<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-21374
THE DII GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1224426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6273 Monarch Park Place
Suite 200
Niwot, Colorado 80503
(Address and zip code of principal executive offices)
(303) 652-2221
(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, and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS August 12, 1996
----- ---------------
Common Stock, Par Value $0.01 8,202,911
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $97,752 83,363 196,230 157,095
Cost of sales 79,268 70,021 160,663 132,207
------- ------ ------- -------
Gross profit 18,484 13,342 35,567 24,888
Selling, general and administrative expenses 8,409 6,388 17,451 12,131
Merger costs 1,104 - 1,104 -
Interest income (289) (159) (679) (310)
Interest expense 1,294 647 2,588 1,348
Amortization of intangibles 679 555 1,313 1,018
Other, net 136 163 175 (15)
------- ------ ------- -------
Income before income taxes 7,151 5,748 13,615 10,716
Income tax expense 2,113 1,883 4,116 3,479
------- ------ ------- -------
Net income $ 5,038 3,865 9,499 7,237
======= ====== ======= =======
Earnings per common share:
Primary $ 0.61 0.48 1.16 0.90
======= ====== ======= =======
Fully diluted $ 0.55 0.48 1.05 0.90
======= ====== ======= =======
Weighted average number of common shares
and equivalents outstanding:
Primary 8,221 8,058 8,210 8,057
Fully diluted 10,724 8,058 10,715 8,057
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 3
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 28,395 44,862
Accounts receivable, net 57,004 52,183
Inventories,net 37,604 44,623
Other 5,533 3,830
-------- -------
Total current assets 128,536 145,498
Property, plant and equipment, net 60,777 58,699
Intangible assets, net 67,003 62,064
Other assets 2,287 1,708
-------- -------
$258,603 267,969
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 33,457 41,238
Accrued expenses 12,838 12,288
Accrued interest payable 1,078 1,164
Notes payable 2,876 16,588
-------- -------
Total current liabilities 50,249 71,278
Convertible subordinated notes payable 86,250 86,250
Other 3,338 1,759
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized; none issued - -
Common stock, $0.01 par value; 45,000,000 shares
authorized; 8,208,075 and 8,108,706 issued at June 30,
1996 and December 31, 1995, respectively 82 81
Additional paid-in capital 66,542 65,082
Retained earnings 59,776 50,277
Cumulative foreign currency translation adjustments (3,897) (3,443)
Unamortized performance stock plan compensation (3,737) (3,315)
-------- -------
Total stockholders' equity 118,766 108,682
-------- -------
$258,603 267,969
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 4
THE DII GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
Six Months Ended June 30,
1996 1995
----------- ------------
<S> <C> <C>
Net cash provided by operating activities $ 9,409 13,551
------- ------
Cash flows from investing activities:
Additions to property, plant and equipment (7,903) (6,386)
Proceeds from sales of property, plant
and equipment 134 2,276
Payments for business acquisitions, net of cash acquired (2,046) -
Grant proceeds received from the Ireland IDA
applied to property, plant and equipment - 131
------- ------
Net cash used by investing activities (9,815) (3,979)
------- ------
Cash flows from financing activities:
Proceeds from line-of-credit borrowings - 3,000
Repayments of line-of-credit borrowings - (3,000)
Repayments of long-term debt - (2,550)
Repayments of notes payable (15,868) (1,200)
Debt issuance costs (286) (173)
Proceeds from stock issued under stock plans 102 459
Restricted cash transferred to unrestricted cash - (1,160)
------- ------
Net cash used by financing activities (16,052) (4,624)
------- ------
Effect of exchange rate changes on cash (9) (247)
------- ------
Net increase (decrease) in cash and cash equivalents (16,467) 4,701
Cash and cash equivalents at beginning of period 44,862 7,363
------- ------
Cash and cash equivalents at end of period $28,395 12,064
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE> 5
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Financial information as of December 31, 1995 has
been derived from the audited consolidated financial statements of The DII
Group, Inc. and subsidiaries (the "Company" or "the DII Group").
The condensed consolidated financial statements do not include all information
and notes required by generally accepted accounting principles for complete
financial statements. However, except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements as of and for the year ended December 31, 1995 included in
the annual report on Form 10-K previously filed with the SEC. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements. Operating results
for the six-month period ended June 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996.
Certain reclassifications have been made in the 1995 condensed consolidated
financial statements to conform with the 1996 presentation.
(2) ACQUISITIONS
In August 1995, the Company acquired TTI Testron, Inc., a quick-turn
manufacturer of test fixturing equipment for the electronics printed circuit
assembly market. The cash purchase price, net of cash acquired, was $4,559.
