMART's memory products do not infringe any valid
claims of any of the three patents at issue. Moreover, we have been and may from
time to time continue to be notified of claims that we may be infringing
patents, copyrights or other intellectual property rights owned by other third
parties. The current litigation or any other litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, financial condition and results of operations. In the
future, third parties may assert infringement claims against us or our
customers. In the event of an infringement claim, we may be required to spend a
significant amount of money to develop a non-infringing alternative or to obtain
licenses. We may not be successful in developing such an alternative or
obtaining a license on reasonable terms, if at all. In addition, any such
litigation could be lengthy and costly and could harm our financial condition.
FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS.
As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during our manufacturing
process. Although we have never sustained any significant loss as a result of
non compliance with such regulations, any failure by us to comply with
environmental laws and regulations could result in liabilities or the suspension
of production. In addition, these laws and regulations could restrict our
ability to expand our facilities or require us to acquire costly equipment or
incur other significant costs to comply with regulations.
OUR STOCK PRICE MAY BE VOLATILE DUE TO FACTORS OUTSIDE OF OUR CONTROL.
Our stock price could fluctuate due to the following factors, among others:
- Announcements of operating results and business conditions by our
customers;
- Announcements by our competitors relating to new customers or
technological innovation or new services;
- Economic developments in the electronics industry as a whole;
- Political and economic developments in countries in which we have
operations; and
- General market conditions.
33
FAILURE TO RETAIN KEY PERSONNEL AND SKILLED ASSOCIATES COULD HURT OUR
OPERATIONS.
Our continued success depends to a large extent upon the efforts and abilities
of key managerial and technical associates. Losing the services of key personnel
could harm us. Our business also depends upon our ability to continue to attract
and retain senior managers and skilled associates. Failure to do so could harm
our operations.
OUR ANTI-TAKEOVER DEFENSE PROVISIONS MAY DETER POTENTIAL ACQUIRORS AND MAY
DEPRESS OUR STOCK PRICE.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of Solectron.
These provisions allow us to issue preferred stock with rights senior to those
of our common stock and impose various procedural and other requirements that
could make it more difficult for our stockholders to effect certain corporate
actions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations for factors related to fluctuations in the exchange rates of foreign
currency and fluctuations in interest rates under "Trend and Uncertainties."
34
SOLECTRON CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 1: Legal Proceedings
SMART Modular Technologies, Inc. (SMART), a wholly owned subsidiary of
Solectron Corporation, and certain of SMART's ex-officers and ex-directors
have been named as defendants in six securities class action lawsuits filed
in the United States District Court for the Northern District of
California, Boren v. SMART Modular Technologies, Inc., et al., No. C 98
20692 JW (PVT) (filed July 1, 1998), Woszczak v. SMART Modular
Technologies, Inc., et al., No. C 98 2617 JL (filed July 2, 1998), Bisson
v. SMART Modular Technologies, Inc., et al., No. C 98 20714 JF (filed July
8, 1998), D'Amato v. SMART Modular Technologies, Inc., et al., No. C 98
2804 PJH (filed July 16, 1998), Cha v. SMART Modular Technologies, Inc., et
al., No. C 98 2833 BZ (filed July 17, 1998) and Chang v. SMART Modular
Technologies, Inc., et al., No. C 98 3151 SI (filed August 13, 1998)
(collectively, the "Federal Actions"). The plaintiffs in the Federal
Actions allege that defendants made material misrepresentations and
omissions during the period from July 1, 1997 through May 21, 1998 in
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. The Federal Actions were consolidated on
October 9, 1998, and a consolidated complaint was filed on November 30,
1998 (the "Federal Complaint"). On November 2, 1999, defendants filed a
motion to dismiss the Federal Complaint. This motion is pending.
On October 22, 1998, a putative securities class action lawsuit, captioned
Reagan v. SMART Modular Technologies, Inc., et al., Case No. H204162-5 (the
"State Complaint"), was filed against SMART and certain of ex-officers and
ex-directors in the Superior Court of the State of California, County of
Alameda. The State Complaint alleges violations of Sections 25400 and 25500
of the California Corporations Code and seeks unspecified damages on behalf
of a purported class of purchasers of SMART common stock during the period
from July 1, 1997 through May 21, 1998. The factual allegations of the
State Complaint are nearly identical to the factual allegations contained
within the Federal Complaint. On February 22, 1999, the Superior Court
granted SMART's motion to stay the state action pending resolution of the
federal action.
On June 23, 1999, Solectron was served, along with 87 other companies
including SMART, as a defendant in a lawsuit brought by the Lemelson
Medical, Education & Research Foundation. The lawsuit alleges that
Solectron and SMART have infringed certain of the plaintiff's patents
relating to machine vision and bar-code technology.
The Company believes that all claims related to the state and federal
securities actions are without merit and intends to defend vigorously
against these actions. The Company also believes it has meritorious
defenses to the patent infringement allegations. The Company does not
expect that all these allegations will result in a material impact on its
financial position or results of operations.
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
35
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule - Nine Months Ended May 26, 2000.
(b) Reports on Form 8-K
On April 4, 2000, Solectron filed a Current Report on Form 8-K in
regard to signing a definitive agreement to acquire Nortel Networks'
New Product Introduction (NPI), printed circuit board (PCB) and
telephone set ("telset") assembly assets in North America and Asia
(the "Assets").
On April 11, 2000, Solectron filed a Current Report on Form 8-K to
include the audited consolidated financial statements of Solectron
and subsidiaries as of August 31, 1999 and 1998 and for each of the
years in the three-year period ended August 31, 1999 giving
retroactive effect to the acquisition of SMART which was accounted
for as a pooling of interests.
On May 16, 2000, Solectron filed a Current Report on Form 8-K
regarding to the completion of its sale of $3,500,000,000 aggregate
principal amount at maturity of Liquid Yield Option(TM) Notes (Zero
Coupon-Senior) due 2020 under an effective registration statement
filed with the Securities and Exchange Commission.
36
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 10, 2000 By: /s/ Susan Wang
----------------------
Susan S. Wang
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
37
EXHIBIT INDEX
Exhibit Number Document
- -------------- --------
27.1 Financial Data Schedule - Nine Months Ended May 26, 2000