UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

Commission file number 1-11098

 

SOLECTRON CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At July 6, 2007, 913,919,916 shares of Common Stock of the Registrant were outstanding (including 13,570,929 shares of Solectron Global Services Canada, Inc., which are exchangeable on a one-to-one basis for the Registrant’s common stock).

 

SOLECTRON CORPORATION

 

INDEX TO FORM 10-Q

 

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 (the “Securities Act”), 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. The forward-looking statements are generally accompanied by words such as “may,” “will,” “could,” “should,” “intend,” “anticipate,” “believe,” “estimate,” “expect,” “continue” and other similar words and statements. These forward-looking statements relate to matters including, but not limited to:

 

 

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 other reports filed with the Securities and Exchange Commission. 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 herein, whether as a result of new information, future events or otherwise.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

SOLECTRON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

SOLECTRON CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Accumulated unrealized foreign currency translation losses were $68.0 million at June 1, 2007 and $89.1 million at August 25, 2006. Foreign currency translation adjustments consist of adjustments to consolidate subsidiaries that use the local currency as their functional currency and gains and losses related to intercompany dollar-denominated debt that is not expected to be repaid in the foreseeable future.

 

See accompanying notes to unaudited condensed consolidated financial statements.

SOLECTRON CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Basis of Presentation

 

The accompanying financial data as of June 1, 2007 and for the three and nine months ended June 1, 2007 and May 26, 2006 has been prepared by the management of 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 25, 2006 condensed consolidated balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. However, the management of 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 25, 2006.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair consolidated statement of financial position as of June 1, 2007, the results of operations and comprehensive income for the three and nine months ended June 1, 2007 and May 26, 2006 and cash flows for the nine months ended June 1, 2007 and May 26, 2006 have been made. The consolidated results of operations for the three and nine months ended June 1, 2007 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

In past filings, for clarity of presentation, Solectron’s third quarter of fiscal 2006 was presented as having ended on May 31, 2006 rather than the actual close date of May 26, 2006. In these condensed consolidated financial statements, the third quarter of fiscal 2006 is presented as having ended on the actual close date of May 26, 2006. Solectron uses a 52- to 53-week fiscal year ending on the last Friday in August. The Company’s second quarters of fiscal 2007 and 2006 ended on March 2, 2007 and February 24, 2006 and contained 14 weeks and 13 weeks, respectively. The additional week is reflected in the nine months results presented for the fiscal period ended June 1, 2007. It is not possible to quantify the impact of this additional week on the fiscal period ended June 1, 2007.

 

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.

 

Research and Development Expenses

 

Selling, general and administrative expense includes $6.6 million and $19.6 million of research and development expenses for the three and nine months ended June 1, 2007, respectively and $6.2 million and $21.9 million for the three and nine months ended May 26, 2006, respectively.

 

Recent Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected,

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which will be in the first quarter of the Company’s fiscal year 2009. The Company is currently evaluating the requirements of SFAS 159 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows.

 

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of uncertain tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. Any differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is currently in the process of determining the impact, if any, of adopting the provisions of FIN 48 on its financial position, results of operations and cash flows.

 

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, (“SAB 108”). The interpretations in SAB 108 are being issued to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 is effective for the first fiscal year ending after November 15, 2006 and must be adopted by the fourth quarter of such fiscal year. Solectron has not yet completed its analysis of the impact of adopting the provisions of SAB 108 on its financial position, results of operations and cash flows; however, the company currently estimates that the expected net reduction to opening retained earnings will be approximately $13.7 million as a result of adopting SAB 108. The Company is continuing to evaluate the impact of adopting SAB 108 and, as a result, the actual reduction to the opening retained earnings balance could be different than the $13.7 million estimate.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 replaces the different definitions of fair value in the accounting literature with a single definition. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for fair-value measurements already required or permitted by other standards for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently in the process of determining the impact, if any, of adopting the provisions of SFAS 157 on its financial position, results of operations and cash flows.

 

 

Effective September 1, 2005, Solectron began recording compensation expense associated with stock options and other forms of equity compensation in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” (“SFAS 123R”) as interpreted by SEC Staff Accounting Bulletin No. 107. Solectron adopted the modified prospective transition method provided under SFAS 123R. Under this transition method, compensation cost associated with stock options now includes 1) quarterly amortization related to the remaining unvested portion of all stock option awards granted prior to September 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123; and 2) quarterly amortization related to all stock option awards granted subsequent to September 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In addition, Solectron records expense over the offering period and the vesting

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

term, respectively, in connection with 1) shares issued under its employee stock purchase plan and 2) discounted stock options. The compensation expense for stock based compensation awards includes an estimate for forfeitures and is recognized over the expected term of the options using the straight-line method. Under SFAS 123R, benefits of tax deductions in excess of recognized compensation costs are to be recorded as a financing cash inflow rather than as a reduction of taxes paid. For the three and nine months ended June 1, 2007, no excess tax benefits were generated from option exercises. The Company has recorded no amount for excess tax benefits in additional paid-in capital since the adoption of SFAS 123R. To determine excess tax benefits, the Company used the alternative transition method (short-cut method) as set forth in the FASB Staff Position No. FAS 123R-3 “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.”

