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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 February 27, 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
Incorporation or Organization)
    
    (I.R.S. Employer Identification
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 March 31, 2004, 838,712,642 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 February 28, 2004 and August 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended February 28, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended February 28, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    42Item 6. Exhibits and Reports on Form 8-K
    
    
    43Signatures
    
    
    45EXHIBIT 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) February 28
    
    August 312004
    
    2003ASSETSCurrent assets:Cash, cash equivalents and short-term investments *
    
    $
    1,839.9
    
    
    $
    1,515.0Accounts receivable, net
    
    
    1,529.5
    
    
    
    1,389.1Inventories
    
    
    1,510.1
    
    
    
    1,327.3Prepaid expenses and other current assets
    
    
    216.8
    
    
    
    270.3Current assets of discontinued operations
    
    
    485.2
    
    
    
    452.1Total current assets
    
    
    5,581.5
    
    
    
    4,953.8Property and equipment, net
    
    
    740.4
    
    
    
    781.9Goodwill
    
    
    134.6
    
    
    
    134.6Other assets
    
    
    410.1
    
    
    
    396.3Long-term assets of discontinued operations
    
    
    112.9
    
    
    
    262.9Total assets
    
    $
    6,979.5
    
    
    $
    6,529.5LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    971.4
    
    
    $
    973.8Accounts payable
    
    
    1,406.7
    
    
    
    1,266.6Accrued employee compensation
    
    
    154.3
    
    
    
    161.0Accrued expenses
    
    
    315.0
    
    
    
    334.9Other current liabilities
    
    
    182.6
    
    
    
    164.7Current liabilities of discontinued operations
    
    
    316.3
    
    
    
    333.9Total current liabilities
    
    
    3,346.3
    
    
    
    3,234.9Long-term debt
    
    
    2,281.0
    
    
    
    1,817.6Other long-term liabilities
    
    
    29.7
    
    
    
    32.4Long-term liabilities of discontinued operations
    
    
    15.5
    
    
    
    22.6Total liabilities
    
    $
    5,672.5
    
    
    $
    5,107.5Commitments and contingenciesStockholders equity:Common stock
    
    
    0.8
    
    
    
    0.8Additional paid-in capital
    
    
    6,674.1
    
    
    
    6,658.2Accumulated deficit
    
    
    (5,228.4
    )
    
    
    (5,040.6
    )Accumulated other comprehensive losses
    
    
    (139.5
    )
    
    
    (196.4
    )Total stockholders equity
    
    
    1,307.0
    
    
    
    1,422.0Total liabilities and stockholders equity
    
    $
    6,979.5
    
    
    $
    6,529.5
 * This caption includes $464.3 million and $62.0 million of restricted
balances as of February 28, 2004 and August 31, 2003, respectively. See accompanying notes to condensed consolidated financial statements. 3




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SOLECTRON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited) Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    2,887.4
    
    
    $
    2,359.6
    
    
    
    5,584.2
    
    
    $
    5,027.7Cost of sales
    
    
    2,756.3
    
    
    
    2,299.2
    
    
    
    5,325.6
    
    
    
    4,802.3Gross profit
    
    
    131.1
    
    
    
    60.4
    
    
    
    258.6
    
    
    
    225.4Operating expenses:Selling, general and administrative
    
    
    109.2
    
    
    
    139.4
    
    
    
    223.9
    
    
    
    298.3Restructuring and impairment costs
    
    
    73.6
    
    
    
    45.9
    
    
    
    100.6
    
    
    
    140.4Operating loss
    
    
    (51.7
    )
    
    
    (124.9
    )
    
    
    (65.9
    )
    
    
    (213.3
    )Interest income
    
    
    3.6
    
    
    
    9.6
    
    
    
    6.0
    
    
    
    14.8Interest expense
    
    
    (44.4
    )
    
    
    (53.7
    )
    
    
    (88.3
    )
    
    
    (109.0
    )Other income
- net
    
    
    3.3
    
    
    
    15.3
    
    
    
    9.3
    
    
    
    51.5Operating loss from continuing operations
before income taxes
    
    
    (89.2
    )
    
    
    (153.7
    )
    
    
    (138.9
    )
    
    
    (256.0
    )Income tax expense (benefit)
    
    
    0.5
    
    
    
    (49.8
    )
    
    
    3.0
    
    
    
    (84.8
    )Loss from continuing operations
    
    $
    (89.7
    )
    
    $
    (103.9
    )
    
    
    (141.9
    )
    
    $
    (171.2
    )Discontinued operations:Income (loss) from discontinued operations
    
    
    25.3
    
    
    
    (4.7
    )
    
    
    (42.0
    )
    
    
    (2.2
    )Income tax expense
    
    
    3.6
    
    
    
    2.2
    
    
    
    3.9
    
    
    
    8.3Income (loss) from discontinued operations
    
    
    21.7
    
    
    
    (6.9
    )
    
    
    (45.9
    )
    
    
    (10.5
    )Net loss
    
    $
    (68.0
    )
    
    $
    (110.8
    )
    
    
    (187.8
    )
    
    $
    (181.7
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    
    (0.17
    )
    
    $
    (0.21
    )Discontinued operations
    
    
    0.03
    
    
    
    
    
    
    
    (0.06
    )
    
    
    (0.01
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    
    (0.23
    )
    
    $
    (0.22
    )Shares used to compute basic and diluted net loss per share
    
    
    835.6
    
    
    
    827.6
    
    
    
    834.6
    
    
    
    825.9
 See accompanying notes to condensed consolidated financial statements. 4




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SOLECTRON CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
(unaudited) Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (68.0
    )
    
    $
    (110.8
    )
    
    
    (187.8
    )
    
    $
    (181.7
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    0.4
    
    
    
    27.4
    
    
    
    49.1
    
    
    
    42.5Unrealized gain (loss) on investments
    
    
    (0.9
    )
    
    
    0.4
    
    
    
    7.8
    
    
    
    0.1Comprehensive loss
    
    $
    (68.5
    )
    
    $
    (83.0
    )
    
    
    (130.9
    )
    
    $
    (139.1
    )
 Accumulated unrealized foreign currency translation losses were $137.6 million
at February 28, 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 $1.9 million at February 28, 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 SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) Six Months Ended February 282004
    
    2003Cash flows from operating activities of continuing operations:Loss from continuing operations
    
    $
    (141.9
    )
    
    $
    (171.2
    )Adjustments to reconcile net loss from continuing operations to net cash used
in operating activities of continuing operations:Depreciation and amortization
    
    
    118.5
    
    
    
    130.7Amortization of debt issuance costs and accretion of discount on notes payable
    
    
    32.4
    
    
    
    47.1Gain on retirement of debt
    
    
    
    
    
    
    (38.3
    )Inventory charge
    
    
    
    
    
    
    76.3Tax benefit associated with exercise of stock option
    
    
    
    
    
    
    0.3Change in the carrying value of property and equipment, goodwill and other
long-term assets
    
    
    23.7
    
    
    
    29.1Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (132.6
    )
    
    
    105.0Inventories
    
    
    (174.6
    )
    
    
    161.1Prepaid expenses and other current assets
    
    
    4.5
    
    
    
    24.4Accounts payable
    
    
    138.5
    
    
    
    (50.0
    )Accrued expenses and other current liabilities
    
    
    (53.8
    )
    
    
    (117.9
    )Other
    
    
    
    
    
    
    (0.2
    )Net cash (used in) provided by operating activities of continuing operations
    
    
    (185.3
    )
    
    
    196.4Cash flows from investing activities of continuing operations:Change in restricted cash and cash equivalents
    
    
    (402.4
    )
    
    
    113.9Sales and maturities of short-term investments
    
    
    21.9
    
    
    
    214.6Purchases of short-term investments
    
    
    
    
    
    
    (39.5
    )Acquisition of manufacturing assets and locations
    
    
    
    
    
    
    (45.5
    )Acquisition of business
    
    
    
    
    
    
    (3.8
    )Net proceeds from disposition of discontinued operations
    
    
    104.2
    
    
    
    Capital expenditures
    
    
    (68.5
    )
    
