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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (MARK ONE) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended November 26, 2004 OR o
    
    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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act.) YES þ NO o Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. At December 23, 2004, 971,062,296 shares of Common Stock of the Registrant were outstanding
(including approximately 26 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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SOLECTRON CORPORATION INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)Condensed Consolidated Balance Sheets at November 30, 2004 and August 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended November 30, 2004 and 2003
    
    
    4Condensed
Consolidated Statements of Comprehensive Income (Loss) for the three months ended November 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 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
    
    
    38Item 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    42EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 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) November 30
    
    August 312004
    

2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,680.2
    
    
    $
    1,430.0Accounts receivable, net
    
    
    1,429.5
    
    
    
    1,549.9Inventories
    
    
    1,405.3
    
    
    
    1,457.2Prepaid expenses and other current assets
    
    
    184.9
    
    
    
    192.9Current assets of discontinued operations
    
    
    
    
    
    
    36.4Total current assets
    
    
    4,699.9
    
    
    
    4,666.4Property and equipment, net
    
    
    711.8
    
    
    
    726.6Goodwill
    
    
    134.6
    
    
    
    134.6Other assets
    
    
    259.0
    
    
    
    277.5Long-term assets of discontinued operations
    
    
    
    
    
    
    11.9Total assets
    
    $
    5,805.3
    
    
    $
    5,817.0LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Short-term debt
    
    $
    21.2
    
    
    $
    25.1Accounts payable
    
    
    1,343.1
    
    
    
    1,417.3Accrued employee compensation
    
    
    173.3
    
    
    
    175.2Accrued expenses and other current liabilities
    
    
    465.9
    
    
    
    495.1Current liabilities of discontinued operations
    
    
    
    
    
    
    46.4Total current liabilities
    
    
    2,003.5
    
    
    
    2,159.1Long-term debt
    
    
    1,215.4
    
    
    
    1,221.4Other long-term liabilities
    
    
    77.0
    
    
    
    55.9Long-term liabilities of discontinued operations
    
    
    
    
    
    
    1.8Total liabilities
    
    $
    3,295.9
    
    
    $
    3,438.2Commitments and contingenciesStockholders equity:Common stock
    
    
    1.0
    
    
    
    1.0Additional paid-in capital
    
    
    7,842.4
    
    
    
    7,775.9Accumulated deficit
    
    
    (5,153.6
    )
    
    
    (5,209.5
    )Accumulated other comprehensive loss
    
    
    (180.4
    )
    
    
    (188.6
    )Total stockholders equity
    
    
    2,509.4
    
    
    
    2,378.8Total liabilities and stockholders equity
    
    $
    5,805.3
    
    
    $
    5,817.0
 See accompanying notes to condensed consolidated financial statements 3




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SOLECTRON CORPORATION
AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in millions,
except per share data)(unaudited)


Three Months Ended November 302004
    
    2003Net sales
    
    $
    2,690.6
    
    
    $
    2,696.8Cost of sales
    
    
    2,534.4
    
    
    
    2,569.3Gross profit
    
    
    156.2
    
    
    
    127.5Operating expenses:Selling, general and administrative
    
    
    95.5
    
    
    
    114.7Restructuring and impairment costs
    
    
    1.6
    
    
    
    27.0Operating income (loss)
    
    
    59.1
    
    
    
    (14.2
    )Interest income
    
    
    5.8
    
    
    
    2.4Interest expense
    
    
    (16.3
    )
    
    
    (43.9
    )Other income  net
    
    
    3.0
    
    
    
    6.0Operating income (loss) from continuing operations
before income taxes
    
    
    51.6
    
    
    
    (49.7
    )Income tax expense
    
    
    4.7
    
    
    
    2.5Income (loss) from continuing operations
    
    $
    46.9
    
    
    $
    (52.2
    )Discontinued operations:Income (loss) from discontinued operations
    
    $
    10.7
    
    
    $
    (67.3
    )Income tax expense
    
    
    1.7
    
    
    
    0.3Income (loss) from discontinued operations
    
    
    9.0
    
    
    
    (67.6
    )Net income (loss)
    
    $
    55.9
    
    
    $
    (119.8
    )Basic net
income (loss) per shareContinuing operations
    
    $
    0.05
    
    
    $
    (0.06
    )Discontinued operations
    
    
    0.01
    
    
    
    (0.08
    )Basic net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.14
    )Diluted net
income (loss) per shareContinuing operations
    
    $
    0.05
    
    
    $
    (0.06
    )Discontinued operations
    
    
    0.01
    
    
    
    (0.08
    )Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.14
    )Shares used to compute basic net income (loss) per share
    
    
    963.2
    
    
    
    833.6Shares used to compute diluted net income (loss) per share
    
    
    967.4
    
    
    
    833.6


See accompanying notes to condensed consolidated financial statements.

4



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SOLECTRON CORPORATION
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)(in millions)(unaudited)
 Three Months Ended November 302004
    

2003Net income (loss)
    
    $
    55.9
    
    
    $
    (119.8
    )Other comprehensive income (loss):Foreign currency translation adjustments
    
    
    8.2
    
    
    
    48.7Unrealized gain on investments
    
    
    
    
    
    
    8.7Comprehensive income (loss)
    
    $
    64.1
    
    
    $
    (62.4
    )
 Accumulated unrealized foreign currency translation losses were $180.4 million at November 30,
2004 and $188.6 million at August 31, 2004. 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. See accompanying notes to condensed consolidated financial statements. 5




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SOLECTRON CORPORATION
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS(in millions)(unaudited)
 Three Months Ended November 302004
    
    2003Cash flows from operating activities of continuing operations:Net income (loss) from continuing operations
    
    $
    46.9
    
    
    $
    (52.2
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    48.5
    
    
    
    59.3Amortization of debt issuance costs and accretion of discount on notes
payable
    
    
    1.5
    
    
    
    16.1Change in the carrying value of property and equipment, goodwill and
other
long-term assets
    
    
    0.5
    
    
    
    0.8Changes in operating assets and liabilities:Accounts receivable, net
    
    
    120.4
    
    
    
    (202.2
    )Inventories
    
    
    52.1
    
    
    
    (145.1
    )Prepaid expenses and other current assets
    
    
    17.4
    
    
    
    17.9Accounts payable
    
    
    (74.2
    )
    
    
    234.1Accrued expenses and other current liabilities
    
    
    (17.9
    )
    
    
    (43.0
    )Net cash provided by (used in) operating activities of continuing
operations
    
    
    195.2
    
    
    
    (114.3
    )Cash flows from investing activities of continuing operations:Change in restricted cash and cash equivalents
    
    
    
    
    
    
    27.0Sales and maturities of short-term investments
    
    
    
    
    
    
    11.2Proceeds from disposition of business
    
    
    30.0
    
    
    
    Capital expenditures
    
    
    (32.0
    )
    
    
    (37.0
    )Proceeds from sale of property and equipment
    
    
    3.8
    
    
    
    25.6Proceeds from sale of investment
    
    
    16.0
    
    
    
    Advances to discontinued operations
    
    
    (22.9
    )
    
    
    (12.1
    )Net cash (used in ) provided by investing activities of continuing
operations
    
    
    (5.1
    )
    
    
    14.7
 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) Three Months Ended November 302004
    
    2003Cash flows from financing activities of continuing operations:Net repayment of bank lines of credit and other debt arrangements
    
    
    (15.1
    )
    
    
    (24.4
    )Net proceeds from issuance of common stock
    
    
    64.3
    
    
    
    Net proceeds from stock issued under option and employee purchase plans
    
    
    1.2
    
    
    
    12.6Net cash provided by (used in) financing activities of continuing
operations
    
    
    50.4
    
    
    
    (11.8
    )Effect of exchange rate changes on
cash and cash equivalents
    
    
    9.7
    
    
    
    6.3Net increase (decrease) in cash and cash equivalents
    
    
    250.2
    
    
    
    (105.1
    )Cash and cash equivalents at beginning of period  continuing operations
    
    
    1,412.5
    
    
    
    1,421.9Cash and cash equivalents at end of period  continuing operations
    
    $
    1,662.7
    
    
    $
    1,316.8Cash and cash equivalents at beginning of period  discontinued operations
    
    $
    
    
    
    $
    36.4Cash provided by discontinued operations
    
    
    
    
    
    
    11.1Cash and cash equivalents at end of period  discontinued operations
    
    $
    
    
    
    $
    47.5
 See accompanying notes to condensed consolidated financial statements. 7




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SOLECTRON CORPORATION AND SUBSIDIARIES 
 Notes to Condensed Consolidated Financial Statements
(Unaudited) NOTE 1  Basis of Presentation and Recent Accounting Pronouncements Basis of Presentation The accompanying financial data as of November 30, 2004 and for the three months ended November 30,
2004 and 2003 has been prepared by Solectron, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote disclosures normally
included in consolidated 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, 2004 condensed consolidated balance sheet was derived from
audited consolidated 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 Annual Report on Form 10-K for the fiscal year ended August 31,
2004. In the opinion of management, all adjustments (which include normal recurring adjustments)
necessary to present a fair consolidated statement of financial position as of November 30, 2004,
the results of operations, comprehensive income (loss) and cash flows for the three months ended
November 30, 2004 and 2003 have been made. The consolidated results of operations for the three
months ended November 30, 2004 are not necessarily indicative of the operating results for the full
fiscal year or any future periods. Solectrons first quarters of fiscal 2005 and 2004 ended on November 26, 2004 and November 28,
2003, respectively. Solectrons fiscal year ended on August 27, 2004. For clarity of presentation,
Solectron has indicated its first quarters as having ended on November 30 and its fiscal year as
having ended on August 31. Selling, general and administrative expense includes $6.8 million and $4.8 million of research and
development expenses for the first quarters of fiscal 2005 and 2004, respectively. The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates. Recent Accounting Pronouncements In September 2004, the EITF reached a consensus on Issue No. 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share. EITF 04-8 requires that all issued securities that
have embedded conversion features that are contingently exercisable upon the occurrence of a
market-price condition should be in the calculation of diluted earnings per share, regardless of
whether the market price trigger has been met. EITF 04-8 is effective for reporting periods ending
after December 15, 2004. The adoption of EITF 04-8 will add 46.6 million shares to the diluted
EPS calculation. In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.
SFAS 151, amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) should be recognized as current period
charges. In addition, SFAS 151 requires that allocation of fixed production overhead to the
cost of conversion be based on the normal capacity of the production facilities. The provision of
SFAS 151 shall be effective for Solectron beginning on September 1, 2005. Solectron is
currently evaluating whether this statement will have a material effect on its consolidated
financial statements. In December 2004, the FASB issued SFAS No. 123R, Share Based Payment: An Amendment of FASB
Statements No. 123 and 95. This statement requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial 8