The Company expects to pay additional contingent consideration of $2,250 based
upon the achievement of specified levels of earnings through March 31, 1997.
The fair value of the assets acquired, excluding cash acquired, amounted to
$13,790 and liabilities assumed were $9,231, including estimated acquisition
costs and contingent consideration. The cost in excess of net assets acquired
amounted to $5,712.
In April 1996, the Company acquired a quick-turn manufacturer of surface mount
printed circuit board solder cream stencils located in the United Kingdom. The
cash purchase price, net of cash acquired, was $2,046. The fair value of the
assets acquired and liabilities assumed were immaterial. The cost in excess of
net assets acquired amounted to $3,658.
These acquisitions were accounted for as purchases with the results of
operations from the acquired businesses included in the Company's results of
operations from the acquisition dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
<PAGE> 6
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) ACQUISITIONS, CONTINUED
In June 1996 the Company entered into a definitive Agreement and Plan of Merger
with Orbit Semiconductor, Inc. ("Orbit") in which Orbit will become a
wholly-owned subsidiary of the Company (the "Merger"). The Merger is still
subject to certain customary closing conditions. At the effective time of the
Merger, which is expected to be August 22, 1996, each outstanding share of
Common Stock, par value $.001 per share, of Orbit will be converted into the
right to receive 45/100ths (0.45) of a share of Common Stock, par value $.01
per share, of the DII Group (the "Exchange Ratio"). In addition, as a result
of the Merger, each outstanding option to purchase Orbit Common Stock will be
assumed by the DII Group and converted into an option to acquire the number of
shares of DII Group Common Stock equal to the product of the number of shares
of Orbit Common Stock that were issuable upon exercise of such option
multiplied by the Exchange Ratio, with an exercise price equal to the quotient
determined by dividing the exercise price of such option by the Exchange Ratio.
During the three months ended June 30, 1996, the Company incurred $1,104 of
pretax costs associated with the Merger. The combined company expects to incur
additional nonrecurring pretax merger costs of approximately $3,000 in the
three months ended September 30, 1996. The combined company's overall
effective tax rate for the three months ended September 30, 1996 will be higher
than the three months ended June 30, 1996 due to certain additional merger
costs expected to be incurred which will not be deductible for domestic income
tax purposes. In addition, the overall effective income tax rate for the
current and future fiscal years will be higher due to the higher anticipated
domestic taxable income resulting from the Merger.
The Merger has been structured as a tax-free exchange and will be accounted for
as a pooling-of-interests. Upon consummation, the Company's historical
financial statements for periods prior to the Merger will be restated to
include the consolidated results of operations, the financial position and cash
flows of Orbit.
Based upon the number of shares of DII Group Common Stock and Orbit Common
Stock outstanding on July 19, 1996 (as well as shares issuable pursuant to
certain outstanding exchange rights for Orbit Common Stock and rights under the
Orbit Employee Stock Purchase Plan), an aggregate of approximately 3,644,856
shares of DII Group Common Stock would be issued in connection with the Merger,
representing 30.8% of the total number of shares of DII Group Common Stock
outstanding after giving effect to such issuance. Based upon the number of
Orbit options outstanding on July 19, 1996, approximately 1,036,065 additional
shares of DII Group Common Stock would be reserved for issuance to holders of
Orbit options in connection with the DII Group's assumption of such Orbit
options. The Company expects the Merger to have a dilutive effect on earnings
per share for the three months ended September 30, 1996.
Orbit is an independent manufacturer and world marketer of quick-turn
application specific integrated circuits (ASICs), providing design and
manufacturing services on a worldwide basis.
<PAGE> 7
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) GOODWILL
Goodwill is subject to future adjustments for contingent purchase price
adjustments for varying periods, all of which end no later than July 1, 1999.
The Company increased goodwill and notes payable relating to various
acquisitions in the amount of $2,181 for contingent purchase price adjustments
during the six-month period ended June 30, 1996.
(4) INVENTORIES
Inventories, by components, are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $31,759 37,533
Work in process 8,919 9,948
Finished goods 1,021 1,461
------- ------
41,699 48,942
Allowance for inventory (4,095) (4,319)
------- ------
$37,604 44,623
======= ======
</TABLE>
The Company made provisions for the allowance for inventory impairment of $400
during the six months ended June 30, 1996.
(5) RELATED PARTY TRANSACTIONS
The Company purchases inventory and fixed assets from, and sells products and
services to, Dover Corporation and its affiliates ("Dover"). Management
believes these transactions are immaterial and generally at terms comparable to
those that could have been obtained on an arms length basis between
unaffiliated parties. The sales to Dover were less than 5% of the total net
sales during the periods presented in the accompanying condensed consolidated
statements of income. Messrs. Gary L. Roubos and Lewis E. Burns, directors of
The DII Group, Inc., are Chairman and Vice President, respectively, of Dover
Corporation.