    
    (61.8
    )Proceeds from sale of property and equipment
    
    
    33.9
    
    
    
    26.6Proceeds from sale of investments
    
    
    10.4
    
    
    
    Advances (to)/from discontinued operations
    
    
    (27.5
    )
    
    
    90.1Supply agreement and other
    
    
    0.2
    
    
    
    48.5Net cash (used in) provided by investing activities of continuing operations
    
    
    (327.8
    )
    
    
    343.1
 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) Six Months Ended February 282004
    
    2003Cash flows from financing activities of continuing operations:Repurchase of LYONS
    
    
    
    
    
    
    (308.9
    )Net proceeds from issuance of convertible senior notes
    
    
    436.5
    
    
    
    Net repayment of bank lines of credit and other debt arrangements
    
    
    (15.2
    )
    
    
    (96.6
    )Net proceeds from stock issued under option and employee purchase plans
    
    
    21.2
    
    
    
    7.6Other
    
    
    
    
    
    
    19.3Net cash provided by (used in) financing activities of continuing operations
    
    
    442.5
    
    
    
    (378.6
    )Effect of exchange rate changes on cash and cash equivalents - continuing
operations
    
    
    14.2
    
    
    
    26.7Net (decrease) increase in cash and cash equivalents - continuing operations
    
    
    (56.4
    )
    
    
    187.6Cash and cash equivalents at beginning of period - continuing operations
    
    
    1,421.9
    
    
    
    1,740.0Cash and cash equivalents at end of period - continuing operations
    
    $
    1,365.5
    
    
    $
    1,927.6Cash and cash equivalents at beginning of period - discontinued operations
    
    $
    36.4
    
    
    $
    41.9Cash provided by (used in) discontinued operations
    
    
    9.7
    
    
    
    (8.8
    )Cash and cash equivalents at end of period - discontinued operations
    
    $
    46.1
    
    
    $
    33.1
 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 February 28, 2004 and for the three and
six months ended February 28, 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
February 28, 2004, the results of operations, comprehensive loss and cash flows
for the three and six months ended February 28, 2004 and 2003 have been made.
The results of operations for the three and six months ended February 28, 2004
are not necessarily indicative of the operating results for the full fiscal
year or any future periods. Solectrons second quarters of fiscal 2004 and 2003 ended on February 27, 2004
and February 28, 2003, respectively. Solectrons fiscal year ended on August
29, 2003. For clarity of presentation, Solectron has indicated its second
quarters as having ended on February 28 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 $6.8 million and $11.6 million of research
and development expense for the three and six months ended February 28, 2004,
respectively, and $6.6 million and $13.3 million for the three and six months
ended February 28, 2003, respectively. This reclassification did not impact
operating loss, net loss or net loss per share for the periods presented. Restricted Cash, Cash Equivalents and Short-Term Investments: Cash, cash
equivalents and short-term investments on the condensed consolidated balance
sheets include $464.3 million and $62.0 million of restricted balances as of
February 28, 2004 and August 31, 2003, respectively. $436.5 million of the
balance at February 28, 2004 is restricted to purchase Solectrons outstanding
unsubordinated indebtedness which includes the 3.25% LYONs due 2020. The
remaining components of restricted cash, cash equivalents and short-term
investments are restricted as collateral for specified obligations under
certain lease agreements. 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- 8




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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 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 SEC 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 loss and net 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. Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003(in millions, except per share data)
    
    (in millions, except per share data)Net loss, as reported
    
    $
    (68.0
    )
    
    $
    (110.8
    )
    
    $
    (187.8
    )
    
    $
    (181.7
    )Stock-based employee compensation
expense determined under fair value
method, net of related tax effects
    
    
    (17.1
    )
    
    
    (28.7
    )
    
    
    (33.5
    )
    
    
    (59.9
    )Pro forma net loss
    
    $
    (85.1
    )
    
    $
    (139.5
    )
    
    $
    (221.3
    )
    
    $
    (241.6
    )Net loss per share:Basic and diluted - as reported
    
    $
    (0.08
    )
    
    $
    (0.13
    )
    
    $
    (0.23
    )
    
    $
    (0.22
    )Basic and diluted - pro forma
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    (0.27
    )
    
    $
    (0.29
    )
 Stock based employee compensation expense determined under the fair value
method, net of related tax effects, included $2.4 million and $5.0 million of
expense relating to discontinued operations during the three and six months
ended February 28, 2004, respectively. Stock based employee compensation
expense related to discontinued operations for the corresponding periods in
fiscal 2003 was $6.8 million and $11.0 million. 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. 9




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Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Expected life of options
    
    3 years
    
    5 years
    
    4 years
    
    5 yearsExpected life of purchase right
    
    6 months
    
    6 months
    
    6 months
    
    6 monthsVolatility
    
    76%
    
    80%
    
    77%
    
    80%Risk-free interest rate
    
    0.99% to 2.44%
    
    1.20% to 2.23%
    
    0.99% to 2.44%
    
    1.20% to 2.32%Dividend yield
    
    zero
    
    zero
    
    zero
    
    zeroWeighted average fair value of grants
    
    $5.04
    
    $4.02
    
    $5.10
    
    $3.75
 During fiscal 2003, Solectron provided a restricted stock award to certain
eligible executives. Compensation expense related to the restricted stock
award amounted to approximately $0.6 million and $1.2 million during the three
and six months ended February 28, 2004, respectively, and $0.3
million in the corresponding periods of fiscal 2003. NOTE 3  Inventories Inventories related to continuing operations as of February 28, 2004 and August
31, 2003, consisted of (in millions): February 28
    
    August 312004
    
    2003Raw materials
    
    $
    1,036.1
    
    
    $
    906.4Work-in-process
    
    
    245.0
    
    
    
    220.4Finished goods
    
    
    229.0
    
    
    
    200.5Total
    
    $
    1,510.1
    
    
    $
    1,327.3
 NOTE 4  Commitments and Contingencies Lease Obligations Solectron has synthetic lease agreements relating to four manufacturing sites.
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, 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 liable to the lessor for any
shortfall. Solectron has provided loans to the lessor equaling approximately
85% of its Termination Value. 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 Termination Values and loan amounts were $101 million and $86
million, respectively, as of February 28, 2004. In addition, cash collateral of $15 million is pledged for the difference
between the 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, we
amended the minimum cash interest coverage ratio covenant for each of the lease
agreements. As a result of these amendments, Solectron was in compliance with
all applicable covenants as of February 28, 2004. Monthly lease payments are
generally based on the Termination Value and 30-day LIBOR index (1.1% as of
February 28, 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 total 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. If Solectron should determine that it is probable that the expected fair value
of the property at the end of the lease term will be less than the Termination
Value, any expected loss will be recognized on a straight-line basis over the
remaining lease term. 10




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##### Table of Contents



Future minimum payments for operating lease obligations related to continuing
operations, including the synthetic leases discussed above, are $46 million
(for the remaining six months of fiscal 2004), $37 million, $24 million, $17
million, and $15 million for each of the years in the four-year period ending
August 31, 2008 and an aggregate of $58 million for all years subsequent to
August 31, 2008 combined. Purchase Commitments Solectron has guaranteed various purchase commitments for materials, supplies
and services incurred during the normal course of business. As of February 28,
2004, these commitments, totaling approximately $150 million, are either at or
below current market prices. 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. On September 19, 2002, one of Solectrons former employees filed a complaint
against Solectron in the Superior Court of the State of California, Santa Clara
County, asserting two claims for wrongful termination. The case is encaptioned
Ronald Sorisho v. Solectron Corporation et al., Case No. CV811243. In the
complaint, plaintiff alleges that he was wrongfully terminated by Solectron in
supposed retaliation for his alleged efforts to ensure that Solectron timely
recognized a charge for excess, obsolete and slow moving inventory in the
former Technology Solutions business unit. Plaintiffs complaint seeks
compensatory damages in an amount not less than $2.5 million as well as
punitive damages. Solectron believes Mr. Sorishos claims of wrongful
termination are without merit. Solectron filed a motion with the court
challenging the sufficiency of Mr. Sorishos complaint, and in response to this
motion, Mr. Sorisho filed an amended complaint in which he dropped one of his
two original wrongful termination claims, but added a new claim for purported
defamation based upon statements attributed to Solectron in a news article
regarding Mr. Sorishos allegations against Solectron. Solectron tendered the
defense of the defamation claim to its insurance carrier and the insurance
carrier has assumed the defense of the defamation claim, subject to a
reservation of rights. Trial in this matter is presently set for May 10, 2004,
although there is no certainty that the matter will actually go to trial on
that date. 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. 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 11