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statements. This statement is effective as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. Solectron is currently evaluating the impact of
this statement on its consolidated financial statements. 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. The table below sets out the pro forma amounts of net income (loss) and net income
(loss) per share that would have resulted for all fiscal periods presented, if Solectron accounted
for its employee stock plans under the fair value recognition provisions of SFAS No. 123. Three Months Ended November 302004
    
    2003(in millions, except per share data)Net income (loss), as reported
    
    $
    55.9
    
    
    $
    (119.8
    )Less: Stock-based employee compensation
expense determined under fair value
method, net of related tax effects
    
    
    (9.2
    )
    
    
    (16.3
    )Pro forma net income (loss)
    
    $
    46.7
    
    
    $
    (136.1
    )Basic earnings (loss) per share:As reported
    
    $
    0.06
    
    
    $
    (0.14
    )Pro forma
    
    $
    0.05
    
    
    $
    (0.16
    )Diluted earnings (loss) per share:As reported
    
    $
    0.06
    
    
    $
    (0.14
    )Pro forma
    
    $
    0.05
    
    
    $
    (0.16
    )Weighted average number of shares:Basic
    
    
    963.2
    
    
    
    833.6Diluted
    
    
    967.4
    
    
    
    833.6
 Stock-based employee compensation expense determined under the fair value method, net of
related tax effects, included $0 and $2.9 million of expense relating to discontinued operations
during the three months ended November 30, 2004 and November 30, 2003, respectively. For purposes of computing pro forma net loss, the fair value of each option grant and Employee
Stock Purchase Plan purchase right is estimated on the date of grant using the Black-Scholes option
pricing model. The assumptions used to value the option grants and purchase rights are stated
below. 9




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Three Months Ended November 30Stock Options
    
    2004
    
    2003Expected life of options
    
    3.9 years
    
    3.9 yearsVolatility
    
    
    70
    %
    
    
    78
    %Risk-free interest rate
    
    
    3.31
    %
    
    
    2.31
    %Dividend yield
    
    zero
    
    zero
 Three Months Ended November 30Employee Stock Purchase Plan
    
    2004
    
    2003Expected life of purchase right
    
    6 months
    
    6 monthsVolatility
    
    
    41
    %
    
    
    78
    %Risk-free interest rate
    
    
    2.32
    %
    
    
    1.03
    %Dividend yield
    
    zero
    
    zero
 During fiscal 2003, Solectron provided restricted stock awards to certain eligible executives.
These restricted shares are not transferable until fully vested and are subject to the Company
Repurchase Option for all unvested shares upon certain early termination events and also subject to
accelerated vesting in certain circumstances. During the three months ended November 30, 2004 and
2003, compensation expense related to the restricted stock awards amounted to approximately $0.6
million for each period. During fiscal 2004 and the first quarter of fiscal 2005, Solectron issued stock options to certain
executives at a price below the market value on the day of the stock option grant. Compensation
expense resulting from the difference between the market value on the date of the discounted stock
option grant and the purchase price is being amortized over the vesting period. The compensation
expense associated with all discounted stock options issued by Solectron is not significant. NOTE 3  Inventories Inventories related to continuing operations as of November 30, 2004 and August 31, 2004, consisted
of (in millions): November 30
    
    August 312004
    
    2004Raw materials
    
    $
    988.1
    
    
    $
    994.4Work-in-process
    
    
    202.9
    
    
    
    224.0Finished goods
    
    
    214.3
    
    
    
    238.8Total
    
    $
    1,405.3
    
    
    $
    1,457.2
 NOTE 4  Accounts Receivable, Net Accounts receivable, net related to continuing operations as of November 30, 2004 and August 31,
2004 consisted of the following (in millions): November 30
    
    August 312004
    
    2004Accounts Receivable
    
    $
    1,460.9
    
    
    $
    1,585.6Less: Allowance for doubtful accounts
    
    
    31.4
    
    
    
    35.7Accounts Receivable, net
    
    $
    1,429.5
    
    
    $
    1,549.9
 NOTE 5  Property and Equipment, Net 10




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Property and equipment, net related to continuing operations as of November 30, 2004 and August 31,
2004 consisted of the following (in millions): November 30
    
    August 312004
    
    2004Original Cost
    
    $
    1,681.4
    
    
    $
    1,663.7Less: Accumulated depreciation
    
    
    969.6
    
    
    
    937.1Total
    
    $
    711.8
    
    
    $
    726.6
 NOTE 6  Commitments and Contingencies Synthetic Leases Solectron has synthetic lease agreements relating to four manufacturing sites in continuing
operations. The synthetic leases have expiration dates in August 2007. At the end of the lease
terms, Solectron has an option, subject to certain conditions, to purchase or to cause a third
party to purchase the facilities subject to the synthetic leases for the Termination Value, which
approximates the lessors original cost for each facility, or may market the property to a third
party at a different price. Solectron is entitled to any proceeds from a sale of the properties to
third parties in excess of the Termination Value and is liable to the lessor for any shortfall not
to exceed 85% of the Termination Value. Solectron has provided loans to the lessor equaling
approximately 85% of the Termination Value for each synthetic lease. These loans are repayable
solely from the sale of the properties to third parties in the future, are subordinated to the
amounts payable to the lessor at the end of the synthetic leases, and may be credited against the
Termination Values payable if Solectron purchases the properties. The approximate aggregate
Termination Values and loan amounts were $101.3 million and $86.1 million, respectively, as of
November 30, 2004. In addition, cash collateral of $15.2 million is pledged for the difference between the aggregate
Termination Values and the loan amounts. Each lease agreement contains various affirmative and
financial covenants. A default under a lease, including violation of these covenants, may
accelerate the termination date of the arrangement. Solectron was in compliance with all applicable
covenants as of November 30, 2004. Monthly lease payments are generally based on the Termination
Value and 30-day LIBOR index (1.99% as of November 30, 2004) plus an interest-rate margin, which
may vary depending upon Solectrons Moodys Investors Services and Standard and Poors ratings and
are allocated between the lessor and Solectron based on the proportion of the loan amount to the
Termination Value for each synthetic lease. During fiscal 2004, Solectron determined that it is probable that the expected fair value of the
properties under the synthetic lease agreements will be less than the Termination Value at the end
of the lease term. The accretion expense for the quarter was approximately $1.1 million. 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 restricted cash and restricted cash
equivalents, respectively, in the consolidated balance sheets. 11




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Future Minimum Lease Obligations Future minimum payments for operating lease obligations (excluding restructured leases) related to
continuing operations, including the synthetic leases discussed
above, are as follows (in millions): FY05
    
    FY06Total
    
    Q2-Q4
    
    Q1
    
    Q2-Q4
    
    FY07
    
    FY08
    
    FY09
    
    FY10
    
    ThereafterOperating lease
    
    $
    180.2
    
    
    $
    44.4
    
    
    $
    11.6
    
    
    $
    25.0
    
    
    $
    27.2
    
    
    $
    16.5
    
    
    $
    12.9
    
    
    $
    11.4
    
    
    $
    31.2
 Legal Proceedings Solectron is from time to time involved in various litigation and legal matters, including the one
described below. By describing the particular matter set forth below, Solectron does not intend to
imply that it or its legal advisors have concluded or believe that the outcome of this particular
matter is or is not likely to have a material adverse impact upon Solectrons business or
consolidated financial condition and results of operations. Solectron has settled the previously reported shareholder derivative lawsuit entitled Lifshitz v.
Cannon et al.,Case No. CV815693, filed in the Santa Clara County, California Superior Court, on
terms not considered to be material to Solectron. Court approval of the settlement terms was
obtained on December 16, 2004. 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 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, consolidated financial condition and results of operations. In
addition, Solectron may be forced to incur substantial litigation expenses in defending this
litigation. NOTE 7  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 consolidated financial
statements and requires selected information about operating segments in interim financial reports
issued to stockholders. 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. Solectrons chief operating decision maker is the Chief Executive Officer. The Chief Executive
Officer evaluates financial information on a company-wide basis for purposes of making decisions
and assessing financial performance. Accordingly, Solectron has one operating segment. 12




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##### Table of Contents



Geographic information for continuing operations as of and for the periods presented is as follows
(in millions): Three Months Ended November 302004
    
    2003Geographic net sales:United States
    
    $
    786.4
    
    
    $
    763.4Other North and Latin America
    
    
    473.7
    
    
    
    382.5Europe
    
    
    434.1
    
    
    
    435.3Malaysia
    
    
    436.5
    
    
    
    395.1China
    
    
    340.1
    
    
    
    368.9Other Asia Pacific
    
    
    219.8
    
    
    
    351.6$
    2,690.6
    
    
    $
    2,696.8
 Geographic net sales are attributable to the country in which the product is manufactured. November 30
    
    August 312004
    
    2004Long-lived assets:United States
    
    $
    295.3
    
    
    $
    277.8Other North and Latin America
    
    
    175.6
    
    
    
    182.8Europe
    
    
    143.4
    
    
    
    145.6Asia Pacific
    
    
    315.6
    
    
    
    330.1$
    929.9
    
    
    $
    936.3
 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 November 302004
    
    2003Cisco Systems
    
    
    14.1
    %
    
    
    11.4
    %Nortel Networks
    
    
    10.4
    %
    
    
    10.6
    %
 Solectron has concentrations of credit risk due to sales to the customers listed above as well as
to Solectrons other significant customers. In particular, Nortel Networks accounted for
approximately 11.3% of total accounts receivable related to continuing operations as of November
30, 2004. NOTE 8  Long-Term Debt 9.625% Senior Notes On February 6, 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 November 30, 2004, the carrying amount of the notes was $498.1 million and
the $16.8 million fair market value of the interest rate swap (See Note 9, Financial Instruments)
were classified as long-term debt. Additionally, Solectron was in compliance with the restrictive
provisions of the indenture at November 30, 2004. 0.5% Convertible Senior Notes due 2034 13