 

Total stock compensation expense for the three months ended June 1, 2007 of $6.3 million was included in cost of sales and selling, general and administrative expense in the amounts of $0.6 million and $5.7 million, respectively. Total stock compensation expense for the nine months ended June 1, 2007 of $20.1 million was included in cost of sales and selling, general and administrative expense in the amounts of $3.1 million and $17.0 million, respectively. Total stock compensation expense for the three months ended May 26, 2006, of $6.7 million was included in cost of sales and selling, general and administrative expense in the amounts of $1.5 million and $5.2 million, respectively. Total stock compensation expense for the nine months ended May 26, 2006, of $16.9 million was included in cost of sales and selling, general and administrative expense in the amounts of $5.1 million and $11.8 million, respectively. There is no tax benefit recorded for this expense due to full valuation allowances in the jurisdictions for which these options are deductible for tax purposes.

 

Stock Options

 

Solectron’s stock option plans provide for grants of options to employees to purchase common stock at the fair market value of such shares on the grant date. The options vest monthly over a four-year period beginning on the grant date. The term of the options is seven years for options granted between January 12, 1994 and September 20, 2001, and ten years for options granted thereafter. Options assumed under past acquisitions generally vest over periods ranging from immediately to five years from the original grant date and have terms ranging from two to ten years. Solectron’s 2002 Stock Plan, as amended, also provides for grants of discounted stock options at a price below the market value on the day of the stock option grant and are deemed exercised on the date of grant.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The expected life of options is based on observed historical exercise patterns. For the three and nine months ended June 1, 2007 and May 26, 2006 respectively, the expected volatility of stock options is based upon equal weightings of the historical volatility of Solectron stock and, for fiscal periods in which there is sufficient trading volume in options on Solectron’s stock, the implied volatility of traded options on Solectron stock having a life of more than six months. The expected volatility of Employee Share Purchase Plan shares is based on the implied volatility of traded options on the Company’s stock in periods in which there is sufficient trading volume in those options. Otherwise, historical volatility is utilized. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The dividend yield reflects that Solectron has not paid any cash dividends since inception and does not intend to pay any cash dividends in the foreseeable future.

 

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

The Company has recorded $2.1 million and $8.1 million of compensation expenses relative to stock options (other than discounted stock options) for the three and nine months ended June 1, 2007, respectively, in accordance with SFAS 123R. As of June 1, 2007, there was $21.6 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted-average period of 1.5 years. A summary of stock option activity under the plans for the nine months ended June 1, 2007 is presented as follows:

 

 

The weighted-average fair value of stock options granted during the three and nine months ended June 1, 2007 was $1.70 and $1.89, respectively. The total intrinsic value of stock options exercised during the three and nine months ended June 1, 2007 was not material.

 

At June 1, 2007, an aggregate of 52.9 million shares were authorized for future issuance under our stock plans, which cover stock options (including discounted stock options) and shares available for purchase under our, Employee Stock Purchase Plans. A total of 45.2 million shares of common stock were available for grant under

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

Solectron’s stock option plans as of June 1, 2007. Awards that expire or are cancelled without delivery of shares generally become available for issuance under the plans.

 

An initial option is granted to each new outside member of Solectron’s Board of Directors to purchase 40,000 shares of common stock at the fair value on the date of the grant. On December 1 of each year, each outside member is granted an additional option to purchase 40,000 shares of common stock at the fair market value on such date. These options vest over one year and have a term of seven years.

 

Employee Stock Purchase Plan

 

Under Solectron’s Employee Stock Purchase Plan, employees meeting specific employment qualifications are eligible to participate and can purchase shares semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the purchase period. The Employee Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation, with an annual maximum of $25,000 in retail value. Solectron has treated the Employee Stock Purchase Plan as a compensatory plan. The Company has recorded compensation expense relative to the Employee Stock Purchase Plan in the three and nine months ended June 1, 2007 of zero and $2.6 million, respectively and $0.7 million and $2.4 million for the three and nine months ended May 26, 2006.

 

Restricted Stock Awards and Discounted Stock Options

 

During fiscal 2005 and 2004, Solectron issued discounted stock options under its 2002 Stock Plan of 1.5 million and 0.7 million shares, respectively, to certain eligible executives and employees at a price below the market value of the Company’s common stock on the day of the stock option grant. During the fiscal year ended August 25, 2006, 7.0 million discounted options were granted to certain eligible employees and during the first quarter of fiscal year 2007, 1.2 million discounted options were granted to certain eligible employees. During the second quarter of fiscal 2007, under Solectron’s 2002 Stock Plan, 4.0 million discounted options were granted to certain eligible employees and 1.8 million discounted options were granted to certain executive officers. During the third quarter of fiscal 2007, under Solectron’s 2002 Stock Plan, 4.9 million discounted options were granted to certain eligible employees and to certain executive officers. Compensation expense under the fair value method for the three and nine months ended June 1, 2007, is being amortized over the vesting period and was $4.2 million and $9.4 million, respectively and for the three and nine months ended May 26, 2006 was $2.0 million and $4.4 million, respectively. For compensation expense purposes, the intrinsic value of restricted stock awards and discounted stock options equals the fair market value of these awards on the date of grant.