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##### Table of Contents



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. Solectron has granted the plaintiffs request for an
extension of time to file a further amended complaint. 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 plan to divest a number of business
operations (see also Note 9, Discontinued Operations, for a discussion of
divesting activities). As a result, Solectron is in the process of divesting a
majority of the assets in the former Global Services, Technology Solutions, and
MicroSystems reportable segments. The assets 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): 12




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##### Table of Contents



February 28
    
    August 312004
    
    2003Long-term assets:United States
    
    $
    509.8
    
    
    $
    428.7Other North and Latin America
    
    
    196.4
    
    
    
    265.3Europe
    
    
    193.2
    
    
    
    219.8Asia Pacific
    
    
    385.7
    
    
    
    399.0$
    1,285.1
    
    
    $
    1,312.8
 Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Geographic net sales:United States
    
    $
    773.1
    
    
    $
    806.4
    
    
    $
    1,536.5
    
    
    $
    1,676.2Other North and Latin America
    
    
    464.0
    
    
    
    335.7
    
    
    
    846.5
    
    
    
    724.5Europe
    
    
    403.9
    
    
    
    365.4
    
    
    
    839.2
    
    
    
    821.7Malaysia
    
    
    434.5
    
    
    
    348.4
    
    
    
    829.6
    
    
    
    670.0China
    
    
    545.5
    
    
    
    245.9
    
    
    
    914.4
    
    
    
    519.5Other Asia Pacific
    
    
    266.4
    
    
    
    257.8
    
    
    
    618.0
    
    
    
    615.8$
    2,887.4
    
    
    $
    2,359.6
    
    
    $
    5,584.2
    
    
    $
    5,027.7
 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 February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Nortel Networks
    
    
    ***
    
    
    
    13.2
    %
    
    
    10.2
    %
    
    
    13.1
    %Cisco Systems
    
    
    13.0
    %
    
    
    11.1
    %
    
    
    12.2
    %
    
    
    10.8
    %NEC
    
    
    10.2
    %
    
    
    ***
    
    
    
    ***
    
    
    
    ***
 *** 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 12% and 15% of total
accounts receivable related to continuing operations at February 28, 2004 and
August 31, 2003, respectively. 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 has a yield of 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
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 may
require Solectron to repurchase all or a portion of such holders notes if a
change in control of Solectron occurs on or before May 20, 2004. Solectron, at
its option, may redeem all or a portion of the notes at any time on or after
May 20, 2004. Solectron is amortizing the issuance cost through May 20, 2004.
During the second quarter of fiscal 2004, Solectron did not repurchase any
portion of these notes. The accreted value of these notes was $946 million as
of February 28, 2004 and Solectron is expecting to be required to purchase
these notes on May 20, 2004 for $953 million in cash and/or common stock.
Accordingly, the carrying amount of $946 million was classified as short-term
debt as of February 28, 2004. 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 13




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##### Table of Contents



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 or about August 15, 2004, the 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
indentures 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
February 28, 2004, the entire carrying amount of these ACES of $1.1 billion was
classified as long-term debt. See Note 13, Subsequent Events, for additional
information regarding these debentures. 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 February 28, 2004, the carrying
amount of the notes of $498 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 February 28, 2004, the carrying amount of the notes of $150 million was
classified as long-term debt. 0.5% Convertible Senior Notes due 2034 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 has agreed pursuant to a registration rights agreement to file a
shelf registration statement with respect to the resale of the notes and the
common stock issuable upon conversion of the notes. If Solectron fails to
comply with specified obligations under the registration rights agreement,
liquidated damages will be payable to the holders of the notes and the common
stock issuable upon conversion of the notes. All costs and expenses incurred
with the issuance of the above offering have been capitalized and will be
amortized quarterly over seven years. 14




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##### Table of Contents



The net proceeds of $436.5 million are maintained by a trustee and recorded as
restricted cash which is included in cash, cash equivalents, and short-term
investments on the condensed consolidated balance sheet as of February 28,
2004. The trustee has instructions to apply the funds to purchase Solectrons
outstanding unsubordinated indebtedness, which include the 3.25% LYONs due
2020. Holders of Solectrons 3.25% LYONs will have the right on May 20, 2004
to require Solectron to repurchase up to the entire $953 million accreted value
of the securities. To the extent that, after May 31, 2004, there are proceeds
of the offering of the notes remaining in the account that were not applied to
the repurchase of Solectrons outstanding unsubordinated indebtedness, the
trustee will be required to call, on Solectrons behalf, a portion of the
9.625% senior notes due 2009, and to apply any such remaining funds to the
redemption of the senior notes. 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 February 28, 2004, Solectron had outstanding foreign exchange forward
contracts with a total notional amount of approximately $599 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 Solectron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 Solectron must pay on a portion of its ACES and
all of its 9.625% senior notes with variable interest rates. These swaps are
designated as fair value hedges under SFAS No. 133. The fair values of the derivatives referred to above were 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 by Solectrons counterparties. NOTE 8  Intangible Assets 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 February 28, 2004
and August 31, 2003 (in millions): 15




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##### Table of Contents



February 28, 2004: Supply
    
    Intellectual PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    228.1
    
    
    $
    108.5
    
    
    $
    126.7
    
    
    $
    463.3Accumulated amortization
    
    
    (85.9
    )
    
    
    (51.3
    )
    
    
    (75.0
    )
    
    
    (212.2
    )Prior year impairment
    
    
    (140.4
    )
    
    
    
    
    
    
    (31.3
    )
    
    
    (171.7
    )Carrying value
    
    $
    1.8
    
    
    $
    57.2
    
    
    $
    20.4
    
    
    $
    79.4
 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 $18.8 million for
each of the next three fiscal years and $11.5 million for each of the two
subsequent fiscal years. Amortization expense for the three and six months
ended February 28, 2004 was $4.6 million and $9.4 million, respectively. 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 for
the future. These businesses are Dy 4 Systems Inc., Kavlico Corporation,
C-MACs Microtechnology division, SMART Modular Technologies Inc., Stream
International Inc., Solectrons 65% interest in US Robotics Corporation, and a
business within Solectrons portfolio which is being marketed on a confidential
basis. The divestitures of 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): 16




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##### Table of Contents



Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    411.5
    
    
    $
    410.0
    
    
    $
    879.1
    
    
    $
    839.0Cost of sales
    
    
    345.3
    
    
    
    342.8
    
    
    
    747.8
    
    
    
    700.2Gross profit
    
    
    66.2
    
    
    
    67.2
    
    
    
    131.3
    
    
    
    138.8Operating
expenses - net
    
    
    44.5
    
    
    
    68.3
    
    
    
    172.8
    
    
    
    141.1Operating income (loss)
    
    
    21.7
    
    
    
    (1.1
    )
    
    
    (41.5
    )
    
    
    (2.3
    )Interest
income (expense) - net
    
    
    0.6
    
    
    
    (3.1
    )
    
    
    0.8
    
    
    
    0.7Other income
(expense) - net
    
    
    3.0
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.6
    )Income (loss) before income taxes
    
    
    25.3
    
    
    
    (4.7
    )
    
    
    (42.0
    )
    
    
    (2.2
    )Income tax expense
    
    
    3.6
    
    
    
    2.2
    
    
    
    3.9
    
    
    
    8.3Income (loss) from discontinued operations, net of tax
    
    $
    21.7
    
    
    $
    (6.9
    )
    
    $
    (45.9
    )
    