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On February 17, 2004, Solectron issued $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, subject to the terms of the notes. Interest on the notes will be paid on February 15 and on August 15 of each year. 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, up 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, up 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 defined, at a price of 100% of
the principal amount of the notes plus accrued and unpaid interest and liquidated damages owed, if
any, up to, but excluding, the date of repurchase. As of November 30, 2004, the carrying amount of the notes of $450.0 million was classified as
long-term debt. 7.375% Senior Notes In February 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 November 30, 2004, the carrying amount of the notes of $150.0 million was
classified as long-term debt. Adjustable Conversion-Rate Equity Securities (ACES) At August 31, 2004, there were 2.6 million ACES units remaining. Each ACES unit has a stated
amount of $25.00 and consisted of (a) a contract requiring the holder to purchase, for $25.00, a
number of shares of Solectron common stock to be determined on November 15, 2004, based on the
average trading price of Solectrons common stock at that time and certain specified settlement
rates ranging from 2.1597 shares of Solectrons common stock per purchase contract to 2.5484 shares
of Solectrons common stock per purchase contract (subject to certain anti-dilution adjustments);
and (b) a $25 principal amount of 7.97% subordinated debenture due 2006. On November 15, 2004, Solectron issued 6.6 million shares of its common stock at a settlement rate
of 2.5484 shares per ACES unit as defined above. Solectron received cash proceeds of $64.3 million
which resulted in a corresponding increase in additional paid in capital. The equity component of
the ACES has been settled. Accordingly, the remaining obligation of the original ACES is the 7.97%
debentures. As of November 30, 2004, there was $63.1 million outstanding of the 7.97% subordinate debentures
due November 2006 which were classified as long-term debt. Liquid Yield Option Notes (LYONs) At November 30, 2004,
Solectron has $9.3  million aggregate accreted value of LYONs outstanding with an interest rate of 2.75%. These
notes are unsecured and unsubordinated indebtedness of Solectron. Solectron will pay no interest
prior to maturity. Each note has a yield of 2.75% with a maturity value of $1,000 on May 8, 2020.
Each note is convertible at any time by the holder to common shares at a conversion rate of 12.3309
shares per note. Holders will be able to require Solectron to purchase all or a portion of their notes
on May 8, 2010, at a price of $761.00 per note. Solectron, at its option, may redeem all or a
portion of the notes at any time on or after May 8, 2003. As of
November 30, 2004, the accreted
value of the 2.75% LYONs is classified as long-term debt on the
condensed consolidated balance sheet. NOTE 9  Derivative Instruments Fair Value of Financial Instruments 14




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##### Table of Contents



The fair value of Solectrons cash, cash equivalents, accounts receivable, accounts payable and
borrowings under lines of credit approximates the carrying amount due to the relatively short
maturity of these items. Derivatives 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, payables, and
indebtedness recognized in operating results. 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 November 30, 2004, Solectron had outstanding foreign exchange forward contracts with a total
notional amount of approximately $471.7 million related to continuing operations. Solectron uses interest rate swaps to hedge its mix of short-term and long-term interest rate
exposures resulting from Solectrons debt obligations. As of November 30, 2004, Solectron had an
interest rate swap outstanding under which it pays variable rates and receives fixed rates. The
interest rate swap has a total notional amount of $500 million, relating to the 9.625% $500 million
senior notes expiring on February 15, 2009. Under the swap transaction, Solectron pays an interest
rate equal to the 3-month LIBOR rate plus a fixed spread. In exchange, Solectron receives a fixed
interest rate of 9.625% on the $500 million. The swap effectively replaces the fixed interest rate
on all the 9.625% senior notes with a variable interest rate. The swap is designated as a fair value
hedge under SFAS No. 133. The fair value of the outstanding derivative referred to above was not significant. For all derivative transactions, Solectron is exposed to counterparty credit risk to the extent
that the counterparties may not be able to meet their obligations towards Solectron. To manage the
counterparty risk, Solectron limits its derivative transactions to those with major financial
institutions. Solectron does not expect to experience any material adverse financial consequences
as a result of default by Solectrons counterparties. Financial instruments that potentially subject Solectron to concentrations of credit risk consist
of cash, cash equivalents and trade accounts receivable. Concentrations of credit risk in accounts
receivable resulting from sales to major customers are discussed in Note 7, Segment Information
and Geographic Information. Solectron generally does not require collateral for sales on credit.
However, for customers that have limited financial resources, Solectron may require coverage for
this risk including standby letters of credit, prepayments and consignment of inventories.
Solectron also monitors extensions of credit and the financial condition of its major customers. NOTE 10  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
as of November 30, 2004 and August 31, 2004 (in millions): November 30, 2004: 15




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##### Table of Contents



Supply
    
    Intellectual PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    87.7
    
    
    $
    61.0
    
    
    $
    94.8
    
    
    $
    243.5Accumulated amortization
    
    
    (86.2
    )
    
    
    (54.9
    )
    
    
    (79.2
    )
    
    
    (220.3
    )Carrying value
    
    $
    1.5
    
    
    $
    6.1
    
    
    $
    15.6
    
    
    $
    23.2
 August 31, 2004: Supply
    
    Intellectual PropertyAgreements
    
    Agreements
    
    Other
    
    TotalGross amount
    
    $
    87.7
    
    
    $
    108.5
    
    
    $
    94.8
    
    
    $
    291.0Accumulated amortization
    
    
    (86.1
    )
    
    
    (54.5
    )
    
    
    (77.5
    )
    
    
    (218.1
    )Impairment
    
    
    
    
    
    
    (47.5
    )
    
    
    
    
    
    
    (47.5
    )Carrying value
    
    $
    1.6
    
    
    $
    6.5
    
    
    $
    17.3
    
    
    $
    25.4
 Amortization expense for the three months ended November 30, 2004 was approximately $2.2 million.
Annual amortization expense for these intangibles over the next five years would be approximately
$5.7 million, $3.8 million, $3.6 million, $3.2 million and $2.3 million. NOTE 11  Discontinued Operations In the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004, Solectron designated
the following businesses as discontinued operations: Dy 4 Systems Inc., Kavlico Corporation, the
Solectron MicroTechnology division, SMART Modular Technologies Inc., Stream International Inc.,
Solectrons 63% interest in US Robotics Corporation, and Force Computers, Inc. In fiscal 2004, all
of the businesses were sold except Solectrons MicroTechnology division. The results from discontinued operations were as follows (in millions): Three Months Ended November 302004
    
    2003Net sales
    
    $
    15.2
    
    
    $
    535.7Cost of sales
    
    
    14.1
    
    
    
    470.6Gross profit
    
    
    1.1
    
    
    
    65.1Operating (income) expenses  net
    
    
    (8.7
    )
    
    
    128.3Operating income (loss)
    
    
    9.8
    
    
    
    (63.2
    )Interest income  net
    
    
    
    
    
    
    0.2Other income (expense)  net
    
    
    0.9
    
    
    
    (4.3
    )Income (loss) before income taxes
    
    
    10.7
    
    
    
    (67.3
    )Income tax expense
    
    
    1.7
    
    
    
    0.3Income (loss) from discontinued operations, net of tax
    
    $
    9.0
    
    
    $
    (67.6
    )
 During the first quarter of fiscal 2005, Solectron completed the sale of its MicroTechnology
division, for cash proceeds of $30.0 million resulting in a $10.1 million pre-tax gain which is
included in operating (income) expenses  net for the quarter ended November 30, 2004 as disclosed
above. As a result of this disposition, Solectron transferred approximately $28.3 million from 16




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##### Table of Contents



accumulated foreign currency translation gains, included in accumulated other comprehensive losses
within Stockholders Equity and recognized that amount as part of the pre-tax gain. The sales
agreement for this divesture provides for a possible adjustment to the proceeds and gain based upon
final settlement of each divestures working capital at closing. Resolution of this possible
working capital adjustment and other reconciling items pursuant to the sales agreement, if any, are
expected to be included in our fiscal 2005 second quarter results. During fiscal 2004, Solectron completed the sale of the previous six discontinued operations.
During the first quarter of fiscal 2005, Solectron increased the net loss on disposal of those
discontinued operations by approximately $0.5 million resulting from a few insignificant
adjustments pursuant to the terms of the disposal transaction. For the three months ended November
30, 2004, the adjustment to the net loss on these discontinued operations is recorded in operating
(income) expenses  net as disclosed above. The sales agreements for all seven divestitures contain certain indemnification provisions under
which Solectron may be required to indemnify the buyer of the divested business for liabilities,
losses, or expenses arising out of breaches of covenants and certain breaches of representations
and warranties relating to the condition of the business prior to and at the time of sale. In
aggregate, Solectron is contingently liable for up to $94.8 million for a period of 12 to 24 months
subsequent to the completion of the sale. As of November 30, 2004, there were no liabilities
recorded under these indemnification obligations. Additionally, Solectron may be required to
indemnify a buyer for environmental remediation costs for a period up to 10 years and not to exceed
$13 million. Solectron maintains an insurance policy to cover environmental remediation
liabilities in excess of reserves previously established upon the acquisition of these properties.
Solectron did not record any environmental charges upon disposition of these properties. Solectron is in the process of terminating a synthetic lease agreement associated with a
discontinued operation that has been sold. Any resulting gain or loss from the absolution of the
synthetic lease agreement will be recognized in discontinued operations. The current and non-current assets and liabilities of discontinued operations as of November 30,
2004 and August 31, 2004, were as follows (in millions): November 30
    
    August 312004
    
    2004Accounts receivable, net
    
    $
    
    
    
    $
    18.3Inventories
    
    
    
    
    
    
    18.1Total current assets of discontinued operations
    
    $
    
    
    
    $
    36.4Net property and equipment
    
    $
    
    
    
    $
    10.1Other assets
    
    
    
    
    
    
    1.8Total non-current assets of discontinued operations
    
    $
    
    
    
