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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q  (MARK ONE) [x]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 28, 2004 OR [   ]     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  Delaware
    
    94-2447045(State or Other Jurisdiction of
    
    (I.R.S. Employer IdentificationIncorporation or Organization)
    
    Number)
 847 Gibraltar Drive
Milpitas, California 95035
(Address of principal executive offices including zip code) (408) 957-8500
(Registrants telephone number, including area code) 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 reports), and (2) has been subject to such
filing requirements for the past 90 days. YES
[X] NO [   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) 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 25, 2004, 961,668,009 shares of Common Stock of the Registrant
were outstanding (including approximately 27 million shares of Solectron Global
Services Canada, Inc., which are exchangeable on a one-to-one basis for the
Registrants common stock).




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TABLE OF CONTENTS SOLECTRON CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets at May 31, 2004 and August 31, 2003Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2004 and 2003Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended May 31, 2004 and 2003Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2004 and 2003Notes to Condensed Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 6. Exhibits and Reports on Form 8-KSignaturesEXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements SOLECTRON CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in millions)
 (unaudited)
 May 31
    
    August 312004
    
    2003ASSETSCurrent assets:Cash, cash equivalents and short-term investments *
    
    $
    1,212.1
    
    
    $
    1,515.0Accounts receivable, net
    
    
    1,616.4
    
    
    
    1,389.1Inventories
    
    
    1,577.2
    
    
    
    1,327.3Prepaid expenses and other current assets
    
    
    143.2
    
    
    
    270.3Current assets of discontinued operations
    
    
    138.6
    
    
    
    452.1Total current assets
    
    
    4,687.5
    
    
    
    4,953.8Property and equipment, net
    
    
    734.6
    
    
    
    781.9Goodwill
    
    
    134.6
    
    
    
    134.6Other assets
    
    
    357.3
    
    
    
    396.3Long-term assets of discontinued operations
    
    
    50.9
    
    
    
    262.9Total assets
    
    $
    5,964.9
    
    
    $
    6,529.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    25.5
    
    
    $
    973.8Accounts payable
    
    
    1,532.3
    
    
    
    1,266.6Accrued employee compensation
    
    
    156.7
    
    
    
    161.0Accrued expenses
    
    
    287.8
    
    
    
    334.9Other current liabilities
    
    
    213.0
    
    
    
    164.7Current liabilities of discontinued operations
    
    
    107.6
    
    
    
    333.9Total current liabilities
    
    
    2,322.9
    
    
    
    3,234.9Long-term debt
    
    
    1,227.5
    
    
    
    1,817.6Other long-term liabilities
    
    
    25.7
    
    
    
    32.4Long-term liabilities of discontinued operations
    
    
    6.1
    
    
    
    22.6Total liabilities
    
    $
    3,582.2
    
    
    $
    5,107.5Commitments and contingenciesStockholders equity:Common stock
    
    
    0.9
    
    
    
    0.8Additional paid-in capital
    
    
    7,763.3
    
    
    
    6,658.2Accumulated deficit
    
    
    (5,207.1
    )
    
    
    (5,040.6
    )Accumulated other comprehensive loss
    
    
    (174.4
    )
    
    
    (196.4
    )Total stockholders equity
    
    
    2,382.7
    
    
    
    1,422.0Total liabilities and stockholders equity
    
    $
    5,964.9
    
    
    $
    6,529.5
 * This caption includes $39.2 million and $62.0 million of restricted balances
as of May 31, 2004 and August 31, 2003, respectively. See accompanying notes to condensed consolidated financial statements. 3




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SOLECTRON CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in millions, except per share data)
 (unaudited)
 Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    3,039.9
    
    
    $
    2,357.3
    
    
    $
    8,624.1
    
    
    $
    7,385.0Cost of sales
    
    
    2,880.7
    
    
    
    2,258.1
    
    
    
    8,206.3
    
    
    
    7,060.4Gross profit
    
    
    159.2
    
    
    
    99.2
    
    
    
    417.8
    
    
    
    324.6Operating expenses:Selling, general and administrative
    
    
    103.9
    
    
    
    138.1
    
    
    
    327.8
    
    
    
    436.4Restructuring and impairment costs
    
    
    5.5
    
    
    
    1,981.2
    
    
    
    106.1
    
    
    
    2,121.6Operating income (loss)
    
    
    49.8
    
    
    
    (2,020.1
    )
    
    
    (16.1
    )
    
    
    (2,233.4
    )Interest income
    
    
    4.8
    
    
    
    6.8
    
    
    
    10.8
    
    
    
    21.6Interest expense
    
    
    (41.8
    )
    
    
    (51.4
    )
    
    
    (130.1
    )
    
    
    (160.4
    )Other income
(expense) - net
    
    
    (77.9
    )
    
    
    (5.4
    )
    
    
    (68.6
    )
    
    
    46.1Operating loss from continuing operations
before income taxes
    
    
    (65.1
    )
    
    
    (2,070.1
    )
    
    
    (204.0
    )
    
    
    (2,326.1
    )Income tax expense
    
    
    0.3
    
    
    
    615.8
    
    
    
    3.3
    
    
    
    531.0Loss from continuing operations
    
    $
    (65.4
    )
    
    $
    (2,685.9
    )
    
    $
    (207.3
    )
    
    $
    (2,857.1
    )Discontinued operations:Income (loss) from discontinued operations
    
    $
    92.8
    
    
    $
    (310.3
    )
    
    $
    50.8
    
    
    $
    (312.5
    )Income tax expense
    
    
    6.1
    
    
    
    105.0
    
    
    
    10.0
    
    
    
    113.3Income (loss) from discontinued operations
    
    
    86.7
    
    
    
    (415.3
    )
    
    
    40.8
    
    
    
    (425.8
    )Net income (loss)
    
    $
    21.3
    
    
    $
    (3,101.2
    )
    
    $
    (166.5
    )
    
    $
    (3,282.9
    )Basic and diluted net income (loss) per shareContinuing operations
    
    $
    (0.08
    )
    
    $
    (3.24
    )
    
    $
    (0.25
    )
    
    $
    (3.45
    )Discontinued operations
    
    
    0.10
    
    
    
    (0.50
    )
    
    
    0.05
    
    
    
    (0.52
    )Basic and diluted net income (loss) per share
    
    $
    0.02
    
    
    $
    (3.74
    )
    
    $
    (0.20
    )
    
    $
    (3.97
    )Shares used to compute basic and diluted net income (loss) per share
    
    
    868.3
    
    
    
    828.8
    
    
    
    845.8
    
    
    
    827.1
 See accompanying notes to condensed consolidated financial statements. 4




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SOLECTRON CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 (in millions)
 (unaudited)
 Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    21.3
    
    
    $
    (3,101.2
    )
    
    $
    (166.5
    )
    
    $
    (3,282.9
    )Other comprehensive
income (loss):Foreign currency
translation
adjustments
    
    
    (35.7
    )
    
    
    115.4
    
    
    
    13.4
    
    
    
    157.9Unrealized gain
(loss) on
investments
    
    
    0.8
    
    
    
    (8.5
    )
    
    
    8.6
    
    
    
    (8.4
    )Comprehensive loss
    
    $
    (13.6
    )
    
    $
    (2,994.3
    )
    
    $
    (144.5
    )
    
    $
    (3,133.4
    )
 Accumulated unrealized foreign currency translation losses were $173.3 million
at May 31, 2004 and $186.7 million at August 31, 2003. Foreign currency
translation adjustments consist of adjustments to consolidate subsidiaries that
use the local currency as their functional currency and transaction gains and
losses related to intercompany dollar-denominated debt that is not expected to
be repaid in the foreseeable future. Accumulated unrealized loss on investments
were $1.1 million at May 31, 2004 and $9.7 million at August 31, 2003. See accompanying notes to condensed consolidated financial statements. 5




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SOLECTRON CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in millions)
 (unaudited)
 Nine Months Ended May 312004
    
    2003Cash flows from operating activities of continuing operations:Loss from continuing operations
    
    $
    (207.3
    )
    
    $
    (2,857.1
    )Adjustments to reconcile net loss from continuing operations to net cash provided by
(used in) in operating activities of continuing operations:Depreciation and amortization
    
    
    174.1
    
    
    
    186.9Amortization of debt issuance costs and accretion of discount on notes
payable
    
    
    47.7
    
    
    
    67.9Loss (gain) on retirement of debt
    
    
    77.7
    
    
    
    (38.3
    )Gain on termination of interest rate swap
    
    
    (5.6
    )
    
    
    Inventory charge
    
    
    
    
    
    
    76.3Deferred tax allowance
    
    
    
    
    
    
    541.0Change in the carrying value of property and equipment, goodwill and other
long-term assets
    
    
    32.3
    
    
    
    1,914.7Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (210.3
    )
    
    
    133.7Inventories
    
    
    (246.0
    )
    
    
    250.0Prepaid expenses and other current assets
    
    
    23.6
    
    
    
    145.6Accounts payable
    
    
    264.6
    
    
    
    (217.3
    )Accrued expenses and other current liabilities
    
    
    (84.0
    )
    
    
    49.1Net cash (used in) provided by operating activities of continuing operations
    
    
    (133.2
    )
    
    
    252.5Cash flows from investing activities of continuing operations:Change in restricted cash and cash equivalents
    
    
    22.8
    
    
    
    133.7Sales and maturities of short-term investments
    
    
    28.2
    
    
    
    233.3Purchases of short-term investments
    
    
    
    
    
    
    (41.0
    )Acquisition of manufacturing assets and locations
    
    
    
    
    
    
    (45.5
    )Acquisition of business
    
    
    
    
    
    
    (3.8
    )Net proceeds from disposition of discontinued operations
    
    
    383.4
    
    
    
    Capital expenditures
    
    
    (101.3
    )
    
    
    (83.9
    )Proceeds from sale of property and equipment
    
    
    54.0
    
    
    
    35.3Proceeds from sale of investments
    
    
    10.4
    
    
    
    Advances to discontinued operations
    
    
    (5.2
    )
    
    
    94.4Supply agreement and other
    
    
    0.2
    
    
    
    48.8Net cash provided by investing activities of continuing operations
    
    
    392.5
    
    
    
    371.3
 See accompanying notes to condensed consolidated financial statements. 6




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SOLECTRON CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) Nine Months Ended May 312004
    
    2003Cash flows from financing activities of continuing operations:Retirement of debt
    
    
    (1,013.5
    )
    
    
    (823.1
    )Net proceeds from issuance of convertible senior notes
    
    
    436.5
    
    
    
    Net repayment of bank lines of credit and other debt arrangements
    
    
    (52.3
    )
    
    
    (89.3
    )Net proceeds from termination of interest rate swap
    
    
    6.0
    
    
    
    Net proceeds from common stock issuance
    
    
    104.9
    
    
    
    7.6Other
    
    
    
    
    
    
    20.9Net cash used in financing activities of continuing operations
    
    
    (518.4
    )
    
    
    (883.9
    )Effect of
exchange rate changes on cash and cash equivalents - continuing operations
    
    
    10.1
    
    
    
    41.8Net decrease
in cash and cash equivalents - continuing operations
    
    
    (249.0
    )
    
    
    (218.3
    )Cash and
cash equivalents at beginning of period - continuing operations
    
    
    1,421.9
    
    
    
    1,740.0Cash and
cash equivalents at end of period - continuing operations
    
    $
    1,172.9
    
    
    $
    1,521.7Cash and
cash equivalents at beginning of period - discontinued operations
    
    $
    36.4
    
    
    $
    41.9Cash used in discontinued operations
    
    
    (25.0
    )
    
    
    (8.5
    )Cash and
cash equivalents at end of period - discontinued operations
    
    $
    11.4
    
    
    $
    33.4
 See accompanying notes to condensed consolidated financial statements. 7




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SOLECTRON CORPORATION AND SUBSIDIARIES 
 Notes to Condensed Consolidated Financial Statements NOTE 1  Basis of Presentation and Recent Accounting Pronouncements Basis of Presentation The accompanying financial data as of May 31, 2004 and for the three and nine
months ended May 31, 2004 and 2003 has been prepared by Solectron, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The August 31,
2003 condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. However, Solectron believes that the disclosures are
adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in Solectrons
Current Report on Form 8-K dated February 9, 2004, which updated the financial
statement information originally presented in our 2003 Form 10-K to reclassify
three additional businesses as discontinued operations. In the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of financial position as of
May 31, 2004, the results of operations, comprehensive loss and cash flows for
the three and nine months ended May 31, 2004 and 2003 have been made. The
results of operations for the three and nine months ended May 31, 2004 are not
necessarily indicative of the operating results for the full fiscal year or any
future periods. Solectrons third quarters of fiscal 2004 and 2003 ended on May 28, 2004 and
May 30, 2003, respectively. Solectrons fiscal year ended on August 29, 2003.
For clarity of presentation, Solectron has indicated its third quarters as
having ended on May 31 and its fiscal year as having ended on August 31. Reclassification: Beginning in the first quarter of fiscal 2004, Solectron
classified research and development costs differently than in prior periods.
Solectron now classifies research and development costs as selling, general and
administrative expense. Previously, research and development expense was a
separate line item on the condensed consolidated statements of operations.
Solectron has revised prior period financial information to conform the expense
classifications to the current presentation. Accordingly, selling, general and
administrative expense now includes $6.2 million and $17.8 million of research
and development expense for the three and nine months ended May 31, 2004,
respectively, and $6.2 million and $19.5 million for the three and nine months
ended May 31, 2003, respectively. This reclassification did not impact
operating income (loss), net income (loss) or net income (loss) per share for
the periods presented. 8




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Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities
(VIE), (revised December 2003 by FIN No. 46R), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in
an entity through means other than voting rights and accordingly should
consolidate the entity. FIN No. 46R, which was issued in December 2003,
replaces FIN No. 46. Solectron will be required to apply FIN No. 46R to
variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, the Interpretation will be
applied beginning on January 1, 2005. For any VIEs that must be consolidated
under FIN No. 46R that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and non-controlling
interest of the VIE. Management believes the adoption of FIN No. 46R will not
have a material impact on Solectrons financial position, results of operations
or cash flows as Solectron does not have any interest in VIEs. In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB 104),
Revenue Recognition. SAB 104 supercedes SAB 101, Revenue Recognition in
Financial Statements. The primary purpose of SAB 104 is to rescind accounting
guidance contained in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of Emerging Issues Task Force (EITF)
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Additionally, SAB 104 rescinds the SECs Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB
101 that had been codified in Topic 13, Revenue Recognition. Selected portions
of the FAQ have been incorporated into SAB 104. While the wording of SAB 104
has changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
adoption of SAB 104 did not have a material impact on Solectrons financial
position, results of operations or cash flows. NOTE 2  Stock-Based Compensation As it is permitted by Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,
Solectron accounts for its employee stock plans, which generally consist of
fixed stock option plans and an employee stock purchase plan, using the
intrinsic value method under APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. In general, where the exercise
price of options granted under these plans is equal to the market price of the
underlying common stock on the grant date, no stock-based employee compensation
expense is recognized. In certain situations, under these plans, options to
purchase shares of common stock may be granted at less than fair market value,
which results in compensation expense equal to the difference between the
market value on the date of grant and the purchase price. This expense is
recognized over the vesting period of the options and included in operations.
However, such expense amount has not been significant. The table below sets out
the pro forma amounts of net income (loss) and net income (loss) per share that
would have resulted for all fiscal periods presented, if Solectron accounted
for its employee stock plans under the fair value recognition provisions of
SFAS No. 123. 9




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Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003(in millions, except per share data)
    
    (in millions, except per share data)Net income (loss), as reported
    
    $
    21.3
    
    
    $
    (3,101.2
    )
    
    $
    (166.5
    )
    
    $
    (3,282.9
    )Stock-based employee compensation
expense determined under fair value
method, net of related tax effects
    
    
    (12.3
    )
    
    
    (25.3
    )
    
    
    (45.8
    )
    
    
    (85.2
    )Pro forma net income (loss)
    
    $
    9.0
    
    
    $
    (3,126.5
    )
    
    $
    (212.3
    )
    
    $
    (3,368.1
    )Net income (loss) per share:Basic and
diluted - as reported
    
    $
    0.02
    
    
    $
    (3.74
    )
    
    $
    (0.20
    )
    
    $
    (3.97
    )Basic and
diluted - pro forma
    
    $
    0.01
    
    
    $
    (3.77
    )
    
    $
    (0.25
    )
    
    $
    (4.07
    )
 Stock based employee compensation expense determined under the fair value
method, net of related tax effects, included $1.2 million and $6.2 million of
expense relating to discontinued operations during the three and nine months
ended May 31, 2004, respectively. Stock based employee compensation expense
related to discontinued operations for the corresponding periods in fiscal 2003
was $4.7 million and $15.7 million, respectively. For purposes of computing pro forma net loss, the fair value of each option
grant and Employee Stock Purchase Plan purchase right is estimated on the date
of grant using the Black-Scholes option pricing model. The assumptions used to
value the option grants and purchase rights are stated below. Three Months Ended May 31
    