    $
    (10.5
    )
 During the second quarter of fiscal 2004, Solectron completed the sale of one
of its discontinued operations for cash proceeds of $110 million resulting in a
pre-tax gain of $67.2 million which is included in operating
expenses - net of
discontinued operations for the three and six months ended February 28, 2004.
The sales agreement for the divestiture contains certain indemnification
provisions that under which Solectron may be required to indemnify the buyer of
the divested business for the 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.
Solectron is contingently liable for up to $15 million for a period of 18
months subsequent to the completion of the sale. As of February 28, 2004, there
were no liabilities recorded under this indemnification. Furthermore, Solectron
recorded approximately $55.7 million of restructuring and impairment costs
related to discontinued operations which is included in operating expenses -
net of discontinued operations for the three and six months ended February 28,
2004. The current and non-current assets and liabilities of discontinued operations
as of February 28, 2004 and August 31, 2003, were as follows (in millions): 17




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February 28
    
    August 312004
    
    2003Cash, cash equivalents and short-term investments
    
    $
    46.1
    
    
    $
    36.4Accounts receivable, net
    
    
    283.5
    
    
    
    276.2Inventories
    
    
    141.5
    
    
    
    121.4Prepaid expenses and other current assets
    
    
    14.1
    
    
    
    18.1Total current assets of discontinued operations
    
    $
    485.2
    
    
    $
    452.1Property and equipment, net
    
    $
    55.7
    
    
    $
    126.5Goodwill
    
    
    44.5
    
    
    
    112.2Other assets
    
    
    12.7
    
    
    
    24.2Total non-current assets of discontinued operations
    
    $
    112.9
    
    
    $
    262.9Short-term debt
    
    $
    9.3
    
    
    $
    6.1Accounts payable
    
    
    169.7
    
    
    
    168.1Accrued employee compensation
    
    
    45.8
    
    
    
    41.4Accrued expenses
    
    
    52.1
    
    
    
    55.2Other current liabilities
    
    
    39.4
    
    
    
    63.1Total current liabilities of discontinued operations
    
    $
    316.3
    
    
    $
    333.9Total non-current liabilities of discontinued operations
    
    $
    15.5
    
    
    $
    22.6
 On February 12, 2004 Solectron signed a definitive agreement to sell SMART
Modular Technologies, Inc. (SMART) to Texas Pacific Group, Francisco Partners
and Shah Management. In conjunction with the sale of SMART, it is anticipated
that Solectron will be assigned a synthetic lease currently held by SMART. 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, owned facilities no longer used by
Solectron 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 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. For leased facilities abandoned and
subleased after December 31, 2002, the estimated lease loss accrued represents
the present value of future lease payments subsequent to abandonment less any
present value of 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,
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: 18




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Three and six months ended February 28, 2004 and 2003 Solectron continued its restructuring activities in the second quarter of
fiscal 2004 and total restructuring and impairment costs of $73.6 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 February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003
    
    NatureImpairment of equipment and facilities
    
    $
    15.6
    
    
    $
    10.1
    
    
    $
    13.1
    
    
    $
    22.2
    
    
    non-cashSeverance and benefit costs
    
    
    4.6
    
    
    
    41.9
    
    
    
    14.7
    
    
    
    103.1
    
    
    cashLoss on leased equipment
    
    
    3.6
    
    
    
    (7.1
    )
    
    
    3.9
    
    
    
    (4.2
    )
    
    cashLoss on leased facilities
    
    
    32.1
    
    
    
    1.0
    
    
    
    36.6
    
    
    
    7.5
    
    
    cashOther exit costs
    
    
    17.7
    
    
    
    
    
    
    
    32.3
    
    
    
    11.8
    
    
    cashTotal
    

    $
    73.6
    
    
    $
    45.9
    
    
    $
    100.6
    
    
    $
    140.4
 During the three months ended February 28, 2004, the company performed a
comprehensive review of the lease liability for vacant facilities. Based on
current and projected market conditions for applicable rental markets,
Solectron recorded approximately $32.1 million in lease expense in continuing
operations. This amount is a combination of additional facility space that was
vacated during the second quarter of fiscal 2004 along with revised estimates
for existing vacant facility space. As of February 28, 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. During the three and six months ended February 28, 2004, Solectron also
incurred $17.7 million and $32.3 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. The employee severance and benefit costs included in the restructuring charges
recorded in the second quarter of fiscal 2004 related to approximately 1,200
full-time positions worldwide, all of which have been eliminated. Approximately
54% of the positions were in the Americas region, 42% were in Europe and 3%
were in Asia/Pacific. The employee severance and benefit costs included in the restructuring charges
recorded in the first quarter of fiscal 2004 related to approximately 850
full-time positions worldwide, all of which have been eliminated. Approximately
68% of the positions were in the Americas region, 24% were in Europe and 8%
were in Asia/Pacific. Fiscal 2003 and 2002 The following table summarizes restructuring charges relating to continuing
operations recorded in fiscal 2003 and 2002 (in millions): 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
    
    
    cashLoss on leased equipment
    
    
    2.2
    
    
    
    23.8
    
    
    cashLoss on leased facilities
    
    
    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 19




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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 February 28, 2004 (in millions): Severance
    
    Lease Payments
    
    Lease Payments
    
    Other Exitand Benefits
    
    on Facilities
    
    on Equipment
    
    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
    
    
    $
    135.1
 Accruals related to restructuring activities were recorded in accrued expenses
in the accompanying condensed consolidated balance sheets. NOTE 11  Loss Per Share Calculation Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share is computed using the weighted average number
of common and dilutive equivalent shares outstanding during the period;
dilutive common equivalent shares consist of options to purchase common stock
and shares issueable upon conversion of Solectrons LYONs and ACES. Dilutive
common equivalent shares would also include shares issuable upon conversion of
Solectrons 0.5% senior notes only if certain conversion events occur. Due to
Solectrons net losses reported, dilutive common equivalent shares were
excluded from the computation of diluted loss per share, as inclusion would be
anti-dilutive for the periods presented. If Solectron had generated earnings during the three and six months ended
February 28, 2004, Solectron would have added 140.0 million and 151.2 million
common equivalent shares, respectively, to the basic weighted average shares
outstanding to compute the diluted weighted average shares outstanding. If
certain conversion events occurred related to Solectrons 0.5% senior notes, an
additional 23.3 million and 11.6 million common equivalent shares would have
been added to the calculation of diluted weighted average shares outstanding
for the three and six months ended February 28, 2004, respectively. If
Solectron had generated earnings during the three and six months ended February
28, 2003, Solectron would have added 149.2 million and 150.2 million common
equivalent shares, respectively, to the basic weighted average shares
outstanding to compute the diluted weighted average shares outstanding. 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 20




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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
$1.4 billion as of February 28, 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 six months ended February 28, 2004. NOTE 13  Subsequent Events On March 22, 2004, Solectron signed a definitive agreement to sell Streams
International call center business to the parent company of ECE Holdings, Inc.
On March 23, 2004, Solectron signed a definitive agreement to sell Kavlicos
sensor products business to Schneider Electric. Solectron will continue to
actively market the remaining three companies and anticipate total proceeds
from the sale of all companies to range from $500-$600 million. On April 8, 2004,
Solectron commenced an offer to exchange 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 purpose of the exchange is to effect the early
settlement of the embedded purchase contracts and the early
retirement of debentures that are currently pledged to secure the
embedded purchase contract settlement on November 15, 2004. The Company expects to complete the exchange in the third
quarter of fiscal 2004 and expects to record a loss in the condensed
consolidated statement of operations to the extent that the reacquisition price
for the ACES differs from their carrying value plus expenses incurred in
conjunction with this exchange. 
 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 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;
    
    our shift from business units to a functionally aligned organizational structure;
    