    $
    11.9Short-term debt
    
    $
    
    
    
    $
    8.9Accounts payable
    
    
    
    
    
    
    26.0Accrued employee compensation
    
    
    
    
    
    
    7.2Accrued expenses
    
    
    
    
    
    
    4.3Total current liabilities of discontinued operations
    
    $
    
    
    
    $
    46.4Total non-current liabilities of discontinued operations
    
    $
    
    
    
    $
    1.8
 NOTE 12  Restructuring and Impairment Over the past few years, Solectron has 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 17




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##### Table of Contents



customer demand and transition our operations to lower cost regions. The restructuring and
impairment costs include employee severance and benefit costs, costs related to leased facilities
abandoned and subleased, impairment of owned facilities no longer used by Solectron which will be
disposed, costs related to leased equipment that has been abandoned, and impairment of owned
equipment that will be disposed. For owned facilities and equipment, the impairment loss recognized
was based on the fair value less costs to sell, with fair value estimated based on existing market
prices for similar assets. Severance and benefit costs and other costs associated with
restructuring activities initiated prior to January 1, 2003 were recorded in compliance with EITF
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity. Severance and benefit costs associated with restructuring activities initiated
on or after January 1, 2003 are recorded in accordance with SFAS No. 112, Employers Accounting
for Postemployment Benefits, as Solectron concluded that it had a substantive severance plan. In
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
the estimated lease loss accrued for leased facilities abandoned and subleased after December 31,
2002 represents the fair value of the lease liability as measured by the present value of future
lease payments subsequent to abandonment less the present value of any estimated sublease income.
For those facilities abandoned and subleased before January 1, 2003, as part of restructuring
activities under EITF Issue No. 94-3, the estimated lease loss represents payments subsequent to
abandonment less any estimated sublease income. In order to estimate future sublease income,
Solectron works with a real estate 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. See also Note 10, Intangible Assets, for discussion of intangible asset impairment charges. Three months ended November 30, 2004 and 2003 Solectron continued to incur expected restructuring charges in the first quarter of fiscal 2005 as
a result of revisions of previous estimates along with idle facility common area maintenance costs.
Total restructuring and impairment costs of $1.6 million were charged against continuing
operations. During the three months ended November 30, 2004, Solectron incurred $1.2 million in impairments of
equipment and facilities resulting from changes in market conditions. The following table summarizes restructuring charges included in the accompanying condensed
consolidated statements of operations (in millions): Three Months Ended November 302004
    
    2003
    
    NatureLoss (gain) on disposal of and impairment of
equipment and facilities
    
    $
    1.2
    
    
    $
    (2.5
    )
    
    non-cashSeverance and benefit costs
    
    
    0.4
    
    
    
    10.1
    
    
    cashNet adjustment to equipment lease loss
accrual
    
    
    0.1
    
    
    
    0.3
    
    
    cashNet adjustment to facility lease loss accrual
    
    
    (0.1
    )
    
    
    4.5
    
    
    cashOther exit costs
    
    
    
    
    
    
    14.6
    
    
    cashTotal
    
    $
    1.6
    
    
    $
    27.0
 The employee severance and benefit costs included in the restructuring charges recorded in the
first quarter of fiscal 2005 related to approximately 200 full-time positions worldwide, all of
which have been eliminated. The positions eliminated were primarily in the Americas and European
regions. Solectron has one restructuring plan of approximately $20.0 million to complete as of
November 30, 2004. Cumulative restructuring costs recorded under this plan as of November 30, 2004
was approximately $19.0 million. Fiscal 2004 and 2003 The following table summarizes restructuring charges relating to continuing operations recorded in
fiscal 2004 and 2003 (in millions): 18




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##### Table of Contents



Years Ended August 312004
    
    2003
    
    NatureLoss on disposal of and impairment of
equipment and facilities
    
    $
    35.8
    
    
    $
    152.4
    
    
    non-cashSeverance and benefit costs
    
    
    27.0
    
    
    
    220.7
    
    
    cashNet adjustment to equipment lease loss
accrual
    
    
    (3.0
    )
    
    
    2.2
    
    
    cashNet adjustment to facility lease loss accrual
    
    
    43.8
    
    
    
    23.6
    
    
    cashOther exit costs
    
    
    25.7
    
    
    
    32.6
    
    
    cashTotal
    
    $
    129.3
    
    
    $
    431.5
 2004
During fiscal 2004, Solectron recorded restructuring and impairment charges (excluding intangible
asset impairment charges) of $129.3 million related to continuing operations. In the fourth quarter of fiscal 2004, Solectron committed to a plan to incur approximately $20.0
million in new restructuring charges. At the end of fiscal 2004, Solectron recorded approximately
$19.0 million of restructuring charges related to this plan. These restructuring actions are to
further consolidate facilities, reduce the workforce in Europe and North America and impair certain
long-lived assets. These new restructuring actions will result in future savings in salaries and
benefits and depreciation expense, and will result in cash expenditures of approximately $14.4
million. Solectron expects to complete this new plan by the end of fiscal 2005. The employee severance and benefit costs included in the 2004 restructuring charges previous to the
above-mentioned plan relate to the elimination of approximately 2,100 full-time positions worldwide
and all such positions have been eliminated under this plan. The positions eliminated were
primarily in the Americas and European regions. Under both restructuring activities mentioned above, facilities and equipment subject to
restructuring were primarily located in the Americas and Europe. For leased facilities that will be
abandoned and subleased, the lease costs represent the present value of 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 other exit costs mainly represent program transfer activity between global operation sites,
which are recorded as the charges are incurred. 2003
The employee severance and benefit costs included in the restructuring charges recorded in fiscal
2003 relate to the elimination of approximately 9,500 full-time positions worldwide and all such
positions have now been eliminated under this plan. Approximately 57% of the positions eliminated
were in the Americas region, 31% were in Europe and 12% were in Asia/Pacific. Facilities and
equipment subject to restructuring were primarily located in the Americas and Europe. For leased facilities that will be 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 other exit costs mainly represent program transfer activity between global operation sites,
which are recorded as the charges are incurred. Restructuring Accrual
The following table summarizes the restructuring accrual balance for continuing operations as of
November 30, 2004 (in millions): 19




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##### Table of Contents



Severance
    
    Lease Accrual
    
    Lease Accrual
    
    Other Exitand Benefits
    
    on Facilities
    
    on Equipment
    
    Costs
    
    TotalBalance of accrual at August 31, 2004
    
    $
    28.9
    
    
    $
    58.8
    
    
    $
    4.9
    
    
    $
    1.3
    
    
    $
    93.9Q1-FY05 Provision
    
    
    0.4
    
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    
    
    
    
    0.4Q1-FY05 Cash payments
    
    
    (9.8
    )
    
    
    (9.9
    )
    
    
    (1.7
    )
    
    
    (0.3
    )
    
    
    (21.7
    )Balance of accrual at November 30, 2004
    
    
    19.5
    
    
    
    48.8
    
    
    
    3.3
    
    
    
    1.0
    
    
    
    72.6
 Accruals related to restructuring activities were recorded in accrued expenses and other current
liabilities in the accompanying consolidated balance sheet. Solectron expects to pay approximately
$45.0 million in the next year related to severance and benefits, lease commitment costs and other
exit costs. The remaining balance, primarily consisting of lease commitment costs on facilities is
expected to be paid out through 2012. NOTE 13  Income (Loss) Per Share Calculation Basic earnings (loss) per share is computed using the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per share calculates the effect of dilutive securities on
weighted average shares. Dilutive securities would include options to purchase common stock and
shares issuable upon conversion of Solectrons LYONs and ACES. If certain conversion events occur,
dilutive securities would also include shares issuable upon conversion of Solectrons 0.5% senior
notes. Earnings per share data for continuing operations were computed as follows (in millions, except per
share amounts): Three Months Ended November 30,2004
    
    2003Basic earnings (net loss) per share:Net income (loss)
    
    $
    46.9
    
    
    $
    (52.2
    )Shares used in computation:Weighted average ordinary shares outstanding
    
    
    963.2
    
    
    
    833.6Basic earnings (net loss) per share
    
    $
    0.05
    
    
    $
    (0.06
    )Diluted earnings per share:Net income (loss)
    
    $
    46.9
    
    
    $
    (52.2
    )Shares used in computation:Weighted average ordinary shares outstanding
    
    
    963.2
    
    
    
    833.6Employee stock options
    
    
    4.2
    
    
    
    Shares issuable upon conversion of LYONs
    
    
    
    
    
    
    Shares issuable upon conversion of ACES
    
    
    
    
    
    
    Weighted average number of shares
    
    
    967.4
    
    
    
    833.6Diluted earnings (net loss) per share
    
    $
    0.05
    
    
    $
    (0.06
    )
 The following table summarizes the weighted average dilutive securities that were excluded from the
above computation of diluted earnings per share because their inclusion would have an anti-dilutive
effect (in millions): 20




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Three Months Ended November 30,2004
    
    2003Dilutive securities:Employee stock options
    
    
    28.5
    
    
    
    44.7Shares issuable upon conversion of LYONs
    
    
    0.3
    
    
    
    19.3Shares issuable upon conversion of ACES
    
    
    5.8
    
    
    
    112.1Total dilutive potential common shares
    
    
    34.6
    
    
    