    Nine Months Ended May 31Stock Options
    
    2004
    
    2003
    
    2004
    
    2003Expected life of options
    
    3 years
    
    3 years
    
    4 years
    
    3 yearsVolatility
    
    73%
    
    78%
    
    76%
    
    79%Risk-free interest rate
    
    2.00% to 3.10%
    
    1.75% to 2.06%
    
    2.00% to 3.10%
    
    1.75% to 2.32%Dividend yield
    
    zero
    
    zero
    
    zero
    
    zeroWeighted average fair value of grants
    
    $5.79
    
    $3.50
    
    $5.19
    
    $3.73
 Three Months Ended May 31
    
    Nine Months Ended May 31Employee Stock Purchase Plan
    
    2004
    
    2003
    
    2004
    
    2003Expected life of purchase right
    
    6 months
    
    6 months
    
    6 months
    
    6 monthsVolatility
    
    73%
    
    78%
    
    76%
    
    79%Risk-free interest rate
    
    1.01% to 1.33%
    
    1.11% to 1.17%
    
    0.99% to 1.33%
    
    1.11% to 1.64%Dividend yield
    
    zero
    
    zero
    
    zero
    
    zeroWeighted average fair value of purchase rights under ESPP
    
    $2.42
    
    $1.21
    
    $2.13
    
    $1.30
 During fiscal 2003 and 2004, Solectron provided restricted stock awards to
certain eligible executives. Compensation expense related to restricted stock
awards amounted to approximately $0.6 million and $1.8 million during the three
and nine months ended May 31, 2004, respectively, and $0.5 million and $0.8
million in the corresponding periods of fiscal 2003. NOTE 3  Inventories Inventories related to continuing operations as of May 31, 2004 and August 31,
2003, consisted of (in millions): May 31
    
    August 312004
    
    2003Raw materials
    
    $
    1,104.8
    
    
    $
    906.4Work-in-process
    
    
    243.1
    
    
    
    220.4Finished goods
    
    
    229.3
    
    
    
    200.5Total
    
    $
    1,577.2
    
    
    $
    1,327.3
 10




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NOTE 4  Commitments and Contingencies Lease Obligations Solectron has synthetic lease agreements relating to four manufacturing sites
related to continuing operations. The synthetic leases have expiration dates
in 2007. At the end of the lease terms, Solectron has an option, subject to
certain conditions, to purchase or to cause a third party to purchase the
facilities subject to the synthetic leases for the Termination Value, which
approximates the lessors original cost for each facility, or may market the
property to a third party at a different price. Solectron is entitled to any
proceeds from a sale of the properties to third parties in excess of the
Termination Value and is liable to the lessor for any shortfall not to exceed
85% of the Termination Value. Solectron has provided loans to the lessor
equaling approximately 85% of the Termination Value for each synthetic lease.
These loans are repayable solely from the sale of the properties to third
parties in the future, are subordinated to the amounts payable to the lessor at
the end of the synthetic leases, and may be credited against the Termination
Value payable if Solectron purchases the properties. The approximate aggregate
Termination Values and loan amounts were $101.3 million and $86.1 million,
respectively, as of May 31, 2004. In addition, cash collateral of $15.2 million is pledged for the difference
between the aggregate Termination Values and the loan amounts. Each lease
agreement contains various affirmative and financial covenants. A default under
a lease, including violation of these covenants, may accelerate the termination
date of the arrangement. Prior to the end of the second quarter of fiscal 2004,
Solectron obtained waivers and amended certain terms and conditions including
the minimum liquidity and the leverage covenants. Solectron was in compliance
with all applicable covenants as of May 31, 2004. Monthly lease payments are
generally based on the Termination Value and 30-day LIBOR index (1.1% as of May
31, 2004) plus an interest-rate margin, which may vary depending upon
Solectrons Moodys Investors Services and Standard and Poors ratings and are
allocated between the lessor and Solectron based on the proportion of the loan
amount to the Termination Value for each synthetic lease. Solectron accounts for these synthetic lease arrangements as operating leases
in accordance with SFAS No. 13, Accounting for Leases, as amended.
Solectrons loans to the lessor and cash collateral were included in other
long-term assets and cash, cash equivalents and short-term investments,
respectively, in the condensed consolidated balance sheets. Future minimum payments for operating lease obligations related to continuing
operations, including the synthetic leases discussed above, are as follows: FY05Total
    
    Q404
    
    Q1-Q3
    
    Q4
    
    FY06
    
    FY07
    
    FY08
    
    FY09
    
    ThereafterOperating lease
    
    $
    173.1
    
    
    $
    23.0
    
    
    $
    33.5
    
    
    $
    8.2
    
    
    $
    25.1
    
    
    $
    16.9
    
    
    $
    13.9
    
    
    $
    11.7
    
    
    $
    40.8
 Purchase Commitments Solectron has guaranteed various purchase commitments for materials, supplies
and services incurred during the normal course of business. As of May 31, 2004,
these commitments totaled approximately $114.8 million. Legal Proceedings Solectron is from time to time involved in various litigation and legal
matters, including those described below. By describing the particular matters
set forth below, Solectron does not intend to imply that it or its legal
advisors have concluded or believe that the outcome of any of those particular
matters is or is not likely to have a material adverse impact upon Solectrons
business or consolidated financial condition and results of operations. The case entitled Ronald Sorisho v. Solectron Corporation et al., Case No.
CV811243, which has been previously reported, was resolved on terms not
material to Solectron and the case has been dismissed. On March 6, 2003, a putative shareholder class action lawsuit was filed against
Solectron and certain of its officers in the United States District Court for
the Northern District of California alleging claims under Section 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and Rule 10b-5 promulgated
thereunder. The case is entitled Abrams v. Solectron Corporation et al., Case
No. C-03-0986 CRB. The complaint alleged that the defendants issued false and
misleading statements in 11




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certain press releases and SEC filings issued between
September 17, 2001 and September 26, 2002. In particular, plaintiff alleged
that the defendants failed to disclose and to properly account for excess and
obsolete inventory in the former Technology Solutions business unit during the
relevant time period. Additional complaints making similar allegations were
subsequently filed in the same court, and pursuant to an order entered June 2,
2003, the Court appointed lead counsel and plaintiffs to represent the putative
class in a single consolidated action. The Consolidated Amended Complaint,
filed September 8, 2003, alleges an expanded class period of June 18, 2001
through September 26, 2002, and purports to add a claim for violation of
Section 11 of the Securities Act of 1933, as amended (the Securities Act), on
behalf of a putative class of former shareholders of C-MAC Industries, Inc.,
who acquired Solectron stock pursuant to the October 19, 2001 Registration
Statement filed in connection with Solectrons acquisition of C-MAC Industries,
Inc. In addition, while the initial complaints focused on alleged inventory
issues at the former Technology Solutions business unit, the Consolidated
Amended Complaint adds allegations of inadequate disclosure and failure to
properly account for excess and obsolete inventory at Solectrons other
business units. The complaint seeks an unspecified amount of damages on behalf
of the putative class. On June 14, 2004 the lead plaintiffs filed a Motion for
Class Certification seeking to have the court declare this matter a class
action litigation. The hearing for the Motion for Class Certification is set
for October 1, 2004. Solectron intends to object to the Class Certification.
Solectron believes the complaint to be without merit, and that it has valid
defenses to the plaintiffs claims. There can be no assurance, however, that
the outcome of the lawsuit will be favorable to Solectron or will not have a
material adverse effect on Solectrons business, financial condition and
results of operations. In addition, Solectron may be forced to incur
substantial litigation expenses in defending this litigation. On March 21, 2003, Solectron, all the current members of its Board of
Directors, and two former officers, were named as defendants in a shareholder
derivative lawsuit entitled Lifshitz v. Cannon et al.,Case No. CV815693, filed
in the Santa Clara County, California Superior Court. The plaintiff alleged
that he should be permitted to pursue litigation, purportedly for the benefit
of Solectron, against the individual director and officer defendants for
alleged mismanagement and waste of corporate assets during the period from May
2001 to the present, purported breaches of fiduciary duty, constructive
fraud, abuse of control, and alleged violations of the California
Corporations Code by certain of the individual defendants who sold some of
their Solectron stockholdings during the period from September 2001 through
September 2002. On May 19, 2003, Solectron and the individual defendants moved
to dismiss the Lifshitzcomplaint. In the meantime, two substantively identical
derivative lawsuits, entitled Schactner v. Cannon, et al., Case No. CV817112,
and Nims v. Cannon, et al.,Case No. CV817158, were filed in the same Court on
May 14 and May 15, respectively. Counsel for the plaintiffs in all three suits
subsequently advised the Court that they would be filing a consolidated amended
complaint, and accordingly, defendants motion to dismiss was taken off
calendar pending the filing of the consolidated amended complaint combining the
three lawsuits. On June 27, 2003, the plaintiffs served their consolidated
amended complaint now alleging that since January of 1999 all of the current
members of Solectrons Board of Directors, as well as four former officers and
directors, purportedly breached their fiduciary duties and participated in or
permitted constructive fraud, unjust enrichment, and alleged violations of
the California Corporations Code. The consolidated complaint alleged an
unspecified amount of compensatory and punitive damages, and sought the
relinquishment of all profits realized by those individual defendants who sold
Solectron stock during the relevant period, together with statutory penalties
under California Corporations Code section 25402 which plaintiff alleged to be
applicable to those sales of Solectron stock. Solectron moved to dismiss the
Consolidated Amended Complaint because Solectron does not believe plaintiffs
have adequately alleged a basis for plaintiffs to appropriate for themselves
the duties of Solectrons Board of Directors under applicable Delaware law, and
believes that the consolidated complaint contains various factual errors and
legal deficiencies. On October 7, 2003, the California Superior Court granted
Solectrons motion to dismiss, but granted the plaintiffs an opportunity to try
to cure the deficiencies in their Consolidated Amended Complaint through a
further amended complaint. The plaintiffs requested and were granted an
extension of time to file a further amended complaint, which barring any
further extensions, is to filed on or before the end of August 2004. Solectron
does not believe plaintiffs can show a sufficient basis to allow them to
appropriate for themselves the duties of Solectrons Board of Directors under
applicable Delaware law. Solectron may be forced to incur substantial
litigation expenses in defending this litigation. NOTE 5  Segment Information and Geographic Information SFAS No. 131 Disclosure about Segments of an Enterprise and Related
Information established standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports. It also established standards
for related disclosures about products and services, geographic areas and major
customers. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. Historically, Solectron had four reportable segments: Global Operations,
Technology Solutions, Global Services and MicroSystems. Following a
comprehensive review of its business strategy, concluding in the fourth quarter
of fiscal 2003, Solectron committed to a 12




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plan to divest a number of business
operations (see also Note 9, Discontinued Operations, for a discussion of
divesting activities). As a result, Solectron has divested and is in the
process of divesting a majority of the assets in the former Global Services,
Technology Solutions, and MicroSystems reportable segments. The assets divested
and being divested are reported as discontinued operations. Starting in the first quarter of fiscal 2004, Solectron realigned to a
functional organizational structure to manage its continuing operations.
Solectron is now organized into one reporting unit, Worldwide Operations, to
deliver integrated solutions to its customers. Worldwide Operations consists of
worldwide manufacturing and post-manufacturing services and is supported by the
following functions - Worldwide Design and Engineering Services; Worldwide
Sales and Account Management; Worldwide Strategy and Marketing; Finance; and
Human Resources. Solectrons chief operating decision maker is the Chief Executive Officer. As a
result of Solectrons organizational realignment, the Chief Executive Officer
evaluates financial information on a company-wide basis for purposes of making
decisions and assessing financial performance. Accordingly, Solectron revised
its presentation of operating and reportable segments from four to one to
reflect how it now manages its business. Geographic information for continuing operations as of and for the periods
presented is as follows (in millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Geographic net sales:United States
    
    $
    804.8
    
    
    $
    811.3
    
    
    $
    2,341.3
    
    
    $
    2,487.5Other North and Latin America
    
    
    461.5
    
    
    
    280.9
    
    
    
    1,308.0
    
    
    
    1,005.4Europe
    
    
    407.1
    
    
    
    373.5
    
    
    
    1,246.3
    
    
    
    1,195.2Malaysia
    
    
    520.2
    
    
    
    372.7
    
    
    
    1,349.8
    
    
    
    1,042.7China
    
    
    548.9
    
    
    
    254.2
    
    
    
    1,463.3
    
    
    
    773.7Other Asia Pacific
    
    
    297.4
    
    
    
    264.7
    
    
    
    915.4
    
    
    
    880.5$
    3,039.9
    
    
    $
    2,357.3
    
    
    $
    8,624.1
    
    
    $
    7,385.0
 May 31
    
    August 312004
    
    2003Long-lived assets:United States
    
    $
    329.7
    
    
    $
    327.0Other North and Latin America
    
    
    188.9
    
    
    
    224.9Europe
    
    
    173.1
    
    
    
    203.9Asia Pacific
    
    
    337.9
    
    
    
    346.9$
    1,029.6
    
    
    $
    1,102.7
 Certain customers accounted for 10% or more of our net sales. The following
table includes these customers and the percentage of net sales attributed to
them: Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Cisco Systems
    
    
    12.8
    %
    
    
    12.0
    %
    
    
    12.4
    %
    
    
    11.2
    %Nortel Networks
    
    
    ***
    
    
    
    12.8
    %
    
    
    ***
    
    
    
    13.0
    %
 *** Less than 10% Solectron has concentrations of credit risk due to sales to the customers
listed above as well as Solectrons other significant customers. In particular,
Nortel Networks accounted for approximately 10% and 15% of total accounts
receivable related to continuing operations at May 31, 2004 and August 31,
2003, respectively. 13




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NOTE 6  Long-Term Debt Liquid Yield Option Notes (LYONs) In November 2000, Solectron issued 2.9 million LYONs at an issue price of
$524.78 per note, which resulted in gross proceeds to Solectron of
approximately $1.5 billion. These notes are unsecured and unsubordinated
indebtedness of Solectron. Solectron will pay no interest prior to maturity.
Each note yields 3.25% with a maturity value of $1,000 on November 20, 2020.
Each note is convertible to common shares at any time by the holder at a
conversion rate of 11.7862 shares per note. Holders may require Solectron to
purchase all or a portion of their notes on May 20, 2004, November 20, 2005 and
November 20, 2010, at prices of $587.46, $616.57 and $724.42 per note,
respectively, payable in cash or common stock at the option of Solectron. Also,
each holder had the right to require Solectron to repurchase all or a portion
of such holders notes if a change in control of Solectron occured on or before
May 20, 2004. On May 20, 2004, Solectron repurchased approximately 1.6 million
LYONs for a total of $950 million in cash. As of May 31, 2004, 5,000 LYONs
remain outstanding at a carrying value of approximately $3.0 million. Adjustable Conversion-Rate Equity Securities (ACES) During the second quarter of fiscal 2002, Solectron closed its public offering
of $1.1 billion, or 44 million units, of 7.25% ACES. Each ACES unit has a
stated amount of $25.00 and consists of (a) a contract requiring the holder to
purchase, for $25.00, a number of shares of Solectron common stock to be
determined on November 15, 2004, based on the average trading price of
Solectrons common stock at that time and certain specified settlement rates
ranging from 2.1597 shares of Solectrons common stock per purchase contract to
2.5484 shares of Solectrons common stock per purchase contract (subject to
certain anti-dilution adjustments); and (b) a $25 principal amount of 7.25%
subordinated debenture due 2006. Solectron received gross proceeds of
approximately $1.1 billion from the transaction. Solectron allocated $46.9
million to the fair value of the purchase contracts and recorded this amount in
additional paid-in capital. The debentures initially were held and pledged for
Solectrons benefit to secure the holders obligation to purchase Solectrons
common stock on November 15, 2004. On April 8, 2004, Solectron commenced an early settlement offer to settle
2.5484 shares of common stock and $1.97 in cash per unit for up to 41,800,000
units of its outstanding 7.25% ACES. The early settlement offer was finalized
on May 12, 2004 and resulted in 41.4 million of the ACES units, or
approximately 94% of the total outstanding, being settled. Upon finalization of
the ACES early settlement offer, Solectron recorded a $77.7 million loss in
other income (expense)  net. On or about August 15, 2004, the remaining ACES debentures will be remarketed
and, if the remarketing is successful, the interest rate will be reset at then
current rates as described in the indenture, and the proceeds from the
remarketing will be used to satisfy the holders obligation to purchase
Solectrons common stock in November 2004. If the debentures are not
successfully remarketed, the interest rate will not be reset and Solectron may
use the pledged debentures to satisfy the holders obligation to purchase
Solectrons common stock in November 2004. As of May 31, 2004, the remaining
carrying amount of these ACES of $62.9 million was classified as long-term
debt. 9.625% Senior Notes On February 8, 2002, Solectron issued an aggregate principal amount of $500
million of 9.625% senior notes due 2009. Solectron is required to pay interest
on the notes in cash on February 15 and August 15 of each year. The indenture
governing the terms of these notes contains restrictive provisions, which limit
Solectron and its subsidiaries from making distributions on their capital
stock, investments, incurring debt, issuing preferred stock and engaging in
assets sales, among other provisions. As of May 31, 2004, the carrying amount
of the notes of $497.9 million was classified as long-term debt. 7.375% Senior Notes In March 1996, Solectron issued $150 million aggregate principal amount of
senior notes. These notes are in denominations and have a maturity value of
$1,000 each and are due on March 1, 2006. Interest is payable semiannually at a
rate of 7.375% per annum. The notes may not be redeemed prior to maturity. As
of May 31, 2004, the carrying amount of the notes of $150.0 million was
classified as long-term debt. 0.5% Convertible Senior Notes due 2034 14