A promissory note (the "IMS Note") evidencing indebtedness of Integrated
Multimedia Solutions, Inc. ("IMS") to the Company in the amount of $1,204,
including interest, was past due as of December 31, 1995. During the second
quarter of 1996, the IMS Note was restructured and written-down to $1,000. The
maturity date of the IMS Note was also extended until the fourth quarter of
1997. In consideration for this restructuring, IMS reconfirmed its obligation
to the Company and a portion of the collateral securing the IMS Note was
escrowed for the benefit of the Company. Alexander W. Young, a director of
the Company, is President, Chief Operating Officer and director of Thomas
Group, Inc., (an affiliate of IMS), and was formerly a director of IMS.
<PAGE> 8
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation and environmental matters
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. The ultimate outcome of these matters cannot, at this time,
be predicted in light of the uncertainties inherent in these matters. Based
upon the facts and circumstances currently known, management cannot estimate
the most likely loss or the maximum loss for these matters. The Company has
accrued the minimum estimated costs, which amounts are immaterial, associated
with these matters in the accompanying June 30, 1996 condensed consolidated
financial statements.
The Company determines the amount of its accruals for environmental matters by
analyzing and estimating the range of possible costs in light of information
currently available. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, or
a determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated to be required for such matters. No assurance can
be given that actual costs will not exceed amounts accrued or that costs will
not be incurred with respect to sites as to which no problem is currently
known. Further, there can be no assurance that additional environmental
matters will not arise in the future.
In March 1994, a subsidiary of the Company, entered into a grant agreement (the
Agreement) with Ireland's Industrial Development Agency (IDA). The IDA has
granted the Company a total of $2,141 for financial assistance towards the cost
of fixed assets. In exchange, the Company agreed to contribute to the regional
development of Ireland by maintaining certain employment levels. If the total
number of employees is less than 320 on or about December 31, 1996, the Company
will be required to repay some or all of the IDA grant based upon a calculation
defined in the Agreement. As of June 30, 1996, the Company employed
approximately 410 people. All grant proceeds received are accounted for as a
reduction of cost basis in the applicable fixed assets.
The Company has approximately $3,444 of capital commitments as of June 30,
1996.
It is anticipated that following consummation of the Merger described in Note 2
herein, the DII Group will be required to devote substantial capital resources
to fund Orbit's capital requirements. Orbit is currently upgrading and
expanding its existing manufacturing capabilities from its current 4-inch wafer
fabrication line to a 6-inch fabrication line. The upgrading and expansion
plans are estimated to require additional funding of approximately $45,000.
The DII Group expects that the combined company will have adequate resources
available to fund these capital requirements.
<PAGE> 9
THE DII GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) COMMITMENTS AND CONTINGENCIES, CONTINUED
Orbit is also planning to upgrade its manufacturing capabilities to utilize an
8-inch wafer line and a 0.6 or 0.5 micron process technology. It is
anticipated that the establishment of such capabilities may be accomplished
through external foundry capacity or the establishment of in-house capacity.
Orbit is continuing to consider the establishment of a facility in Israel
utilizing an 8-inch wafer line and a 0.6 or 0.5 micron process technology. The
establishment of such facility in Israel would be expected to require capital
expenditures of approximately $217,000, of which it is anticipated that
approximately $76,000 would be funded through grants from the Israeli
government. In the event the DII Group decides to establish such a facility in
Israel or elsewhere, it is expected that the DII Group's capital resources and
cash flows from operations would not be sufficient to fully fund such a
project. In such event, the DII Group would need to raise additional funds
through public or private financing. If additional funds are raised through
the issuance of equity securities, the percentage ownership of then current
stockholders of the DII Group would be reduced and such equity securities may
have rights, preferences or privileges senior to those of the holders of the
DII Group Common Stock. No assurance can be given that additional financing
would be available or that, if available, it would be available on terms
favorable to the DII Group. If adequate funds are not available to satisfy its
capital requirements, the combined company would be required to curtail
significantly or defer, temporarily or permanently, this expansion project.
As of June 30, 1996, the Company has a $60,000 senior secured revolving
line-of-credit which expires in June 1997. This credit facility requires
compliance with certain financial covenants and is secured by substantially all
of the Company's assets. There were no borrowings outstanding under the
line-of-credit, and the Company was in compliance with all financial
covenants, as of June 30, 1996 and 1995.