    176.1
 In addition, there were 46.6 million shares related to the 0.5% convertible senior notes that were
excluded from the diluted earnings per share calculation for the first quarter of fiscal 2005 as
they are issuable only if certain conversion events occur. The 0.5% convertible senior notes did
not exist in the first quarter of fiscal 2004. NOTE 14  Income Taxes SFAS No. 109, Accounting for Income Taxes, requires that a valuation allowance be established
when it is more likely than not that all or a portion of deferred tax assets will not be
realized. A review of all available positive and negative evidence needs to be considered,
including the companys performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods, and existing
contracts or sales backlog that will result in future profits, among other factors. It further
states that forming a conclusion that a valuation allowance is not needed is difficult when there
is negative evidence such as cumulative losses in recent years in the jurisdictions to which the
deferred tax assets relate. Therefore, cumulative losses weigh heavily in the overall assessment.
As a result of the review undertaken after the end of the third quarter of fiscal 2003, 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 $1.6 billion as of November 30, 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 incurs tax expense
in certain countries which are not subject to the aforementioned valuation allowance during the
three months ended November 30, 2004. Certain of Solectrons offshore operations are beginning to report taxable profits, mostly arising
in low-cost locations. Accordingly, Solectron anticipates some tax expense in future quarters
related to those operations. Solectron will not be able to offset this tax expense with
unrecognized deferred tax assets described above, because, for the most part, those assets did not
arise in the jurisdictions where Solectron is realizing taxable profits. In addition, Solectron has established contingency reserves for income taxes in various
jurisdictions. The estimate of appropriate tax reserves is based upon the amount of prior tax
benefit that might be at risk upon audit and upon the reasonable estimate of the amount at risk.
Solectron periodically reassess the amount of such reserves and adjust reserve balances as
necessary. Income taxes payable of $161.7 million and $162.4 million is included in other current liabilities
as of November 30, 2004 and August 31, 2004, respectively. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements With the exception of historical facts, the statements contained in this quarterly report are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and are subject to the safe harbor provisions set forth in the Exchange Act. These forward-looking
statements relate to matters including, but not limited to:  
    
    future sales and operating results;
    
    our anticipation of the timing and amounts of our future obligations and commitments;
    
    our belief that our cash and cash equivalents, lines of credit and cash to be generated form
continuing operations will be sufficient for us to meet our obligations for the next twelve months; 21




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
    
    the capabilities and capacities of our business operations;
    
    the anticipated financial impact of recent and future acquisitions and divestitures and the adequacy of our provisions
for indemnification obligations pursuant to such transactions;
    
    our belief that our current environmental liability exposure related to our facilities will not be material to our
business, financial condition or results of operations; 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 and variations
or negatives of these words. 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,10-Q, 8-K
and S-3. Such risks, uncertainties and changes in condition, significance, value and effect could
cause our actual results to differ materially from our anticipated outcomes. Although we believe
that the assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate. Therefore, we can give no assurance that the results implied by
these forward-looking statements will be realized. The inclusion of forward-looking information
should not be regarded as a representation by our company or any other person that the future
events, plans or expectations contemplated by Solectron will be achieved. Furthermore, past
performance in operations and share price is not necessarily indicative of future performance. We
disclaim any intention or obligation to update or revise any forward-looking statements contained
in the documents incorporated by reference herein, whether as a result of new information, future
events or otherwise Overview We provide a range of worldwide manufacturing and integrated supply chain services to companies who
design and market electronic products. Our revenue is generated from sales of our services
primarily to customers in the Computing & Storage, Networking, Communications, Consumer,
Industrial, and Automotive markets. Summary of Results The following table sets forth, for the three-month periods indicated certain key operating results
and other financial information (in millions): 22




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Three Months Ended November 302004
    
    2003Net sales
    
    $
    2,690.6
    
    
    $
    2,696.8Gross profit
    
    
    156.2
    
    
    
    127.5Selling, general and administrative expense
    
    
    95.5
    
    
    
    114.7Income (loss) from continuing operations
    
    
    46.9
    
    
    
    (52.2
    )
 Net sales for the first
quarter of fiscal 2005 remained the same at approximately
$2.7 billion relative to the same period of fiscal 2004. Our sales levels during the first quarter of fiscal 2005 were softer than
anticipated. Gross profit improved to 5.8% for the first quarter of fiscal 2005 compared to 4.7% for the same
period of fiscal 2004. The gross profit improvement was the result of effectively implementing the
Lean Initiative in our manufacturing sites around the world and increasing discipline in our quote
process for new business. Selling, general and administrative (SG&A) expense continued to decline in the first quarter of
fiscal 2005. SG&A expense was $95.5 million during the first quarter of fiscal 2005 compared to
$114.7 million for the same period of fiscal 2004. The reduction in SG&A expense is a result of our
continued discipline in spending. Key Performance Indicators Management regularly reviews financial and non-financial performance indicators to assess the
Companys operating results. The following table sets forth, for the quarterly periods indicated,
certain of managements key financial performance indicators. Three Months EndedNovember 30, 2004
    
    August 31, 2004
    
    May 31, 2004
    
    February 28, 2004
    
    November 30, 2003Inventory turns
    
    7.1 turns
    
    7.5 turns
    
    7.5 turns
    
    7.4 turns
    
    7.4 turnsDays sales outstanding (DSO)
    
    50 days
    
    47 days
    
    47 days
    
    49 days
    
    50 daysDays payable outstanding (DPO)
    
    49 days
    
    47 days
    
    46 days
    
    48 days
    
    48 daysCash-to-cash cycle (C2C)
    
    51 days
    
    49 days
    
    49 days
    
    50 days
    
    50 daysCapital expenditures (in millions)
    
    $
    32.0
    
    
    $
    48.3
    
    
    $
    32.8
    
    
    $
    31.5
    
    
    $
    37.0
 Inventory turns are calculated as the ratio of cost of sales compared to the average inventory for
the quarter. During the first quarter of fiscal 2005, inventory turns declined due to a decrease in
revenue resulting from lower demand than anticipated. DSO is calculated as the ratio of average
accounts receivable for the quarter compared to daily revenue for the quarter. DSO has increased
from the prior quarter due the higher mix of customers with longer payment terms in the quarter.
DPO is calculated as the ratio of average accounts payable during the quarter compared to daily
cost of sales for the quarter. DPO has increased from the prior quarter due to higher payable
balances resulting from increasing inventory in anticipation of higher sales. The C2C cycle is
determined by taking the ratio of 360 days compared to inventory turns plus DSO minus DPO. The C2C
cycle has increased from the prior quarter primarily as a result of higher DSO and lower inventory
turns, partially offset by improvements in DPO. Critical Accounting Policies Management is required to make judgments, assumptions and estimates that affect the amounts
reported when we prepare consolidated 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, 2004 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 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. 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 23




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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 In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets, we review the carrying amount of goodwill for impairment on an annual
basis during the fourth quarter (as of June 1). Additionally, we perform an impairment assessment
of goodwill whenever events or changes in circumstances indicate that the carrying value of
goodwill may not be recoverable. Significant changes in circumstances can be both internal to our
strategic and financial direction, as well as changes to the competitive and economic landscape.
With the change in operating segments as of Sept 1, 2003, we determined that there was a single
reporting unit for the purpose of goodwill impairment tests under SFAS No. 142. For purposes of
assessing the impairment of our goodwill, we estimate the value of the reporting unit using our
market capitalization as the best evidence of fair value. This fair value is then compared to the
carrying value of the reporting unit. If the fair value of the reporting unit is less than its
carrying value, we then allocate the fair value of the unit to all the assets and liabilities of
that unit (including any unrecognized intangible assets) as if the reporting units fair value was
the purchase price to acquire the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to its assets and liabilities is the implied fair value of the
goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount equal to that excess. The process of
evaluating the potential impairment of goodwill is subjective and requires judgment at many points
during the test including future revenue forecasts, discount rates and various reporting unit
allocations. Intangible Assets Our intangible assets consist primarily of intellectual property agreements and other intangible
assets obtained from asset acquisitions. Intangible assets are evaluated for impairment whenever
events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
Impairment is measured by comparing the intangible assets carrying amounts to the fair values as
determined using discounted cash flow models. 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 or returned to the lessor,
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. In accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, the estimated lease loss accrued for leased facilities that have been
abandoned and subleased after January 1, 2003 represents the fair value of the lease liability as
measured by the present value of future lease payments subsequent to abandonment less the present
value of any estimated sublease income. For those facilities abandoned and subleased as part of
restructuring activities under EITF Issue No. 94-3, the estimated lease loss represents payments
subsequent to abandonment less any estimated sublease income. In order to estimate future sublease
income, we work with a real estate broker to estimate the length of time until we can sublease a
facility and the amount of rent we can expect to receive. Our 24




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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 carry-forwards, net operating losses and other deductible temporary differences, which will
reduce taxable income in such jurisdictions in future periods. We have provided valuation
allowances for future tax benefits resulting from foreign net operating loss carry-forwards and for
certain other U.S. and foreign deductible temporary differences where we believe future
realizability is in doubt. SFAS No. 109 requires a valuation allowance to be established when it is
more likely than not that all or a portion of deferred tax assets will not be realized, and
further provides that it is difficult to conclude that a valuation allowance is not needed when
there is negative evidence in the form of cumulative losses in recent years. Therefore, cumulative
losses weigh heavily in the overall assessment. We established a valuation allowance in the third
quarter of fiscal 2003 for most of our deferred tax assets because prior losses and an uncertain
future outlook did not support projections of profitability sufficient to establish our ability to
use those deferred tax assets in future periods. We have not yet established sustained
profitability since that time which would support recognition of deferred tax assets generated in
prior and current periods. We have established contingency reserves for income taxes in various jurisdictions in accordance
with SFAS No. 5 Accounting for Contingencies. The estimate of appropriate tax reserves is based
upon the amount of prior tax benefit which might be at risk upon audit and upon the reasonable
estimate of the amount at risk. We periodically reassess the amount of such reserves and adjusts
reserve balances as necessary. Loss Contingencies We are subject to the possibility of various loss contingencies arising in the ordinary course of
business (for example, environmental and legal matters). 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 consolidated
results of operations and financial position. Results of Operations The following table summarizes certain items in the condensed consolidated statements of operations
as a percentage of net sales. The financial information and the discussion below should be read in
conjunction with the accompanying condensed consolidated financial statements and notes thereto.
The discussion following the table is provided separately for continuing and discontinued
operations. For all periods presented, our condensed consolidated statements of operations exclude
the results from certain operations we plan to divest which have been classified as discontinued
operations. Information related to the discontinued operations results is provided separately;
following the continuing operations discussion below. 25




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Three Months Ended November 302004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    94.2
    
    
    
    95.3Gross profit
    
    
    5.8
    
    
    
    4.7Operating expenses:Selling, general and
administrative
    
    
    3.5
    
    
    
    4.2Restructuring and impairment costs
    
    
    0.1
    
    
    
    1.0Operating income (loss)
    
    
    2.2
    
    
    
    (0.5
    )Interest income
    
    
    0.3
    
    
    