 

The weighted-average fair value of the discounted stock options granted in the three and nine months ended June 1, 2007 was $3.14 per share and $3.26 per share, respectively and for the three and nine months ended May 26, 2006 was $4.01 and $3.84, respectively. At June 1, 2007, unrecognized costs related to restricted stock awards and discounted stock options totaled approximately $39.4 million and is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of restricted stock and discounted stock options vested was zero during the three and nine months ended June 1, 2007 and $1.0 million during the three and nine months ended May 26, 2006, respectively.

 

 

On November 1, 2005, Solectron’s Board of Directors approved a stock repurchase program whereby the Company was authorized to repurchase up to $250 million of the Company’s common stock pursuant to a 10b5-1 trading plan. Solectron commenced this $250 million repurchase program at the end of the quarter ended February 24, 2006. In October 2006, the Board of Directors approved a twelve-month extension to the stock repurchase program. As of June 1, 2007, Solectron had repurchased and retired a total of 17.8 million shares under the repurchase program for approximately $61.6 million. During the third quarter of fiscal 2007, Solectron made no repurchases under the plan.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

 

Inventories related to continuing operations as of June 1, 2007 and August 25, 2006, consisted of the following (in millions):

 

 

On March 9, 2007, Solectron launched the Cisco Systems Lean Initiative. This initiative required us to purchase PCBA boards that were previously sold to Cisco Systems. As a result, the Company had a net reduction of revenue of $240.7 million and an increase to inventories of $260.3 million for the second quarter of fiscal 2007. In addition, during the third quarter of fiscal 2007, the Company purchased $74.4 million of inventory from third party suppliers in connection with the initiative. Under the Cisco Systems Lean Initiative, Solectron is required to complete the building of systems and boxes. Systems and boxes require PCBA boards and third party built parts. Under the previous arrangement with Cisco Systems, the Company was required only to manufacture PCBA boards and if required by Cisco subsequently, the Company built systems and boxes on a consignment basis.

 

 

Accounts receivable, net related to continuing operations as of June 1, 2007 and August 25, 2006 consisted of the following (in millions):

 

 

 

Property and equipment, net related to continuing operations as of June 1, 2007 and August 25, 2006, consisted of the following (in millions):

 

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

8.00% Senior Subordinated Notes due 2016

 

On February 14, 2006, Solectron’s wholly owned subsidiary Solectron Global Finance Ltd (“Solectron Global Finance”) issued $150 million of senior subordinated notes due 2016 (the “Subordinated Notes”). The Subordinated Notes are unconditionally guaranteed by Solectron on a senior subordinated basis, will mature on March 15, 2016, and bear interest at the rate of 8% annually. Cash interest payments on the Subordinated Notes will be made semiannually in arrears on March 15 and September 15 of each year. The Subordinated Notes will be redeemable, in whole or in part, at any time on or after March 15, 2011 at specified redemption prices plus accrued and unpaid interest. Prior to March 15, 2011, Solectron Global Finance or Solectron will have the option to redeem the Subordinated Notes, in whole or in part at a price equal to the greater of (1) 100% of the principal amount of the Subordinated Notes redeemed plus accrued and unpaid interest or (2) the make-whole premium plus accrued and unpaid interest. In addition, subject to certain conditions, prior to March 15, 2009, Solectron Global Finance or Solectron may redeem up to 35% of the aggregate principal amount of the Subordinated Notes with the net proceeds of a qualified public common stock offering by Solectron at a redemption price of 108% of the principal amount of the Subordinated Notes, plus any accrued and unpaid interest to the redemption date. On September 5, 2006, pursuant to a Registration Rights Agreement, Solectron Global Finance and Solectron completed an exchange offer of $150 million in aggregate principal amount of Solectron Global Finance’s 8.00% Senior Subordinated Notes due 2016 (the “Exchange Notes”) that have been registered under the Securities Act for the same principal amount of its outstanding unregistered Subordinated Notes. 100% of the outstanding unregistered Subordinated Notes were exchanged for the registered Exchange Notes. The Exchange Notes are guaranteed by Solectron on a senior subordinated basis and the guarantee with respect to the Exchange Notes has been registered under the Securities Act. At June 1, 2007, the aggregate carrying amount of the Exchange Notes of $150 million is classified as long-term debt.

 

0.5% Convertible Senior Notes due 2034

 

On February 17, 2004, Solectron issued $450 million of 0.5% convertible senior notes (the “Original Notes”). The Original Notes are unsecured and unsubordinated indebtedness of Solectron and will mature on February 15, 2034. Upon conversion of the Original Notes, Solectron will deliver shares of its common stock at the applicable conversion rate. The Original Notes do not provide an adjustment to the conversion rate upon a change in control.