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in thousands)
A. OVERVIEW
The Company is a leading provider of electronics outsourcing products and
services which operates through a global network of companies in North America,
Europe and Southeast Asia. These companies are uniquely integrated to provide
a broad range of related products and services, including initial printed
circuit board design; manufacturing of prototype printed circuit boards;
assembly of printed circuit boards; process tooling; machine tools; in-circuit
and functional test hardware and software; and final system configuration. By
offering a comprehensive set of integrated manufacturing services, the Company
believes it is better able to develop long-term relationships with its
customers, expand into new markets and enhance its profitability.
The Company serves the electronics manufacturing industry through the following
operating companies:
Multilayer Technology ("Multek") manufactures high density, complex
multilayer printed circuit boards on a quick-turn basis.
IRI International ("IRI") manufactures surface mount printed circuit
board solder cream stencils on a quick- turn basis.
DOVatron International assembles complex electronic circuits on a high
and low volume contract basis.
TTI Testron designs and manufactures in-circuit and functional test
software and hardware on a quick-turn basis.
Cencorp manufactures depaneling systems that route individual printed
circuit boards from an assembled master panel in the final step of the
electronics assembly process.
Operating results may be affected by a number of factors including price
competition, the level of volume and the timing of orders, the amount of
automation existing on specific manufacturing projects, efficiencies achieved
by inventory management, fixed asset utilization, the level of experience in
manufacturing a particular product, customer product delivery requirements,
shortages of components or experienced labor, and start-up costs associated
with adding new geographical locations. In addition, the level of revenues can
greatly shift based on whether certain projects are contracted on a turnkey
basis, where the Company purchases materials, versus a consignment basis, where
materials are provided by the customer.
The DII Group has actively pursued acquisitions in furtherance of its strategy
of aggressively expanding its revenue base and providing integrated outsourcing
technology solutions. Acquisitions, such as the Merger described below in
Section D, Acquisitions, involve numerous risks including difficulties in the
assimilation of the operations, technologies, and products and services of the
acquired companies, the diversion of management's attention from other business
concerns, risks of entering markets in which the DII Group has no or limited
direct prior experience and where competitors in such markets have stronger
market positions, and the potential loss of key employees of the acquired
company. The integration of certain operations following an acquisition,
including the Merger, will require the dedication of management resources that
may distract attention from the day-to-day business of the combined company.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(Dollars in thousands)
A. OVERVIEW, CONTINUED
A majority of the Company's sales are to customers in the electronics industry,
which is subject to rapid technological change, product obsolescence and price
competition. The factors affecting the electronics industry in general, or any
of the Company's major customers, in particular, could have a material adverse
affect on the Company's operating results. Following the Merger, the Company
will be affected by factors affecting the semiconductor industry, including
factors that affect products incorporating semiconductors. The semiconductor
industry has historically been cyclical and subject to significant economic
downturns at various times, characterized by diminished product demand,
accelerated erosion of average selling prices and overcapacity. The Company
seeks a well-balanced customer profile across most sectors of the electronics
industry in order to reduce exposure due to a downturn in any particular
sector. The primary sectors within the electronics industry served by the
Company are networking, computer, telecommunications, industrial,
instrumentation, and medical. The Company's international operations subject
the Company to the risks of doing business abroad, including currency
fluctuations, export duties, import controls and trade barriers, restrictions
on the transfer of funds, greater difficulty in accounts receivable collection,
burdens of complying with a wide variety of foreign laws and, in certain parts
of the world, political instability.
From time to time, some of the Company's customers have terminated their
manufacturing arrangements with the Company, and other customers have
significantly reduced or delayed the volume of manufacturing services from the
Company. Any such termination of a manufacturing relationship or change,
reduction or delay in orders could have a material adverse affect on the
Company's operating results. Although management believes the Company has a
broad diversification of customers and markets, the Company has no firm
long-term commitments or volume guarantees from its customers.
At any given time, certain customers may account for significant portions of
the Company's business. No customer accounted for more than 10% of net sales
during the six months ending June 30, 1996. Standard Microsystems Corporation
("SMC") and Seagate Technology, Inc. ("Seagate") each accounted for 16% of net
sales for the six months ending June 30, 1995. No other customer accounted for
more than 10% of net sales during the six month period ending June 30, 1995.
The Company's top ten customers accounted for 53% and 63% of net sales for the
six months ending June 30, 1996 and 1995, respectively.
It is management's understanding that Seagate plans to significantly reduce its
number of contract manufacturers currently being utilized. There can be no
assurance that Seagate will continue to utilize the DII Group's contract
manufacturing services. Significant reductions in sales to Seagate without the
timely replacement with new business would have a material adverse effect on
the Company's operating results.