    0.1Interest expense
    
    
    (0.6
    )
    
    
    (1.6
    )Other income  net
    
    
    0.1
    
    
    
    0.2Operating income (loss) from continuing
operations before income taxes
    
    
    2.0
    
    
    
    (1.8
    )Income tax expense
    
    
    0.2
    
    
    
    0.1Income (loss) from continuing
operations
    
    
    1.8
    %
    
    
    (1.9
    )%Discontinued operations:Income (loss) from discontinued
operations
    
    
    0.4
    
    
    
    (2.5
    )Income tax expense
    
    
    0.1
    
    
    
    Income (loss) from discontinued
operations
    
    
    0.3
    %
    
    
    (2.5
    )%Net income (loss)
    
    
    2.1
    %
    
    
    (4.4
    )%
 Net Sales  Continuing Operations For the first quarter of fiscal 2005, net sales remained flat at $2.7 billion as compared to the
same period of fiscal 2004. The sales mix between end-markets changed between reporting periods.
We have seen a decline in the computing and storage end-markets since the first quarter of fiscal
2004. Revenue dollars in all other end-markets have increased between periods. The decline in the
computing and storage end markets is due primarily to the disengagement of certain low-margin
programs. The following table depicts, for the periods indicated, revenue by market expressed as a percentage
of net sales. The distribution of revenue across our markets has fluctuated, and will continue to
fluctuate, as a result of numerous factors, including but not limited to: increased business from
new and existing customers; fluctuations in customer demand; seasonality; and growth in
outsourcing. 26




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Three Months Ended November 302004
    
    2003Computing & Storage
    
    
    28.7
    %
    
    
    36.6
    %Consumer
    
    
    17.4
    %
    
    
    16.0
    %Communications
    
    
    20.5
    %
    
    
    17.9
    %Networking
    
    
    23.1
    %
    
    
    20.9
    %Industrial
    
    
    5.3
    %
    
    
    4.0
    %Automotive
    
    
    3.3
    %
    
    
    3.2
    %Other
    
    
    1.7
    %
    
    
    1.4
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 International Sales  Continuing Operations In the three months ended November 30, 2004, our international locations contributed approximately
70.8% of net sales compared to approximately 71.7% for the corresponding period of fiscal 2004. 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 November 302004
    
    2003Cisco Systems
    
    
    14.1
    %
    
    
    11.4
    %Nortel Networks
    
    
    10.4
    %
    
    
    10.6
    %
 Our top ten customers accounted for approximately 60.7% of net sales for the three months
ended November 30, 2004, compared to approximately 58.1% in the corresponding period of fiscal
2004. We believe that our ability to grow depends on increasing sales to existing customers and on
successfully attracting new customers. Customer contracts can be canceled and volume levels can be
changed or delayed. The timely replacement of delayed, canceled or reduced orders with new business
cannot be ensured. In addition, we cannot assume that any of our current customers will continue to
utilize our services. Consequently, our results of operations may be materially adversely affected. Gross profit  Continuing Operations Gross profit varies from period to period and is affected by a number of factors, including product
mix, production efficiencies, component costs and delivery linearity, product life cycles, unit
volumes, expansion and consolidation of manufacturing facilities, utilization of manufacturing
capacity, pricing, competition, and unanticipated restructuring or inventory charges. Our gross profit percentage increased to 5.8% for the three months ended November 30, 2004 compared
to 4.7% for the corresponding period in fiscal 2004, respectively. The gross profit improvement was
the result of effectively implementing the Lean Initiative in our manufacturing sites around the
world and increasing discipline in our quote process for new business. Sales of inventory previously written down or written off have not been significant and have not
had any material impact on our gross profits for the three months ended November 30, 2004. Selling, General and Administrative (SG&A) Expenses  Continuing Operations SG&A expenses decreased $19.2 million, or 16.7%, for the three months ended November 30, 2004
compared to the corresponding period in fiscal 2004. As a percentage of net sales, SG&A expenses
decreased to 3.5% for the three months ended November 30, 2004 compared to 4.2% in the
corresponding periods in fiscal 2004. The decrease was primarily due to headcount and other SG&A
expense reductions resulting from our restructuring initiatives. 27




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Restructuring and Impairment  Continuing Operations During the first quarter of fiscal 2005, restructuring and impairment costs of $1.6 million were
charged against operations which mainly related to the impairment charges on property and equipment
held for sale due to changes in market condition. The decrease quarter over quarter was due to a
reduction in restructuring activities. Interest Income  Continuing Operations Interest income increased $3.4 million to $5.8 million for the three months ended November 30, 2004
from $2.4 million in the
corresponding period in fiscal 2004. The increase was due to increased average cash and cash
equivalent balances. Interest Expense  Continuing Operations Interest expense decreased $27.6 million to $16.3 million for the three months ended November 30,
2004 from $43.9 million in the corresponding period in fiscal 2004. The decrease was primarily due
to the retirement of approximately $1.6 billion aggregate principal amount of our LYONs and the
settlement of approximately 94% of our ACES debentures during fiscal 2004. Other Income   net Continuing Operations Other income   net decreased $3.0 million to $3.0 million for the three months ended November 30,
2004 from $6.0 million in the corresponding period in fiscal 2004. The fluctuation is primarily
due to foreign currency gains and losses. Income Taxes  Continuing Operations Our income tax expense was $4.7 million and $2.5 million for the three months ended November 30,
2004 and 2003, respectively. We incurred net tax expense in certain countries in which we had
profitable operations during the periods ended November 30, 2004 and November 30, 2003. 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 January 2012, subject to certain conditions,
including maintaining certain levels of research and development expenditures. The Singapore tax
holiday is effective through March 2011, subject to certain conditions. Several of our China sites
have separate tax holiday agreements. Certain of our offshore operations are reporting taxable profits, mostly arising in low-cost
locations. Accordingly, we are recognizing some tax expense related to those operations. We will
not be able to offset this tax expense with unrecognized deferred tax assets described above,
because, for the most part, those assets did not arise in the jurisdictions where we are realizing
taxable profits. In addition, Solectron has established contingency reserves for income taxes in various
jurisdictions. The estimate of appropriate tax reserves is based upon the amount of prior tax
benefit which might be at risk upon audit and upon the reasonable estimate of the amount at risk.
Solectron periodically reassess the amount of such reserves and adjust reserve balances as
necessary. On October 22, 2004, the American Jobs Creation Act (the AJCA) was signed into law. The AJCA
includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the
AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in either
the balance of Fiscal 2005 or in Fiscal 2006. The Company has started an evaluation of the effects
of the repatriation provision; however, the Company does not expect to be able to complete this
evaluation until after Congress or the Treasury Department provide additional clarifying language
on key elements of the provision. Liquidity and Capital Resources  Continuing Operations  Cash and cash equivalents increased to approximately $1.7 billion at November 30, 2004 from
approximately $1.4 billion at August 31, 2004. The table below, for the periods indicated, provides
selected condensed consolidated cash flow information (in millions): 28




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Three Months Ended November 302004
    
    2003Net cash provided by (used in) operating activities of continuing operations
    
    
    195.2
    
    
    
    (114.3
    )Net cash (used in) provided by investing activities of continuing operations
    
    
    (5.1
    )
    
    
    14.7Net cash provided by (used in) financing activities of continuing operations
    
    
    50.4
    
    
    
    (11.8
    )
 Net cash provided by operating activities was $195.2 million during the three months ended
November 30, 2004. This cash was
generated by a $46.9 million income from continuing operations, a $120.4 million decrease in
accounts receivable a $52.1 million decrease in inventories, a $17.4 million decrease in prepaids
and other current assets, non-cash depreciation and amortization charges of $48.5 million. These
were offset by a $74.2 million decrease in accounts payable, and a $17.9 million decrease in
accrued expenses and other current liabilities. The decrease in inventory levels and accounts
payable is due to lower levels of material purchases resulting from lower first quarter revenue.
Accounts receivable has decreased in conjunction with lower revenues in the quarter. Net cash used in investing activities of $5.1 million during the three months ended November 30,
2004 primarily consisted of net proceeds of $30.0 million received from the disposition of one of
our discontinued operations, $16.0 million received from sale of investment in ECS Holdings, and
$3.8 million in proceeds from sale of property and equipment. These were offset by $32.0 million
in capital expenditures and $22.9 million in advances to discontinued operations. Net cash provided by financing activities of $50.4 million during the three months ended November
30, 2004 primarily consisted of the proceeds from issuance of common stock of $64.3 million related
to the retirement of ACES securities offset by $15.1 million of repayment of debt related to
various debt facilities. As of November 30, 2004, we had available a $500 million revolving credit facility that expires on
August 20, 2007. 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 2.25% based on our current senior secured 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 November 30, 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, cash interest coverage and leverage. We were in
compliance with all applicable covenants as of November 30, 2004. In addition, we had $15.2 million in committed and $176.7 million in uncommitted foreign lines of
credit and other bank facilities as of November 30, 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 1.0%. As of November 30, 2004, borrowings and guaranteed amounts were $5.8
million under committed and $0 under uncommitted foreign lines of credit. Borrowings are payable on
demand. The weighted-average interest rate was 4.0% for committed foreign lines of credit as of
November 30, 2004. During the first quarter of fiscal 2005, we issued 6.6 million shares of common stock for total net
proceeds of $64.3 million in connection with the settlement and retirement of the equity component
of the remaining ACES units, as defined in the ACES agreement. $150.0 million aggregate principal amount of 7.375% senior notes is due on March 1, 2006, our
$500.0 million aggregate principal amount of 9.625% senior notes is due on February 15, 2009, and
our $450.0 million aggregate principal amount of 0.5%
convertible senior notes is callable by the holders on
February 15, 2011. We have synthetic lease agreements relating to four manufacturing sites for continuing operations.
The synthetic leases have expiration dates in 2007. At the end of the lease term, we have an
option, subject to certain conditions, to purchase or to cause a first party to purchase the
facilities subject to the synthetic leases for the Termination Value, which approximates the
lessors original cost for each facility, or we may market the property to a first party at a
different price. We are entitled to any proceeds from a sale of the properties to first parties in
excess of the Termination Value and liable to the lessor for any shortfall. We provided loans to
the lessor equaling approximately 85% of the Termination Value for each synthetic lease. These
loans are repayable solely from the sale of the properties to first parties in the future, are
subordinated to the amounts payable to the lessor at the end of the synthetic leases, and may be
credited against the Termination Value payable if we purchase the properties. The approximate
aggregate Termination 29




