| Risk Factors The following risk factors should be carefully considered |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that our management currently deems immaterial also may impair our business operations |
| If any of the risks described below were to occur, our business, operating results and consolidated financial condition could be materially adversely affected |
| 8 _________________________________________________________________ [63]Table of Contents Most of our sales come from a small number of customers; if we lose any of these customers, our net sales could decline significantly |
| Our ten largest customers accounted for approximately 61dtta4prca, 61dtta6prca, and 59dtta8prca of net sales from continuing operations in fiscal years 2006, 2005, and 2004 respectively |
| Any material delay, cancellation or reduction of orders from these or other major customers could cause our 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 earnings per share, cash flow 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 agreements, as well as on the consolidated financial condition and success of our customers and their customers |
| Our customers may cancel their orders, change production quantities or locations, or delay production |
| To remain competitive, EMS companies must provide their customers increasingly rapid product turnaround, at increasingly competitive prices |
| We generally do not have long-term contractual commitments from our top customers |
| Customers may cancel orders at their sole discretion, change production quantities or delay production for a number of reasons outside of our control |
| Many of our customers have experienced from time to time significant decreases in demand for their products and services, as well as continual material price competition and sales price erosion |
| This volatility has resulted, and will continue from time to time to result, in our customers delaying purchases on 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 lowering, eliminating or deferring revenue without substantial offsetting reductions in our costs thereby reducing our profitability |
| In addition, customers may require that manufacturing of their products be transitioned from one of our facilities to another of our facilities to achieve cost reductions and other objectives |
| Such transfers, if unanticipated or not properly executed, could result in various inefficiencies and increased 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 all of which would have the effect of reducing our profits |
| Our business has low operating margins and any increase in cost of sales or operating expenses could have a material adverse effect on our profitability |
| Our business generates low operating margins |
| Increases in cost of sales or operating expenses without corresponding increases in net sales would have a material adverse effect on the profitability of the Company on a consolidated basis |
| 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 on-hand inventory that becomes obsolete |
| If our contracts with customers do not require our customers to purchase, or our customers do not comply with contractual obligations to purchase, excess or obsolete inventory, our results of operations could be materially harmed |
| In recent years some of our OEM customers have experienced declining revenue, large losses, negative cash flows, and bankruptcies or defaults on borrowing arrangements |
| There is a risk that, in the future, these or other customers may not purchase inventory back from us despite contractual obligations, which could harm our results of operations |
| In addition, enforcement of these supply agreements may result in material expenses, delays in payment for inventory or disruptions in our customer relationships |
| 9 _________________________________________________________________ [64]Table of Contents In addition, we are generally 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 outside those provided for in our 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 based upon various assumptions and market conditions which are subject to rapid change, 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 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 |
| We are exposed to risks associated with operating internationally |
| Approximately 69dtta0prca, 70dtta1prca and 72dtta3prca of our net sales from continuing operations during fiscal years 2006, 2005, and 2004, respectively, are the result of services delivered and products manufactured in countries outside the United States |
| 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 US 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 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 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; • risks of conflict and terrorism that could disrupt our or our customers’ and suppliers’ businesses; and • increased risk of improper payments or inappropriate business activities |
| We have been granted tax holidays, which are effective through 2012 and 2011, respectively, subject to some conditions, for our Malaysian and Singapore sites |
| 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 |
| 10 _________________________________________________________________ [65]Table of Contents 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 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; • our ability to drive down manufacturing costs in accordance with customer and market requirements, which is dependent upon our ability to apply Lean Six Sigma operating principles; • 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; • fluctuations in currency exchange rates; • 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, technological innovation or new services; • economic developments in the electronics industry as a whole; • credit rating and stock analyst downgrades; • our ability to successfully implement changes to our enterprise resource planning systems; • political and economic developments in countries in which we have operations; and • general market conditions |
| If our operating results in the future are below the expectations of securities analysts and investors, the market price of our outstanding securities could be harmed |
| If we incur more restructuring-related charges than currently anticipated, our consolidated financial condition and results of operations may suffer |
| We incurred approximately dlra14dtta0 million of restructuring and impairment costs relating to continuing operations in fiscal 2006 and approximately dlra91dtta1 million during fiscal 2005, and we anticipate incurring approximately dlra50 to dlra60 million of restructuring and impairment costs in the next 12 months under the Fiscal 2007 Restructuring Plan |
| If our estimates about previous and currently contemplated restructuring charges prove to be incorrect, our consolidated financial condition and results of operations may suffer |
| While we believe our 11 _________________________________________________________________ [66]Table of Contents 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 incorrect, our consolidated financial condition and consolidated results of operations may suffer |
| 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 |
| Our business also depends upon our ability to continue to attract and retain key executives, senior managers and skilled associates |