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During the second quarter of fiscal 2004, Solectron completed the offering of
$450 million of convertible senior notes, or 450,000 notes in $1,000
denomination, to qualified buyers in reliance on Rule 144A under the Securities
Act. The notes are unsecured and unsubordinated indebtedness of Solectron and
will mature on February 15, 2034. The notes are convertible into shares of
common stock of Solectron at any time prior to maturity, redemption or
repurchase by Solectron, if (1) the price of our common stock issuable upon
conversion of a note reaches 120% of the conversion price of the notes, or
$11.60, (2) the notes have been called for redemption, (3) specified corporate
transactions occur, or (4) the trading price of the notes fall below 95% of the
average conversion value. The initial conversion rate is 103.4468 shares per
each $1,000 principal amount of notes, subject to adjustment in certain
circumstances. This is equivalent to a conversion price of approximately $9.67
per share. Interest on the notes will be paid on February 15 and on August 15 of each
year. The first payment will be made on August 15, 2004. On or after February
20, 2011, Solectron will have the option to redeem all or a portion of the
notes that have not been previously purchased, repurchased or converted, at
100% of the principal amount of the notes to be redeemed plus accrued and
unpaid interest and liquidated damages owed, if any, to, but excluding, the
date of the purchase. Holders of the notes may require Solectron to purchase
all or a portion of the notes for cash on each of February 15, 2011, 2014,
2019, 2024, and 2029 at a price equal to 100% of the principal amount of the
notes to be repurchased plus accrued and unpaid interest, and liquidated
damages owed, if any, to, but excluding, the date of repurchase. Holders will
have the option, subject to certain conditions, to require Solectron to
repurchase any notes held by such holder in the event of a change in control,
as described in the offering circular dated February 9, 2004, at a price of
100% of the principal amount of the notes plus accrued and unpaid interest and
liquidated damages owed, if any, to, but excluding, the date of repurchase. Solectron filed a shelf registration statement in the third quarter of fiscal
2004 with respect to the resale of the notes and the common stock issuable upon
conversion of the notes, pursuant to a registration rights agreement. The net
proceeds of $436.5 million were applied to repurchase Solectrons 3.25% LYONs
indebtedness on May 20, 2004. As of May 31, 2004, the carrying amount of the notes of $450 million was
classified as long-term debt. NOTE 7  Derivative Instruments Solectron enters into foreign exchange forward contracts intended to reduce the
short-term impact of foreign currency fluctuations on foreign currency
receivables, investments and payables. The gains and losses on the foreign
exchange forward contracts are intended to largely offset the transaction gains
and losses on the foreign currency receivables, investments, and payables
recognized in earnings. Solectron does not enter into foreign exchange forward
contracts for speculative purposes. Solectrons foreign exchange forward
contracts related to current assets and liabilities are generally three months
or less in original maturity. As of May 31, 2004, Solectron had outstanding foreign exchange forward
contracts with a total notional amount of approximately $585.4 million related
to continuing operations. Solectron also uses interest rate swaps to hedge its mix of short-term and
long-term interest rate exposures resulting from Solectrons debt obligations.
During the third quarter of fiscal 2002, Solectron entered into interest rate
swap transactions under which it pays variable rates and receives fixed rates.
The interest rate swaps have a total notional amount of $1 billion. $500
million relates to the Companys $1.1 billion ACES and expires on November 15,
2004 and $500 million relates to the 9.625% $500 million senior notes expiring
on February 15, 2009. Under each of these swap transactions, Solectron pays an
interest rate equal to the 3-month LIBOR rate plus a fixed spread. In exchange,
Solectron receives fixed interest rates of 7.25% on the first $500 million and
9.625% on the second $500 million. These swap transactions effectively replace
the fixed interest rates that the Company must pay on a portion of its ACES and
all its 9.625% senior notes with variable interest rates. These swaps are
designated as fair value hedges under SFAS No. 133. During the third quarter of fiscal 2004, Solectron settled the above mentioned
$500 million swap contract related to the $1.1 billion ACES at the time of the
early settlement of the ACES debentures. The settlement of the swap contract resulted in a gain of
approximately $5.6 million, which was recorded in other income
(expense) - net. The fair value of the outstanding derivative referred to above was not
significant. For all derivative transactions, Solectron is exposed to counterparty credit
risk to the extent that the counterparties may not be able to meet their
obligations towards Solectron. To manage the counterparty risk, Solectron
limits its derivative transactions to those with major financial institutions.
Solectron does not expect to experience any material adverse financial
consequences as a result of default 15




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by Solectrons counterparties. NOTE 8  Intangible Assets and Goodwill Solectrons intangible assets, which are classified in other assets in the
condensed consolidated balance sheets, are categorized into three main classes:
supply agreements, intellectual property agreements and other. The intellectual
property agreements resulted from Solectrons acquisitions of various IBM
facilities. The other intangible assets consist of miscellaneous acquisition
related intangibles from Solectrons various asset purchases. The following tables summarize the gross amounts and accumulated amortization
for each main class of Solectrons intangible assets as of May 31, 2004 and
August 31, 2003 (in millions): May 31, 2004: Supply
    
    Intellectual PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    228.1
    
    
    $
    108.5
    
    
    $
    126.4
    
    
    $
    463.0Accumulated amortization
    
    
    (86.0
    )
    
    
    (54.1
    )
    
    
    (76.7
    )
    
    
    (216.8
    )Prior year impairment
    
    
    (140.4
    )
    
    
    
    
    
    
    (31.3
    )
    
    
    (171.7
    )Carrying value
    
    $
    1.7
    
    
    $
    54.4
    
    
    $
    18.4
    
    
    $
    74.5
 August 31, 2003: Supply
    
    Intellectual PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    228.1
    
    
    $
    108.5
    
    
    $
    126.1
    
    
    $
    462.7Accumulated amortization
    
    
    (85.7
    )
    
    
    (45.6
    )
    
    
    (71.5
    )
    
    
    (202.8
    )Impairment
    
    
    (140.4
    )
    
    
    
    
    
    
    (31.3
    )
    
    
    (171.7
    )Carrying value
    
    $
    2.0
    
    
    $
    62.9
    
    
    $
    23.3
    
    
    $
    88.2
 Solectron expects that its annual amortization expense, reportable as required
by SFAS No. 142 for these intangibles, would be approximately $18.6 million for
each of the next three years and $9.4 million for each of the two subsequent
years. Amortization expense for the three and nine months ended May 31, 2004
was $4.6 million and $14.0 million, respectively. During the third quarter of fiscal 2003, Solectron concluded that sufficient
indicators existed to require it to perform an analysis according to the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets to assess whether a portion of intangible assets was
impaired. As a result of this analysis, Solectron recorded an impairment
charge of approximately $161.1 million primarily related to its intangible
assets acquired in a transaction with a large customer. This intangible asset
impairment was recorded within restructuring and impairment costs in the
accompanying condensed consolidated statements of operations for the three and
nine months ended May 31, 2003. Primarily due to significant industry and economic trends that continued to
negatively affect Solectrons operations and stock price, Solectron performed a
goodwill impairment test according to the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets during the third quarter of fiscal 2003 in advance
of the Companys annual test originally scheduled for the fourth quarter of
fiscal 2003. This impairment test resulted in an impairment charge of
approximately $1.6 billion related to continuing operations and was performed
using the same methodology as the annual test performed in the fourth quarter
of fiscal 2002. This goodwill impairment was recorded within
restructuring and impairment costs in the accompanying condensed consolidated
statements of
operations for the three and nine months ended May 31, 2003. 16




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NOTE 9  Discontinued Operations During the fourth quarter of fiscal 2003, as a result of a full review of its
portfolio of businesses, Solectron committed to a plan to divest a number of
business operations that are no longer part of Solectrons strategic plan.
These businesses are Dy 4 Systems Inc., Kavlico Corporation, the Solectron
MicroTechnology division, SMART Modular Technologies Inc., Stream International
Inc., Solectrons 63% interest in US Robotics Corporation, and Force Computers,
Inc. Divesting these companies will allow Solectron to offer a more focused
and integrated set of supply chain solutions for its customers. These businesses each qualify as a discontinued operation component of
Solectron under SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Solectron has reported the results of operations and
financial position of these businesses in discontinued operations within the
condensed consolidated statements of operations and the balance sheets for all
periods presented. In addition, Solectron has excluded the cash flow activity
from these businesses from the condensed consolidated statements of cash flows
for all periods presented. The results from discontinued operations were as follows (in millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    325.8
    
    
    $
    458.2
    
    
    $
    1,204.9
    
    
    $
    1,297.2Cost of sales
    
    
    274.2
    
    
    
    393.8
    
    
    
    1,022.0
    
    
    
    1,094.0Gross profit
    
    
    51.6
    
    
    
    64.4
    
    
    
    182.9
    
    
    
    203.2Operating
expenses (income) - net
    
    
    (43.8
    )
    
    
    376.8
    
    
    
    129.0
    
    
    
    517.9Operating income (loss)
    
    
    95.4
    
    
    
    (312.4
    )
    
    
    53.9
    
    
    
    (314.7
    )Interest
income - net
    
    
    0.4
    
    
    
    0.7
    
    
    
    1.2
    
    
    
    1.4Other income
(expense) - net
    
    
    (3.0
    )
    
    
    1.4
    
    
    
    (4.3
    )
    
    
    0.8Income (loss) before income taxes
    
    
    92.8
    
    
    
    (310.3
    )
    
    
    50.8
    
    
    
    (312.5
    )Income tax expense
    
    
    6.1
    
    
    
    105.0
    
    
    
    10.0
    
    
    
    113.3Income (loss) from discontinued operations, net of tax
    
    $
    86.7
    
    
    $
    (415.3
    )
    
    $
    40.8
    
    
    $
    (425.8
    )
 During the third quarter of fiscal 2004, Solectron completed the sale of three
of its discontinued operations for net cash proceeds of $273.4 million
resulting in a pre-tax gain of $97.2 million which is included in operating
expenses (income) - net for the three and nine months ended May 31, 2004 as
disclosed above. The sale agreements for these divestures provide for a
possible adjustment to the proceeds and gain based upon final settlement of
each divestures working capital at closing. Resolution of these possible
working capital adjustments and other reconciling items pursuant to the sales
agreements, if any, are expected to be included in our fiscal 2004 fourth
quarter results. As a result of the sale agreement for one of the discontinued operations during
the third quarter of fiscal 2004, a synthetic lease held by the discontinued
operation was not assumed by the buyer. Solectron is in the process of
terminating the synthetic lease by selling the property subject to the
synthetic lease and any potential loss associated with its termination
will be recorded as part of discontinued operations. The approximate
Termination Value and loan amounts was $23.4 million and $19.9 million,
respectively, as of May 31, 2004. At the end of the third quarter in fiscal
2004, Solectron completed a preliminary valuation of the property under this
synthetic lease and has determined a shortfall of approximately $11.3 million
between the value of the property and the loan amount. The effect of this
shortfall will be recognized ratably until the termination of the lease through
fiscal 2007 or upon its ultimate disposition. During the second quarter of fiscal 2004, Solectron completed the sale of one
of its discontinued operations for cash proceeds of $110.0 million resulting in
a pre-tax gain of $67.2 million which is included in operating expenses
(income) - net for the nine months ended May 31, 2004 as disclosed above.
During the third quarter of fiscal 2004, Solectron reduced the gain on disposal
of this discontinued operation by approximately $8.9 million resulting from
adjustments pursuant to the terms of the disposal transaction. For the three
and nine months ended May 31, 2004, the adjustment to the gain on this
discontinued operation is recorded in operating expenses (income)  net as disclosed above. The sales agreements for all four divestitures contain certain indemnification
provisions under which Solectron may be required to indemnify the buyer of the
divested business for liabilities, losses, or expenses arising out of breaches
of covenants and certain 17




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breaches of representations and warranties relating to the condition of the
business prior to and at the time of sale. In aggregate, Solectron is
contingently liable for up to $61.5 million for a period of 12 to 24 months
subsequent to the completion of the sale. As of May 31, 2004, there were no
liabilities recorded under these indemnification obligations. Furthermore, Solectron recorded approximately $0.6 million and $56.3 million of
restructuring and impairment costs related to discontinued operations which is
also included in operating expenses (income) - net for the three and nine
months ended May 31, 2004, respectively, as disclosed above. The current and non-current assets and liabilities of discontinued operations
as of May 31, 2004 and August 31, 2003, were as follows (in millions): May 31
    
    August 312004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    11.4
    
    
    $
    36.4Accounts receivable, net
    
    
    61.5
    
    
    
    276.2Inventories
    
    
    48.7
    
    
    
    121.4Prepaid expenses and other current assets
    
    
    17.0
    
    
    
    18.1Total current assets of discontinued operations
    
    $
    138.6
    
    
    $
    452.1Property and equipment, net
    
    $
    33.1
    
    
    $
    126.5Goodwill
    
    
    
    
    
    
    112.2Other assets
    
    
    17.8
    
    
    
    24.2Total non-current assets of discontinued operations
    
    $
    50.9
    
    
    $
    262.9Short-term debt
    
    $
    6.6
    
    
    $
    6.1Accounts payable
    
    
    41.5
    
    
    
    168.1Accrued expenses and other current liabilities
    
    
    59.5
    
    
    
    159.7Total current liabilities of discontinued operations
    
    $
    107.6
    
    
    $
    333.9Total non-current liabilities of discontinued operations
    
    $
    6.1
    
    
    $
    22.6
 NOTE 10  Restructuring and Impairment Beginning in the second quarter of fiscal 2001, Solectron recorded
restructuring and impairment costs as it rationalized operations in light of
customer demand declines and the economic downturn. The measures, which
included reducing the workforce, consolidating facilities and changing the
strategic focus of a number of sites, was largely intended to align Solectrons
capacity and infrastructure to anticipated customer demand as well as to
rationalize its footprint worldwide. The restructuring and impairment costs
include employee severance and benefit costs, costs related to leased
facilities abandoned and subleased, impairment of owned facilities no longer
used by Solectron which will be disposed, costs related to leased equipment
that has been abandoned, and impairment of owned equipment that will be
disposed. For owned facilities and equipment, the impairment loss recognized
was based on the fair value less costs to sell, with fair value estimated based
on existing market prices for similar assets. Severance and benefit costs and
other costs associated with restructuring activities initiated prior to January
1, 2003 were recorded in compliance with EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity. Severance and benefit costs associated with restructuring
activities initiated on or after January 1, 2003 are recorded in accordance
with SFAS No. 112, Employers Accounting for Postemployment Benefits, as
Solectron concluded that it had a substantive severance plan. In accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, the estimated lease loss accrued for leased facilities abandoned and subleased after December 31,
2002 represents the fair value of the lease
liability as measured by the present value of future lease payments subsequent
to abandonment less the present value of any estimated sublease income. For
those facilities abandoned and subleased before January 1, 2003, as part of
restructuring activities under EITF Issue No. 94-3, the estimated lease loss
represents payments subsequent to abandonment less any estimated sublease
income. In order to estimate future 18




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##### Table of Contents



sublease income, Solectron works with an independent broker to estimate the
length of time until it can sublease a facility and the amount of rent it can
expect to receive. Estimates of expected sublease income could change based on
factors that affect Solectrons ability to sublease those facilities such as
general economic conditions and the real estate market, among others. The following summarizes Solectrons restructuring charges: Three and nine months ended May 31, 2004 and 2003 Solectron continued its restructuring activities in the third quarter of fiscal
2004 and total restructuring and impairment costs of $5.5 million were charged
against continuing operations. The following table summarizes restructuring
charges included in the accompanying condensed consolidated statements of
operations (in millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003
    
    NatureLoss on disposal of and impairment of
equipment and facilities
    
    $
    8.9
    
    
    $
    104.9
    
    
    $
    22.0
    
    
    $
    127.1
    
    
    non-cashSeverance and benefit costs
    
    
    0.2
    
    
    
    81.1
    
    
    
    14.9
    
    
    
    184.2
    
    
    cashNet adjustment to equipment lease loss accrual
    
    
    (3.2
    )
    
    
    5.9
    
    
    
    0.7
    
    
    
    1.7
    
    
    cashNet adjustment to facility lease loss accrual
    
    
    (3.1
    )
    
    
    
    
    
    
    33.5
    
    
    
    7.5
    
    
    cashOther exit costs
    
    
    2.7
    
    
    
    3.6
    
    
    
    35.0
    
    
    
    15.4
    
    
    cashTotal
    
    $
    5.5
    
    
    $
    195.5
    
    
    $
    106.1
    
    
    $
    335.9
 During the three and nine months ended May 31, 2004, Solectron incurred $8.9
million and $22.0 million, respectively, in impairment of equipment and
facilities. These costs mainly represent a loss on the sale of property and
equipment. During the three and nine months ended May 31, 2004, Solectron incurred $0.2
million and $14.9 million, respectively, in severance and benefit costs. These
costs are related to continued reduction of employees mainly in North America
and Europe. During the three and nine months ended May 31, 2004, Solectron continued to
perform a review of its operating leases for restructured facilities and
equipment in order to ensure all assumptions and estimates made to record these
liabilities were still accurate. Upon review, Solectron has adjusted the
accrual for restructured facilities and equipment based on the unforeseen
reutilization of certain facilities and equipment in operations as well as for
any changes to the current and projected market conditions for applicable
rental markets. As of May 31, 2004, Solectron has approximately 1.7 million square feet of
vacant facility space in continuing operations. If projected sublease income
does not meet expectation, Solectron could potentially incur up to
approximately $25.0 million in additional facility lease expenses. During the three and nine months ended May 31, 2004, Solectron also incurred
$2.7 million and $35.0 million, respectively, in other exit costs. These costs
mainly represent program transfer activity between global operation sites,
which are recorded as the charges are incurred. Fiscal 2003 and 2002 The following table summarizes restructuring charges relating to continuing
operations recorded in fiscal 2003 and 2002 (in millions): 19