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Values and loan amounts are $101.3 million and $86.1 million, respectively,
as of November 30, 2004. In addition, cash collateral of $15.2 million is pledged for the difference between the aggregate
Termination Values and the loan amounts. Each synthetic lease agreement contains various
affirmative and financial covenants. A default under a lease, including violation of these
covenants, may accelerate the termination date of the arrangement. We were in compliance with all
applicable covenants as of November 30, 2004. Monthly lease payments are generally based on the
Termination Value and 30-day LIBOR index (1.99% as of November 30, 2004) plus an interest-rate
margin, which may vary depending upon our Moodys Investors Services and Standard and Poors
ratings, and are allocated between the lessor and us based on the proportion of the loan amount to
the Termination Value for each synthetic lease. We have determined that it is probable that the expected fair value of the properties at the end of
each of the various synthetic lease terms will be less than the applicable Termination Value.
Accretion expense during the quarter ending November 30, 2004 was $1.1 million. 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 and cash equivalents, respectively, in the condensed
consolidated balance sheets. We believe that our current cash, cash equivalents, lines of credit and cash anticipated to be
generated from continuing operations and divestitures of our discontinued operation 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 November 30, 2004 for
continuing operations: Payments Due by Period
(in millions) FY05
    
    FY06Total
    
    Q2-Q4
    
    Q1
    
    Q2-Q4
    
    FY07
    
    FY08
    
    FY09
    
    FY10
    
    ThereafterLong term debt
    
    
    1,208.1
    
    
    
    
    
    
    
    
    
    
    
    168.0
    
    
    
    72.6
    
    
    
    0.3
    
    
    
    501.4
    
    
    
    15.4
    
    
    
    450.4Operating lease
    
    
    180.2
    
    
    
    44.4
    
    
    
    11.6
    
    
    
    25.0
    
    
    
    27.2
    
    
    
    16.5
    
    
    
    12.9
    
    
    
    11.4
    
    
    
    31.2Operating leases
for restructured
facilities
and equipment
    
    
    55.8
    
    
    
    18.9
    
    
    
    3.4
    
    
    
    10.2
    
    
    
    11.3
    
    
    
    6.0
    
    
    
    3.0
    
    
    
    2.0
    
    
    
    1.0Other (1)
    
    
    225.3
    
    
    
    225.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,669.4
    
    
    $
    288.6
    
    
    $
    15.0
    
    
    $
    203.2
    
    
    $
    111.1
    
    
    $
    22.8
    
    
    $
    517.3
    
    
    $
    28.8
    
    
    $
    482.6
   (1)
    
    We have guaranteed various purchase commitments for materials, supplies and services
incurred during the normal course of business. Other long-term liabilities of $77.0 million disclosed on the consolidated financial statements
includes deferred tax liabilities related to timing differences, which due to their nature are not
projected. Off-Balance Sheet Arrangements and Contractual Obligations Our off-balance sheet arrangements and contractual obligations consist of our synthetic and
operating leases, our interest rate swap instrument related to our long-term debt (described in the
We are exposed to interest rate fluctuations Risk Factor), our foreign
exchange contracts (described in the We are exposed to fluctuations in foreign currency exchange
rates Risk Factor), and certain indemnification provisions related to our seven divestures
(described in the Discontinued Operations portion below). 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 30




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In the fourth quarter of fiscal 2003 and the first quarter of fiscal 2004, we designated the
following businesses as discontinued operations: Dy 4 Systems Inc., Kavlico Corporation, our
MicroTechnology division, SMART Modular Technologies Inc., Stream International Inc., our 63%
interest in US Robotics Corporation, and Force Computers, Inc. In fiscal 2004, all of the
businesses were sold except the MicroTechnology division. The collective results from all discontinued operations for all periods presented were as follows
(in millions): Three Months Ended November 302004
    
    2003Net sales
    
    $
    15.2
    
    
    $
    535.7Cost of sales
    
    
    14.1
    
    
    
    470.6Gross profit
    
    
    1.1
    
    
    
    65.1Operating (income) expenses  net
    
    
    (8.7
    )
    
    
    128.3Operating income (loss)
    
    
    9.8
    
    
    
    (63.2
    )Interest income  net
    
    
    
    
    
    
    0.2Other income (expense)  net
    
    
    0.9
    
    
    
    (4.3
    )Income (loss) before income taxes
    
    
    10.7
    
    
    
    (67.3
    )Income tax expense
    
    
    1.7
    
    
    
    0.3Income (loss) from discontinued operations, net of tax
    
    $
    9.0
    
    
    $
    (67.6
    )
 Net sales, gross profit, operating expenses (income)  net, interest income  net, other
income (expense) net, and income tax expense from discontinued operations decreased for the three
months ended November 30, 2004 as compared to the same period in fiscal 2004 primarily due to the
fact that the activity during fiscal 2005 only represents the operations and sale of the final
discontinued operation as the remaining discontinued operations were previously sold in fiscal
2004. In addition, there was a $10.1 million pre-tax gain from the sale of the discontinued
operations recorded in operating (income) expenses  net for the three month period ended November
30, 2004. As a result of this disposition, we transferred approximately $28.3 million from
accumulated foreign currency translation gains, included in accumulated other comprehensive losses
within Stockholders Equity and recognized that amount as part of the pre-tax gain. During fiscal 2004, we completed the sale of the other discontinued operations. During the first
quarter of fiscal 2005, we increased the net loss on disposal of these discontinued operations by
approximately $0.5 million resulting from a few insignificant adjustments pursuant to the terms of
the disposal transaction. For the three months ended November 30, 2004, the adjustment to the net
loss on
these discontinued operations is recorded in operating (income) expenses  net as disclosed above. The sales agreements for all seven divestitures contain certain 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. In
aggregate, we are contingently liable for up to $94.8 million for a period of 12 to 24 months
subsequent to the completion of the sale. As of November 30, 2004 there were no liabilities
recorded under these indemnification obligations. Additionally, we may be required to indemnify a
buyer for environmental remediation costs for a period up to 10 years and not to exceed $13
million. We maintain an insurance policy to cover environmental remediation liabilities in excess
of reserves previously established upon the acquisition of these properties. We did not record
any environmental charges upon disposition of these properties. We are in the process of terminating a synthetic lease agreement associated with a discontinued
operation that has been sold. Any resulting gain or loss from the absolution of the synthetic
lease agreement will be recognized in discontinued operations. The sales agreements of the discontinued operations generally include terms which may result in
adjustments to the gain or loss in fiscal quarters subsequent to the closing of the sale. RISK FACTORS 31




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Most of our net sales come from a small number of customers; if we lose any of these customers, our
net sales could decline significantly. Most of our annual net sales come from a small number of our customers. Our ten largest customers
accounted for approximately 60.7% and 58.1% of net sales from continuing operations in the first
quarter of fiscal 2005 and 2004, respectively. During the first quarter of fiscal 2005, two 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, consolidated
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 consolidated 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 profits, we have engaged in pricing discussions with certain customers on
specific programs where we felt we were under-compensated for the services and value that were
providing. Where we have not been 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 unanticipated or 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 profits. In addition, customers may require that manufacturing of their products be
transitioned from one facility to another to achieve cost and other objectives. Such transfers, if
unanticipated or not properly executed, could result in various inefficiencies and costs, including
excess capacity and overhead at one facility and capacity
constraints and related strains on our resources at the other, disruption and delays in product
deliveries and sales, deterioration in product quality and customer satisfaction, and increased
manufacturing and scrap costs. We may not be able to sell excess or obsolete inventory to customers or third parties, which could
have a material adverse impact on our consolidated 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 consolidated
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 32




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or other customers may not purchase inventory back from us
despite contractual obligations, which could harm our consolidated financial condition if we are
unable to sell the inventory at carrying value. In addition, enforcement of these supply agreements
may result in material expenses, delays in payment for inventory and/or disruptions in our customer
relationships. We are responsible for excess and obsolete inventory resulting from inventory purchases in excess
of inventory needed to meet customer demand forecasts at the time the purchase commitments were
made, as well as any inventory purchases not made pursuant to the customers responsibility under
our supply agreements. For inventory which is not the customers responsibility, provisions are
made when required to reduce any such excess or obsolete inventory to its estimated net realizable
value, based on the quantity of such inventory on hand, our customers latest forecasts of
production requirements, and our assessment of available disposition alternatives such as use of
components on other programs, the ability and cost to return components to the vendor, and our
estimates of resale values and opportunities. These assessments are necessarily based upon various
assumptions and market conditions which are subject to rapid change, and/or which may ultimately
prove to be inaccurate. Any material changes in our assumptions or market conditions could have a
significant effect on our estimates of net realizable value, could necessitate material changes in
our provisions for excess and obsolete inventory, and could have a material adverse impact on our
consolidated 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 consolidated financial condition. Our non-U.S. locations represent a significant portion of our net sales; we are exposed to risks
associated with operating internationally. Approximately 70.8% and 71.7% of our net sales from continuing operations are the result of
services and products manufactured in countries outside the United States during the first quarter
of fiscal 2005 and 2004, 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 2012 subject to some conditions, for
our Malaysian and Singapore sites. We have also been granted various tax holidays in China. These
tax holidays are effective for various terms and are subject to some conditions. It is possible
that the current tax holidays will be terminated or modified or that future tax holidays that we
may seek will not be granted. If the current tax holidays are terminated or modified, or if
additional tax holidays are not granted in the future or when our current tax holidays expire, our
future effective income tax rate could increase. We are exposed to general economic conditions, which could have a material adverse impact on our
business, operating results and consolidated financial condition. 33




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As a result of the recent economic conditions in the U.S. and internationally, and reduced capital
spending as well as uncertain end-market demand, our customers and therefore our sales have been
difficult to forecast with accuracy. If there were to be continued or resumed weakness in these
industries which we serve, 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
consolidated 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 consolidated financial condition. Possible fluctuation of operating results from quarter to quarter and factors out of our control
could affect the market price of our securities. Our quarterly earnings and/or stock price may fluctuate in the future due to a number of factors
including the following:  
    
    differences in the profitability of the types of manufacturing services we provide.
For example, high velocity and low complexity printed circuit boards and systems assembly
services have lower gross profit 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;
    