B. RESULTS OF OPERATIONS
The following table presents selected consolidated financial information stated
as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0 100.0 100.0 100.0
Cost of sales 81.1 84.0 81.9 84.2
----- ----- ----- -----
Gross margin 18.9 16.0 18.1 15.8
Selling, general and administrative 8.6 7.7 8.9 7.7
----- ----- ----- -----
10.3 8.3 9.2 8.1
===== ===== ===== =====
</TABLE>
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
Net sales for the three months ended June 30, 1996 increased $14,389 to $97,752
from $83,363 for the three months ended June 30, 1995, representing a 17.3%
increase. Net sales for the six months ended June 30, 1996 increased $39,135
to $196,230 from $157,095 for the six months ended June 30, 1995, representing
a 24.9% increase. These increases are attributable to increased sales to
existing customers and an expanding customer base at the Company's facilities
which were in existence in the second quarter of 1995, as well as the start-up
of the DOVatron International Contract Electronics Manufacturing (CEM) facility
in Clearwater, Florida, which was established in November 1995, the
commencement of production at the Multilayer Technology facility located in
Roseville, Minnesota, which began limited production in April 1996, the August
1995 acquisition of TTI Testron and the April 1996 acquisition of Chemtech.
These increases were partially offset by certain DOVatron International CEM
customer deferrals and cancellations, including certain low-margin customer
orders at the Malaysian facility.
Gross profit for the three-month period ending June 30, 1996 increased $5,142
to $18,484 from $13,342 for the comparable period of 1995. Gross profit for
the six-month period ending June 30, 1996 increased $10,679 to $35,567 from
$24,888 for the comparable period of 1995. The gross margin increased to 18.9%
for the three-month period ended June 30, 1996 from 16.0% for the three-month
period ended June 30, 1995. The gross margin increased to 18.1% for the
six-month period ended June 30, 1996 from 15.8% for the six-month period ended
June 30, 1995. The increases in gross margins are the result of proportional
increases in revenues associated with the Company's non-contract electronics
manufacturing businesses, which typically carry higher margins than CEM
products and services due to the fact that they sell their services to customer
design engineers who require quick-turn service to increase speed-to-market.
Selling, general and administrative (SG&A) expense increased $2,021 to $8,409
for the three months ended June 30, 1996 from $6,388 for the comparable period
in 1995. SG&A expense increased $5,320 to $17,451 for the six months ended
June 30, 1996 from $12,131 for the comparable period in 1995. The percentage
of SG&A expense to net sales was 8.6% and 7.7% for the three months ended June
30, 1996 and 1995, respectively and 8.9% and 7.7% for the six months ended June
30, 1996 and 1995, respectively. These increases are mainly attributable to
the TTI Testron and Chemtech acquisitions. TTI Testron and Chemtech carry
higher SG&A expenses as a percentage of net sales due to the nature of their
quick-turn operation. The increases in SG&A expense as a percentage of net
sales is also attributable to the building of the Company's sales and
marketing, finance and engineering infrastructure necessary to support the
Company's current and prospective sales growth.
Interest income increased $130 to $289 for the three months ended June 30, 1996
from $159 for the comparable period in 1995. Interest income increased $369 to
$679 for the six months ended June 30, 1996 from $310 for the comparable period
in 1995. These increases are attributable to the earnings generated on the
unexpended cash proceeds from the issuance of the convertible subordinated
notes in October 1995. Interest expense increased $647 to $1,294 for the three
months ended June 30, 1996 from $647 for the comparable period in 1995.
Interest expense increased $1,240 to $2,588 for the six months ended June 30,
1996 from $1,348 for the comparable period in 1995. These increases are
attributable to the incremental borrowings resulting from the issuance of the
convertible subordinated notes in October 1995.
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(Dollars in thousands)
B. RESULTS OF OPERATIONS, CONTINUED
Amortization of intangibles increased $124 to $679 for the three months ended
June 30, 1996 from $555 for the comparable period in 1995. Amortization of
intangibles increased $295 to $1,313 for the six months ended June 30, 1996
from $1,018 for the comparable period in 1995. These increases are
attributable to the incremental debt issuance costs associated with the
convertible subordinated notes in October 1995 and the goodwill associated with
the TTI Testron and Chemtech acquisitions. Other expenses, (net) decreased $27
for the three months ended June 30, 1996 as compared to the three months ended
June 30, 1995 due mainly to higher gains realized on foreign exchange
transactions. Other expenses, (net) increased $190 for the six months ended
June 30, 1996 when compared to the similar period in 1995 primarily due to
approximately $221 of gains on sales of equipment being realized during the
first six months of 1995 offset partially by decreased provisions for doubtful
accounts during the first six months of 1996.