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Years Ended August 312003
    
    2002
    
    NatureImpairment of equipment
    
    $
    47.7
    
    
    $
    120.0
    
    
    non-cashImpairment of facilities
    
    
    77.8
    
    
    
    81.0
    
    
    non-cashImpairment of other long-lived assets
    
    
    26.9
    
    
    
    162.5
    
    
    non-cashImpairment of equipment, facilities and other
    
    $
    152.4
    
    
    $
    363.5Severance and benefit costs
    
    $
    220.7
    
    
    $
    115.0
    
    
    cashNet adjustment to equipment lease loss accrual
    
    
    2.2
    
    
    
    23.8
    
    
    cashNet adjustment to facility lease loss accrual
    
    
    23.6
    
    
    
    79.3
    
    
    cashOther exit costs
    
    
    32.6
    
    
    
    20.7
    
    
    cashTotal
    
    $
    431.5
    
    
    $
    602.3
 The employee severance and benefit costs included in the restructuring charges
recorded in fiscal 2003 relate to the elimination of approximately 9,500
full-time positions worldwide and all such positions have now been eliminated
under this plan. Approximately 57% of the positions eliminated were in the
Americas region, 31% were in Europe and 12% were in Asia/Pacific. Facilities
and equipment subject to restructuring were primarily located in the Americas
and Europe. For leased facilities that are abandoned and subleased, the lease
costs represent future lease payments subsequent to abandonment less estimated
sublease income. For owned facilities and equipment, the impairment loss
recognized was based on the fair value less costs to sell, with fair value
based on estimates of existing market prices for similar assets. The employee severance and benefit costs included in the restructuring charges
recorded in fiscal 2002 related to approximately 15,000 full-time positions
worldwide, all of which have been eliminated. Approximately 69% of the
positions were in the Americas region, 20% were in Europe and 11% were in
Asia/Pacific. The employment reductions primarily affected employees in
manufacturing and back office support functions. Facilities and equipment
subject to restructuring were primarily located in the Americas and Europe. The following table summarizes the restructuring accrual balance for continuing
operations as of May 31, 2004 (in millions): Severance
    
    Facility
    
    Equipment
    
    Other Exitand Benefits
    
    Lease Loss
    
    Lease Loss
    
    Costs
    
    TotalBalance of accrual at August 31, 2003
    
    $
    73.1
    
    
    $
    32.5
    
    
    $
    29.3
    
    
    $
    10.5
    
    
    $
    145.4Q1-FY04 Provison
    
    
    10.1
    
    
    
    4.5
    
    
    
    0.3
    
    
    
    14.6
    
    
    
    29.5Q1-FY04 Cash payments
    
    
    (23.5
    )
    
    
    (1.3
    )
    
    
    (8.8
    )
    
    
    (16.9
    )
    
    
    (50.5
    )Balance of accrual at November 30, 2003
    
    $
    59.7
    
    
    $
    35.7
    
    
    $
    20.8
    
    
    $
    8.2
    
    
    $
    124.4Q2-FY04 Provison
    
    
    4.6
    
    
    
    32.1
    
    
    
    3.6
    
    
    
    17.7
    
    
    
    58.0Q2-FY04 Cash payments
    
    
    (36.7
    )
    
    
    (4.5
    )
    
    
    (5.4
    )
    
    
    (0.7
    )
    
    
    (47.3
    )Balance of accrual at February 28, 2004
    
    $
    27.6
    
    
    $
    63.3
    
    
    $
    19.0
    
    
    $
    25.2
    
    
    $
    135.1Q3-FY04 Provision
    
    
    0.2
    
    
    
    (3.1
    )
    
    
    (3.2
    )
    
    
    2.7
    
    
    
    (3.4
    )Q3-FY04 Cash payments
    
    
    (5.7
    )
    
    
    (3.9
    )
    
    
    (5.0
    )
    
    
    (10.4
    )
    
    
    (25.0
    )Balance of accrual at May 31, 2004
    
    $
    22.1
    
    
    $
    56.3
    
    
    $
    10.8
    
    
    $
    17.5
    
    
    $
    106.7
  Accruals related to restructuring activities were recorded in accrued expenses
in the accompanying condensed consolidated balance sheets.NOTE 11  Loss Per Share CalculationBasic net loss per share is computed using the weighted average number of
common shares outstanding during the period.Due to Solectrons loss from continuing operations, dilutive potential common
shares were excluded from the computation of diluted loss per share, as
inclusion would be anti-dilutive for the periods presented. Diluted net loss
per common share is computed using the weighted average number of common and
dilutive potential common shares outstanding during the period; dilutive
potential common shares consist of options to purchase common stock and shares
issuable upon conversion of Solectrons LYONs and ACES. Dilutive 20




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potential common shares would also include shares issuable upon conversion of
Solectrons 0.5% senior notes only if certain conversion events occur. The following table summarizes the dilutive potential common shares that were
excluded from the computation of diluted loss per share (in millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Dilutive potential common shares:Employee stock options
    
    
    6.0
    
    
    
    2.1
    
    
    
    8.0
    
    
    
    1.3Shares issuable upon conversion of LYONs
    
    
    17.7
    
    
    
    30.9
    
    
    
    18.8
    
    
    
    35.0Shares issuable upon conversion of ACES
    
    
    1.7
    
    
    
    112.1
    
    
    
    0.6
    
    
    
    112.1Total dilutive potential common shares
    
    
    25.4
    
    
    
    145.1
    
    
    
    27.4
    
    
    
    148.4Contingent dilutive potential common shares:Shares issuable upon conversion of 0.5% senior
notes, only if certain conversion events occur
    
    
    46.6
    
    
    
    
    
    
    
    17.2
    
    
    
    
 NOTE 12  Income Taxes SFAS No. 109, Accounting for Income Taxes, requires that a valuation
allowance be established when it is more likely than not that all or a
portion of deferred tax assets will not be realized. A review of all available
positive and negative evidence needs to be considered, including the companys
performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods,
and existing contracts or sales backlog that will result in future profits,
among other factors. It further states that forming a conclusion that a
valuation allowance is not needed is difficult when there is negative evidence
such as cumulative losses in recent years in the jurisdictions to which the
deferred tax assets relate. Therefore, cumulative losses weigh heavily in the
overall assessment. As a result of the review undertaken after the end of the
third quarter of the preceding fiscal year, Solectron concluded that it was
appropriate to establish a full valuation allowance for most of the net
deferred tax assets arising from its operations in the jurisdictions to which
the deferred tax assets relate. The total valuation allowance is approximately
$1.5 billion as of May 31, 2004. In addition, Solectron expects to continue to
provide a full valuation allowance on future tax benefits until it can
demonstrate a sustained level of profitability that establishes its ability to
utilize the assets in the jurisdictions to which the assets relate. Solectron
incurred net tax expenses in certain countries in which it has profitable
operations during the three and nine months ended May 31, 2004. Certain of Solectrons offshore operations are beginning to report taxable
profits, mostly arising in low-cost locations. Accordingly, Solectron
anticipates some tax expense in future quarters related to those operations.
Solectron will not be able to offset this tax expense with unrecognized
deferred tax assets described above, because, for the most part, those assets
did not arise in the jurisdictions where Solectron is realizing taxable
profits. In addition, Solectron has established contingency reserves for income taxes in
various jurisdictions. The estimate of appropriate tax reserves is based upon
the amount of prior tax benefit which might be at risk upon audit and upon the
reasonable estimate of the amount at risk. Solectron periodically reassess the
amount of such reserves and adjust reserve balances as necessary. NOTE 13  Common Stock During the third quarter of fiscal 2004, Solectron issued 17.1 million shares
of common stock at a price of $4.775 per share for total net proceeds of $81.7
million. These net proceeds of $81.7 million in part, along with an additional
common stock issuance of 105.6 million shares, were used to early settle
approximately 94% of the 7.25% ACES debentures. See Note 6, Long-Term Debt,
for further discussion of the early settlement of the 7.25% ACES debentures. NOTE 14  Subsequent Events On June 16, 2004, Solectron signed a definitive agreement to sell its Force
Computers, Inc. embedded computing business to Motorola, 21




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Inc. On June 29, 2004,
Solectron sold its 63% interest in US Robotics Corporation to the management of
US Robotics. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Cautionary Statement Regarding Forward-Looking Statements With the exception of historical facts, the statements contained in this
quarterly report are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and are
subject to the safe harbor provisions set forth in the Exchange Act. These
forward-looking statements relate to matters including, but not limited to:  
    
    future sales and operating results;  
    
    future prospects and growth;  
    
    our ability to improve our gross profit margins;  
    
    the capabilities and capacities of our business operations;  
    
    any financial or other guidance, including interest expense savings;  
    
    our business strategy and our ability to execute on such strategy;  
    
    our ability to successfully divest certain operations;  
    
    the anticipated financial impact of recent and future acquisitions and divestitures;  
    
    the timing and amount of our planned restructuring activities and related estimated cost savings;  
    
    the expansion of our low-cost manufacturing capacity and redirection
of our manufacturing operations to lower-cost facilities;  
    
    our ability to maintain a long-term cost structure to support improved operating efficiency and margins;  
    
    the anticipated production levels and revenues of manufacturing and supply agreements with customers;  
    
    the potential impact of, and our strategies for addressing, our current litigation and environmental liability exposure; and  
    
    various other forward-looking statements contained in Managements
Discussion and Analysis of Financial Condition and Results of
Operations. We intend that our forward-looking statements be subject to the safe harbors
created by the Exchange Act. The forward-looking statements are generally
accompanied by words such as intend, anticipate, believe, estimate,
expect and other similar words and statements. Our forward-looking statements
are based on current expectations, forecasts and assumptions and are subject to
risks, uncertainties and changes in condition, significance, value and effect,
including those discussed under the heading Risk Factors in this report and
in our reports filed with the Securities and Exchange Commission on Forms 10-K,
8-K, 10-Q and S-3. Such risks, uncertainties and changes in condition,
significance, value and effect could cause our actual results to differ
materially from our anticipated outcomes. Although we believe that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate. Therefore, we can give no assurance
that the results implied by these forward-looking statements will be realized.
The inclusion of forward-looking information should not be regarded as a
representation by our company or any other person that the future events, plans
or expectations contemplated by Solectron will be achieved. Furthermore, past
performance in operations and share price is not necessarily indicative of
future performance. We disclaim any intention or obligation to update or revise
any forward-looking statements contained in the documents incorporated by
reference herein, whether as a result of new information, future events or
otherwise. 22




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##### Table of Contents



Overview We provide a range of global manufacturing and integrated supply chain services
to companies who design and market electronic products. Our revenue is
generated from sales of our services primarily to customers in the Computing &
Storage, Networking, Communications, Consumer, Industrial, and Automotive
markets. Sales to a relatively small number of customers historically have been making
up a significant portion of our net sales and we expect that trend to continue
in the future. Sales to our ten largest customers accounted for 60.7% and 60.0%
for the three and nine months ended May 31, 2004, respectively. Currently, our
largest customer, Cisco Systems, accounted for 10% or more of our net sales in
the three and nine months ended May 31, 2004. The EMS industry experienced rapid change and growth over the past decade as an
increasing number of OEMs outsourced an increasing portion of their
manufacturing requirements. In 2001, the industrys revenue declined as a
result of significant reduction in end-market demand, which was consistent with
the overall global economic downturn. Beginning in the second quarter of
fiscal 2001, we initiated the restructuring of our operations in light of the
global economic downturn. The measures, which included reducing the workforce,
consolidating facilities and changing the strategic focus of a number of sites,
were intended to align our capacity and infrastructure to anticipated customer
demand, transition our operations to lower cost regions and rationalize our
footprint worldwide. Additionally, we decided to divest selected assets that
are not central to our strategy. These assets have been accounted for as
discontinued operations. Our revenues have increased over the last year as
customer production requirements have risen during this economic recovery, and
we are winning business with new and existing customers. 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 Risk Factors for
additional factors relating to possible fluctuations of our operating results. Summary of Results The following table sets forth, for the three-month and nine-month periods
indicated, certain key operating results and other financial information (in
millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    3,039.9
    
    
    $
    2,357.3
    
    
    $
    8,624.1
    
    
    $
    7,385.0Gross profit
    
    
    159.2
    
    
    
    99.2
    
    
    
    417.8
    
    
    
    324.6Selling, general and administrative expense
    
    
    103.9
    
    
    
    138.1
    
    
    
    327.8
    
    
    
    436.4Income (loss) from discontinued operations
    
    
    86.7
    
    
    
    (415.3
    )
    
    
    40.8
    
    
    
    (425.8
    )
 Sales for the third quarter of fiscal 2004 increased 29.0% to $3.0 billion
compared to $2.4 billion for the same period of fiscal 2003. Our sales levels
during the third quarter of fiscal year 2004 were stronger across all markets.
The increase in revenue base represents stronger demand from existing programs,
as well as growth from new and existing customers. Gross margin improved to 5.2% for the third quarter of fiscal 2004 compared to
4.2% for the same period of fiscal 2003. The improvement in gross margin is a
result of the execution of our Lean Six Sigma manufacturing initiative (Lean
Initiative), increased discipline in the implementation of our quote process,
and improved capacity utilization. The Lean Initiative has begun to give us
greater flexibility, improved our productivity and reduced costs. The Lean
Initiative encompasses specifying value, lining-up value-creating actions in
the best sequence, conducting these activities without interruption whenever a
customer requests them, and performing them more effectively. In general, the
Lean Initiative in our manufacturing environment attempts to provide customers
with what they require using less human effort, equipment, time and space. The
increased discipline in the implementation of our quote process has involved
centralizing the process, standardizing the cost models used to evaluate
programs, raising decision making authority to more senior levels within the
company, emphasizing the expected returns to Solectron in deciding what pricing
to offer and accept, and implementing profitability-based sales force
compensation. Selling, general and administrative (SG&A) expense continued to decline in the
third quarter of fiscal 2004. SG&A expense was $103.9 million during the third
quarter of fiscal 2004 compared to $138.1 million for the same period of fiscal
2003. The reduction in 23




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##### Table of Contents



SG&A expense, which was required for us to be
competitive within our industry, is a result of our restructuring activities. During the three months ended May 31, 2004, we completed the sale of three
discontinued operations: Kavlico Corporation, Stream International Inc., and
SMART Modular Technologies, Inc. Additionally in June 2004, we announced that
we entered into a definitive agreement to sell Force Computers, Inc. and we
sold our 63% interest in US Robotics Corporation. We continue to anticipate
total proceeds from the sale of all discontinued operations to range from
$500-$600 million. We have made significant progress in reducing our outstanding debt. During the
third quarter of fiscal 2004, we completed the early settlement of
approximately 94% of our outstanding 7.25% ACES debentures and the cash
settlement of $950 million of our outstanding LYONs. These two actions
decreased our outstanding debt by approximately $2.0 billion, increased equity
by approximately $1.0 billion, and will reduce quarterly interest expense by
approximately $23.0 million in the fourth quarter of fiscal year 2004 from the
third quarter of fiscal 2004. The net effect of reducing debt and increasing
equity improved our debt-to-capital ratio from 71.3% to 34.5%. Our short-term
debt is now $25.5 million and our remaining long-term debt of $1.2 billion has
an average maturity of 5 years. Key Performance Indicators Management regularly reviews financial and non-financial performance indicators
to assess the Companys operating results. The following table sets forth, for
the quarterly periods indicated, certain of managements key financial
performance indicators. Three Months EndedMay 31, 2004
    
    February 28, 2004
    
    November 30, 2003
    
    August 31, 2003Inventory turns
    
    7.5 turns
    
    7.4 turns
    
    7.4 turns
    
    6.6 turnsDays sales outstanding (DSO)
    
    47 days
    
    49 days
    
    50 days
    
    53 daysDays payable outstanding (DPO)
    
    46 days
    
    48 days
    
    48 days
    
    46 daysCash-to-cash cycle (C2C)
    
    49 days
    
    50 days
    
    50 days
    
    59 daysCapital expenditures (in millions)
    
    $    32.8
    
    $    31.5
    
    $    37.0
    
    $    40.7
 Inventory turns is calculated as the ratio of cost of sales compared to the
average inventory for the quarter. The improvement in inventory turns was
primarily the result of: (1) our disciplined and focused effort on material and
production planning and, (2) continued implementation of the Lean Initiative in
our manufacturing sites around the world. DSO is calculated as the ratio of
average accounts receivable for the quarter compared to daily revenue for the
quarter. DSO has declined from the prior quarter due to an increased focus on
collection activity and ensuring compliance with the terms and conditions of
our contracts. DPO is calculated as the ratio of average accounts payable
during the quarter compared to daily cost of sales for the quarter. The C2C
cycle is determined by taking the ratio of 360 days compared to inventory turns
plus DSO minus DPO. The C2C cycle has declined from the prior quarter
primarily as a result of improvements in both inventory turns and DSO,
partially offset by lower DPO. Capital expenditures are primarily related to
equipment purchases supporting increased demand and new programs. Critical Accounting Policies Management is required to make judgments, assumptions and estimates that affect
the amounts reported when we prepare financial statements and related
disclosures in conformity with generally accepted accounting principles in the
United States. Note 1, Summary of Significant Accounting Policies, to the
consolidated financial statements in our Annual Report on Form 10-K for the
fiscal year ended August 31, 2003 describes the significant accounting policies
and methods used in the preparation of our consolidated financial statements.
Estimates are used for, but not limited to, our accounting for contingencies,
allowance for doubtful accounts, inventory valuation, goodwill and other
intangible asset impairments, restructuring costs, and income taxes. Actual
results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates
used in the preparation of our consolidated financial statements. Loss Contingencies We are subject to the possibility of various loss contingencies arising in the
ordinary course of business. We consider the likelihood and our ability to
reasonably estimate the amount of loss in determining the necessity for, and
amount of, any loss contingencies. Estimated loss contingencies are accrued
when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. We regularly evaluate information available to us
to determine whether any such accruals should be adjusted. 24