    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 21




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facilities;
    
    our ability to weather the current economic downturn with a
sustainable 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, S-3, S-4 and S-8. 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. Overview We provide a full range of global manufacturing and integrated supply chain
services to the worlds high-tech electronics companies. Our revenue is
generated from sales of our services primarily to customers in the Computing &
Storage, Networking, Communications, Consumer, Semiconductor/Test, and
Automotive markets. A relatively small number of customers historically have been responsible for a
significant portion of our net sales. Sales to our ten largest customers
accounted for 62% and 60% for the three and six months ended February 28, 2004,
respectively. Cisco Systems and NEC, each accounted for 10% or more of our net
sales in the three months ended February 28, 2004, while Cisco Systems and
Nortel Networks each accounted for 10% or more of our net sales in the six
months ended February 28, 2004. For the second quarter of fiscal 2004, net sales totaled $2.9 billion, a 22.4%
increase over the corresponding period of fiscal 2003 and a 7.1% increase over
the first quarter of fiscal 2004. Sales in the Consumer market as a percentage
of total sales increased to 20.5% in the second quarter of fiscal 2004 from
13.0% in the corresponding period of fiscal 2003, whereas the Communications,
Networking and Computing & Storage markets as a percentage of total sales
declined to 18.1%, 21.8%, and 30.9%, in the second quarter of fiscal 2004 from
21.9%, 24.6%, and 31.4%, respectively, in the corresponding period of 2003. For the six months ended February 28, 2004, net sales totaled $5.6 billion, an
11.1% increase over the corresponding period of fiscal 2003. Sales in the
Computing & Storage and Consumer markets as a percentage of total sales
increased to 33.7% and 18.3% in the six months ended February 28, 2004, from
30.4% and 13.4%, respectively, in the corresponding period of fiscal 2003.
Sales in the Communications and Networking markets as a percentage of total
sales declined to 18.0% and 21.4% for the six months ended February 28, 2004
from 22.9% for the corresponding period in fiscal 2003. These revenue increases
were driven primarily by increased end-market demand across a majority of the
markets we serve as well as the ramp of new customer wins. We have made significant progress in lowering selling, general, and
administrative expense to below 4% of sales and have reported increased
revenues over the past two quarters. Having made significant progress in
operating expenses over the past several quarters, we are now focusing on
improving our gross margins by implementing Six Sigma Lean initiatives to
enable us 22




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to better utilize our existing manufacturing capacity and lower supply chain
costs, while improving our flexibility to meet customer requirements. We have
completed our shift of capacity to low cost regions and now have greater than
70% of our people and equipment in low-cost geographies. 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. 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. 23




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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
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. For leased facilities that have been abandoned and
subleased after December 31, 2002, the estimated lease loss accrued represents
the present value of future lease payments subsequent to abandonment less 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. In previous reporting periods, we had 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 believed future realizability was in doubt. We
had believed it was more likely than not that the remaining net deferred tax
assets would be realized principally based upon forecasted taxable income,
generally within the twenty-year net operating loss carryforward periods. 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 identified several significant developments,
which we considered in determining the need for nearly a full valuation
allowance recorded in the third quarter of fiscal 2003, including the
continuing market conditions, the absence of material growth in quarterly
revenue levels, the necessity for further cost reduction actions to attain
profitability, and the resulting inability to accurately predict sustainable
profit levels in the countries in which the deferred tax assets arose
sufficient to establish, to the requisite level of certainty, that we would be
able to utilize those deferred tax assets. As a result of our assessment, we
increased our total valuation allowance on deferred tax assets arising from
continuing operations to approximately $1.4 billion at February 28, 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. 24




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##### Table of Contents



Results of Operations The electronics industry is subject to rapid technological change, product
obsolescence and price competition. These and other factors affecting the
electronics industry, or any of Solectrons major customers in particular could
materially harm Solectrons results of operations. See Risk Factors for
additional factors relating to possible fluctuations of our operating results. 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. Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    95.5
    
    
    
    97.4
    
    
    
    95.4
    
    
    
    95.5Gross profit
    
    
    4.5
    
    
    
    2.6
    
    
    
    4.6
    
    
    
    4.5Operating expenses:Selling, general and
administrative
    
    
    3.8
    
    
    
    5.9
    
    
    
    4.0
    
    
    
    5.9Restructuring and impairment costs
    
    
    2.5
    
    
    
    2.0
    
    
    
    1.8
    
    
    
    2.8Operating loss
    
    
    (1.8
    )
    
    
    (5.3
    )
    
    
    (1.2
    )
    
    
    (4.2
    )Interest income
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.3Interest expense
    
    
    (1.5
    )
    
    
    (2.3
    )
    
    
    (1.6
    )
    
    
    (2.2
    )Other income-net
    
    
    0.1
    
    
    
    0.7
    
    
    
    0.2
    
    
    
    1.0Operating loss from continuing
operations before income taxes
    
    
    (3.1
    )
    
    
    (6.5
    )
    
    
    (2.5
    )
    
    
    (5.1
    )Income tax expense (benefit)
    
    
    
    
    
    
    (2.1
    )
    
    
    
    
    
    
    (1.7
    )Loss from continuing operations
    
    
    (3.1
    )%
    
    
    (4.4
    )%
    
    
    (2.5
    )%
    
    
    (3.4)
    %Discontinued operations:Income (loss) from discontinued
operations
    
    
    0.9
    
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    Income tax expense
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Net loss
    
    
    (2.4
    )%
    
    
    (4.7
    )
    
    
    (3.4
    )%
    
    
    (3.6)
    %
 Net Sales  Continuing Operations Net sales increased to $2.9 billion and $5.6 billion for the three and six
months ended February 28, 2004 from $2.4 billion and $5.0 billion in the
corresponding periods of fiscal 2003, respectively. The increase was driven by
the Consumer and Computing & Storage markets generating approximately $286.8
million and $151.3 million, respectively, more in revenue during the second
quarter of fiscal 2004 as compared to the same period a year ago. In addition,
revenue generated by the Consumer and Computing & Storage markets increased by
approximately $703.9 million during the six months ended February 28, 2004 as
compared to the six months ended February 28, 2003. This growth is attributed
to the ramp-up of 3G hand-set business in the Consumer market, along with
strong demand for low-end/mid-range servers and personal computers in the
Computing & Storage market. International Sales  Continuing Operations In the three and six months ended February 28, 2004, our international
locations contributed approximately 73.2% and 72.5%, respectively, of net sales
compared to approximately 65.8% and 66.7%, respectively, for the corresponding
periods of fiscal 25




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##### Table of Contents



2003. 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 lower cost of operations.
Our international operations are subject to various risks of doing business
abroad. See Risk Factors for additional factors relating to possible
fluctuations of our international operating results. While these dynamics have
not materially harmed our results of operations, we cannot ensure that there
will not be such an impact in the future. 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 February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Nortel Networks
    
    ***
    
    13.2%
    
    10.2%
    
    13.1%Cisco Systems
    
    13.0%
    
    11.1%
    
    12.2%
    
    10.8%NEC
    
    10.2%
    
    ***
    
    ***
    
    ***
 *** Less than 10% Our top ten customers accounted for approximately 62% and 60% of net sales for
the three and six months ended February 28, 2004, respectively, compared to
approximately 60% in the corresponding periods of fiscal 2003. We are dependent
upon continued revenues from the customers listed above as well as our other
large customers. Sales to these or any other customers could increase or
decrease as a percentage of consolidated net sales either individually or as a
group. Consequently, any material decrease in sales to these or other customers
could materially harm our results of operations. 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, unanticipated restructuring or inventory
charges and new product introductions. Our gross margin percentage increased to 4.5% and 4.6%, respectively, for the
three and six months ended February 28, 2004, compared to 2.6% and 4.5% for the
corresponding periods in fiscal 2003. 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. During the past year, our margins have been negatively affected by our sales
mix and continued pricing pressure in our industry. Recently, we have
increased sales in the Consumer market which generally yields lower gross
profit margins. Our gross margins have also been negatively impacted due to
the under-absorption of fixed costs as a result of excess manufacturing
capacity. We are implementing a number of initiatives to improve our gross margins: (1)
Six Sigma Lean manufacturing initiative to improve operational effectiveness
and efficiency; (2) Improving capacity utilization; (3) Ensuring contractual
relationships reflect value added by our operations; (4) A more disciplined
pricing model; (5) Engaging with our customers in collaborative design; and (6)
Alignment of incentive compensation to improve operational and financial
metrics. Over time, gross margins at the individual sites and for Solectron as a whole
may continue to fluctuate. Increases in the systems-build business or turnkey
projects, additional costs associated with new projects and price erosion
within the electronics industry could negatively impact our gross margins. 26