During the three months ended June 30, 1996, the Company incurred $1,104 of
expenses associated with the Company's proposed merger with Orbit as discussed
below in Section D, Acquisitions.
The Company's estimated effective income tax rate decreased from 32.5% for the
six months ended June 30, 1995 to 30.2% for the six months ended June 30, 1996
primarily as a result of the $1,104 of merger costs incurred in the second
quarter of 1996. The Company's estimated effective income tax rate differs
from the U.S. statutory rate primarily due to lower effective income tax rates
on foreign earnings considered permanently invested. The effective tax rate
for a particular year will vary depending on the mix of foreign and domestic
earnings. As foreign earnings considered permanently invested increase, as a
percentage of consolidated earnings, the overall consolidated effective income
tax rate will decrease as the foreign earnings are usually taxed at a lower
rate than domestic earnings.
C. FOREIGN CURRENCY EXPOSURE
The Company conducts a significant amount of its business and has a number of
operating facilities in countries outside of the United States. As a result,
the Company may experience transaction and translation gains and losses because
of currency fluctuations. In order to minimize foreign exchange transaction
risk, the Company selectively hedges certain of its foreign exchange exposures
through forward exchange contracts, if available at reasonable economic prices,
principally relating to nonfunctional currency monetary assets and liabilities.
To date, the Company's overall hedging activity has been immaterial. The
strategy of selective hedging can reduce the Company's vulnerability to certain
of its foreign currency exposures, and the Company expects to continue this
practice in the future.
Effective January 1, 1996, the Company's Mexican facility changed its
functional currency from the Mexican peso to the U.S. dollar.
D. ACQUISITIONS
In August 1995, the Company acquired TTI Testron, Inc., a quick-turn
manufacturer of test fixturing equipment for the electronics printed circuit
assembly market. The cash purchase price, net of cash acquired, was $4,559.
The Company expects to pay additional contingent consideration of $2,250 based
upon the achievement of specified levels of earnings through March 31, 1997.
The fair value of the assets acquired, excluding cash acquired, amounted to
$13,790 and liabilities assumed were $9,231, including estimated acquisition
costs and contingent consideration. The cost in excess of net assets acquired
amounted to $5,712.
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED (Dollars in thousands)
D. ACQUISITIONS, CONTINUED
In April 1996, the Company acquired a quick-turn manufacturer of surface mount
printed circuit board solder cream stencils located in the United Kingdom. The
cash purchase price, net of cash acquired, was $2,046. The fair value of the
assets acquired and liabilities assumed were immaterial. The cost in excess of
net assets acquired amounted to $3,658.
These acquisitions were accounted for as purchases with the results of
operations from the acquired businesses included in the Company's results of
operations from the acquisition dates forward. Pro forma results of operations
would not be materially different from the historical results reported. The
costs of these acquisitions have been allocated on the basis of the estimated
fair value of the assets acquired and the liabilities assumed.
In June 1996 the Company entered into a definitive Agreement and Plan of Merger
with Orbit Semiconductor, Inc. ("Orbit") in which Orbit will become a
wholly-owned subsidiary of the Company (the "Merger"). The Merger is still
subject to certain customary closing conditions. At the effective time of the
Merger, which is expected to be August 22, 1996, each outstanding share of
Common Stock, par value $.001 per share, of Orbit will be converted into the
right to receive 45/100ths (0.45) of a share of Common Stock, par value $.01
per share, of the DII Group (the "Exchange Ratio"). In addition, as a result
of the Merger, each outstanding option to purchase Orbit Common Stock will be
assumed by the DII Group and converted into an option to acquire the number of
shares of DII Group Common Stock equal to the product of the number of shares
of Orbit Common Stock that were issuable upon exercise of such option
multiplied by the Exchange Ratio, with an exercise price equal to the quotient
determined by dividing the exercise price of such option by the Exchange Ratio.
During the three months ended June 30, 1996, the Company incurred $1,104 of
pretax costs associated with the Merger. The combined company expects to incur
additional nonrecurring pretax merger costs of approximately $3,000 in the
three months ended September 30, 1996. The combined company's overall
effective tax rate for the three months ended September 30, 1996 will be higher
than the three months ended June 30, 1996 due to certain additional merger
costs expected to be incurred which will not be deductible for domestic income
tax purposes. In addition, the overall effective income tax rate for the
current and future fiscal years will be higher due to the higher anticipated
domestic taxable income resulting from the Merger.
The Merger has been structured as a tax-free exchange and will be accounted for
as a pooling-of-interests. Upon consummation, the Company's historical
financial statements for periods prior to the Merger will be restated to
include the consolidated results of operations, the financial position and cash
flows of Orbit. As a percentage of consolidated net sales, gross profit, SG&A
expenses and income tax expense are expected to increase as a result of the
Merger.