 

On February 10, 2005, Solectron completed an exchange offer with respect to the Original Notes for an equal amount of its newly issued 0.5% convertible senior notes, Series B due 2034 (the “New Notes”) and cash. Solectron accepted for exchange $447.3 million aggregate principal amount of outstanding notes, representing approximately 99.4% of the total outstanding notes. Upon conversion of the New Notes, Solectron will deliver $1,000 in cash for the principal amount, and at its election, either common stock or cash, for the conversion value above the principal amount. Holders electing to convert upon a change of control, prior to February 15, 2011, unless the consideration consists of at least 90% in the form of listed shares (excluding cash payments for fractional shares and cash payments made pursuant to dissenters’ appraisal rights), shall be eligible for an increase in the conversion rate in accordance with the terms of the New Notes.

 

On or after February 20, 2011, Solectron will have the option to redeem all or a portion of the New Notes that have not been previously purchased, repurchased or converted, at 100% of the principal amount of the New 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 New Notes may require Solectron to purchase all or a portion of the convertible 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 convertible notes to be repurchased plus accrued and unpaid interest, up to, but excluding, the date of repurchase. Holders will have the option, subject to certain conditions, to require Solectron to repurchase any New 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 convertible notes plus accrued and unpaid interest up to, but excluding, the date of repurchase. The

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

New Notes are convertible into cash and either common stock or cash at any time prior to maturity, subject to the terms of the notes.

 

After the exchange offer was completed, there were approximately $2.7 million aggregate principal amount of Original Notes outstanding. Interest on both the Original Notes and the New Notes (together, the “convertible notes”) will be paid on February 15 and on August 15 of each year. The conversion rate for the convertible notes is 103.4468 per $1,000 principal amount, subject to certain adjustments in certain circumstances. This is equivalent to a conversion price of $9.67 per share. At June 1, 2007, the aggregate carrying amount of the convertible notes is $450 million, and classified as long-term debt.

 

Adjustable Conversion-Rate Equity Securities (ACES)

 

On 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 (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 was settled, and the remaining obligation of the original ACES was the 7.97% debentures.

 

Solectron repaid the remaining $64.3 million of the 7.97% subordinated debentures at maturity on November 15, 2006.

 

Liquid Yield Option Notes (LYONs^tm)

 

On June 1, 2007, Solectron has $8.2 million aggregate accreted value of LYONs^tm 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. As of June 1, 2007, the accreted value of the 2.75% LYONs^tm is classified as long-term debt on the consolidated balance sheet.

 

On June 1, 2007, Solectron had $0.9 million aggregate accreted value of LYONs^tm outstanding with an interest rate of 3.25%. These notes are unsecured and unsubordinated indebtedness of Solectron. Solectron will pay no interest prior to maturity. Each note has a yield of 3.25% with a maturity value of $1,000 on November 20, 2020. Each note is convertible at any time by the holder to common shares at a conversion rate of 11.7862 shares per note. Holders will be able to require Solectron to purchase all or a portion of their notes on November 20, 2010, at a price of $724.42 per note. Solectron, at its option, may redeem all or a portion of the notes at any time on or after May 20, 2004. As of June 1, 2007, the accreted value of the 3.25% LYONs^tm is classified as long-term debt.

 

Credit Facility

 

On August 28, 2006, Solectron entered into a $350 million Credit Agreement (“the Credit Agreement”) that amends and replaces a $500 million secured revolving facility. The Credit Agreement provides for a revolving, multicurrency, secured-credit facility, which may be used to borrow revolving loans or issue standby letters of credit, subject to a $100 million letter of credit sub-limit. The Company may request an increase in the credit facility of up to an additional $150 million, to provide for an aggregate commitment of up to $500 million. There are currently no revolving loans outstanding and approximately $0.6 million in letters of credit outstanding under the Credit Agreement. The revolving loans under the Credit Agreement bear interest, at the Company’s option, at either (i) the base rate, which is defined as a fluctuating rate per annum equal to the greater of (A) Bank of America N.A.’s

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

prime rate, or (B) the average rate on overnight federal funds plus one-half of one percent, or (ii) a rate equal to (A) the London Inter-bank Offered Rate (LIBOR) plus (B) an applicable margin ranging from 1.0% to 2.0% based on Solectron’s non-credit-enhanced senior unsecured long-term debt ratings. The Credit Agreement matures on August 28, 2009 and may be prepaid at any time without penalty or premium at the option of the Company.

 

 

Solectron enters into foreign exchange forward contracts intended to reduce the short-term impact of foreign currency fluctuations on foreign currency receivables, investments, payables and indebtedness. The gains and losses on the foreign exchange forward contracts are intended largely to 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 nine months or less in original maturity. The majority of the forward contracts are not designated as hedges under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The changes in the values of these forward contracts are included in other expense, net and were immaterial for the three and nine months ended June 1, 2007.