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##### Table of Contents



Such revisions in
the estimates of the potential loss contingencies could have a material impact
in our results of operations and financial position. Inventory Valuation Our inventories are stated at the lower of weighted average cost or market. Our
industry is characterized by rapid technological change, short-term customer
commitments and rapid changes in demand, as well as any other lower of cost or
market considerations. We make provisions for estimated excess and obsolete
inventory based on our regular reviews of inventory quantities on hand and the
latest forecasts of product demand and production requirements from our
customers. Our provisions for excess and obsolete inventory are also impacted
by our contractual arrangements with our customers including our ability or
inability to re-sell such inventory to them. If actual market conditions or our
customers product demands are less favorable than those projected or if our
customers are unwilling or unable to comply with any contractual arrangements
related to excess and obsolete inventory, additional provisions may be
required. Allowance for Doubtful Accounts We evaluate the collectability of our accounts receivable based on a
combination of factors. Where we are aware of circumstances that may impair a
specific customers ability to meet its financial obligations to us, we record
a specific allowance against amounts due to us and thereby reduce the net
receivable to the amount we reasonably believe is likely to be collected. For
all other customers, we recognize allowances for doubtful accounts based on the
length of time the receivables are outstanding, industry and geographic
concentrations, the current business environment and our historical experience.
If the financial condition of our customers deteriorates or if economic
conditions worsen, additional allowances may be required. Goodwill We perform a goodwill impairment test annually during the fourth quarter of our
fiscal year and more frequently if an event or circumstance indicates that an
impairment loss has occurred. Such events or circumstances may include
significant adverse changes in the general business climate or a prolonged
depressed market capitalization, among others. The tests are performed by
determining the fair values of our reporting units using a discounted future
cash flow model and comparing those fair values to the carrying values of the
reporting units, including goodwill. If the fair value of a reporting unit is
less than its carrying value, we then allocate the fair value of the unit to
all the assets and liabilities of that unit (including any unrecognized
intangible assets) as if the reporting units fair value was the purchase price
to acquire the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to its assets and liabilities is the implied
fair value of the goodwill. If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. The process of evaluating the
potential impairment of goodwill is subjective and requires judgment at many
points during the test including future revenue forecasts, discount rates and
various reporting unit allocations. Intangible Assets Our intangible assets consist primarily of intellectual property agreements and
other intangible assets obtained from asset acquisitions. Intangible assets are
evaluated for impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Such an asset is
considered impaired if the carrying amount of the asset grouping including the
intangible asset exceeds the sum of the undiscounted cash flows expected to
result from the use and ultimate disposition of the assets. If such assets are
considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds fair value determined using a
discounted cash flow model. While our cash flow assumptions and estimated
useful lives are consistent with our business plans, there is significant
judgment involved in determining these cash flows. Restructuring and Related Impairment Costs Over the past few years, we have recorded restructuring and impairment costs as
we rationalized our operations in light of customer demand declines and the
economic downturn. These restructuring and impairment charges include employee
severance and benefit costs, costs related to leased facilities that have been
abandoned and subleased, owned facilities no longer used by us which will be
disposed of, costs related to leased equipment that has been abandoned, and
impairment of owned equipment that will be disposed of. For owned facilities
and equipment, the impairment loss recognized was based on the fair value less
costs to sell, with fair value estimated based on existing market prices for
similar assets. Severance and benefit costs and other costs associated with
restructuring activities initiated prior to January 1, 2003 were recorded in
compliance with EITF Issue No. 94-3, Liability Recognition for Certain 25




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##### Table of Contents



Employee Termination Benefits and Other Costs to Exit an Activity. Severance
and benefit costs associated with restructuring activities initiated on or
after January 1, 2003 are recorded in accordance with SFAS No. 112, Employers
Accounting for Postemployment Benefits, as we concluded that we had a
substantive severance plan. In accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, the estimated lease loss accrued for leased facilities that
have been abandoned and subleased after
December 31, 2002 represents the fair value
of the lease liability as measured by the present value of future lease
payments subsequent to abandonment less the present value of any estimated
sublease income. For those facilities abandoned and subleased as part of
restructuring activities under EITF Issue No. 94-3, the estimated lease loss
represents payments subsequent to abandonment less any estimated sublease
income. In order to estimate future sublease income, we work with an
independent broker to estimate the length of time until we can sublease a
facility and the amount of rent we can expect to receive. Our estimates of
expected sublease income could change based on factors that affect our ability
to sublease those facilities such as general economic conditions and the real
estate market, among others. Income Taxes We currently have significant deferred tax assets in certain jurisdictions
resulting from tax credit carryforwards, net operating losses and other
deductible temporary differences, which will reduce taxable income in such
jurisdictions in future periods. We have provided valuation allowances for
future tax benefits resulting from foreign net operating loss carryforwards and
for certain other U.S. and foreign deductible temporary differences where we
believe future realizability is in doubt. SFAS No. 109 requires a valuation
allowance be established when it is more likely than not that all or a
portion of deferred tax assets will not be realized, and further provides that
it is difficult to conclude that a valuation allowance is not needed when there
is negative evidence in the form of cumulative losses in recent years.
Therefore, cumulative losses weigh heavily in the overall assessment. We
established a valuation allowance in the third quarter of fiscal 2003 for most
of our deferred tax assets because prior losses and an uncertain future outlook
did not support projections of profitability sufficient to establish our
ability to use those deferred tax assets in future periods. We have not yet
established sufficient sustained profitability since that time which would
support projections of future profitability consistent with the recognition of
deferred tax assets generated in prior and current periods. As a result of our
assessment, we increased our total valuation allowance on deferred tax assets
arising from continuing operations to approximately $1.5 billion at May 31,
2004. We expect to record a full valuation allowance on future tax benefits
until we reach a sustained level of profitability in the countries in which
deferred tax assets arise. Results of Operations The following table summarizes certain items in the condensed consolidated
statements of operations as a percentage of net sales. The financial
information and the discussion below should be read in conjunction with the
accompanying condensed consolidated financial statements and notes thereto. The
discussion following the table is provided separately for continuing and
discontinued operations. For all periods presented, our condensed consolidated
statements of operations exclude the results from certain operations we plan to
divest which have been classified as discontinued operations. Information
related to the discontinued operations results is provided separately;
following the continuing operations discussion below. 26




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##### Table of Contents



Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    94.8
    
    
    
    95.8
    
    
    
    95.2
    
    
    
    95.6Gross profit
    
    
    5.2
    
    
    
    4.2
    
    
    
    4.8
    
    
    
    4.4Operating expenses:Selling, general and
administrative
    
    
    3.4
    
    
    
    5.9
    
    
    
    3.8
    
    
    
    5.9Restructuring and impairment
costs
    
    
    0.2
    
    
    
    84.0
    
    
    
    1.2
    
    
    
    28.7Operating income (loss)
    
    
    1.6
    
    
    
    (85.7
    )
    
    
    (0.2
    )
    
    
    (30.2
    )Interest income
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.3Interest expense
    
    
    (1.4
    )
    
    
    (2.2
    )
    
    
    (1.5
    )
    
    
    (2.2
    )Other income
(expense) - net
    
    
    (2.6
    )
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    0.6Operating loss from continuing
operations before income taxes
    
    
    (2.2
    )
    
    
    (87.8
    )
    
    
    (2.4
    )
    
    
    (31.5
    )Income tax expense
    
    
    
    
    
    
    26.1
    
    
    
    
    
    
    
    7.2Loss from continuing operations
    
    
    (2.2
    )%
    
    
    (113.9
    )%
    
    
    (2.4
    )%
    
    
    (38.7
    )%Discontinued operations:Income (loss) from discontinued
operations
    
    
    3.1
    
    
    
    (13.2
    )
    
    
    0.6
    
    
    
    (4.2
    )Income tax expense
    
    
    0.2
    
    
    
    4.5
    
    
    
    0.1
    
    
    
    1.5Net income (loss)
    
    
    0.7
    %
    
    
    (131.6
    )%
    
    
    (1.9
    )%
    
    
    (44.4
    )%
 Net Sales  Continuing Operations For the third quarter of fiscal 2004, net sales increased 29.0% to $3.0 billion
from $2.4 billion in the same period of fiscal 2003. The increase for the
three months ended May 31, 2004 from the same period of the previous fiscal
year was due to increased sales levels across all markets. Specific increases
include an 8.6% increase in the sale of computing and storage products; a 14.9%
increase in the sale of networking products; a 27.0% increase in the sale of
communication products; an 81.3% increase in sales of consumer products; a
135.4% increase in the sale of industrial products; and a 20.1% increase in the
sales of automotive products. The increased sales levels were due to the
addition of new customers and growth in these markets. For the nine months ended May 31, 2004, net sales increased 16.8% to $8.6
billion from $7.4 billion in the same period of fiscal 2003. The increase for
the nine months ended May 31, 2004 from the same period of the previous fiscal
year was due to increased sales levels across most markets. Specific increases
include a 18.0% increase in the sale of computing and storage products; a 7.3%
increase in the sale of networking products; a 62.1% increase in sales of
consumer products; a 50.8% increase in the sale of industrial products; and a
26.6% increase in the sales of automotive products. The increased sales levels
were due to the addition of new customers and growth in these markets. The following table depicts, for the periods indicated, revenue by market
expressed as a percentage of net sales. The distribution of revenue across our
markets has fluctuated, and will continue to fluctuate, as a result of numerous
factors, including but not limited to: increased business from new and existing
customers; fluctuations in customer demand; seasonality; and growth in market
outsourcing. 27




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##### Table of Contents



Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Computing & Storage
    
    
    29
    %
    
    
    34
    %
    
    
    32
    %
    
    
    31
    %Consumer
    
    
    20
    %
    
    
    14
    %
    
    
    19
    %
    
    
    14
    %Communications
    
    
    19
    %
    
    
    20
    %
    
    
    18
    %
    
    
    22
    %Networking
    
    
    21
    %
    
    
    24
    %
    
    
    21
    %
    
    
    23
    %Industrial
    
    
    6
    %
    
    
    3
    %
    
    
    5
    %
    
    
    4
    %Automotive
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Other
    
    
    2
    %
    
    
    2
    %
    
    
    2
    %
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 International Sales  Continuing Operations In the three and nine months ended May 31, 2004, our international locations
contributed approximately 73.5% and 72.9%, respectively, of net sales compared
to approximately 65.6% and 66.3% for the corresponding periods
of fiscal 2003, respectively. Net sales from our international sites, as a percentage of
consolidated net sales, have grown primarily in the Asia/Pacific region where
we have invested to take advantage of the lower cost of operations. Major Customers  Continuing Operations Certain customers accounted for 10% or more of our net sales. The following
table includes these customers and the percentage of net sales attributed to
them: Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Cisco Systems
    
    
    12.8
    %
    
    
    12.0
    %
    
    
    12.4
    %
    
    
    11.2
    %Nortel Networks
    
    
    ***
    
    
    
    12.8
    %
    
    
    ***
    
    
    
    13.0
    %
 *** Less than 10% Our top ten customers accounted for approximately 60.7% and 60.0% of net sales
for the three and nine months ended May 31, 2004, respectively, compared to
approximately 61.7% and 60.1% in the corresponding periods of fiscal 2003,
respectively. We believe that our ability to grow depends on increasing sales to existing
customers and on successfully attracting new customers. Customer contracts can
be canceled and volume levels can be changed or delayed. The timely replacement
of delayed, canceled or reduced orders with new business cannot be ensured. In
addition, we cannot assume that any of our current customers will continue to
utilize our services. Consequently, our results of operations may be materially
adversely affected. Gross profit  Continuing Operations Gross profit varies from period to period and is affected by a number of
factors, including product mix, production efficiencies, component costs and
delivery linearity, product life cycles, unit volumes, expansion and
consolidation of manufacturing facilities, utilization of manufacturing
capacity, pricing, competition, and unanticipated restructuring or inventory
charges. Our gross profit percentage increased to 5.2% and 4.8% for the three and nine
months ended May 31, 2004, respectively, compared to 4.2% and 4.4% for the
corresponding periods in fiscal 2003, respectively. The gross profit improvement was the
result of effectively implementing the Lean Initiative in our manufacturing
sites around the world and increasing discipline in the implementation of our
quote process. Furthermore, during the second quarter of fiscal 2003, our
margin was negatively affected by inefficiencies associated with reduced demand
and a $76.3 million inventory charge related to excess and obsolete inventory
which was taken due to the continued depressed condition of the
telecommunications market. We continue to implement a number of initiatives to improve our gross profits:
(1) Lean Initiative to improve operational effectiveness and efficiency; (2)
further improving capacity utilization; (3) ensuring contractual relationships
reflect value added by 28




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##### Table of Contents



our operations; (4) a disciplined pricing model; (5)
engaging with our customers in collaborative design; and (6)
profitability-based sales force compensation. Sales of inventory previously written down or written off have not been
significant and have not had any material impact on our gross profits for the
three and nine months ended May 31, 2004. Selling, General and Administrative (SG&A) Expenses  Continuing Operations SG&A expenses decreased $34.2 million, or 24.8%, for the three months
ended May 31, 2004 compared to the corresponding period in fiscal 2003. SG&A
expenses decreased $108.6 million, or 24.9%, for the nine months ended May 31,
2004 compared to the corresponding period in fiscal 2003. As a percentage of
net sales, SG&A expenses decreased to 3.4% and 3.8% for the three and nine
months ended May 31, 2004, respectively, compared to 5.9% in the corresponding
periods in fiscal 2003. The decrease was primarily due to headcount and other
SG&A expense reductions resulting from our restructuring initiatives. Restructuring and Impairment  Continuing Operations During the third quarter of fiscal 2004, we continued our restructuring
activities and total restructuring and impairment costs of $5.5 million were
charged against operations which mainly related to the loss on disposal of
property and equipment and continued review of our operating lease liabilities
associated with vacant facilities and unused equipment. As of May 31, 2004, liabilities related to our restructuring activities total
approximately $106.7 million. Approximately $67.0 million of this total is
expected to be paid out within the next twelve months for severance and benefit
payments related to the remaining restructuring activities, lease commitment
costs and other exit costs. The remaining balance, consisting of lease
commitment costs, is expected to be paid out through 2012. As of May 31, 2004,
Solectron has approximately 1.7 million square feet of vacant facility space in
continuing operations. If projected sublease income does not meet expectation,
Solectron could potentially incur up to approximately $25 million in additional
facility lease expenses. Ongoing Restructuring Activities We continue to evaluate our cost structure relative to current anticipated
revenue levels and to adjust our manufacturing footprint between high cost and
low cost areas and may take additional restructuring charges in the future. If
our estimates about future restructuring charges prove to be inadequate, our
financial condition and results of operations may suffer. We expect to incur
nominal
restructuring charges which will consist of both cash and non-cash charges
during the remainder of the fiscal year as we continue to sell assets and
revise previous estimates. See Note 10, Restructuring and Impairment, for further discussion of our
restructuring activities. Interest Income  Continuing Operations Interest income decreased $2.0 million to $4.8 million for the three months
ended May 31, 2004 from $6.8 million in the corresponding period in fiscal
2003. Interest income decreased $10.8 million to $10.8 million for the nine
months ended May 31, 2004 from $21.6 million in the corresponding period in
fiscal 2003. The decreases were due to reduced average cash, cash equivalent
and short-term investment balances and lower average interest rates in fiscal
2004 as compared to fiscal 2003. Interest Expense  Continuing Operations Interest expense decreased $9.6 million to $41.8 million for the three months
ended May 31, 2004 from $51.4 million in the corresponding period in fiscal
2003. Interest expense decreased $30.3 million to $130.1 million for the nine
months ended May 31, 2004 from $160.4 million in the corresponding period in
fiscal 2003. The decreases were primarily due to the retirement of
approximately $1.8 billion aggregate principal amount at maturity of our LYONs
during fiscal 2003 and approximately $1.6 billion aggregate principal amount at
maturity of our LYONs during the third quarter of fiscal 2004. In addition, we
completed the early settlement of approximately 94% of our outstanding 7.25%
ACES debentures during the third quarter of fiscal 2004. The LYONs retirement
and early settlement of our 7.25% ACES debentures will provide an interest
expense reduction of approximately $23 million in future fiscal quarters. 29




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##### Table of Contents



Other
Income (Expense) - net Continuing Operations Other
income (expense) - net increased $72.5 million to a $77.9 million expense
for the three months ended May 31, 2004 from a $5.4 million expense in the
corresponding period in fiscal 2003. Other income (expense)  net decreased
$114.7 million to a $68.6 million expense for the nine months ended May 31,
2004 from a $46.1 million income in the corresponding period in fiscal 2003.
For the three and nine months ended May 31, 2004, other income (expense)  net
primarily consisted of a loss resulting from the early settlement of
approximately 94% of our 7.25% ACES debentures of $77.7 million. For the nine months ended May 31, 2003, other income (expense) - net primarily
consisted of gains on retirement of our LYONs. The following tables provide the
details of the early settlement of our 7.25% ACES debentures, the retirement of
our 4.0% LYONs due 2019, the retirement of our 2.75% LYONs due 2020 and the
retirement of our 3.25% LYONs due 2020 in each period presented recorded in the
accompanying condensed consolidated financial statements (in millions): 7.25% ACES Early Settlement
    
    Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Principal amount at maturity
    
    $
    1,012.5
    
    
    $
    
    
    
    $
    1,012.5
    
    
    $
    Carrying value
    
    $
    1,007.5
    
    
    $
    
    
    
    $
    1,007.5
    
    
    $
    Common stock issued
    
    
    1,006.4
    
    
    
    
    
    
    
    1,006.4
    
    
    
    Cash paid
    
    
    63.3
    
    
    
    
    
    
    
    63.3
    
    
    
    Debt issuance cost write-off
    
    
    15.5
    
    
    
    
    
    
    
    15.5
    
    
    
    Loss
included in other income (expense) - net
    
    $
    (77.7
    )
    
    $
    
    
    
    $
    (77.7
    )
    
    $
    
 LYONs Retirement
    
    Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Principal amount at maturity
    
    $
    1,617.5
    
    
    $
    818.1
    
    
    $
    1,617.5
    
    
    $
    1,443.1Carrying value
    
    $
    950.2
    
    
    $
    514.2
    
    
    $
    950.2
    
    
    $
    861.4Cash paid
    
    
    950.2
    
    
    
    514.2
    
    
    
    950.2
    
    
    
    823.1Gain
included in other income (expense) - net
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    38.3
 The
remaining components of other income (expense) - net fluctuated primarily
due to foreign currency gains and losses. Income Taxes  Continuing Operations Our income tax expense was $0.3 million and $3.3 million, respectively, for the
three and nine months ended May 31, 2004 as compared to an income tax expense
of $615.8 million and $531.0 million, respectively, for the three and nine
months ended May 31, 2003. Managements decision to provide a valuation
allowance on certain deferred tax assets resulted in the tax expense incurred
in the third quarter of fiscal 2003. Subsequent to the third quarter of fiscal
2003, we established a full valuation allowance for most of the net deferred
tax assets arising from operations. Income tax expense that would otherwise be
incurred over the next several quarters will be reduced to the extent of
offsetting valuation allowance reductions. We incurred net tax expense in
certain countries in which we have profitable operations during the three and
nine months ended May 31, 2004. In prior quarters, the effective income tax rate had been largely a function of
the balance between income and losses from domestic and international
operations. Our international operations, taken as a whole, have been subject
to tax at a lower rate than operations in the United States, primarily due to
tax holidays granted to several of our overseas sites in Malaysia, Singapore
and China. The Malaysian tax holiday is effective through July 2011, subject to
some conditions, including maintaining certain levels of research and
development expenditures. The Singapore tax holiday is effective through March
2011, subject to some conditions. Seven of our China sites have separate tax
holiday agreements. Each agreement expires five years from the first profitable
year for each site. Certain of our offshore operations are beginning to report taxable profits,
mostly arising in low-cost locations. Accordingly, we anticipate some tax
expense in future quarters related to those operations. We will not be able to
offset this tax expense with 30




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##### Table of Contents



unrecognized deferred tax assets described above, because, for the most part,
those assets did not arise in the jurisdictions where we are realizing taxable
profits. Liquidity and Capital Resources  Continuing Operations Cash, cash equivalents, and short-term investments decreased to approximately
$1.2 billion at May 31, 2004 from approximately $1.5 billion at August 31,
2003. The table below, for the periods indicated, provides selected condensed
consolidated cash flow information (in millions): Nine Months Ended May 312004
    
    2003Net cash (used in) provided by operating activities of continuing operations
    
    $
    (133.2
    )
    
    $
    252.5Net cash provided by investing activities of continuing operations
    
    $
    392.5
    
    
    $
    371.3Net cash used in financing activities of continuing operations
    
    $
    (518.4
    )
    
    $
    (883.9
    )
 We used cash from operating activities of $133.2 million during the nine months
ended May 31, 2004. This use of cash was generated from a $207.3 million loss
from continuing operations, a $210.3 million increase in accounts receivable,
net, a $246.0 million increase in inventories offset by a $264.6 million
increase in accounts payable, non-cash depreciation and amortization charges of
$174.1 million and loss on the retirement of debt of $77.7 million. The rise in
inventory levels and accounts payable is due to an increase in forecasted
demand from our customers. Accounts receivable, net has increased in conjunction
with higher revenues. We generated cash from investing activities of $392.5 million during the nine
months ended May 31, 2004 primarily due to net proceeds of $383.4 million
received from the disposition of four of our discontinued operations. Net cash used in financing activities of $518.4 million during the nine months
ended May 31, 2004 primarily consisted of the retirement of LYONs for $950
million offset by $436.5 million of net proceeds generated from the issuance of 0.5%
convertible senior notes. As of May 31, 2004, we had available a $250 million revolving credit facility
that expires on February 14, 2005. Our revolving credit facility is guaranteed
by certain of our domestic subsidiaries and secured by the pledge of domestic
accounts receivable, inventory and equipment, the pledge of equity interests in
certain of our subsidiaries and notes evidencing intercompany debt. Borrowings
under the credit facility bear interest, at our option, at the London Interbank
offering rate (LIBOR) plus a margin of 2.125% based on our current senior
unsecured debt ratings, or the higher of the Federal Funds Rate plus 1/2 of 1%
or Bank of America N.A.s publicly announced prime rate. As of May 31, 2004,
there were no borrowings outstanding under this facility. We are subject to
compliance with certain financial covenants set forth in these facilities
including, but not limited to, capital expenditures, consolidated tangible net
worth, cash interest coverage, leverage, liquidity, and minimum cash. Prior to
the end of the second quarter of fiscal 2004, we amended
certain terms and conditions including the minimum liquidity and the leverage
covenants. We were in compliance with all applicable covenants as of May 31,
2004. On October 28, 2003 Standard and Poors downgraded our senior unsecured debt
rating to B+ with a stable outlook. On October 31, 2003 Moodys downgraded
our senior unsecured debt rating to B1 with a stable outlook. These rating downgrades increase our cost of
capital should we borrow under our revolving lines of credit, and may make it
more expensive for us to raise additional capital in the future. Such capital
raising activities may be on terms that may not be acceptable to us or
otherwise not available. On June 22,
2004, Standard and Poors affirmed our senior unsecured rating and revised our
outlook to positive from stable. In addition, we had $31.6 million in committed and $198.0 million in
uncommitted foreign lines of credit and other bank facilities as of May 31,
2004 relating to continuing operations. A committed line of credit obligates a
lender to loan us amounts under the credit facility as long as we adhere to the
terms of the credit agreement. An uncommitted line of credit is extended to us
at the sole discretion of a lender. The interest rates range from the banks
prime lending rate to the banks prime rate plus 2.0%. As of May 31, 2004,
borrowings and guaranteed amounts were $8.4 million under committed and $11.6
million under uncommitted foreign lines of credit. Borrowings are payable on
demand. The weighted-average interest rate was 1.92% for committed and 5.46%
for uncommitted foreign lines of credit as of May 31, 2004. During the third quarter of fiscal 2004, we issued 17.1 million shares of
common stock for total net proceeds of $81.7 million. These 31




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net proceeds of $81.7 million in part, along with an additional common stock
issuance of 105.6 million shares were used to early settle approximately 94% of
our 7.25% ACES. Holders of our 3.25% LYONs due November 2020 had the option to require us to
repurchase their notes on May 20, 2004 in an amount of $587.46 per $1,000
principal amount for a total of approximately $953 million. Solectron
repurchased approximately $950 million of these LYONS with cash during the
third quarter of fiscal 2004. The early settlement of approximately 94% of our
ACES debentures results in approximately $63 million of the 7.25% subordinated
ACES debentures to be due on November 15, 2006. On or about August 15, 2004,
the remaining ACES debentures of $63 million are scheduled to be remarketed and
if the remarketing is successful, the interest rate will be reset at the then
current rates as described in the indenture and the proceeds from the
remarketing will be used to satisfy the holders obligation to purchase our
common stock in November 2004. If the debentures are not successfully
remarketed, the interest rate will not be reset and we expect to use the
pledged debentures to satisfy the holders obligation to purchase our common
stock in November 2004. In addition, our $150 million aggregate principal
amount of 7.375% senior notes is due on March 1, 2006, our $500 million
aggregate principal amount of 9.625% senior notes is due on February 15, 2009,
and our $450 million aggregate principal amount of 0.5% convertible senior
notes is due on February 15, 2034. We have synthetic lease agreements relating to four manufacturing sites for
continuing operations. The synthetic leases have expiration dates in 2007. At
the end of the lease term, we have an option, subject to certain conditions, to
purchase or to cause a third party to purchase the facilities subject to the
synthetic leases for the Termination Value, which approximates the lessors
original cost for each facility, or we may market the property to a third party
at a different price. We are entitled to any proceeds from a sale of the
properties to third parties in excess of the Termination Value and liable to
the lessor for any shortfall. We provided loans to the lessor equaling
approximately 85% of the Termination Value for each synthetic lease. These
loans are repayable solely from the sale of the properties to third parties in
the future, are subordinated to the amounts payable to the lessor at the end of
the synthetic leases, and may be credited against the Termination Value payable
if we purchase the properties. The approximate aggregate Termination Values and
loan amounts are $101.3 million and $86.1 million, respectively, as of May 31,
2004. In addition, cash collateral of $15.2 million is pledged for the difference
between the aggregate Termination Values and the loan amounts. Each synthetic
lease agreement contains various affirmative and financial covenants. A default
under a lease, including violation of these covenants, may accelerate the
termination date of the arrangement. Prior to the end of the second quarter of
fiscal 2004, we amended certain terms and conditions
including the minimum liquidity and the leverage covenants. We were in
compliance with all applicable covenants as of May 31, 2004. Monthly lease
payments are generally based on the Termination Value and 30-day LIBOR index
(1.1% as of May 31, 2004) plus an interest-rate margin, which may vary
depending upon our Moodys Investors Services and Standard and Poors ratings,
and are allocated between the lessor and us based on the proportion of the loan
amount to the Termination Value for each synthetic lease. We account for these synthetic lease arrangements as operating leases in
accordance with SFAS No. 13, Accounting for Leases, as amended. Our loans to
the lessor and cash collateral were included in other long-term assets and
cash, cash equivalents and short-term investments, respectively, in the
condensed consolidated balance sheets. We believe that our current cash, cash equivalents, short-term investments,
lines of credit and cash anticipated to be generated from continuing operations
and divestitures of our discontinued operations will satisfy our expected
working capital, capital expenditures, debt service and investment requirements
through at least the next 12 months. The following is a summary of certain obligations and commitments as of May 31,
2004 for continuing operations: Payments Due by Period
(in millions) FY05Total
    
    Q404
    
    Q1-Q3
    
    Q4
    
    FY06
    
    FY07
    
    FY08
    
    FY09
    
    ThereafterLong term debt
    
    $
    1,213.3
    
    
    $
    
    
    
    $
    
    
    
    $
    1.5
    
    
    $
    171.7
    
    
    $
    72.5
    
    
    $
    0.2
    
    
    $
    0.1
    
    
    $
    967.3Operating lease
    
    
    173.1
    
    
    
    23.0
    
    
    
    33.5
    
    
    
    8.2
    
    
    
    25.1
    
    
    
    16.9
    
    
    
    13.9
    
    
    
    11.7
    
    
    
    40.8Other (1)
    
    
    114.8
    
    
    
    114.8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,501.2
    
    
    $
    137.8
    
    
    $
    33.5
    
    
    $
    9.7
    
    
    $
    196.8
    
    
    $
    89.4
    
    
    $
    14.1
    
    
    $
    11.8
    
    
    $
    1,008.1
 32




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(1)
    
    We have guaranteed various purchase commitments for materials,
supplies and services incurred during the normal course of business. In addition, we guarantee committed and uncommitted lines of credit and debt
for our continuing operations subsidiaries totaling $229.6 million as of May
31, 2004. We also guarantee performance of certain of our continuing
operations subsidiaries in various transactions such as leases, totaling
$261.6 million as of May 31, 2004. Off-Balance Sheet Arrangements and Contractual Obligations Our off-balance sheet arrangements consist of our synthetic and operating
leases, subsidiary guarantees (leases and subsidiary guarantees are both
described in the Liquidity and Capital Resources portion of Managements
Discussion and Analysis of Financial Condition and Results of Operations), our
interest rate swap instrument related to our long-term debt (described in the
We are exposed to interest rate fluctuations Risk Factor), and our foreign
exchange contracts (described in the We are exposed to fluctuations in foreign
currency exchange rates Risk Factor). A tabular presentation of our contractual obligations is provided in the
Liquidity and Capital Resources portion of Managements Discussion and
Analysis of Financial Condition and Results of Operations. Discontinued Operations During the fourth quarter of fiscal 2003, as a result of a full review of our
portfolio of businesses, we committed to a plan to divest a number of business
operations that are no longer part of our strategic plan for the future. In
accordance with SFAS No. 144, we have reported the results of operations and
financial position of these businesses in discontinued operations within the
condensed consolidated statements of operations and balance sheets for all
periods presented. As a result of further divestment activity during the first
quarter of fiscal 2004, we identified certain additional operations, which were
included in continuing operations in fiscal 2003 that now qualify for
classification as discontinued operations. The companies that we have divested
and are in the process of divesting and that are included in discontinued
operations are: Dy 4 Systems Inc., Kavlico Corporation, Solectrons
MicroTechnology division, SMART Modular Technologies Inc., Stream International
Inc., our 63% interest in US Robotics Corporation, and Force Computers, Inc. The collective results from all discontinued operations for all periods
presented were as follows (in millions): Three Months Ended May 31
    
    Nine Months Ended May 312004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    325.8
    
    
    $
    458.2
    
    
    $
    1,204.9
    
    
    $
    1,297.2Cost of sales
    
    
    274.2
    
    
    
    393.8
    
    
    
    1,022.0
    
    
    
    1,094.0Gross profit
    
    
    51.6
    
    
    
    64.4
    
    
    
    182.9
    
    
    
    203.2Operating
expenses (income) - net
    
    
    (43.8
    )
    
    
    376.8
    
    
    
    129.0
    
    
    
    517.9Operating income (loss)
    
    
    95.4
    
    
    
    (312.4
    )
    
    
    53.9
    
    
    
    (314.7
    )Interest
income - net
    
    
    0.4
    
    
    
    0.7
    
    
    
    1.2
    
    
    
    1.4Other income
(expense) - net
    
    
    (3.0
    )
    
    
    1.4
    
    
    
    (4.3
    )
    
    
    0.8Income (loss) before income taxes
    
    
    92.8
    
    
    
    (310.3
    )
    
    
    50.8
    
    
    
    (312.5
    )Income tax expense
    
    
    6.1
    
    
    
    105.0
    
    
    
    10.0
    
    
    
    113.3Income (loss) from discontinued operations, net of tax
    
    $
    86.7
    
    
    $
    (415.3
    )
    
    $
    40.8
    
    
    $
    (425.8
    )
 Net sales, gross profit, operating expenses (income)  net, and interest income
- net from discontinued operations decreased for the three and nine months
ended May 31, 2004 as compared to the same periods in fiscal 2003 primarily due
to the sale of four discontinued operations during the nine months ended May
31, 2004. In addition, the aggregate pre-tax gain from the sales of all four
discontinued operations of $88.3 million and $155.5 million was recorded in operating expenses (income) - net for the three and
nine month periods ended May 31, 2004, respectively. We continue to anticipate total proceeds from the
sale of all discontinued operations to range from $500-$600 million. 33