Based upon the number of shares of DII Group Common Stock and Orbit Common
Stock outstanding on July 19, 1996 (as well as shares issuable pursuant to
certain outstanding exchange rights for Orbit Common Stock and rights under the
Orbit Employee Stock Purchase Plan), an aggregate of approximately 3,644,856
shares of DII Group Common Stock would be issued in connection with the Merger,
representing 30.8% of the total number of shares of DII Group Common Stock
outstanding after giving effect to such issuance. Based upon the number of
Orbit options outstanding on July 19, 1996, approximately 1,036,065 additional
shares of DII Group Common Stock would be reserved for issuance to holders of
Orbit options in connection with the DII Group's assumption of such Orbit
options. The Company expects the Merger to have a dilutive effect on earnings
per share for the three months ended September 30, 1996.
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED (Dollars in thousands)
D. ACQUISITIONS, CONTINUED
Orbit is an independent manufacturer and world marketer of quick-turn
application specific integrated circuits (ASICs), providing design and
manufacturing services on a worldwide basis.
E. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
The Company's net cash provided by operating activities for the six-month
period ended June 30, 1996, decreased $4,142 to $9,409 from $13,551 for the
comparable period in 1995. Although net income for the six-month period ended
June 30, 1996, increased $2,262 to $9,499 from $7,237 for the comparable period
in 1995, the Company's working capital requirements increased by $6,822
(excluding cash, cash equivalents, and current notes payable) in the six months
ended June 30, 1996. This increase was primarily due to the reduction in
accounts payable of $7,781 in the first six months of 1996, offset by a small
net increase in all other working capital components. The accounts payable
reduction resulted from the timing of vendor payments during the six months
ended June 30, 1996.
The Company's net cash flows used by investing activities amounted to $9,815
and $3,979 for the six months ended June 30, 1996 and 1995, respectively.
Capital expenditures amounted to $7,903 and $6,386 for the six months ended
June 30, 1996 and 1995, respectively. The Company's continued investment in
state-of-the-art, high-technology equipment enables the Company to accept
increasingly complex orders. The Company sold $2,276 of equipment during the
six months ended June 30, 1995 to allow for the potential replacement of older
equipment with state-of-the-art, high-technology equipment. As described above
in Section D, Acquisitions, the Company purchased Chemtech Limited, a
manufacturer of surface mount printed circuit board solder cream stencils. The
cash purchase price, net of cash acquired, was $2,046.
The Company's net cash flows used by financing activities amounted to $16,052
and $4,624 in the six months ended June 30, 1996 and 1995, respectively. The
Company borrows against its line-of-credit from time-to-time to fund its
immediate liquidity needs. The Company borrowed and repaid $3,000 under its
line-of-credit during the six months ended June 30, 1995. Repayments of notes
payable amounted to $15,868 and $1,200 for the six month period ending June 30,
1996 and 1995, respectively. These notes payable resulted from various
acquisitions which occurred in previous periods. The Company repaid $2,550 in
scheduled long-term debt maturities in the six months ended June 30, 1995.
During the first six months of 1995, the Company was required to escrow $250 per
month to fund a portion of the then outstanding notes payable. Accordingly, the
Company transferred $1,160 (including interest earnings) into this escrow
account in the six months ended June 30, 1995. With the issuance of the
convertible subordinated notes in October 1995, this escrow requirement was
terminated.
It is anticipated that following consummation of the Merger described above in
Section D, Acquisitions, the DII Group will be required to devote substantial
capital resources to fund Orbit's capital requirements. Orbit is currently
upgrading and expanding its existing manufacturing capabilities from its
current 4-inch wafer fabrication line to a 6- inch fabrication line. The
upgrading and expansion plans are estimated to require additional funding of
approximately $45,000. The DII Group expects that the combined company will
have available adequate resources to fund these capital requirements.
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary course of
business. Although management is of the opinion that these matters will not
have a material adverse effect on the consolidated financial position or
results of operations of the Company, the ultimate outcome of these matters
cannot, at this time, be predicted in light of the uncertainties inherent in
litigation. See note 8 of the Company's 1995 Consolidated Financial Statements
included in Part II, Item 8 of Form 10-K for the Company's contingencies and
environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders meeting, which was held on May 14, 1996,
the Company's shareholders elected the following seven persons as directors to
one-year terms: Ronald R. Budacz, Chairman and Chief Executive Officer, Carl
R. Vertuca, Jr., Senior Vice President and Chief Financial Officer, Robert L.
Brueck, Lewis E. Burns, Gary L. Roubos, Gerard T. Wrixon and Alexander W.