 

During the second quarter of fiscal 2007, the Company entered into certain foreign exchange forward contracts, with a total notional amount approximating $12.2 million. These foreign exchange forward contracts are designated as a “cash flow hedge” under SFAS No. 133. These contracts have various maturity dates that coincide with the occurrence of the exposure being hedged. The change in the fair value of these contracts representing the effective portion of the hedge is recorded to other comprehensive income. The ineffective portion of these contracts was recorded to earnings. The amount recorded in other comprehensive income will be recognized in net earnings when the underlying hedged exposure occurs. As of June 1, 2007, the deferred foreign exchange gain expected to be reclassified to earnings in the next three months was $0.4 million.

 

As of June 1, 2007, Solectron had outstanding foreign exchange forward contracts with a total notional amount of approximately $423.7 million related to continuing operations, including the $12.2 million of “cash flow hedges” discussed previously.

 

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 11, “Segment Information and Geographic Information.”

 

 

Future Minimum Lease Obligations

 

Future minimum payments for operating lease obligations related to continuing operations are as follows:

 

 

Legal Proceedings

 

Solectron is from time to time involved in various litigation and legal matters arising in the normal course of its business operations. Management believes that the final resolution of these matters will not have a material adverse

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

effect on the Company’s consolidated financial position, cash flows or results of operations. By describing any particular matter, Solectron does not intend to imply that it or its legal advisors have concluded or believe that the outcome of any of those particular matters is or is not likely to have a material adverse impact upon Solectron’s consolidated financial position, cash flows or results of operations.

 

On June 4, 2007, a purported class action complaint has been filed alleging breach of fiduciary duty of the directors of Solectron in the Superior Court of the State of California, County of Santa Clara, seeking to enjoin the proposed merger between Solectron and Flextronics International Ltd. (“Flextronics”) described in Note 17 below. While this case is in the early stages, Solectron believes that it is without merit. Any judgments, however, in respect of this or similar lawsuits that are adverse to Flextronics and Solectron may adversely affect Flextronics and Solectron’s ability to consummate the merger.

 

Environmental Liability

 

Solectron has potential environmental liabilities, largely related to (i) our acquisition of sites with potential pre-existing environmental issues and (ii) our indemnification obligations set forth in sale agreements for sites we have divested. Internal and external legal and environmental expertise are utilized to evaluate such past environmental remediation exposures, as well as issues related to continuing operations.

 

Solectron has an accrued liability balance for environmental remediation of $35.8 million, as of June 1, 2007 and August 25, 2006.

 

This environmental remediation liability represents known exposures, which have been disclosed to Solectron’s insurance carriers, and identified as self-insured retention. No additional site exposures are known to be probable or reasonably possible, in the context of SFAS 5 “Contingencies” and SOP 96-1 “Environmental Remediation Liabilities” for the aforementioned balance sheet dates.

 

Additionally, routine environmental clean-ups required upon future disposal of Solectron facilities are recorded in accordance with SFAS 143 “Accounting for Asset Retirement Obligations” and its interpretation under FIN 47 “Accounting for Conditional Asset Retirement Obligations.”

 

 

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 June 1, 2007. In addition, Solectron expects to continue to provide a full valuation allowance on future tax benefits until it can demonstrate a sustained level of profitability that establishes its ability to utilize the assets in the jurisdictions to which the assets relate. Solectron incurred tax expense in certain countries that are not subject to the aforementioned valuation allowance during the three and nine months ended June 1, 2007.

 

Certain of Solectron’s non-US operations are reporting taxable profits, mostly arising in the same low-cost locations where the majority of our manufacturing capabilities are found. Solectron will not be able to offset any tax expense associated with these taxable profits with the unrecognized deferred tax assets described above, because, for the most part, those assets did not arise in the same jurisdictions where Solectron is realizing taxable profits.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

The income tax provision for the interim periods is based on the best estimate of the effective tax rate expected to be applicable for the full fiscal year. Changes in the interim period for the tax (or benefit) related to items other than ordinary income are individually computed and recognized when the items occur. Included in the computation of three foreign entities’ estimated annual effective tax rate is the income tax benefits associated with a refund of taxes paid on the reinvested earnings of the foreign subsidiaries. During the nine months ended June 1, 2007, the Company recorded income tax benefits of $4.4 million associated with the refund of taxes paid on the reinvested earnings, of which $2.5 million of the tax benefit was included in the computation of the foreign entities’ estimated annual effective tax rate. The remaining portion of the refund of taxes paid on reinvested earnings in the amount of $1.9 million was individually computed and recognized in the three months ended November 24, 2006. Beginning January 1, 2007, the Company has decided to no longer apply for reinvestment of earnings, as a result, the amount of the tax benefit included in the foreign entities’ estimated annual effective tax rate during the nine months ended June 1, 2007 is lower than the amount reported for the first quarter of fiscal 2007.