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##### Table of Contents



Sales of inventory previously written down or written off have not been
significant and have not had any material impact on our gross margins for the
three and six months ended February 28, 2004. Selling, General and Administrative Expenses  Continuing Operations Selling, general and administrative (SG&A) expenses decreased $30.2 million, or
21.7%, for the three months ended February 28, 2004 compared to the
corresponding period in fiscal 2003. SG&A expenses decreased $74.4 million, or
24.9%, for the six months ended February 28, 2004 compared to the corresponding
period in fiscal 2003. As a percentage of net sales, SG&A decreased to 3.8% and
4.0% for the three and six months ended February 28, 2004 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 cost reduction
initiatives. Restructuring and Impairment  Continuing Operations Beginning in the second quarter of fiscal 2001, we initiated the restructuring
of our operations in light of the economic downturn. The measures, which
included reducing the workforce, consolidating facilities and changing the
strategic focus of a number of sites, have been intended to align our capacity
and infrastructure to anticipated customer demand, transition our operations to
lower cost regions, and rationalize our footprint worldwide. For leased
facilities abandoned and subleased, lease costs charged to restructuring
expense represent the present value of future lease payments subsequent to
abandonment less the present value of estimated sublease income. For facilities
and equipment held for disposal, 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. 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. During the second quarter of fiscal 2004, we continued our restructuring
activities and total restructuring and impairment costs of $73.6 million were
charged against operations which were related to the closure and consolidation
of, and impairment of certain long-lived assets at various manufacturing sites. During the second quarter of
fiscal 2004, we performed a comprehensive
review of the lease liability for vacant facilities. Based on current and
projected real estate market conditions for applicable rental markets,
we recorded approximately $32.1 million of lease expense in continuing
operations. This amount is a combination of additional facility space that was
vacated during the quarter along with revised estimates for existing vacant
facility space. At the end of the second quarter of fiscal 2004, we have
approximately 1.7 million square feet of vacant facility space in continuing
operations. Ongoing Restructuring Activities We continue to rationalize manufacturing facilities and headcount to better
scale capacity to current market and operating conditions. 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 $6.0 million to $3.6 million for the three months
ended February 28, 2004 from $9.6 million in the corresponding period in fiscal
2003. Interest income decreased $8.8 million to $6.0 million for the six months
ended February 28, 2004 from $14.8 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 $9.3 million to $44.4 million for the three months
ended February 28, 2004 from $53.7 million in the corresponding period in
fiscal 2003. Interest expense decreased $20.7 million to $88.3 million for the
six months ended February 28, 2004 from $109.0 million in the corresponding
period in fiscal 2003. The decreases were primarily due to the retirement of
approximately $1.8 billion aggregate principal amount of our Liquid Yield
Option Notes (LYONs) during fiscal 2003. 27




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##### Table of Contents



Other Income - net Continuing Operations Other income - net decreased $12.0 million to
$3.3 million for the three months
ended February 28, 2004 from $15.3 million in the corresponding period in
fiscal 2003. Other income decreased $42.2 million to $9.3 million for the six
months ended February 28, 2004 from $51.5 million in the corresponding period
in fiscal 2003. For the three and six months ended February 28, 2003, other
income - net primarily consisted of gains on retirement of our LYONs. The
following table provides the details of the retirement of our 4.0% LYONs due
2019, 2.75% LYONs due 2020 and our 3.25% LYONs due 2020 in each period
presented in the accompanying condensed consolidated financial statements (in
millions): Three Months Ended February 28
    
    
    Six Months Ended February 282004
    
    2003
    
    
    2004
    
    2003Principal amount at maturity
    
    $
    
    
    
    $
    235.0
    
    
    $
    
    
    
    $
    625.1Carrying value
    
    $
    
    
    
    $
    131.0
    
    
    $
    
    
    
    $
    347.2Cash paid
    
    
    
    
    
    
    126.9
    
    
    
    
    
    
    
    308.9Gain included in other income-net
    
    $
    
    
    
    $
    4.1
    
    
    $
    
    
    
    $
    38.3
 The remaining components of
other income - net fluctuate primarily due to
foreign currency gains and losses. Income Taxes  Continuing Operations Our income tax expense was $0.5 million and $3.0 million, respectively, for the
three and six months ended February 28, 2004 as compared to an income tax
benefit of $49.8 million and $84.8 million, respectively, for the three and six
months ended February 28, 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
six months ended February 28, 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. Liquidity and Capital Resources  Continuing Operations Cash, cash equivalents, and short-term investments increased to approximately
$1.8 billion at February 28, 2004 from approximately $1.5 billion at August 31,
2003. Our cash, cash equivalents and short-term investments on the accompanying
condensed consolidated balance sheets include $464.3 million and $62.0 million,
respectively, of balances restricted primarily in connection with the terms of
our leasing transactions and recently issued convertible securities. Cash used in and provided by operating activities was $185.3 million and $196.4
million during the six months ended February 28, 2004 and February 28, 2003,
respectively. The net increase in cash used for operating activities in the six
months ended February 28, 2004 was primarily due to increases in current
assets, including accounts receivable and inventory, to support higher revenue. Cash used in and provided by investing activities was $327.8 million and $343.1
million during the six months ended February 28, 2004 and February 28, 2003,
respectively. The decrease in cash provided by investing activities is
primarily due to reduction of cash provided by sales and maturities of
short-term investments and restricted cash between the two periods. During the 28




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second quarter of fiscal 2003, we reduced our cash investments in order to
retire a portion of our LYONs debt. During the second quarter of fiscal 2004,
restricted cash increased as the proceeds from the issuance of convertible
securities were classified as restricted cash. Capital expenditures during the
period ended February 28, 2004 primarily related to equipment expenditures
supporting increased demand and new programs. Cash generated by and used in financing activities was $442.5 million and
$378.6 million during the six months ended February 28, 2004 and February 28,
2003, respectively. The decrease in cash used for financing activities was
primarily due to repurchasing a portion of our LYONs during the period ended
February 28, 2003 which did not occur during the period ending February 28,
2004 and the issuance of our 0.5% senior notes on February 9, 2004 which
generated net restricted proceeds of $436.5 million. As of February 28, 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
February 28, 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 the
minimum cash interest coverage ratio and the leverage covenants. As a result of
the amendment, we were in compliance with all applicable covenants as of
February 28, 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. In addition, we had $34.9 million in committed and $197.1 million in
uncommitted foreign lines of credit and other bank facilities as of February
28, 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
February 28, 2004, borrowings and guaranteed amounts were $9.0 million under
committed and $25.3 million under uncommitted foreign lines of credit.
Borrowings are payable on demand. The weighted-average interest rate was 5.27%
for committed and 0.91% for uncommitted foreign lines of credit as of February
28, 2004. Based on the aggregate amount outstanding on February 28, 2004, holders of our
3.25% LYONs due November 2020 will have 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. Instead of repurchasing these LYONs
with cash, we could elect to offer holders our common stock or a combination of
our cash and common stock. However, we expect to satisfy such obligation in
cash. See Risk Factors - We Have Significant Debt Leverage and Debt Service
Obligations. Conversely, satisfying these obligations with cash could impair
our liquidity. Our 7.25% subordinated ACES debentures are due November 15, 2006. On or about
August 15, 2004, the ACES debentures 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 $500 million aggregate principal amount of 9.625% senior notes is
due on February 15, 2009, our $150 million aggregate principal amount of 7.375%
senior notes is due on March 1, 2006 and our $450 million aggregate principal
amount of 0.5% convertible senior notes is due February 15, 2034. In April
2004, the Board of Directors approved an offer to exchange common stock and
cash for up to 95% of our outstanding 7.25% ACES, which will allow us to retire
the debentures associated with any ACES that are exchanged. We have synthetic lease agreements relating to four manufacturing sites. 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 29