    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. 34




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If we incur more restructuring-related charges than currently anticipated, our consolidated
financial condition and results of operations may suffer. We incurred approximately $1.6 million of restructuring and impairment costs relating to continuing
operations in the first quarter of fiscal 2005 and approximately $27.0 million during the first
quarter of fiscal 2004. If our estimates about previous restructuring charges prove to be
inadequate, our consolidated financial condition and results of operations may suffer. While we
believe our capacity is appropriate for current revenue levels, we continue to evaluate our cost
structure relative to future financial results and customer demand. If our estimates about future
financial results and customer demand prove to be inadequate, our consolidated financial condition
and consolidated results of operations may suffer. 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. 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 have
experienced instances in which customers have transferred certain portions of their business to
competitors in response to more attractive pricing quotations than we have been willing to offer,
and there can be no assurance that we will not lose business in the future in response to such
competitive pricing or other inducements which may be offered by our competitors. 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 strategic relationships with major customers create risks. 35




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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 future acquisitions, and cost-effectively run our operations, our
profitability could be adversely affected. Our ability to manage and integrate 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
consolidated 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. Notwithstanding our divestiture of certain businesses, we will remain subject to certain
indemnification obligations for a period of time after completion of the divestitures. The sale agreement for each of our divested businesses contains indemnification provisions under
which we may be required to indemnify the buyer of the divested business for liabilities, losses,
or expenses arising out of breaches of covenants and certain breaches of representations and
warranties relating to the condition of the business prior to and at the time of sale. While we
believe, based upon the facts presently known to us, that we have made adequate provision for any
such potential indemnification obligations, it is possible that other facts may become known in the
future which may subject us to claims for additional liabilities or expenses beyond those presently
anticipated and provided for. Should any such unexpected liabilities or expenses be of a material
amount, our finances could be adversely affected. We may not be able to adequately satisfy regulatory requirements relating to internal controls over
financial reporting or may encounter difficulties in implementing any new or improved internal
controls. 36




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Section 404 of the Sarbanes Oxley Act of 2002 (S404) requires that we evaluate and report on the
effectiveness of Solectrons internal controls over financial reporting beginning with the annual
report filed on Form 10-K for the reporting period ending August 31, 2005. In addition, our
independent auditors must report on managements evaluation of Solectrons internal controls. We
are currently in the process of documenting and testing internal controls that will be used as the
basis for the management report to be included in the Form 10-K. Our evaluation of internal
controls may conclude that enhancements or changes to internal controls are necessary to satisfy
the requirements of Section 404. Any failure to implement required new or improved controls, or
difficulties encountered in the implementation of such new or improved controls, could have
implications on our consolidated operating results or could result in a material weakness that
would be required to be reported in the Form 10-K. We are exposed to fluctuations in foreign currency exchange rates. We have currency exposure arising from both sales and purchases denominated in currencies other
than the functional currency of our sites. Fluctuations in the rate of exchange between the
currency of the exposure and the functional currency of our sites could seriously harm our
business, operating results and consolidated financial condition. We enter into foreign exchange forward contracts intended to reduce the short-term impact of
foreign currency fluctuations on foreign currency cash, receivables, investments, payables and
indebtedness. 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 November 30, 2004, we had outstanding foreign exchange forward contracts with a total
notional amount of approximately $471.7 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 November 30, 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 26.0% of our net sales from continuing operations in
the first quarter of fiscal 2005 were denominated in currencies other than the U.S. dollar, we do
not believe our total exposure to be significant because of natural hedges. We are exposed to interest rate fluctuations. The primary objective of our investment activities is to preserve principal, while at the same time
maximize yields without significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents in a variety of securities, including government and corporate
obligations, certificates of deposit and money market funds. As of November 30, 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 November 30, 2004, we had no cash equivalents 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 approximated the carrying value as of November 30, 2004. Interest on long-term debt instruments is payable at fixed rates. In addition, the amount of
principal to be repaid at maturity is also fixed. On November 15, 2002, we entered into an interest
rate swap transaction under which we pay variable rates and we receive fixed rate. The interest
swap effectively converted $500 million of our long-term debt with fixed interest rate into debt
with variable rates of interest. Our interest rate swap, which expires on February 15, 2009, has a
total notional amount of $500 million and relates to our 9.625% $500 million senior notes. Under
this swap transaction we pay an interest rate equal to the 3-month LIBOR rate plus a fixed spread.
In exchange, we receive fixed interest rates of 9.625%. Our interest rate swap creates interest
rate risk for us. A hypothetical 50 basis point change in interest rates would not have a material
effect on our consolidated financial position, results of operations and cash flows over the next
fiscal year. 37




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Failure to attract and retain key personnel and skilled associates could hurt our operations. Our continued success depends to a large extent upon the efforts and abilities of key managerial
and technical associates. Losing the services of key personnel could harm us. Our business also
depends upon our ability to continue to attract key executives and retain senior managers and
skilled associates. Failure to do so could harm our business. Failure to comply with environmental regulations could harm our business. 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, consolidated 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,
consolidated financial condition and results of operations in the future. We may not be able to adequately protect or enforce our intellectual property rights and could
become involved in intellectual property disputes. Our ability to effectively compete may be affected by our ability to protect our proprietary
information. We hold a number of patents, patent applications, and 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, or we might find it necessary
to initiate litigation proceedings to protect our intellectual property rights. Any such litigation
could be lengthy and costly and could harm our consolidated financial condition. In the past we have been and may from time to time continue to be, notified of claims that we may
be infringing patents, copyrights or other intellectual property rights owned by other parties. In
the event of an infringement claim, we may be required to spend a significant amount of money to
develop a non-infringing alternative, to obtain licenses, and/or to defend against the claim. We
may not be successful in developing such an alternative or obtaining a license on reasonable terms,
if at all. Any litigation, even where an infringement claim is without merit, could result in
substantial costs and diversion of resources. Accordingly, the resolution or adjudication of
intellectual property disputes could have a material adverse effect on our business, consolidated
financial condition and results of operations. Our rating downgrades make it more expensive for us to borrow money. On October 28, 2003 Standard and Poors downgraded our senior unsecured debt rating to B+ with a
stable outlook. On October 31, 2003 Moodys downgraded our senior unsecured debt rating to B1
with a stable outlook. These rating downgrades increase our cost of capital should we borrow under
our revolving lines of credit, and may make it more expensive for us to raise additional capital in
the future. Such capital raising activities may be on terms that may not be acceptable to us or
otherwise not available. On June 22, 2004, Standard and Poors affirmed our senior unsecured rating
and revised our outlook to positive from stable. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk See Managements Discussion and Analysis of Financial Condition and Results of Operations for
factors related to fluctuations in the exchange rates of foreign currency and fluctuations in
interest rates under Risk Factors -We are exposed to fluctuations in foreign currency exchange
rates, and We are exposed to interest rate fluctuations. 
 Item 4. Controls and Procedures 38




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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 Securities Exchange Act of 1934 (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 Securities and Exchange Commission rules and forms. Changes in Internal Controls. There were no changes in Solectrons internal controls over financial
reporting during the first quarter of fiscal 2005 or in other factors that could have materially
affected or are reasonably likely to materially affect our internal controls over financial
reporting. 39




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Solectron is from time to time involved in various litigation and legal matters, including the one
described below. By describing the particular matter set forth below, Solectron does not intend to
imply that it or its legal advisors have concluded or believe that the outcome of this particular
matter is or is not likely to have a material adverse impact upon Solectrons business or
consolidated financial condition and results of operations. Solectron has settled the previously reported shareholder derivative lawsuit entitled Lifshitz v.
Cannon et al.,Case No. CV815693, filed in the Santa Clara County, California Superior Court, on
terms not considered to be material to Solectron. Court approval of the settlement terms was
obtained on December 16, 2004. 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 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, consolidated financial condition and results of operations. In
addition, Solectron may be forced to incur substantial litigation expenses in defending this
litigation. 
 Item 6. Exhibits  (a)
    
    Exhibits: Exhibit No.
    
    Exhibit Description3.1*
    
    Certificate of Incorporation of the Company, as amended3.2**
    
    Amended and Restated Bylaws of the Company3.3***
    
    Certificate of Designation Rights, Preferences and Privileges
of Series A Participating Preferred Stock of the Company10.1
    
    Form of Change of Control Severance Agreement for executive officers
Craig London, Kevin OConnor and Kiran Patel10.2
    
    Form of Employment Agreement for executive officers Kevin OConnor
and Kiran Patel10.3
    
    Employment Agreement for executive officer Dave Purvis10.4
    
    Employment Agreement for executive officer Marty Neese31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.31.2
    
    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
 40




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*
    
    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 for Exhibit 3.2
filed with Solectrons Form 10-Q
for the quarter ended November 28, 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. 41




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SOLECTRON CORPORATION 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLECTRON CORPORATION(Registrant) Date: January 3, 2005 By /S/ Kiran
Patel
Kiran PatelExecutive Vice President, Chief Financial Officer
(Principal Financial Officer)By /S/ Warren
Ligan
Warren LiganSenior Vice President and Corporate Controller
(Principal Accounting Officer) 42




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INDEX TO EXHIBITS Exhibit No.
    
    Exhibit Description3.1*
    
    Certificate of Incorporation of the Company, as amended3.2**
    
    Amended and Restated Bylaws of the Company3.3***
    
    Certificate of Designation Rights, Preferences and Privileges
of Series A Participating Preferred Stock of the Company10.1
    
    Form of Change of Control Severance Agreement for executive officers
Craig London, Kevin OConnor and Kiran Patel10.2
    
    Form of Employment Agreement for executive officers Kevin OConnor
and Kiran Patel10.3
    
    Employment Agreement for executive officer Dave Purvis10.4
    
    Employment Agreement for executive officer Marty Neese31.1
    
    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 for Exhibit 3.2
filed with Solectrons Form 10-Q
for the quarter ended November 28, 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. 43