 

The Internal Revenue Service (“IRS”) and other tax authorities regularly examine the Company’s income tax returns. During the fourth quarter of fiscal 2006, the IRS completed its field examination of the Company’s federal income tax returns for fiscal years 2001 and 2002 and issued a Revenue Agent’s Report (“RAR”). The RAR is not a final Statutory Notice of Deficiency, and the Company has protested certain of the proposed adjustments with the Appeals Office of the IRS. The most significant of the disputed adjustments relates to transfer pricing arrangements that the Company has with its foreign subsidiaries. The Company believes that the proposed IRS adjustments are inconsistent with applicable tax laws, and that it has meritorious defenses to the proposed adjustments. The Company has accrued an amount determined to be a reasonable estimate of the loss. Although there is a reasonable possibility that additional amounts will be paid or incurred, an estimate of the possible loss or range of loss cannot be made.

 

During the quarter ended March 2, 2007, the IRS issued a final Statutory Notice of Deficiency for the disallowance of a loss associated with a transaction entered into by a domestic subsidiary in a tax year prior to the subsidiary’s acquisition by Solectron. The Company did not record an additional accrual related to this item during the quarter, as it believes that adequate amounts of tax and interest have already been recorded. On April 30, 2007, the Company filed a petition with the U.S. Tax Court for redetermination of the deficiency set forth by the IRS.

 

A domestic state jurisdiction is currently conducting a sales and use tax audit for the period from January 1, 1999, through December 31, 2001. Solectron filed an application to participate in an amnesty program in order to protect itself from any penalties that may arise as a result of a potential audit assessment. Although there is a reasonable possibility that a loss may be incurred, no estimate of the possible loss can be made at this time.

 

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 is at risk upon audit and upon the reasonable estimate of the amount at risk. Solectron periodically reassesses the amount of such reserves and adjusts reserve balances as necessary.

 

Significant judgment is required in determining Solectron’s provision for income taxes. The calculation of Solectron’s tax liabilities involves dealing with uncertainties in the application of complex tax rules and regulations. In determining the adequacy of its provision for income taxes, Solectron has assessed the likelihood of adverse outcomes resulting from these examinations, including the IRS RAR for fiscal years 2001 and 2002. Although the ultimate outcome of tax examinations cannot be predicted with certainty, including the total amount payable and the timing of such payments, the Company believes that adequate amounts of tax and interest have been provided for any adjustments that are expected to result. Solectron, however, cannot be certain that such amounts will not be materially different than what is reflected in its historical income tax provisions and accruals. Should the tax authorities assess additional taxes as a result of any current or future examinations, Solectron may be required to record changes to operations in future periods that could have a material adverse effect on its results of operations, financial position or cash flows in the period or periods recorded.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

 

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 Interim Chief Executive Officer. The Interim 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.

 

Geographic information for continuing operations as of and for the periods presented is as follows (in millions):

 

 

Geographic net sales are attributable to the country in which the product is manufactured.

 

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

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 of our customers’ markets; and growth in market outsourcing.

 

 

Certain customers accounted for 10% or more of our net sales. The following table includes those customers and the percentage of net sales attributed to them for the periods indicated:

 

 

 

 

Solectron has concentrations of credit risk due to sales to the customers listed above as well as to Solectron’s other significant customers. As of June 1, 2007, Hewlett-Packard accounted for approximately 17.2% of total accounts receivable related to continuing operations.

 

 

Over the past few years, Solectron has recorded restructuring and impairment costs to optimize its global footprint, reduce its cost structure and to respond to declines in customer demands. The measures, which included reducing the workforce, consolidating facilities and changing the strategic focus of a number of sites, was largely intended to align Solectron’s capacity and infrastructure to anticipated customer demand and transition its 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 are recorded in accordance with SFAS No. 112, “Employer’s Accounting for Postemployment Benefits,” as Solectron has 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

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

payments subsequent to abandonment less any estimated sublease income. In order to estimate future sublease income, Solectron works with real estate brokers 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. At each reporting date, the Company evaluates its accruals for exit costs and employee separation costs to ensure the accruals are still appropriate. In certain circumstances, accruals are no longer required because of efficiencies in carrying out the plans or because employees previously identified for separation resigned from the Company and did not receive severance or were redeployed due to circumstances not foreseen when the original plans were initiated. The Company reverses accruals through the income statement line item where the original charges were recorded when it is determined that they are no longer required.

 

Overview of Restructuring Plans

 

Fiscal Year 2007 Phase II Restructuring Plan

 

On March 26, 2007, the Solectron Board of Directors approved the Fiscal Year 2007 Phase II Restructuring Plan, pursuant to Solectron’s phased approach to restructuring announced in the first quarter of fiscal 2007, to further optimize its global footprint and reduce its cost structure. Solectron estimates that total charges related to this phase of restructuring will be between $35 million to $45 million, of which approximately 90% represents cash expenditures. Total estimated charges primarily consist of (i) $23 million to $30 million related to severance costs, (ii) $9 million to $12 million related to leased facility liabilities and transfer and other exit costs and (iii) an estimated non-cash charge of $3 million related to disposition or impairment of facilities and equipment, $1.3 million of which was impaired at the end of the second quarter of fiscal 2007. The restructuring plan consists of the following measures:

 

 

Cumulative restructuring costs recorded under the Fiscal 2007 Phase II Restructuring Plan as of June 1, 2007 were $25.4 million. This consists of $23.7 million in severance, $1.3 million in impairment charges on facilities and equipment (impaired at the end of the second quarter of fiscal 2007) and $0.4 million of transfer costs, other expenses and leased facilities expenses.