| Our failure to attract and retain key personnel and a high rate of turnover could harm our business |
| 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 harm 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 a number of different contract manufacturers, depending on the type of service we provide or the geographic locale of our operations |
| Our industry is intensely competitive and many of our competitors may have greater manufacturing, financial, R&D or marketing resources than we have |
| In order to compete, we may have to provide our manufacturing and other services at lower margins, or we may lose customers |
| 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 would 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 |
| If we are unable to improve our capabilities substantially, 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 all or certain portions of their business to competitors in response to more attractive pricing quotations than we have been willing to offer to retain such customers, 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 |
| 12 _________________________________________________________________ [67]Table of Contents 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 |
| 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 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 |
| Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses |
| Our worldwide operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenue and financial condition and increase our costs and expenses |
| We are predominantly self-insured for losses and interruptions caused by earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, typhoons, hurricanes, fires, extreme weather conditions and other natural or manmade disasters |
| 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 13 _________________________________________________________________ [68]Table of Contents 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 |
| We incurred approximately dlra14dtta0 million of restructuring and impairment costs relating to continuing operations in fiscal 2006 and approximately dlra91dtta1 million during fiscal 2005 |
| See also the Risk Factor entitled “If we incur more restructuring-related charges than currently anticipated, our consolidated financial condition and results of operations may suffer |
| ” If we have a material weakness in our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities |
| One or more material weaknesses in our internal controls over financial reporting could occur or be identified in the future |
| In addition, because of inherent limitations, our internal controls over financial reporting may not prevent or detect misstatements, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate |
| If we fail to maintain the adequacy of our internal controls, including any failure or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, we may not be able to provide reasonable assurance as to our financial results or meet our reporting obligations and there could be a material adverse effect on the price of our securities |
| If our products are subject to warranty or liability claims, we may incur significant costs |
| Our customers may experience defects in our designs or deficiencies with respect to our manufacturing services |
| We may be exposed to warranty or manufacturers’ liability claims as a result of these defects or deficiencies, and some claims may relate to customer product recalls |
| A claim for damages arising as a result of such defects or deficiencies could have a material adverse effect on our business, results of operations and financial condition |
| A claim for such damages, or a product recall conducted by one of our customers, also could have an adverse effect on our business reputation |
| In addition, as we increase our engagements with customers in the medical device and automotive industries, we may have greater exposure to product and personal injury liability claims, as well as to liabilities relating to product recalls |
| Any claim, regardless of merit, may be time-consuming and expensive to resolve, and a successful claim could have a material adverse effect on our results of operations and financial condition |
| We may not have sufficient insurance coverage for certain of the risks and liabilities we assume in connection with the products and services we provide to our customers |
| We carry various forms of business and liability insurance that we believe are typical for companies in our industry |
| However, we may not have sufficient insurance coverage for certain risks and liabilities we assume in connection with the products and services we provide to our customers, such as potential warranty, product liability and product recall claims |
| Such liability claims may only be partially covered under our insurance policies |
| We continue to monitor the insurance marketplace to evaluate the need to obtain additional insurance coverage in the future |
| Costs associated with potential claims and liabilities for which we do not have sufficient insurance coverage could have a material adverse effect on our results of operations, financial condition and liquidity |
| Our design and engineering services may result in additional exposure to product liability, intellectual property infringement and other claims |
| We are offering more design services, primarily those relating to products that we manufacture for our customers, and we offer design services related to collaborative design manufacturing and turnkey solutions |
| Providing such services can expose us to different or greater potential liabilities than those we face when providing our regular manufacturing services |
| With the growth of our design services business, we have increased exposure to potential product liability claims resulting from injuries caused by defects in products we design, as well as 14 _________________________________________________________________ [69]Table of Contents potential claims that products we design infringe third-party intellectual property rights |
| Such claims could subject us to significant liability for damages and, regardless of their merits, could be time-consuming and expensive to resolve |
| We also may have greater potential exposure from warranty claims, and from product recalls due to problems caused by product design |
| Costs associated with possible product liability claims, intellectual property infringement claims, and product recalls could have a material adverse effect on our results of operations |
| Notwithstanding our divestiture of certain businesses in recent years, we remain subject to certain indemnification obligations for a period of time after completion of the divestitures |
| The sale agreements for the businesses we divested in recent years contain indemnification provisions pursuant to which we may be required to indemnify the buyer of the divested business for liabilities, losses, or expenses arising out of breaches of covenants and certain breaches of representations and warranties relating to the condition of the business prior to and at the time of sale |
| While we believe, based upon the facts presently known to us, that we have made adequate provision for any such potential indemnification obligations, it is possible that other facts may become known in the future which may subject us to claims for additional liabilities or expenses beyond those presently anticipated and provided for |