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##### Table of Contents



facilities subject to the
synthetic leases for the Termination Value, which approximates the lessors
original cost, 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 its
Termination Value. 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 Termination Values and loan amounts are $101 million and $86
million, respectively, as of February 28, 2004. In addition, cash collateral of $15 million is pledged for the difference
between the 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 obtained a waiver to the minimum cash interest coverage ratio covenant for
the quarter. As a result of the amendment, we were in compliance with all
applicable covenants as of February 28, 2004. Monthly lease payments are
generally based on the Termination Value and 30-day LIBOR index (1.1% as of
February 28, 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 total 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. If we should determine that it is
probable that the expected fair value of the property at the end of the lease
term will be less than the Termination Value, any expected loss will be
recognized on a straight-line basis over the remaining lease term. 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
February 28, 2004 for continuing operations (in millions): Payments Due by Period
(in millions) 6 monthsTotal
    
    FY04
    
    FY05
    
    FY06
    
    FY07
    
    FY08
    
    ThereafterShort term debt (1)
    
    $
    985.8
    
    
    $
    985.8
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt (2)
    
    
    2,263.5
    
    
    
    
    
    
    
    13.7
    
    
    
    163.2
    
    
    
    1,111.7
    
    
    
    11.7
    
    
    
    963.2Operating lease
    
    
    196.7
    
    
    
    45.8
    
    
    
    37.1
    
    
    
    24.0
    
    
    
    17.2
    
    
    
    14.9
    
    
    
    57.7Other (3)
    
    
    150.0
    
    
    
    150.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,596.0
    
    
    $
    1,181.6
    
    
    $
    50.8
    
    
    $
    187.2
    
    
    $
    1,128.9
    
    
    $
    26.6
    
    
    $
    1,020.9
  (1)
    
    Since the holders of our 3.25% LYONs due November 2020 have the option to
require us to repurchase on May 20, 2004 their notes in an amount of
$587.46 per $1,000 principal amount at maturity, the payment due includes
a total of approximately $953 million from such commitment based on the
carrying amount outstanding as of February 28, 2004.  (2)
    
    Assumes a successful remarketing of the ACES in August 2004. In the event
of this successful remarketing, we will receive up to $1.1 billion
proceeds from the exercise of the stock purchase contracts included in
each ACES unit in fiscal 2005. See Note 6, Long-Term Debt, for further
discussion of our ACES.  (3)
    
    We have guaranteed various purchase commitments for materials, supplies
and services incurred during the normal course
of business. As of February 28, 2004, these commitments, totaling
approximately $150 million, are either at or below current market prices. In addition, we guarantee committed and uncommitted lines of credit and debt
for our continuing operations subsidiaries totaling $232.0 million as of
February 28, 2004. We also guarantee performance of certain of our continuing
operations subsidiaries in various transactions such as leases, totaling
$308.2 million as of February 28, 2004. 30




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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 instruments 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 are in the
process of divesting and that are included in discontinued operations are: Dy 4
Systems Inc., Kavlico Corporation, C-MACs Microtechnology division, SMART
Modular Technologies Inc., Stream International Inc., our 65% interest in US
Robotics Corporation, and a business within our portfolio which is being
marketed on a confidential basis. The collective results from all discontinued operations for all periods
presented were as follows (in millions): Three Months Ended February 28
    
    Six Months Ended February 282004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    411.5
    
    
    $
    410.0
    
    
    $
    879.1
    
    
    $
    839.0Cost of sales
    
    
    345.3
    
    
    
    342.8
    
    
    
    747.8
    
    
    
    700.2Gross profit
    
    
    66.2
    
    
    
    67.2
    
    
    
    131.3
    
    
    
    138.8Operating
expenses - net
    
    
    44.5
    
    
    
    68.3
    
    
    
    172.8
    
    
    
    141.1Operating income (loss)
    
    
    21.7
    
    
    
    (1.1
    )
    
    
    (41.5
    )
    
    
    (2.3
    )Interest
income (expense) - net
    
    
    0.6
    
    
    
    (3.1
    )
    
    
    0.8
    
    
    
    0.7Other income
(expense) - net
    
    
    3.0
    
    
    
    (0.5
    )
    
    
    (1.3
    )
    
    
    (0.6
    )Income (loss) before income taxes
    
    
    25.3
    
    
    
    (4.7
    )
    
    
    (42.0
    )
    
    
    (2.2
    )Income tax expense
    
    
    3.6
    
    
    
    2.2
    
    
    
    3.9
    
    
    
    8.3Income (loss) from discontinued operations, net of tax
    
    $
    21.7
    
    
    $
    (6.9
    )
    
    $
    (45.9
    )
    
    $
    (10.5
    )
 Sales from discontinued operations increased in the second quarter of fiscal
2004 from fiscal 2003 primarily due to an increase in demand that affected all
of our operations. Gross profit of discontinued operations decreased $1.0
million or 1.5% for the second quarter of fiscal 2004 compared to the second
quarter of fiscal 2003. Gross profit of discontinued operations decreased $7.5
million or 5.4% for the six months ended February 28, 2004 as compared to the
corresponding period in fiscal 2003. The decreases are primarily due to
continued pricing pressure from our customers that affected all of our
operations. Operating expenses-net decreased $23.8 million from $68.3 million
for the three months ended February 28, 2004 as compared to $44.5 million in
the corresponding period in fiscal 2003 which is primarily due to the gain on
disposal of a discontinued operation. During the second quarter of fiscal 2004,
we completed the sale of one of our discontinued operations for cash proceeds
of $110 million, resulting in a pre-tax gain on disposal of $67.2 million which
is included in operating expenses-net for the three and six months ended
February 28, 2004. This gain on disposal was offset by $55.7 million of
restructuring and impairment costs relating to discontinued operations which
was recorded in the second quarter of fiscal 2004 while only $11.0 million was
recorded in the corresponding period of 2003. 31




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On February 12, 2004, we signed a definitive agreement to sell SMART Modular
Technologies, Inc., (SMART) to Texas Pacific Group, Francisco Partners and
Shah Management. In conjunction with the sale of SMART, it is anticipated that
we will be assigned a synthetic lease currently held by SMART. On March 22,
2004, we signed a definitive agreement to sell Streams International call
center business to the parent company of ECE Holdings, Inc. On March 23, 2004,
we signed a definitive agreement to sell Kavlicos sensor products business
to Schneider Electric. We continue to actively market the remaining three
companies and anticipate total proceeds from the sale of all companies to range
from $500-$600 million. RISK FACTORS 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. WE HAVE SIGNIFICANT DEBT LEVERAGE AND DEBT SERVICE OBLIGATIONS. For the six month periods ending February 28, 2004 and 2003, our fixed charges
exceeded our earnings from continuing operations by approximately $239.8
million and $380.8 million, respectively. The fixed charge excesses are
primarily due to our operating losses. We compute the ratio of earnings from
continuing operations to fixed charges by dividing earnings available for fixed
charges by fixed charges. When the ratio is negative, we report the excess of
fixed charges over earnings rather than a negative ratio. The computations
include our consolidated subsidiaries. For these ratios, earnings represents
(1) loss before tax expense (benefit) and before adjustments for minority
interests, plus (2) fixed charges (excluding capitalized interest), plus (3)
amortization of capitalized interest. Fixed charges consist of (1) interest on all indebtedness and amortization of
debt discount and expense, plus (2) capitalized interest, plus (3) an interest
factor attributable to rentals under our operating leases. As of February 28, 2004, we had approximately $971 million of short-term
indebtedness, primarily consisting of our obligation under our 3.25% LYONs due
2020 (which the holders will have the right to require us to repurchase on May
20, 2004) and approximately $2.3 billion of long-term indebtedness. We will
require substantial amounts of cash to fund scheduled payments of principal and
interest on this outstanding indebtedness, as well as future capital
expenditures and any increased working capital requirements. We repurchased LYONs with approximately $1.8 billion aggregate principal amount
at maturity in fiscal 2003 for approximately $1 billion in cash. We repurchased
LYONs with approximately $5.2 billion aggregate principal amount at maturity in
fiscal 2002 for approximately $2.8 billion in cash. As a result, we have
repurchased substantially all of the 2.75% LYONs due 2020 and the 4.0% LYONs
due 2019 leaving only a portion of our 3.25% LYONs due 2020 outstanding. Based
on the aggregate amount outstanding on February 28, 2004, holders of our 3.25%
LYONs will have the option to require us to repurchase their notes on May 20,
2004 in an amount of $587.46 per $1,000 principal amount at maturity for a total of
approximately $953 million. While we have the right to satisfy these
obligations with shares of our common stock, because this could result in
significant dilution to our stockholders, which in turn could significantly
reduce our earnings per share, we are likely, given recent prices of our common
stock, to choose to satisfy these obligations with cash. Satisfying these
obligations with cash, however, could impair our liquidity. In addition, the entire principal amount of $500 million of our 9.625% senior
notes issued in February 2002 is due on February 15, 2009 and the entire $150
million principal amount of our 7.375% senior notes are due on March 1, 2006. The principal amount of $450 million of our 0.5% senior convertible notes are
due on February 15, 2034 unless we elect or are
required to purchase them on or after February 20, 2011, or we are required to
purchase them on each of February 15, 2011, 2014, 2019, 2024 and 2029, or the
holders of the notes elect to convert them into our common stock. Our three-year $250 million credit facility, under which there was no debt
outstanding as of February 28, 2004, remains in effect. 32