 

As of June 1, 2007, Solectron has reduced its workforce by 90 personnel in connection with this plan and expects to reduce headcount by an additional 1,200 to 1,400 personnel prior to the completion of this plan. The remaining accrual balance of $22.4 million consists primarily of existing severance commitments for 1,200 to 1,400 personnel, the majority of which will be paid by December 31, 2007.

 

In certain circumstances, severance accruals may not be required. This may result from re-employment outside of Solectron or failure to file for severance benefits. When it is determined that accruals are no longer required in these situations, the Company reverses the accruals through the income statement line item originally charged. The Fiscal Year 2007 Phase II Restructuring Plan is expected to be completed within twelve months of the Board’s approval of the plan.

 

Fiscal Year 2007 Phase I Restructuring Plan

 

On October 2, 2006, the Solectron Board of Directors approved the Fiscal Year Phase I 2007 Restructuring Plan to optimize its global footprint and reduce its cost structure. Solectron anticipates that total charges related to this restructuring plan will be between $50 million to $60 million. Total estimated charges consist of (i) $32 million to $39 million related to severance costs, (ii) $10 million to $13 million related to leased facility liabilities and

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

transfer and other exit costs and (iii) an estimated non-cash charge of $8 million related to disposition or impairment of facilities and equipment. The restructuring plan consists of the following measures:

 

 

Cumulative restructuring costs recorded under the Fiscal 2007 Phase I Restructuring Plan as of June 1, 2007 were $50.0 million. This consists of $39.1 million in severance, $5.1 million in impairment charges on facilities and equipment (which includes $3.1 million recorded in the fourth quarter of fiscal year 2006), and $5.8 million of transfer costs, other expenses and leased facilities expenses.

 

As of June 1, 2007, Solectron has reduced its workforce by 1,050 personnel in connection with this plan and expects to reduce headcount by an additional 150 to 350 personnel prior to the completion of this plan. The remaining accrual balance of $13.1 million is primarily related to existing severance commitments for 150 to 350 personnel, the majority of which will be paid by November 30, 2007.

 

In certain circumstances, severance accruals may not be required. This may result from re-employment outside of Solectron or failure to file for severance benefits. When it is determined that accruals are no longer required in these situations, the Company reverses the accruals through the income statement line item originally charged. The Fiscal Year 2007 Phase I Restructuring Plan is expected to be completed within twelve months of the Board’s approval of the plan.

 

Fiscal Year 2005 Restructuring Plan

 

During fiscal year 2005, in response to a decline in revenues from fiscal year 2004 levels, Solectron reviewed its cost structure and geographic footprint and determined that cost savings could be realized by moving certain activities from high-cost facilities in Europe and North America to facilities in low-cost geographies. During fiscal 2006, the Company had lowered its total anticipated restructuring costs for the Fiscal Year 2005 Restructuring Plan from $80-$95 million to $55-$65 million. The original anticipated costs were based on the occurrence of certain future events. Due to non-occurrence of some events and changes in business conditions, the Company lowered its total anticipated costs. However, for the restructuring items that were executed, the Company expects cost savings to be in line with the original estimates. This restructuring plan as amended will result in restructuring charges of approximately $55 million to $65 million, and includes the following measures:

 

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

Cumulative restructuring costs recorded under the Fiscal Year 2005 Restructuring Plan as of June 1, 2007 were $59.5 million. As of June 1, 2007, Solectron has reduced its workforce by 2,506 personnel in connection with this plan and expects to reduce headcount by an additional 16 personnel prior to the completion of this plan. The remaining accrual balance of $1.2 million is primarily related to expenses associated with taxes, leased facilities and severance payouts. The Company expects to pay out a substantial portion of these costs during the next two fiscal quarters. This plan was substantially completed as of the end of fiscal 2006.

 

Fiscal Year 2004 Restructuring Plan

 

In the fourth quarter of fiscal 2004, in order to drive savings in its human resources and information technology functions, as well as reduce labor costs in certain high-cost facilities, Solectron committed to a plan to eliminate approximately 2,100 full-time positions primarily in Europe and North America, consolidate certain facilities, and impair certain long-lived assets.