Young. Not less than 6,881,635 shares were cast for each of the Directors.
The shareholders ratified the selection of KPMG Peat Marwick LLP as the
Company's independent auditors. Voting in favor were 7,049,866, opposed were
6,013, and 15,157 were abstained.
The shareholders approved the proposal to approve the Senior Executive
Performance Bonus Plan. Voting in favor were 6,489,583, opposed were 215,095,
abstaining were 32,062, and broker non-votes were 334,296.
The shareholders approved the proposal to approve the amendment of the 1994
Stock Incentive Plan to increase the number of shares reserved for issuance
thereunder by 375,000 shares. Voting in favor were 6,406,890, opposed were
392,268, abstaining were 91,855, and broker non-votes were 180,023.
The shareholders approved the proposal to approve the Non-employee Directors'
Stock Compensation Plan. Voting in favor were 6,445,691, opposed were
413,067, abstaining were 32,255, and broker non-votes were 180,023.
ITEM 6(A). EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
ITEM 6(B). REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and Exchange
Commission during the quarter ended June 30, 1996. The following item was
reported in the Form 8-K dated June 11, 1996:
Item 5. Other Events - On June 9, 1996, The DII Group, Inc. announced that the
DII Group entered into a Merger Agreement with Orbit Semiconductor,
Inc., providing for the acquisition of Orbit by the Company.
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE DII GROUP, INC.
Date: August 12, 1996 By: /s/ RONALD R. BUDACZ
------------------- -------------------------------
Ronald R. Budacz
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: August 12 , 1996 By: /s/ CARL R. VERTUCA, JR.
------------------- -------------------------------
Carl R. Vertuca, Jr.
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1996 By: /s/ THOMAS J. SMACH
------------------- ------------------------------
Thomas J. Smach
Vice President
and Corporate Controller
(Principal Accounting Officer)
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
11.1 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
THE DII GROUP, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Earnings Available for Primary Earnings Per Share:
Net income $ 5,038 3,865 9,499 7,237
======= ===== ====== =====
Shares Used in Computation:
Weighted average common shares outstanding 8,202 8,058 8,191 8,057
Shares subscribed under Employee Stock Purchase Plan 12 - 12 -
Shares awarded pursuant to Non-Employee Directors'
Stock Compensation Plan 7 - 7 -
------- ----- ------ -----
8,221 8,058 8,210 8,057
======= ===== ====== =====
Primary Earnings Per Share $ 0.61 0.48 1.16 0.90
======= ===== ====== =====
FULLY DILUTED EARNINGS PER SHARE:
Net income $ 5,038 3,865 9,499 7,237
Interest expense (net of tax) on 6% convertible
subordinated notes issued in October 1995 776 - 1,552 -
Amortization of debt issuance cost (net of tax) on 6%
convertible subordinated notes issued in October 1995 85 - 147 -
------- ----- ------ -----
Earnings Available for Fully Diluted Earnings Per Share $ 5,899 3,865 11,198 7,237
======= ===== ====== =====
Shares Used in Computation:
Weighted average common shares outstanding 8,202 8,058 8,191 8,057
Shares subscribed under Employee Stock Purchase Plan 12 - 12 -
Shares awarded pursuant to Non-Employee Directors'
Stock Compensation Plan 7 - 7 -
Additional potentially dilutive securities (equivalent in
common stock):
Stock options 158 - 160 -
Performance stock awards 45 - 45 -
6% convertible subordinated notes 2,300 - 2,300 -
------- ----- ------ -----
10,724 8,058 10,715 8,057
======= ===== ====== =====
Fully Diluted Earnings Per Share $ 0.55 0.48 1.05 0.90
======= ===== ====== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 28,395
<SECURITIES> 0
<RECEIVABLES> 57,004
<ALLOWANCES> 0
<INVENTORY> 37,604
<CURRENT-ASSETS> 128,536
<PP&E> 95,480
<DEPRECIATION> 34,703
<TOTAL-ASSETS> 258,603
<CURRENT-LIABILITIES> 50,249
<BONDS> 86,250
<COMMON> 82
0
0
<OTHER-SE> 118,684
<TOTAL-LIABILITY-AND-EQUITY> 258,603
<SALES> 196,230
<TOTAL-REVENUES> 196,230
<CGS> 160,663
<TOTAL-COSTS> 160,663
<OTHER-EXPENSES> 19,117
<LOSS-PROVISION> 247
<INTEREST-EXPENSE> 2,588
<INCOME-PRETAX> 13,615
<INCOME-TAX> 4,116
<INCOME-CONTINUING> 9,499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,499
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.05
</TABLE>