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As a result of the sales agreement for one of the discontinued operations
during the third quarter of fiscal 2004, a synthetic lease held by the
discontinued operations was not assumed by the buyer. We are in the process of
terminating the synthetic lease by selling the property subject to the
synthetic lease and any potential loss associated with its termination
will be recorded as part of discontinued operations. The approximate
Termination Value and loan amounts was $23.4 million and $19.9 million,
respectively, as of May 31, 2004. At the end of the third quarter in fiscal
2004, we completed a preliminary valuation of the property under this
synthetic lease and has determined a shortfall of approximately $11.3 million
between the value of the property and the loan amount. The effect of this
shortfall will be realized ratably until the termination of the lease through
fiscal 2007 or upon its ultimate disposition. The sales agreements for all four divestitures contain certain indemnification
provisions under which Solectron may be required to indemnify the buyer of the
divested business for liabilities, losses, or expenses arising out of breaches
of covenants and certain breaches of representations and warranties relating to
the condition of the business prior to and at the time of sale. In
aggregate, Solectron is contingently liable for up to $61.5 million for a
period of 12 to 24 months subsequent to the completion of the sale. As of May
31, 2004, there were no liabilities recorded under these indemnification
obligations. The sales agreements of the discontinued operations generally include
terms which may result in adjustments to the gain or loss in fiscal quarters
subsequent to the closing of the sale. On June 16, 2004, we signed a definitive agreement to sell Force Computers,
Inc. embedded computing business to Motorola, Inc. On June 29, 2004, we sold
our 63% interest in US Robotics Corporation to the management of US Robotics. RISK FACTORS MOST OF OUR NET SALES COME FROM A SMALL NUMBER OF CUSTOMERS; IF WE LOSE ANY OF THESE
CUSTOMERS, OUR NET SALES COULD DECLINE SIGNIFICANTLY. Most of our annual net sales come from a small number of our customers. Our ten
largest customers accounted for approximately 60.7% and 61.7% of net sales from
continuing operations in the third quarters of fiscal 2004 and 2003,
respectively. Some of these customers individually account for more than ten
percent of our annual net sales. Any material delay, cancellation or reduction
of orders from these or other major customers could cause our net sales to
decline significantly, and we may not be able to reduce the accompanying
expenses at the same time. We cannot guarantee that we will be able to retain
any of our largest customers or any other accounts, or that we will be able to
realize the expected revenues under existing or anticipated supply agreements
with these customers. Our business, market share, financial condition and
results of operations will continue to depend significantly on our ability to
obtain orders from new customers, retain existing customers, realize expected
revenues under existing and anticipated supply agreements, as well as on the
financial condition and success of our customers and their customers. Net sales may not improve, and could decline, in future periods if there is
continued or resumed weakness in customer demand, particularly in the
telecommunications and computing sectors, resulting from worldwide economic
conditions. In addition, in connection with our efforts to improve our gross
margins, we are engaged in pricing discussions with certain current customers
on specific programs where we feel we are presently under-compensated for the
services and value that we provide. Where we are not able to reach mutual
agreement with a customer on price adjustments, we have mutually agreed with
the customer to transition the business in question to a new supplier. While we
believe our disengagement from specific programs with certain customers will
ultimately advance our efforts to return to sustained profitability, there can
be no assurance that such disengagements will not result in a loss of
significant revenue, a lowering of our capacity utilization at affected sites,
and other adverse financial effects. OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES OR
LOCATIONS, OR DELAY PRODUCTION. To remain competitive, EMS companies must provide increasingly rapid product
turnaround, at increasingly competitive prices, for their customers. We
generally do not have long-term contractual commitments from our top customers.
As a result, we cannot guarantee that we will continue to receive any net sales
from our customers. Customers may cancel their orders, change production
quantities or delay production for a number of reasons outside of our control.
Many of our customers industries have recently experienced a significant
decrease in demand for their products and services, as well as substantial
price competition. The generally uncertain economic condition of several of our
customers industries has resulted, and may continue to result, in some of our
customers delaying purchases on some of the products we manufacture for them,
and placing purchase orders for lower volumes of 34




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##### Table of Contents



products than previously anticipated. Cancellations, reductions or delays by a
significant customer or by a group of customers would seriously harm our
results of operations by reducing the volumes of products manufactured by us
for the customers and delivered in that period. Furthermore, delays in the
repayment of our expenditures for inventory in preparation for customer orders
and lower asset utilization in those periods would result in lower gross
margins. In addition, customers may require that manufacturing of their
products be transitioned from one facility to another to achieve cost and other
objectives. Such transfers, if unanticipated or not properly executed, could
result in various inefficiencies and costs, including excess capacity and
overhead at one facility and capacity constraints and related strains on our
resources at the other, disruption and delays in product deliveries and sales,
deterioration in product quality and customer satisfaction, and increased
manufacturing and scrap costs. WE MAY NOT BE ABLE TO SELL EXCESS OR OBSOLETE INVENTORY TO CUSTOMERS OR THIRD
PARTIES, WHICH COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL CONDITION. The majority of our inventory purchases and commitments are based upon demand
forecasts that our customers provide to us. The customers forecasts, and any
changes to the forecasts, including cancellations, may lead to on-hand
inventory quantities and on-order purchase commitments that are in excess of
the customers revised needs, or that become obsolete. We generally enter into supply agreements with our significant customers. Under
these supply agreements, the extent of our customers responsibility for excess
or obsolete inventory related to raw materials that were previously purchased
or ordered to meet that customers demand forecast is defined. If our customers
do not comply with their contractual obligations to purchase excess or obsolete
inventory back from us and we are unable to use or sell such inventory, our
financial condition could be materially harmed. Some of our customers are in
the telecommunications industry, an industry that in recent years has
experienced declining revenue, large losses, negative cash flows, and several
bankruptcies or defaults on borrowing arrangements. In the past, some of our
customers have defaulted on their obligations to purchase inventory back from
us. There is a risk that, in the future, these or other customers may not
purchase inventory back from us despite contractual obligations, which could
harm our financial condition if we are unable to sell the inventory at carrying
value. In addition, enforcement of these supply agreements may result in
material expenses, delays in payment for inventory and/or disruptions in our
customer relationships. We are responsible for excess and obsolete inventory resulting from inventory
purchases in excess of inventory needed to meet customer demand forecasts at
the time the purchase commitments were made, as well as any inventory purchases
not made pursuant to the customers responsibility under our supply agreements.
For inventory which is not the customers responsibility, provisions are made
when required to reduce any such excess or obsolete inventory to its estimated
net realizable value, based on the quantity of such inventory on hand, our
customers latest forecasts of production requirements, and our assessment of
available disposition alternatives such as use of components on other programs,
the ability and cost to return components to the vendor, and our estimates of
resale values and opportunities. These assessments are necessarily based upon
various assumptions and market conditions which are subject to rapid change,
and/or which may ultimately prove to be inaccurate. Any material changes in our
assumptions or market conditions could have a significant effect on our
estimates of net realizable value, could necessitate material changes in our
allowances for excess and obsolete inventory, and could have a material adverse
impact on our financial condition. In addition, in the normal course of
business, bona fide disagreements may arise over the amount and/or timing of
such claims, and in order to avoid litigation expenses, collection risks, or
disruption of customer relationships, we may elect to settle such disputes for
lesser amounts than we believe we should be entitled to recover. In these
instances, we must bear the economic loss of any such excess or obsolete
inventory, which could have a material adverse impact on our financial
condition. For example, we recorded a charge of $76 million related to excess
and obsolete inventory during the second quarter of fiscal 2003, and there can
be no assurance that similar charges at lesser or greater levels will not be
necessary in future periods. OUR NON-U.S. LOCATIONS REPRESENT A SIGNIFICANT PORTION OF OUR NET SALES; WE ARE
EXPOSED TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY. Approximately 73.5% and 65.6% of our net sales from continuing operations came
from sites outside the United States during the third quarters of fiscal 2004
and 2003, respectively. As a result of our foreign sales and facilities, our
operations are subject to a variety of risks and costs 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 and/or imports; 35




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
    
    potential restrictions on the transfer of funds;
    
    government and license requirements governing the transfer of
technology and products abroad;
    
    disruption of local labor supply and/or transportation services;
    
    inflexible employee contracts in the event of business downturns;
    
    the burden and cost of compliance with import and export regulations and foreign laws;
    
    economic and political risks in emerging or developing economies; and
    
    risks of conflict and terrorism that could disrupt our or our
customers and suppliers businesses. We have been granted tax holidays, which are effective through 2011 subject to
some conditions, for our Malaysian and Singapore 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 or when our current tax holidays expire, our future effective income tax
rate could increase. WE ARE EXPOSED TO GENERAL ECONOMIC CONDITIONS, WHICH COULD HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION. As a result of the recent economic downturn in the U.S. and internationally,
and reduced capital spending as well as end-market demand, our customers and
therefore our sales have declined significantly from prior years. In
particular, we depend on the telecommunications and computing industries, where
the decline began in the second quarter of fiscal 2001. If there were to be
continued or resumed weakness in these industries or any further deterioration
in the business or financial condition of our customers, it could
have a material adverse impact on our business, operating results and financial
condition. In addition, if the economic conditions in the United States and the
other markets we serve worsen, we may experience a material adverse impact on
our business, operating results and financial condition. POSSIBLE FLUCTUATION OF OPERATING RESULTS FROM QUARTER TO QUARTER AND FACTORS
OUT OF OUR CONTROL COULD AFFECT THE MARKET PRICE OF OUR SECURITIES. Our quarterly earnings and/or stock price 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
printed circuit boards and systems assembly services have lower gross
margins than low volume/complex printed circuit boards 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;
    
    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 customers demand for our products and their ability to take
delivery of our products and to make timely payments for delivered
products;
    
    our ability to optimize the ordering of inventory as to timing and
amount to avoid holding inventory in excess of immediate production
needs;
    
    our ability to offer technologically advanced, cost-effective,
quick response, manufacturing services; 36




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
    
    fluctuations in the availability and pricing of components;
    
    timing of expenditures in anticipation of increased sales;
    
    cyclicality in our target markets;
    
    fluctuations in our market share;
    
    expenses and disruptions associated with acquisitions and divestitures;
    
    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;
    
    credit rating and stock analyst downgrades;
    
    political and economic developments in countries in which we have operations; and
    
    general market conditions. If our operating results in the future are below the expectations of securities
analysts and investors, the market price of our outstanding securities could be
harmed. WE MAY NOT BE ABLE TO MEET OUR CASH REQUIREMENTS BECAUSE OF A NUMBER OF
FACTORS, MANY OF WHICH ARE BEYOND OUR CONTROL. Our ability to meet our cash requirements (including our debt service
obligations) is dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations, many of which
are beyond our control. If we are unable to meet our cash requirements from
operations, we would be required to fund these cash requirements by alternative
financings. The degree to which we may be leveraged could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes, could make us more vulnerable to industry
downturns and competitive pressures, or could limit our flexibility in planning
for, or reacting to, changes and opportunities in the electronics manufacturing
industry, which may place us at a competitive disadvantage. There can be no
assurance that we will be able to obtain alternative financing, that any such
financing would be on acceptable terms, or that we would be permitted to do so
under the terms of our existing financing arrangements. In the absence of such
financing, our ability to respond to changing business and economic conditions,
make future acquisitions, react to adverse operating results, meet our debt
service obligations or fund required capital expenditures or increased working
capital requirements may be adversely affected. IF WE INCUR MORE RESTRUCTURING-RELATED CHARGES THAN CURRENTLY ANTICIPATED, OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY SUFFER. In furtherance of the continued implementation of the series of restructuring
plans which we commenced in fiscal 2001, we expect to continue to incur
restructuring-related charges in fiscal 2004, primarily to consolidate
facilities and reduce our workforce in North America and Europe, although no
certainty can be attributed to an amount or the timing of its recognition. We
will continue to evaluate our cost structure relative to our revenue levels and
may take additional restructuring charges in the future. If our estimates about
future restructuring charges prove to be inadequate, our financial condition
and results of operations may suffer. In addition, if we are unable to
successfully move production from higher cost to lower cost facilities without
experiencing degradation of quality or timeliness of our service to our
customers, our business could be harmed. WE DEPEND ON LIMITED OR SOLE SOURCE SUPPLIERS FOR CRITICAL COMPONENTS. THE
INABILITY TO OBTAIN SUFFICIENT COMPONENTS AS REQUIRED, AND UNDER FAVORABLE
PURCHASE TERMS, WOULD CAUSE HARM TO OUR BUSINESS. 37




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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 in turn
could cause delays in product shipments and require the redesign of certain
products. In addition, if we are unable to procure necessary components under
favorable purchase terms, including at favorable prices and with the order
lead-times needed for the efficient and profitable operation of our factories,
our results of operations could suffer. The electronics industry has
experienced in the past, and may experience in the future, shortages in
semiconductor devices, including application-specific integrated circuits,
DRAM, SRAM, flash memory, certain passive devices such as tantalum capacitors,
and other commodities that may be caused by such conditions as overall market
demand surges or supplier production capacity constraints. The inability to
continue to obtain sufficient components as and when required, or to develop
alternative sources as and when required, could cause delays, disruptions or
reductions in product shipments or require product redesigns which could damage
relationships with current or prospective customers, and increase inventory
levels and costs, thereby causing harm to our business. WE POTENTIALLY BEAR THE RISK OF PRICE INCREASES ASSOCIATED WITH SHORTAGES IN
ELECTRONICS COMPONENTS. At various times, there have been shortages of components in the electronics
industry leading to increased component prices. 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 if 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, in an industry which is 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, or because such competitors are willing to accept
business at lower margins in order to utilize more of their excess capacity. In
that event, our net sales could 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 value-added performance and
improved pricing. Any of these could cause a decline in sales, loss of market
acceptance of our products or services and corresponding loss of market share,
or profit margin compression. WE DEPEND ON THE CONTINUING TREND OF OEMS TO OUTSOURCE. A substantial factor in our past revenue growth was attributable to the
transfer of manufacturing and supply-based 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. THE AGREEMENTS GOVERNING OUR EXISTING AND FUTURE DEBT CONTAIN AND WILL CONTAIN
VARIOUS COVENANTS THAT LIMIT OUR DISCRETION IN THE OPERATION OF OUR BUSINESS. The agreements and instruments governing our existing and future debt and our
secured credit facility contain and will contain various restrictive covenants
that, among other things, require us to comply with or maintain certain
financial tests and ratios and restrict our ability to:  
    
    incur debt;
    
    incur or maintain liens;
    
    redeem and/or prepay debt;
    
    make acquisitions of businesses or entities;
    
    make investments, including loans, guarantees and advances; 38




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
    
    make capital expenditures;
    
    engage in mergers, consolidations or certain sales of assets;
    
    engage in transactions with affiliates;
    
    pay dividends or engage in stock redemptions; and
    
    enter into certain restrictive agreements. Our secured credit facility is secured by a pledge of all of the capital stock
of our material domestic subsidiaries, 65% of the capital stock of certain of
our material foreign subsidiaries, certain of our intercompany loans and
certain additional assets, including inventory, accounts receivable and
equipment of us and our domestic subsidiaries. The covenants governing our
secured credit facility also restrict the operations of certain of our
subsidiaries, including, in some cases, limiting the ability of our
subsidiaries to make distributions to us. Our ability to comply with covenants contained in our secured credit facility
and other indebtedness to which we are or may become a party may be affected by
events beyond our control, including prevailing economic, financial and
industry conditions. Our failure to comply with our debt-related obligations
could result in an event of default which, if not cured or waived, could result
in an acceleration of our indebtedness and cross-defaults under our other
indebtedness, which could have a material adverse effect on our financial
condition. We obtained amendments related to the minimum cash interest coverage
ratio covenants applicable to various debt and lease agreements as described in
Liquidity and Capital
Resources, and as a result of such waivers, we were in compliance with all
applicable covenants as of May 31, 2004. Even if we are able to comply with all applicable covenants, the restrictions
on our ability to operate our business in our sole discretion could harm our
business by, among other things, limiting our ability to take advantage of
financings, mergers, acquisitions and other corporate opportunities. OUR STRATEGIC RELATIONSHIPS WITH MAJOR CUSTOMERS CREATE RISKS. In the past several years, we completed several strategic transactions with OEM
customers. Under these arrangements, we generally acquired inventory, equipment
and other assets from the OEM, and leased (or in some cases acquired) their
manufacturing facilities, while simultaneously entering into multi-year supply
agreements for the production of their products. There has been strong
competition among EMS companies for these transactions, and this competition
may continue to be a factor in customers selection of their EMS providers.
These transactions contributed to a significant portion of our past revenue
growth, as well as to a significant portion of our more recent restructuring
charges and goodwill and intangible asset impairments. While we do not
anticipate our acquisitions of OEM plants and equipment in the near future to
return to the levels at which they occurred in the recent past, there may be
occasions on which we determine it to be advantageous to complete acquisitions
in selected geographic and/or industry markets. As part of such arrangements,
we would typically enter into supply agreements with the divesting OEMs, but
such agreements generally do not require any minimum volumes of purchases by
the OEM and the actual volume of purchases may be less than anticipated.
Arrangements which may be entered into with divesting OEMs typically would
involve many risks, including the following:  
    
    we may pay a purchase price to the divesting OEMs that exceeds the
value we are ultimately able to realize from the future business of the
OEM;
    
    the integration into our business of the acquired assets and
facilities may be time-consuming and costly;
    
    we, rather than the divesting OEM, would bear the risk of excess capacity;
    
    we may not achieve anticipated cost reductions and efficiencies;
    
    we may be unable to meet the expectations of the OEM as to volume,
product quality, timeliness and cost reductions; and
    
    if demand for the OEMs products declines, the OEM may reduce its
volume of purchases, and we may not be able to sufficiently reduce the
expenses of operating the facility or use the facility to provide
services to other OEMs, and we might find it appropriate to close,
rather than continue to operate, the facility, and any such actions
would require us to incur 39