| Should any such unexpected liabilities or expenses be of a material amount, our finances could be adversely affected |
| We are exposed to fluctuations in foreign currency exchange rates and interest rate fluctuations |
| 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 |
| As of August 31, 2006, we had outstanding foreign exchange forward contracts with a total notional amount of approximately dlra293dtta2 million related to continuing operations |
| The change in value of the foreign exchange forward contracts resulting from a hypothetical 10prca 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 |
| 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 August 31, 2006, substantially our entire portfolio was scheduled to mature in less than three months |
| A hypothetical 10prca change in interest rates would not have a material effect on the fair value of our investment portfolios |
| 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 |
| We are also required to comply with laws and regulations relating to occupational safety and health, product disposal and product content and labeling |
| 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 15 _________________________________________________________________ [70]Table of Contents costs of such activities would not harm our business, consolidated financial condition and results of operations in the future |
| In general, we are not directly responsible for compliance with laws like Waste Electrical and Electronic Equipment (WEEE) and Restrictions of Hazardous Substances (RoHS) |
| However, some customers may require that we take responsibility for the non-compliance risk of some or all of the components we procure for the customer product |
| Solectron requires all of its suppliers to comply with all hazardous substance laws and regulations and employs inventory management processes to mitigate non-compliance risk |
| Failure to have the capability of delivering the products which comply with these present and future environmental laws and regulations could restrict our ability to expand facilities, or could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations, and could impair our relations with our customers |
| Moreover, to the extent we are found non-compliant with any environmental laws and regulations applicable to our activities, we may incur substantial fines and penalties |
| Our ongoing implementation of new enterprise resource planning (ERP) software and systems may cause disruptions in our business operations |
| The ongoing implementation of new ERP software and systems at various Solectron sites domestically and internationally is a technically intensive process, requiring extensive testing, modifications, customization and project coordination |
| We may experience disruptions in our business operations from time to time relating to these implementation efforts or as a result of complications with the software or systems, and such disruptions may have a material adverse effect on our business, consolidated financial condition and results of operations |
| We may not be able to adequately protect or enforce our intellectual property rights and could become involved in intellectual property disputes |
| In the past we have been and may from time to time continue to be notified of claims that we may be infringing patents, copyrights or other intellectual property rights owned by other parties |
| In the event of an infringement claim, we may be required to spend a significant amount of money to develop a non-infringing alternative, to obtain licenses, 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 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 trade secrets and license rights |
| These patents, trade secrets, and license rights may not provide meaningful protection for our proprietary manufacturing processes, equipment innovations and products, 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 |
| Rating downgrades may make it more expensive for us to borrow money |
| Our senior unsecured debt has been rated as “B+” with a positive outlook by Standard and Poors and as “B1” with stable outlook by Moody’s |
| These credit ratings are subject to change at the discretion of the rating agencies |
| If our credit ratings were downgraded, it would increase our cost of capital should we borrow under our revolving lines of credit, and it may make it more expensive for us to raise additional capital in the future |
| Such capital raising may be on terms that may not be acceptable to us or otherwise not available |
| Any future adverse rating agency actions with respect to our ratings could have an adverse effect on the market price of our securities, our ability to compete for new business, our cost of capital, and our ability to access capital markets |
| Unanticipated changes in our tax rates or in our exposure to additional tax liabilities could affect our operating results and financial condition |
| We are subject to income taxes both in the United States and various foreign jurisdictions |
| Our effective tax rates could be adversely affected by changes in tax laws and increases in the percentages of our earnings from 16 _________________________________________________________________ [71]Table of Contents countries with higher tax rates, as well as other factors |
| If any of these changes were to occur, our income tax provision, operating results and financial condition could be adversely affected |
| We have received an examination report from the Internal Revenue Service proposing a tax deficiency in certain of our tax returns, and the outcome may have a material adverse effect on our results of operations and cash flows |
| The Internal Revenue Service (“IRS”) and other tax authorities regularly examine our income tax returns |
| In the quarter ended May 31, 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 we filed a protest during the quarter ended August 25, 2006 to protest 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 |
| We believe that the proposed IRS adjustments are inconsistent with applicable tax laws, and that the Company has meritorious defenses to the proposed adjustments |
| In determining the adequacy of our provision for income taxes, we regularly assess the likelihood of adverse outcomes resulting from tax examinations, including the IRS RAR for the fiscal years 2001 and 2002 |
| Based upon that assessment, Solectron may establish 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 the reasonable estimate of the amount at risk |
| However, the ultimate outcome of the tax examination process is always uncertain, including the total amount payable or the timing of any such payments upon resolution of these issues |
| In addition, we cannot assure you that such amount will not be materially different than that which is reflected in our historical income tax provisions and accruals |
| Should the IRS or other tax authorities assess additional taxes as a result of a current or future examinations, we may be required to record charges to operations in future periods that could have a material impact on the results of operations, financial position or cash flows in the applicable period or periods recorded |