 

The Fiscal Year 2004 Restructuring Plan was expected to result in total restructuring charges of $20.0 million. Through June 1, 2007, Solectron had recorded restructuring charges of approximately $26.1 million related to this plan. This amount consisted of $9.8 million of severance charges, $10.2 million relating to the impairment of certain long-lived assets, and $6.1 million of facility lease obligation and other expenses. This restructuring plan is substantially complete. The remaining accrual balance of $2.4 million as of June 1, 2007 is primarily related to an ongoing facility lease obligation, which expires in 2011. However, Solectron may incur additional restructuring costs as it revises estimates due to changes in assumptions used for the facility lease loss accrual.

 

Legacy Restructuring Plans

 

From 2001 through 2003, a significant economic downturn adversely impacted Solectron’s business, resulting in a decline in revenues from $17.4 billion in fiscal year 2001 to $9.8 billion in fiscal year 2003. In response to these trends, Solectron initiated a series of restructuring measures to align its capacity and infrastructure with anticipated customer demand. These actions included significant reductions in the Company’s workforce, the closure and consolidation of facilities, and the impairment of certain long-lived assets. These restructuring activities are substantially complete, as the remaining accrual is almost entirely attributable to ongoing facility lease obligations, which are currently leased through 2014. However, Solectron may incur future restructuring costs as it continues to sell restructured long-lived assets and revise previous estimates in connection with these plans. Revisions to estimates will primarily be due to changes in assumptions used for the facility lease loss accrual.

 

Solectron incurred restructuring charges in the third quarter of fiscal 2007 in accordance with previously announced plans. Total net restructuring and impairment costs of $29.6 million were charged against continuing operations as a result of these planned actions as well as revisions to previous estimates.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

The following table summarizes restructuring charges and impairment included in the accompanying condensed consolidated statements of operations (in millions):

 

 

Restructuring Accrual

 

The following table summarizes the restructuring accrual balance for continuing operations as of June 1, 2007 (in millions). The amounts presented include remaining obligations under both the Fiscal Year 2007 Restructuring Plans and prior plans.

 

 

Accruals related to restructuring activities were recorded in accrued expenses in the accompanying condensed consolidated balance sheets. Solectron expects to pay amounts related to severance and benefits within the next 12 months. The remaining balance, primarily consisting of lease commitment costs on facilities, is expected to be paid out through 2014.

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

 

Restructuring Activity by Plan

 

The restructuring and impairment charges incurred by restructuring plan during the nine months ended June 1, 2007 (in millions) were as follows:

 

 

 

Goodwill information is as follows (in millions):

 

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

Solectron’s intangible assets are classified as other assets on the condensed consolidated balance sheets and categorized into three main classes: supply agreements, intellectual property and contractual and non-contractual customer relationships obtained in asset purchases or business combinations. The following table summarizes the intangible asset balance at June 1, 2007 and August 25, 2006 (in millions):

 

 

In January 2007, Solectron acquired NCR’s North American manufacturing business responsible for producing ATMs and payment solutions in the Americas and self-checkout systems globally. The acquisition resulted in acquiring identifiable intangible assets of approximately $12.9 million. The identifiable intangible assets acquired included a supply agreement valued at $11.0 million and intellectual property valued at $1.5 million. Both categories of identifiable intangible assets will be amortized over five years. The remaining balance of $0.4 million was allocated to goodwill.

 

During the three months ended June 1, 2007, Solectron acquired Software Remodeling, Inc., a business that provides software, electronic, mechanical, industrial design, and user interface design and engineering services to its customers for the production of electromechanical and software driven products. The purchase price of the acquisition was approximately $6.0 million, of which $0.8 million will be paid on the termination date, net of claims. The identifiable intangible assets acquired were comprised of customer relationships valued at $1.4 million and a noncompete agreement valued at $1.4 million. The amount allocated to goodwill was $3.0 million and the amount allocated to fixed assets was $0.2 million. The Company may be required to pay an additional amount of $1.9 million after the 12 month anniversary of the closing date as a retention award to certain key employees.

 

Amortization expense for the three and nine months ended June 1, 2007 was approximately $2.2 million and $4.7 million, respectively. Amortization expense for the three and nine months ended May 26, 2006 was approximately $1.0 million and $5.0 million, respectively. The Company anticipates that annual amortization expense for these intangibles over the next five years to be approximately $7.8 million, $6.6 million, $5.2 million, $3.8 million and $2.8 million, respectively.

 

 

During fiscal 2004, as a result of a full review of our portfolio of businesses, we committed to a plan to divest a number of business operations that were no longer part of our strategic plan for the future. In accordance with SFAS No. 144, we have reported the results of operations and financial position of these businesses in discontinued operations within the consolidated statements of operations and balance sheets for all periods presented. The companies that we have divested and that are currently included in discontinued operations are Solectron’s MicroTechnology division, Stream International Inc. and Force Computers, Inc.

 

These businesses each qualify as a discontinued operation component of Solectron under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Solectron has reported the results of operations

 

SOLECTRON CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements — (Continued)

and consolidated financial position of these businesses in discontinued operations within the consolidated statements of operations and the balance sheets for all periods presented.

 

The results from discontinued operations were as follows (in millions):