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significant restructuring and/or impairment charges. As a result of these and other risks, we may be unable to achieve anticipated
levels of profitability under such arrangements and they may not result in
material revenues or contribute positively to our earnings. Additionally, other
OEMs may not wish to obtain logistics or operations management services from
us. IF WE ARE UNABLE TO MANAGE OUR DIVESTITURES AND ANY FUTURE ACQUISITIONS, AND
COST-EFFECTIVELY RUN OUR OPERATIONS AND DISPOSE OF NON-STRATEGIC ASSETS, OUR
PROFITABILITY COULD BE ADVERSELY AFFECTED. While we may consider future acquisitions of companies and strategic assets on
a selective basis, subject to compliance with any restrictions that may exist
under certain of our financing instruments, we are presently focused on
divestiture activity. We are in the process of divesting certain parts of our
current operations that we do not believe to be strategic or synergistic to our
primary business focus, and we believe such divestitures, if successfully and
timely completed at the presently anticipated valuations and without undue
disruption of operations, present us with the opportunity to improve our
liquidity and reduce our interest and operating expenses. In order to achieve anticipated revenue and other financial performance
targets, we must continue to manage our assets and operations efficiently while
simultaneously preparing parts of our operations for divestiture. Our
divestiture activities are expected to place a heavy strain on various
personnel and management resources, and must be carefully managed in order to
avoid or minimize disruptions in the business operations of the affected
businesses, customer relations and cash flows, and to enable us to maximize the
value which we may be able to realize from the divestitures. There can be no
assurance that such divestiture activities will be able to be consummated
without an adverse impact on the near-term operations of the affected
businesses or on Solectron as a whole. Any failure to successfully manage and
consummate the divestitures in a timely manner could harm our financial
condition and results of operations, as well as adversely impact the realizable
value of the divested operations. In addition, there can be no assurance that
we will be successful in realizing the presently anticipated benefits from our
divestiture activities, as such transactions involve significant risks and
uncertainties with respect to valuation of the entities to be divested,
particularly given the potential disruption of operations inherent in the
divestiture process, and may result in significant costs, expenses and charges
that may significantly reduce the value which we may realize in connection with
the anticipated divestiture transactions. In the event we fail to consummate a
divestiture, we may need to incur restructuring charges. Our ability to manage and integrate any future acquisitions will require
successful integration of such acquisitions into our manufacturing and
logistics infrastructure, and may require enhancements or upgrades of
accounting and other internal management systems and the implementation of a
variety of procedures and controls. We cannot guarantee 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. In addition, we may experience
inefficiencies from the management of geographically dispersed facilities and
incur substantial infrastructure and working capital costs. We incurred
approximately $5.5 million of restructuring and impairment costs relating to
continuing operations in the third quarter of fiscal 2004. See also the Risk
Factor entitled If We Incur More Restructuring-Related Charges Than Currently
Anticipated, Our Financial Condition and Results of Operations May Suffer. NOTWITHSTANDING OUR DIVESTITURE OF CERTAIN BUSINESSES, WE WILL REMAIN SUBJECT
TO CERTAIN INDEMNIFICATION OBLIGATIONS FOR A PERIOD OF TIME AFTER COMPLETION OF
THE DIVESTITURES The sale agreement for each of our divested businesses contains indemnification
provisions under which we may be required to indemnify the buyer of the
divested business for liabilities, losses, or expenses arising out of breaches
of covenants and certain breaches of representations and warranties relating to
the condition of the business prior to and at the time of sale. While we
believe, based upon the facts presently known to us, that we have made adequate
provision for any such potential indemnification obligations, it is possible
that other facts may become known in the future which may subject us to claims
for additional liabilities or expenses beyond those presently anticipated and
provided for. Should any such unexpected liabilities or expenses be of a
material amount, our finances could be adversely affected. WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES. We have currency exposure 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 sites could seriously harm our business, operating results and
financial condition. For example, if there is an increase in the rate at which
a 40




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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 enter into foreign exchange forward contracts intended to reduce the
short-term impact of foreign currency fluctuations on foreign currency cash,
receivables, investments and payables. The gains and losses on the foreign
exchange forward contracts are intended to offset the transaction gains and
losses on the foreign currency cash, receivables, investments, and payables
recognized in earnings. We do not enter into foreign exchange forward contracts
for speculative purposes. Our foreign exchange forward contracts related to
current assets and liabilities are generally three months or less in original
maturity. As of May 31, 2004, we had outstanding foreign exchange forward contracts with
a total notional amount of approximately $585.4 million related to continuing
operations. The change in value of the foreign exchange forward contracts
resulting from a hypothetical 10% change in foreign exchange rates would be
offset by the remeasurement of the related balance sheet items, the result of
which would not be significant. As of May 31, 2004, the majority of our foreign currency hedging contracts were
scheduled to mature in approximately 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, 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. Although approximately
29.1% of our net sales from continuing operations in the third quarter of
fiscal 2004 were denominated in currencies other than the U.S. dollar, we do
not believe our total exposure to be significant because of natural hedges. WE ARE EXPOSED TO INTEREST RATE FLUCTUATIONS. 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 government and
corporate obligations, certificates of deposit and money market funds. As of
May 31, 2004, substantially our entire total portfolio was scheduled to mature
in less than three months. A hypothetical 10% change in interest rates would
not have a material effect on the fair value of our investment portfolios. As of May 31, 2004, we had no cash equivalents and short-term investments that
were subject to interest rate risk (defined as risk of loss of investment fair
value due to interest rate movements). The fair value of our cash equivalents
and short-term investments approximated the carrying value as of May 31, 2004. Interest on long-term debt instruments is payable at fixed rates. In addition,
the amount of principal to be repaid at maturity is also fixed. During the
third quarter of fiscal 2002, we entered into an interest rate swap transaction
under which we pay variable rates and we receive fixed rates. The interest swap
effectively converted $500 million of our long-term debt with fixed interest
rates into debt with variable rates of interest. Our interest rate swap, which
expires on February 15, 2009, has a total notional amount of $500 million and
relates to our 9.625% $500 million senior notes. Under this swap transaction
we pay an interest rate equal to the 3-month LIBOR rate plus a fixed spread. In
exchange, we receive fixed interest rates of 9.625%. On November 15, 2002, the
original swaps related to the senior notes were settled. This settlement
resulted in cash received and a gain of approximately $26 million, which is
being amortized over the remaining life of the senior notes. Also on November
15, 2002, Solectron entered into swaps with terms similar to the original swap
transactions used to hedge the interest paid on the senior notes and designated
the swaps as fair value hedges under SFAS No. 133. FAILURE TO ATTRACT AND 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 key executives and retain senior managers and skilled associates.
Failure to do so could harm our business. FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS. 41




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As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations, including those relating to the use,
storage, discharge and disposal of hazardous chemicals used during our
manufacturing process as well as air quality and water quality regulations,
restrictions on water use, and storm water regulations. 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. We own and lease some contaminated sites (for some of which we have been
indemnified by third parties for required remediation), sites for which there
is a risk of the presence of contamination, and sites with some levels of
contamination for which we may be liable and which may or may not ultimately
require any remediation. We have obtained environmental insurance to reduce
potential environmental liability exposures posed by some of our operations and
facilities. We believe, based on our current knowledge, that the cost of any
groundwater or soil clean up that may be required at our facilities would not
materially harm our business, financial condition and results of operations.
Nevertheless, the process of remediating contamination in soil and groundwater
at facilities is costly and cannot be estimated with high levels of confidence,
and there can be no assurance that the costs of such activities would not harm
our business, financial condition and results of operations in the future. WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS AND COULD BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES Our ability to effectively compete may be affected by our ability to protect
our proprietary information. We (including companies included in discontinued
operations) hold a number of patents and possess various other trade secrets
and license rights. These patents, trade secrets, and license rights may not
provide meaningful protection for our manufacturing processes and equipment
innovations, which could result in litigation. Any resulting litigation could
be lengthy and costly and could harm our financial condition. In the past 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 parties. In the event of an infringement claim,
we may be required to spend a significant amount of money to develop a
non-infringing alternative, to obtain licenses, and/or to defend against the
claim. We may not be successful in developing such an alternative or obtaining
a license on reasonable terms, if at all. Any litigation, even where an
infringement claim is without merit, could result in substantial costs and
diversion of resources. Accordingly, the resolution or adjudication of
intellectual property disputes could have a material adverse effect on our
business, financial condition and results of operations. OUR RATING DOWNGRADES MAKE IT MORE EXPENSIVE FOR US TO BORROW MONEY. On October 28, 2003 Standard and Poors downgraded our senior unsecured debt
rating to B+ with a stable outlook. On October 31, 2003 Moodys downgraded
our senior unsecured debt rating to B1 with a stable outlook. Rating
downgrades increase our cost of capital should we borrow under our revolving
line of credit, and may make it more expensive for us to raise additional
capital in the future. Such capital raising activities may be on terms that may
not be acceptable to us or may otherwise not be available. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk See Risk Factors - We Are Exposed to Fluctuations in Foreign Currency
Exchange Rates, and We Are Exposed to Interest Rate Fluctuations, for
factors related to fluctuations in the exchange rates of foreign currency and
fluctuations in interest rates. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Based on their evaluation as
of the end of the period covered by this Report, Solectrons principal
executive officer and principal financial officer have concluded that
Solectrons disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) are effective to ensure that information
required to be disclosed by Solectron in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms. Changes in Internal Controls. There were no changes in Solectrons internal
controls over financial reporting during the third quarter of fiscal 2004 or in
other factors that could have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting. 42




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Solectron is from time to time involved in various litigation and legal
matters, including those described below. By describing the particular matters
set forth below, Solectron does not intend to imply that it or its legal
advisors have concluded or believe that the outcome of any of those particular
matters is or is not likely to have a material adverse impact upon Solectrons
business or consolidated financial condition and results of operations. The case entitled Ronald Sorisho v. Solectron Corporation et al., Case No.
CV811243, which has been previously reported, was resolved on terms not
material to Solectron and the case has been dismissed. On March 6, 2003, a putative shareholder class action lawsuit was filed against
Solectron and certain of its officers in the United States District Court for
the Northern District of California alleging claims under Section 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and Rule 10b-5 promulgated thereunder. The case is entitled Abrams v. Solectron
Corporation et al., Case No. C-03-0986 CRB. The complaint alleged that the
defendants issued false and misleading statements in certain press releases and
SEC filings issued between September 17, 2001 and September 26, 2002. In
particular, plaintiff alleged that the defendants failed to disclose and to
properly account for excess and obsolete inventory in the former Technology
Solutions business unit during the relevant time period. Additional complaints
making similar allegations were subsequently filed in the same court, and
pursuant to an order entered June 2, 2003, the Court appointed lead counsel and
plaintiffs to represent the putative class in a single consolidated action. The
Consolidated Amended Complaint, filed September 8, 2003, alleges an expanded
class period of June 18, 2001 through September 26, 2002, and purports to add a
claim for violation of Section 11 of the Securities Act of 1933, as amended
(the Securities Act), on behalf of a putative class of former shareholders of
C-MAC Industries, Inc., who acquired Solectron stock pursuant to the October
19, 2001 Registration Statement filed in connection with Solectrons
acquisition of C-MAC Industries, Inc. In addition, while the initial complaints
focused on alleged inventory issues at the former Technology Solutions business
unit, the Consolidated Amended Complaint adds allegations of inadequate
disclosure and failure to properly account for excess and obsolete inventory at
Solectrons other business units. The complaint seeks an unspecified amount of
damages on behalf of the putative class. On June 14, 2004 the lead plaintiffs
filed a Motion for Class Certification seeking to have the court declare this
matter a class action litigation. The hearing for the Motion for Class
Certification is set for October 1, 2004. Solectron intends to object to the
Class Certification. Solectron believes the complaint to be without merit, and
that it has valid defenses to the plaintiffs claims. There can be no
assurance, however, that the outcome of the lawsuit will be favorable to
Solectron or will not have a material adverse effect on Solectrons business,
financial condition and results of operations. In addition, Solectron may be
forced to incur substantial litigation expenses in defending this litigation. On March 21, 2003, Solectron, all the current members of its Board of
Directors, and two former officers, were named as defendants in a shareholder
derivative lawsuit entitled Lifshitz v. Cannon et al.,Case No. CV815693, filed
in the Santa Clara County, California Superior Court. The plaintiff alleged
that he should be permitted to pursue litigation, purportedly for the benefit
of Solectron, against the individual director and officer defendants for
alleged mismanagement and waste of corporate assets during the period from May
2001 to the present, purported breaches of fiduciary duty, constructive
fraud, abuse of control, and alleged violations of the California
Corporations Code by certain of the individual defendants who sold some of
their Solectron stockholdings during the period from September 2001 through
September 2002. On May 19, 2003, Solectron and the individual defendants moved
to dismiss the Lifshitzcomplaint. In the meantime, two substantively identical
derivative lawsuits, entitled Schactner v. Cannon, et al., Case No. CV817112,
and Nims v. Cannon, et al.,Case No. CV817158, were filed in the same Court on
May 14 and May 15, respectively. Counsel for the plaintiffs in all three suits
subsequently advised the Court that they would be filing a consolidated amended
complaint, and accordingly, defendants motion to dismiss was taken off
calendar pending the filing of the consolidated amended complaint combining the
three lawsuits. On June 27, 2003, the plaintiffs served their consolidated
amended complaint now alleging that since January of 1999 all of the current
members of Solectrons Board of Directors, as well as four former officers and
directors, purportedly breached their fiduciary duties and participated in or
permitted constructive fraud, unjust enrichment, and alleged violations of
the California Corporations Code. The consolidated complaint alleged an
unspecified amount of compensatory and punitive damages, and sought the
relinquishment of all profits realized by those individual defendants who sold
Solectron stock during the relevant period, together with statutory penalties
under California Corporations Code section 25402 which plaintiff alleged to be
applicable to those sales of Solectron stock. Solectron moved to dismiss the
Consolidated Amended Complaint because Solectron does not believe plaintiffs
have adequately alleged a basis for plaintiffs to appropriate for themselves
the duties of Solectrons Board of Directors under applicable Delaware law, and
believes that the consolidated complaint contains various factual errors and
legal deficiencies. On October 7, 2003, the California Superior Court granted
Solectrons motion to dismiss, but granted the plaintiffs an 43




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opportunity to try to cure the deficiencies in their Consolidated Amended
Complaint through a further amended complaint. The plaintiffs requested and
were granted an extension of time to file a further amended complaint, which
barring any further extensions, is to filed on or before the end of August
2004. Solectron does not believe plaintiffs can show a sufficient basis to
allow them to appropriate for themselves the duties of Solectrons Board of
Directors under applicable Delaware law. Solectron may be forced to incur
substantial litigation expenses in defending this litigation. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No.
    
    Exhibit Description3.1*
    
    
    
    Certificate of Incorporation of Solectron, as amended3.2**
    
    
    
    Amended and Restated Bylaws of Solectron3.3***
    
    
    
    Certificate of Designation Rights, Preferences and Privileges of Series A Participating Preferred
Stock of Solectron10.1
    
    
    
    Eighth Amendment and Waiver to Credit Agreement, dated as of April 6, 2004, among Solectron, Goldman
Sachs Credit Partners L.P., JPMorgan Chase Bank, The Bank of Novia Scotia, Bank of America, N.A. and
certain other lenders31.1
    
    
    
    Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
    
    Incorporated by reference from Exhibit 3.1 filed with
Solectrons Form 10-Q for the quarter ended February 28, 2001,
Exhibit 3.1 filed with Solectrons Form 10-Q for the quarter ended
February 25, 2000, and Exhibit 3.1 filed with Solectrons Form
10-Q for the quarter ended February 26, 1999.**
    
    Incorporated by reference from Exhibit 3.2 filed with
Solectrons Form 10-Q for the quarter ended November 30, 2003.***
    
    Incorporated by reference from Exhibit 3.3 filed with
Solectrons Annual Report on Form 10-K for the fiscal year ended
August 31, 2001.
 (b) Reports on Form 8-K On May 7, 2004, Solectron filed a report on Form 8-K with the SEC which
incorporated, pursuant to Item 5, an Underwriting Agreement with Goldman,
Sachs & Co. and certain other exhibits relating to the offering and sale by
Solectron of up to 17,109,948 shares of common stock under its Registration
Statement on Form S-3 (Registration No. 333-64454-01). On May 25, 2004, Solectron filed a report on Form 8-K with the SEC which
incorporated, pursuant to Item 5, (i) a Prospectus Supplement, dated May 6,
2004, to and with the Prospectus dated August 29, 2001, included as part of
Solectrons Registration Statement on Form S-3 (Registration No.
333-64454-01), relating to the offering of 17,109,948 shares of the
Solectrons common stock (ii) a press release issued by Solectron regarding
final results of the early settlement offer, dated May 12, 2004, relating to
its offer to exchange up to a maximum of 41,800,000 of its outstanding 7.25%
Adjustable Conversion-Rate Equity Security Units, issued in December 2001,
for shares of Solectron common stock and cash, and (iii) a press release
issued by Solectron regarding Solectrons repurchase of approximately $950
million of its zero-coupon senior convertible notes due in November 2020,
dated May 21, 2004. On June 17, 2004, Solectron filed a report on Form 8-K with the SEC in which
it furnished, pursuant to Item 12, a press release announcing Solectrons
results of operations for its fiscal quarter ended May 31, 2004. 44




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SOLECTRON CORPORATION 
 SIGNATURES 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 2, 2004By /s/ Kiran PatelKiran PatelExecutive Vice President, Chief Financial Officer
(Principal Financial Officer)By /s/ Warren LiganWarren LiganSenior Vice President, Corporate Controller
(Principal Accounting Officer)
 45




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INDEX TO EXHIBITS Exhibit No.
    
    Exhibit Description3.1*
    
    
    
    Certificate of Incorporation of Solectron, as amended3.2 **
    
    
    
    Amended and Restated Bylaws of Solectron3.3***
    
    
    
    Certificate of Designation Rights, Preferences and Privileges of Series A Participating Preferred
Stock of Solectron10.1
    
    
    
    Eighth Amendment and Waiver to Credit Agreement, dated as of April 6, 2004, among Solectron, Goldman
Sachs Credit Partners L.P., JPMorgan Chase Bank, The Bank of Novia Scotia, Bank of America, N.A. and
certain other lenders31.1
    
    
    
    Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
    
    Incorporated by reference from Exhibit 3.1 filed with
Solectrons Form 10-Q for the quarter ended February 28, 2001,
Exhibit 3.1 filed with Solectrons Form 10-Q for the quarter ended
February 25, 2000, and Exhibit 3.1 filed with Solectrons Form
10-Q for the quarter ended February 26, 1999.**
    
    Incorporated by reference from Exhibit 3.2 filed with
Solectrons Form 10-Q for the quarter ended November 30, 2003.***
    
    Incorporated by reference from Exhibit 3.3 filed with
Solectrons Annual Report on Form 10-K for fiscal year ended
August 31, 2001.