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OUR SUBSTANTIAL DEBT COULD HAVE MATERIAL ADVERSE CONSEQUENCES. Our substantial debt could have material adverse consequences. For example, it
could:  
    
    require us to dedicate a substantial portion of our cash flow from
operations and other capital resources to debt service, thereby reducing
our ability to fund working capital, capital expenditures and other cash
requirements;  
    
    increase our vulnerability to adverse economic and industry conditions;  
    
    make it more difficult or impossible for us to make payments on indebtedness or obligations;  
    
    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 compared to our competitors; and  
    
    limit our ability to incur additional debt on commercially reasonable
terms, if at all. If we and our subsidiaries incur substantial indebtedness in the future, the
related risks that we and they now face could intensify. 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. 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; 33




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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 February 28, 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. 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 34




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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. 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 62% and 60% of net sales from
continuing operations in the second 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 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. 35




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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 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 36




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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 $73.6 million of restructuring and impairment costs relating to
continuing operations in the second 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. 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;  
    
    fluctuations in the availability and pricing of components;  
    
    timing of expenditures in anticipation of increased sales;  
    
    cyclicality in our target markets; 37




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
    
    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. 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. 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. 38




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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. OUR NON-U.S. LOCATIONS REPRESENT A SIGNIFICANT PORTION OF OUR NET SALES; WE ARE
EXPOSED TO RISKS ASSOCIATED WITH OPERATING INTERNATIONALLY. Approximately 73.2% and 65.8% of our net sales from continuing operations came
from sites outside the United States during the second 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;  
    
    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. 39




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WE ARE EXPOSED TO FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES. 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 February 28, 2004, we had outstanding foreign exchange forward contracts
with a total notional amount of approximately $599 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 February 28, 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 25% of our net sales from continuing operations in the second
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 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 foreign currency is exchanged for U.S. dollars, it will require more of the
foreign currency to equal a specified amount of U.S. dollars than before the
rate increase. In such cases, and if we price our products and services in the
foreign currency, we will receive less in U.S. dollars than we did before the
rate increase went into effect. If we price our products and services in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our prices being
uncompetitive in markets where business is transacted in the local currency. WE ARE EXPOSED TO 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
February 28, 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 February 28, 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
February 28, 2004. Interest on our 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 interest rate swap
transactions under which we pay variable rates and we receive fixed rates. The
interest swaps effectively converted $1 billion of our long-term debt with
fixed interest rates into debt with variable rates of interest. Our interest
rate swaps have a total notional amount of $1 billion. The first $500 million
of swap transactions relate to our 7.25% $1.1 billion ACES and expire on
November 15, 2004. The second $500 million of swap transactions relate to our
9.625% $500 million senior notes and expire on February 15, 2009. Under each of
these swap transactions; we pay an interest rate equal to the 3-month LIBOR
rate plus a fixed spread. In exchange, we receive fixed interest rates of 7.25%
on the $500 million related to the ACES and 9.625% on the $500 million related
to the senior notes. 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. 40




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WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS. 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. WE COULD BECOME INVOLVED IN INTELLECTUAL PROPERTY DISPUTES. 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. FAILURE TO COMPLY WITH ENVIRONMENTAL REGULATIONS COULD HARM OUR BUSINESS. As a company in the electronics manufacturing services industry, we are subject
to a variety of environmental regulations, 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. 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
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 may otherwise not be available. 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. 41




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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 second 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. 
 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 financial condition and results of operations. On September 19, 2002, one of Solectrons former employees filed a complaint
against Solectron in the Superior Court of the State of California, Santa Clara
County, asserting two claims for wrongful termination. The case is encaptioned
Ronald Sorisho v. Solectron Corporation et al., Case No. CV811243. In the
complaint, plaintiff alleges that he was wrongfully terminated by Solectron in
supposed retaliation for his alleged efforts to ensure that Solectron timely
recognized a charge for excess, obsolete and slow moving inventory in the
former Technology Solutions business unit. Plaintiffs complaint seeks
compensatory damages in an amount not less than $2.5 million as well as
punitive damages. Solectron believes Mr. Sorishos claims of wrongful
termination are without merit. Solectron filed a motion with the court
challenging the sufficiency of Mr. Sorishos complaint, and in response to this
motion, Mr. Sorisho filed an amended complaint in which he dropped one of his
two original wrongful termination claims, but added a new claim for purported
defamation based upon statements attributed to Solectron in a news article
regarding Mr. Sorishos allegations against Solectron. Solectron tendered the
defense of the defamation claim to its insurance carrier and the insurance
carrier has assumed the defense of the defamation claim, subject to a
reservation of rights. Trial in this matter is presently set for May 10, 2004,
although there is no certainty that the matter will actually go to trial on
that date. 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 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 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. 42




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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 of 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. Solectron has granted the plaintiffs request for an
extension of time to file a further amended complaint while the parties attempt
to resolve certain disputes relating to discovery. 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
    
    Seventh Amendment to Credit Agreement, dated as of February 27, 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, 43




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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 February 9, 2004, Solectron filed a report on Form 8-K with the Securities
and Exchange Commission (SEC) to reissue, in an updated format, certain of its
historical consolidated financial statements in connection with the provision
of Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, and rule 3-01 of
Regulation S-X under the 33 Act. During the first quarter of fiscal 2004, as a
result of a review of its portfolio of businesses, Solectron committed to a
plan to divest three non-strategic businesses in addition to the divestiture of
four non-strategic businesses we have previously announced. These businesses
are C-MAC Microtechnology division, SMART Modular Technologies, Inc., and a
business within our portfolio which is being marketed on a confidential basis.
As a result of this decision, Solectron reported the financial results of these
businesses as discontinued operations in its Form 10-Q for the three-month
period ended November 30, 2003. The SEC requires the same classification for
discontinued operations as is required by SFAS No. 144, for previously issued
financial statements and related information included in Solectrons last
Annual Report on Form 10-K for the fiscal year ended August 31, 2003 (the 2003
10-K) if the 2003 10-K is incorporated by reference in subsequent filings with
the SEC made under the Securities Act. Consequently, the Form 8-K filed on
February 9, 2004, supersedes certain information included in Solectrons 2003
10-K to reflect the three businesses as discontinued operations. On February 13, 2004, Solectron filed a report on Form 8-K with the SEC to
announce its intention to offer approximately $450 million aggregate principal
amount of convertible senior notes due 2034. Solectron further announced the
subsequent pricing of its $450 million of convertible senior notes due 2034 to
qualified institutional buyers pursuant to Rule 144A under the Securities Act.
The notes will bear interest at a rate of 0.5% per year and will rank equal in
right of payment with all of Solectrons unsubordinated, unsecured obligations.
Solectron has also granted the initial purchasers of the notes a 30-day option
to purchase up to an additional $50 million principal amount of the notes to
cover over-allotments. On March 18, 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 February 28, 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: April 9, 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
    
    Seventh Amendment to Credit Agreement, dated as of February 27, 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.